Item 7. Management’s Discussion and Analysis
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
You
should read the following discussion and analysis of our financial condition and results of operations together with our financial
statements and related notes appearing elsewhere in this prospectus. In addition to historical financial information, the following
discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ
materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences
include those discussed below and elsewhere in this prospectus, particularly in the sections entitled “Risk Factors”
and “Cautionary Note Regarding Forward-Looking Statements.”
Overview
We design, manufacture, integrate, refurbish,
service, distribute and sell electric power systems, distributed energy resources, used and new power generation equipment and
mobile 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.
The Company intends to grow its business
through continued internal product development and expansion of our engineering, sales and marketing personnel.
Our
operations are divided into two reportable segments: T&D Solutions segment and Critical Power segment. Our T&D Solutions
business provides equipment solutions, including e-Bloc, that help customers effectively and efficiently protect, control, transfer,
monitor and manage their electric energy requirements. These solutions are marketed principally through our PCEP brand name. Our
Critical Power business provides customers with our suite of mobile E-BOOST© EV charging solutions, new and refurbished 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 and Pioneer
Critical Power brand names.
Recent
Developments
On October 20, 2020, we entered into an
At the Market Offering Agreement (the “ATM Agreement”) with H.C. Wainwright & Co., LLC (“Wainwright”),
pursuant to which we may offer and sell our shares of common stock, preferred stock, warrants and/or units of up to $25.0 million
from time to time through Wainwright, acting as sales agent or principal (the “ATM Program”). On October 20, 2020,
we filed a registration statement on Form S-3, including a base prospectus (the “Base Prospectus”), which covers the
offering, issuance and sale by us of up to $25.0 million of our common stock, preferred stock, warrants and/or units, and a sales
agreement prospectus (the “Sales Agreement Prospectus” and, together with the Base Prospectus, the “Registration
Statement”) which covered the offering, issuance and sale by us of up to a maximum aggregate offering price of $9.0 million
of our common stock under the ATM Program. The Registration Statement was declared effective on October 27, 2020. 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 Wainwright), resulting in net proceeds of approximately $8.7 million. On December
13, 2021, we filed a new sales agreement prospectus supplement related to the Registration Statement, which covers the offering,
issuance and sale of up to a maximum aggregate offering price of up to $8.6 million of common stock that may be issued and sold
under the ATM Agreement.
Critical
Accounting Policies
Use
of Estimates. The preparation of financial statements in accordance with generally accepted accounting principles in the U.S.
requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. The financial statements include estimates based on currently available information and our judgment as to the outcome
of future conditions and circumstances. Significant estimates in these financial statements include, inventory provisions, useful
lives and impairment of long-lived assets, income tax provision, stock-based compensation, and allowance for
doubtful accounts. Changes in the status of certain facts or circumstances could result in material changes to the estimates used
in the preparation of the financial statements and actual results could differ from the estimates and assumptions.
19
Revenue
Recognition . Revenue is
recognized when (1) a contract with a customer exists, (2) performance obligations promised in a contract are identified based
on the products or services that will be transferred to the customer, (3) the transaction price is determined based on the consideration
to which the Company will be entitled in exchange for transferring products or services to the customer, (4) the transaction price
is allocated to the performance obligations in the contract and (5) the Company satisfies performance obligations. 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 products is predominantly
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 large equipment 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 cost incurred relative to the estimated cost expected to be consumed to complete the project. 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.
Return
of a products requires that the buyer obtain permission in writing from the Company. If products are returned without such permission, the
buyer authorizes the Company, in addition to such other remedies as it may have, to hold the returned products at the buyer’s
sole risk and expense. 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 the years ended December 31, 2021 and 2020 were insignificant.
Inventories .
A substantial portion of the Company’s inventory includes raw materials and parts utilized to support the manufacturing
process at PCEP and equipment sales and service offerings at Titan. We value inventories at the lower of cost or net realizable
value. If a write down to the current market value is necessary, the market value cannot be greater than the net realizable value,
which is defined as selling price less costs to complete and dispose, and cannot be lower than the net realizable value less a
normal profit margin. We also continually evaluate the composition of our inventory and identify obsolete, slow-moving and excess
inventories. Inventory items identified as obsolete, slow-moving or excess are evaluated to determine if reserves are required.
If we were not able to achieve our expectations of the net realizable value of the inventory at current market value, we would
have to adjust our reserves accordingly. We attempt to accurately estimate future product demand to properly adjust inventory
levels for our standard products. However, significant unanticipated changes in demand could have a significant impact on the
value of inventory and of operating results.
Impairment
of Long-Lived Assets . We review long-lived assets for impairment including intangible assets with determinable useful lives
whenever events or changes in circumstances indicate that the carrying value of the corresponding asset group may not be realizable.
If an evaluation is required, the estimated future undiscounted cash flows associated with the asset group are compared to the
asset group’s carrying amount to determine if an impairment of such asset is necessary. This requires us to make long-term
forecasts of the future revenues and costs related to the assets groups subject to review. Forecasts require assumptions about
demand for our products and future market conditions. Estimating future cash flows requires significant judgment, and our projections
may vary from cash flows eventually realized. Future events and unanticipated changes to assumptions could require a provision
for impairment in a future period. The effect of any impairment would be reflected in operating income in the Consolidated Statements
of Operations. In addition, we estimate the useful lives of our long-lived assets and other intangibles and periodically review
these estimates to determine whether these lives are appropriate.
Leases.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-02, Leases (Topic 842) , which requires, among other things, a lessee to recognize a liability representing
future lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For operating
leases, a lessee will be required to recognize at inception a right-of-use asset and a lease liability equal to the net present
value of the lease payments, with lease expense recognized over the lease term on a straight-line basis. For leases with a term
of twelve months or less, ASU 2016-02 allows a reporting entity to make an accounting policy election to not recognize a right-of-use
asset and a lease liability, and to recognize lease expense on a straight-line basis. ASU No. 2016-02 is effective for fiscal
years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. Upon
adoption, a reporting entity should apply the provisions of ASU 2016-02 at the beginning of the earliest period presented using
a modified retrospective approach, which includes certain optional practical expedients that an entity may elect to apply. We
adopted this standard in our first quarter of 2018 using the modified retrospective approach.
Stock
Compensation. In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements
to Nonemployee Share-Based Payment Accounting. The amendments in this update expand the scope of Topic 718 to include share-based
payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718
to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is,
the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments
specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used
or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic
718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction
with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers.
The updated standard is effective for the Company beginning after December 15, 2018, including interim periods within that fiscal
year. Early adoption of the new guidance is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company
adopted this guidance on January 1, 2019. The adoption of this ASU did not have a material impact on the consolidated financial
statements.
20
Fair
Value Measurement. In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework
- Changes to the Disclosure Requirements for Fair Value Measurement that eliminates, amends, and adds certain disclosure requirements
for fair value measurements. The ASU is effective for all annual and interim periods beginning January 1, 2020, with early adoption
permitted. The Company adopted this guidance on January 1, 2020. The adoption of this ASU did not have a material impact on the
consolidated 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.
Income
Taxes. We account for income
taxes under the asset and liability method, based on the income tax laws and rates in the countries in which operations are conducted
and income is earned. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities using expected rates
in effect for the tax year in which the differences are expected to reverse. Developing the provision for income taxes requires
significant judgment and expertise in federal, international and state income tax laws, regulations and strategies, including the
determination of deferred tax assets and liabilities and, if necessary, any valuation allowances that may be required for deferred
tax assets. The Company has recorded a valuation allowance in the current and prior years to reduce deferred tax assets to zero.
If we were to subsequently determine that we would be able to realize deferred tax assets in the future in excess of its net recorded
amount, an adjustment to deferred tax assets would increase net income for the period in which such determination was made. We
will continue to assess the adequacy of the valuation allowance on a quarterly basis. Our judgments and tax strategies are subject
to audit by various taxing authorities.
Rounding
All
dollar amounts (except share and per share data) presented are stated in thousands of dollars, unless otherwise noted. Amounts
may not foot due to rounding.
21
RESULTS
OF OPERATIONS
Overview
of 2021 Operating Results
Selected
financial and operating data for our reportable business segments for the most recent two years is summarized below. This information,
as well as the selected financial data provided in Note 15 and our audited Consolidated Financial Statements and related
notes included in this Annual Report on Form 10-K, should be referred to when reading our discussion and analysis of results of
operations below. Our summary of operating results during the years ended 2021 and 2020 are as follows:
For the Year Ended
December 31,
2021
2020
Revenues
T&D Solutions
$ 9,484
$ 10,257
Critical Power Solutions
8,827
9,233
Consolidated
18,311
19,490
Cost of goods sold
T&D Solutions
9,430
10,630
Critical Power Solutions
7,488
7,979
Consolidated
16,918
18,609
Gross profit
1,393
881
Selling, general and administrative expenses
5,148
5,028
Depreciation and amortization expense
107
137
Total operating expenses
5,255
5,165
Operating loss from continuing operations
(3,862 )
(4,284 )
Interest income
(387 )
(334 )
Other income
(1,292 )
(969 )
Loss before taxes
(2,183 )
(2,981 )
Income tax (benefit) expense
(16 )
5
Net loss
$ (2,167 )
$ (2,986 )
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.
Our
order backlog at December 31, 2021 was $22.8 million, an increase of $10.1 million, or 80%, when compared to $12.7 million at
December 31, 2020. During the year ended December 31, 2021, the Company experienced a surge in orders for its e-Bloc power system
of almost $13 million. This was the primary driver of the 80% increase in the Company’s year over year ending backlog.
The following table represents the progression of our backlog, by reporting segment, for the periods ended as indicated:
December 31,
2021
2020
T&D Solutions
$ 17,499
$ 5,881
Critical Power Solutions
5,349
6,792
Total order backlog
$ 22,848
$ 12,673
22
Revenue
The
following table represents our revenues by reporting segment and major product category for the periods indicated (in thousands,
except percentages):
For the Year Ended
December 31,
2021
2020
Variance
%
T&D Solutions
Switchgear and e-Bloc power system
$ 9,484
$ 10,257
$ (773 )
(7.5 )
9,484
10,257
(773 )
(7.5 )
Critical Power Solutions
Equipment
1,891
1,574
317
20.1
Service
6,936
7,659
(723 )
(9.4 )
8,827
9,233
(406 )
(4.4 )
Total revenue
$ 18,311
$ 19,490
$ (1,179 )
(6.0 )
For
the year ended December 31, 2021, our consolidated revenue decreased by $1.2 million, or 6.0% to $18.3 million, down from $19.5
million during the year ended December 31, 2020.
T&D
Solutions . During the year
ended December 31, 2021, revenue from our switchgear and e-Bloc power system product lines decreased by $773, or 7.5%, as compared
to the year ended December 31, 2020, due to a reduction in sales of our automatic transfer switches and low voltage switchgear
partially caused by delays in shipments of equipment at the end of 2021 as a result of supply chain disruptions, offset by an increase
in sales of our medium voltage switchgear. Additionally, approximately 37% of our sales in the year ended December 31, 2021 were made to a large international
container shipping company in Hawaii.
Critical
Power . For the year ended December 31, 2021, revenue for our equipment sales increased by $317, or 20.1%, as compared to the
prior year, mainly due to an increase in shipments and completions of larger equipment projects by our Florida division and increased
sales of our refurbished power generation equipment during the year ended December 31, 2021.
For
the year ended December 31, 2021, our service revenue decreased by $723, or 9.4%, as compared to the same period in the prior
year, primarily due to the cyclicality of our preventative maintenance schedules and the loss of Verizon preventive maintenance
business.
Gross
Profit (Loss) and Gross Margin
The
following table represents our gross profit (loss) by reporting segment for the periods indicated (in thousands, except percentages):
For the Year Ended
December 31,
2021
2020
Variance
%
T&D Solutions
Gross profit (loss)
$ 54
$ (373 )
$ 427
114.5
Gross margin %
0.6
(3.6 )
4.2
Critical Power Solutions
Gross profit
1,339
1,254
85
6.8
Gross margin %
15.2
13.6
1.6
Consolidated gross profit
$ 1,393
$ 881
$ 512
58.1
Consolidated gross margin %
7.6
4.5
3.1
For
the year ended December 31, 2021, our gross margin percentage was 7.6% of revenues, compared to 4.5% during the year ended December
31, 2020.
T&D
Solutions. For the year ended December 31, 2021, our gross margin increased by 4.2%, as compared to the year ended December 31,
2020. This increase was primarily due to the $546 write down of inventory recognized during the year ended December 31, 2020 as a
result of management’s strategic decisions to rationalize its traditional product offerings and no comparable write down of
inventory being recognized during the year ended December 31, 2021.
Critical
Power . For the year ended December 31, 2021, our gross margin increased by 1.6%, to 15.2%, from 13.6% for the prior year,
predominately due to a reduction in overhead costs and the acceptance of price increases from our customers.
23
During
the year ended December 31, 2021, we experienced an increase in raw material and labor costs which applied downward pressure on
our consolidated gross margin.
Operating
Expenses
The
following table represents our operating expenses by reportable segment for the periods indicated (in thousands, except percentages):
For the Year Ended
December 31,
2021
2020
Variance
%
T&D Solutions
Selling, general and administrative expense
$ 1,099
$ 1,516
$ (417 )
(27.5 )
Depreciation and amortization expense
15
45
(30 )
(66.7 )
Segment operating expense
$ 1,114
$ 1,561
$ (447 )
(28.6 )
Critical Power Solutions
Selling, general and administrative expense
$ 1,660
$ 1,624
$ 36
2.2
Depreciation and amortization expense
64
60
4
6.7
Segment operating expense
$ 1,724
$ 1,684
$ 40
2.4
Unallocated Corporate Overhead Expenses
Selling, general and administrative expense
$ 2,389
$ 1,888
$ 501
26.5
Depreciation and amortization expense
28
32
(4 )
(12.5 )
Segment operating expense
$ 2,417
$ 1,920
$ 497
25.9
Consolidated
Selling, general and administrative expense
$ 5,148
$ 5,028
$ 120
2.4
Depreciation and amortization expense
107
137
(30 )
(21.9 )
Consolidated operating expense
$ 5,255
$ 5,165
$ 90
1.7
Selling,
General and Administrative Expense . For the year ended December 31, 2021, consolidated selling, general and administrative
expense, before depreciation and amortization, increased by approximately $120, or 2.4%, to $5.1 million, as compared to $5.0
million during the year ended December 31, 2020. As a percentage of our consolidated revenue, selling, general and administrative
expense increased to 28.1% in 2021, as compared to 25.8% in the year ended December 31, 2020.
The
selling, general and administrative expense in our T&D Solutions segment decreased by $417, or 27.5%, during the year ended
December 31, 2021, as compared to the year ended December 31, 2020, primarily due to a reduction in professional fees related
to the Myers Power Case, which was settled during the year ended December 31, 2020, offset by an increase in payroll related expenses,
product development fees, bad debt expense and third party commissions during the year ended December 31, 2021.
The
selling, general and administrative expense in our Critical Power segment increased by $36, or 2.2%, during the year ended December
31, 2021, as compared to the year ended December 31, 2020, primarily due to product development fees recording during the year
ended December 31, 2021 and no product development fees being recognized during the year ended December 31, 2020.
The
selling, general and administrative expense in our unallocated corporate overhead expenses increased by $501, or 26.5%,
during the year ended December 31, 2021, as compared to the year ended December 31, 2020, primarily due to an increase in
stock-based compensation and payroll related expenses, investor relations and public reporting fees and business travel
related costs. Additionally, we recognized a recovery of a receivable that was previously written off during the year ended
December 31, 2020, and no comparable recovery of a receivable was recognized during the year ended December 31,
2021.
Depreciation
and Amortization Expenses . 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 year ended December 31,
2021, consolidated depreciation and amortization expense decreased by $30, or 21.9%, as compared to the year ended December 31, 2020
primarily due to a reduction in depreciation expense as a result of fixed assets having become fully depreciated during the year
ended December 31, 2021, while such assets incurred depreciation expense for the full year ended December 31, 2020.
24
Operating
Loss
The
following table represents our operating loss by reportable segment for the periods indicated:
For the Year Ended
December 31,
2021
2020
Variance
%
T&D Solutions
$ (1,060 )
$ (1,934 )
$ 874
45.2
Critical Power Solutions
(385 )
(430 )
45
10.5
Unallocated corporate overhead expenses
(2,417 )
(1,920 )
(497 )
(25.9 )
Total operating loss
$ (3,862 )
$ (4,284 )
$ 422
9.9
T&D
Solutions . Operating loss from our T&D Solutions segment decreased by $874, or 45.2%, in the year ended December
31, 2021, as compared to the year ended December 31, 2020, primarily due to the $546 write down of inventory recognized during
the year ended December 31, 2020 and no write down of inventory being recognized during the year ended December 31, 2021, and
a reduction in professional fees related to the Myers Power Case, which was settled during the year ended December 31, 2020.
Critical
Power . Operating loss from our Critical Power segment decreased by $45, or 10.5%, during the year ended December 31, 2021,
primarily due to the acceptance of price increases from our customers and a reduction in overhead costs which strengthened our
margins on sales of equipment and service.
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 year ended December 31, 2021, our unallocated
corporate overhead expense increased by $497, or 25.9%, as compared to the year ended December 31, 2020, primarily due to an
increase in stock-based compensation and payroll related expenses, investor relations and public reporting fees and business
travel related costs. Additionally, we recognized a recovery of a receivable that was previously written off during the year
ended December 31, 2020, and no comparable recovery of a receivable was recognized during the year ended December 31,
2021.
Non-Operating
Income
Interest Income . For the year ended
December 31, 2021, we had interest income of approximately $387, as compared to interest income of approximately $334 during the
year ended December 31, 2020. We generate the majority of our interest income from the Seller
Notes received from the sale of the transformer business units in August 2019 and our cash on hand.
Other
Income . Other income in the consolidated statements of operations reports certain gains and losses associated with activities not
directly related to our core operations. For the year ended December 31, 2021, other non-operating income was $1.3 million, as compared
to $969 during the year ended December 31, 2020. For the year ended December 31, 2021, included in other income was a gain of $1.4 million
for the extinguishment and forgiveness of the PPP Loan, and for the year ended December 31, 2020, included in other income was a gain
of $968 related to the sale and mark to market adjustment on the fair value of the right to receive 175,000 shares of CleanSpark Common
Stock converted from the issued and outstanding shares of PCPI, and warrants to purchase CleanSpark Common Stock.
Provision
for Income Taxes . Our provision reflects an effective tax rate on loss before taxes of 0.7% for the year ended December 31,
2021, as compared to (0.2)% for the year ended December 31, 2020, as set forth below:
For the Year Ended
December 31,
2021
2020
Variance
Loss before income taxes
$ (2,183 )
$ (2,981 )
$ 798
Income tax (benefit) expense
(16 )
5
(21 )
Effective income tax rate %
0.7
(0.2 )
0.9
Net
Loss per Share
We
generated a net loss of $2.2 million for the year ended December 31, 2021, as compared to a net loss of $3.0 million
during the year ended December 31, 2020.
Our
net loss per basic and diluted share for the year ended December 31, 2021 was $0.24, compared to $0.34 for the year ended December
31, 2020.
25
LIQUIDITY
AND CAPITAL RESOURCES
General . As of December 31, 2021,
we had $9.9 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 historically met our cash needs through a combination of cash flows from operating activities and bank
borrowings, the completion of the Equity Transaction, proceeds from the sale of the CleanSpark Common Stock and warrants to purchase
CleanSpark Common Stock, proceeds from insurance and funding from the Payroll Protection Program. Our cash requirements historically
were generally for operating activities, debt repayment, capital improvements and acquisitions.
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 consolidated statement of cash flows:
December 31,
2021
2020
Cash
$ 9,924
$ 7,567
Restricted cash
1,775
—
Total cash and restricted cash as shown in the statement of cash flows
$ 11,699
$ 7,567
During
the first quarter of 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 $1.8 million. As a result of executing the cash collateral security agreement, the Company
recognized approximately $1.8 million of restricted cash within the consolidated balance sheet at December 31, 2021.
On
January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain
of coronavirus originating in Wuhan, China and the risks to the international community as the virus spreads globally beyond its
point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic (the “COVID-19 pandemic”),
based on the rapid increase in exposure globally.
The
full impact of the COVID-19 pandemic continues to evolve as the date of this report. As such, it is uncertain as to the full magnitude
that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. During the
year ended December 31, 2021, the Company experienced an impact to productivity as a result of following social distancing guidelines
and practicing personal protective measures. Notwithstanding, the Company has been 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 and the global responses to contain its
spread, the Company is not able to estimate the full effects of the COVID-19 pandemic at this time, however, if the pandemic continues,
it may continue to have an adverse effect on the Company’s results of operations, financial condition, or liquidity.
On
March 27, 2020, 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 first quarter of 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 $2.3 million during the year ended December 31, 2021, as
compared to cash used in our operating activities of $3.6 million during the year ended December 31, 2020. The
decrease in cash used in operating activities is primarily due to working capital fluctuations and a one-time settlement payment (in
an amount that did not differ significantly from the $1.2 million of expected costs the Company had recognized as a legal contingency
during the year ended December 31, 2018) that was made during the year ended December 31, 2020, and a one-time $1.4 million gain on the
extinguishment and forgiveness of the PPP Loan recognized during the year ended December 31, 2021.
Cash Used in / Provided by Investing
Activities. Cash used in investing activities during the year ended December 31, 2021 was $237, as compared to cash provided
by our investing activities of $2.6 million during the year ended December 31, 2020. The decrease in cash provided by investing
activities is primarily due to the recognition of $2.4 million of proceeds from the sale of the CleanSpark Common Stock and warrants
during the year ended December 31, 2020, and no comparable proceeds being recognized during the year ended December 31, 2021. During
the year ended December 31, 2021, additions to our property, plant and equipment were $237.
Cash Provided by Financing Activities.
Cash provided by our financing activities was $6.7 million during the year
ended December 31, 2021, as compared to cash provided by our financing activities of $337 during the year ended December 31, 2020. The
primary source of cash provided by financing activities for the year ended December 31, 2021 were the net proceeds from the issuance of
common stock in November 2021 under the ATM Program, offset by cash used in financing activities as a result of recognizing a dividend
paid to shareholders of $1.0 million.
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Working
Capital . As of December 31, 2021, we had working capital of $18.6 million, including $9.9 million of cash and $1.8 million
of restricted cash, compared to working capital of $8.4 million, including $7.6 million of cash at December 31, 2020. At December
31, 2021 and December 31, 2020, we no longer had a revolving credit facility, as it was paid in full and terminated in August
2019 with the proceeds from the sale of the transformer business units.
Assessment of Liquidity . At December
31, 2021, we had $9.9 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 historically met our cash needs through a combination of cash flows from operating activities
and bank borrowings, the completion of the Equity Transaction, proceeds from the sale of the CleanSpark Common Stock and warrants
to purchase CleanSpark Common Stock, proceeds from insurance 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 net proceeds of approximately $8.7 million. See “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments”.
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 our cash balance is sufficient to fund operations for the next twelve months. Beginning
January 1, 2022, in the next 12 months, we have contractual lease obligations representing approximately $920. We have historically funded
these obligations by a combination of cash flow from operations and the raising of capital through additional debt or equity.
In addition, beginning in January 2023, we have contractual
lease obligations representing an aggregate of approximately $908. We intend to fund the majority of these obligations by a combination
of cash flow from operations, as well as the raising of capital through additional debt or equity.
Capital
Expenditures
Our
additions to property, plant and equipment were $237 during the year ended December 31, 2021 as compared to no additions during
the year ended December 31, 2020.
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. We predominately sell to customers in the industrial production and commercial construction markets. Accordingly,
changes in the condition of any of our customers may have a greater impact than if our sales were more evenly distributed between
different end markets. For a further discussion of factors that may affect future operating results see the sections entitled
“Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.”
Off
Balance Sheet Transactions and Related Matters
We
have no off-balance sheet transactions, arrangements, obligations (including contingent obligations), or other relationships with
unconsolidated entities or other persons that have, or may have, a material effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
New
Accounting Pronouncements
The
information required by this Item is provided in “Note 2 - Summary of Significant Accounting Policies” to our audited
financial statements for the year ended December 31, 2021 included in this Annual Report on Form 10-K.
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Recent
Accounting Pronouncements
There
have been no recent accounting pronouncements not yet adopted by the Company which would have a material impact on the Company’s
financial statements.
Income
Taxes. In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) , which simplifies the accounting
for income taxes by removing certain exceptions to the general principles in Topic 740 and also clarifies and amends existing
guidance to improve consistent application. The ASU is effective for all annual and interim periods beginning December 15, 2020,
with early adoption permitted. The Company adopted this guidance on January 1, 2021. The adoption of this ASU did not have a material
impact on the consolidated financial statements.
Fair
Value Measurement. In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework
- Changes to the Disclosure Requirements for Fair Value Measurement that eliminates, amends, and adds certain disclosure requirements
for fair value measurements. The Company adopted this guidance on January 1, 2020. The adoption of this ASU did not have a material
impact on the consolidated 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.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not
Applicable.
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