PIONEER POWER SOLUTIONS, INC. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Consolidated Financial Statements for the Years Ended December 31, 2021 and 2020 Report of Independent Registered Public Accounting Firm (BDO USA, LLP, New York, NY: PCAOB ID# 243 ) 30 Consolidated Statements of Operations 32 Consolidated Balance Sheets 33 Consolidated Statements of Cash Flows 34 Consolidated Statements of Stockholders’ Equity 35 Notes to the Consolidated Financial Statements 36 29 Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors Pioneer Power Solutions, Inc. Fort Lee, New Jersey Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Pioneer Power Solutions, Inc. (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. 30 Inventory Reserve As described in Note 6 to the consolidated financial statements, as of December 31, 2021 a substantial portion of the Company’s inventory is comprised of work-in-process, which includes raw materials and capitalized labor and overhead utilized to support the manufacturing process at Pioneer Custom Electrical Products Corp (PCEP) to fulfill customer orders. Management analyzes work-in-process inventory to identify circumstances whereby the capitalized inventory cost exceeds its net realizable value. If management determines that the cost of the work-in-process inventory will not be recoverable, a reserve to adjust the inventory to net realizable value is required to be recognized. We identified the valuation of inventory reserve related to net realizable value at PCEP as a critical audit matter. In determining the net realizable value reserve over PCEP work-in-process inventory, significant estimates for estimated costs to complete projects are applied to open work orders. The evaluation over the need for a reserve requires management to develop and utilize assumptions in its determination of estimates to complete the open work orders based upon an assessment of project status and efforts required to complete the assembly of the finished product. Auditing the critical assumptions used by management in determining the net realizable value reserve involved especially challenging auditor judgment due to the nature and extent of audit effort needed to evaluate the reasonableness of the assumptions and judgments made by management. The primary procedures we performed to address this critical audit matter included: ● Testing a sample of PCEP work-in-process inventory on hand at year end and comparing expected completed costs to current market prices through the examination of relevant source documents. ● Testing the completeness and accuracy of the underlying costs incurred to date on PCEP work-in-process inventory on hand at year end through the examination of relevant source documents including bill of materials and actual costs incurred to date. ● Evaluating management's conclusion of estimated projects to complete on a sample of PCEP work-in-process inventory on hand at year end through a combination of inquiries of operating project managers and agreeing subsequent costs incurred through the examination of relevant source documents. ● Evaluating the reasonableness of management’s estimates and current period costs estimates of inventory reserves by performing a retrospective comparison of prior estimates to current period activity to assess management’s ability to estimate inventory reserves. /s/ BDO USA, LLP We have served as the Company's auditor since 2014. New York, New York March 31, 2022 31 PIONEER POWER SOLUTIONS, INC. Consolidated Statements of Operations (In thousands, except per share data) For the Year Ended December 31, 2021 2020 Revenues $ 18,311 $ 19,490 Cost of goods sold Cost of goods sold 16,918 18,063 Write down of inventory — 546 Total cost of goods sold 16,918 18,609 Gross profit 1,393 881 Operating expenses Selling, general and administrative 5,255 5,165 Total operating expenses 5,255 5,165 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 ) Loss per share: Basic $ ( 0.24 ) $ ( 0.34 ) Diluted $ ( 0.24 ) $ ( 0.34 ) Weighted average common shares outstanding: Basic 8,858 8,726 Diluted 8,858 8,726 The accompanying notes are an integral part of these consolidated financial statements. 32 PIONEER POWER SOLUTIONS, INC. Consolidated Balance Sheets (In thousands, except share amounts) December 31, 2021 2020 ASSETS Current assets Cash $ 9,924 $ 7,567 Restricted cash 1,775 — Notes receivable 5,778 — Accounts receivable, net 2,429 2,587 Insurance receivable — 95 Inventories, net 4,160 2,403 Income taxes receivable — 407 Prepaid expenses and other current assets 1,069 897 Total current assets 25,135 13,956 Property, plant and equipment, net 516 433 Right-of-use assets 2,237 1,504 Notes receivable — 5,350 Other assets 39 44 Total assets $ 27,927 $ 21,287 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable and accrued liabilities $ 4,159 $ 4,027 Deferred revenue 2,423 714 Current maturities of long-term debt — 780 Income taxes payable — 17 Total current liabilities 6,582 5,538 Long-term debt — 633 Other long-term liabilities 1,793 1,257 Total liabilities 8,375 7,428 Commitments and contingencies (note 11) — — Stockholders’ equity Preferred stock, $ 0.001 par value, 5,000,000 shares authorized; none issued — — Common stock, $ 0.001 par value, 30,000,000 shares authorized; 9,640,545 and 8,726,045 shares issued and outstanding on December 31, 2021 and 2020, respectively 10 9 Additional paid-in capital 31,840 23,981 Accumulated other comprehensive income 14 14 Accumulated deficit ( 12,312 ) ( 10,145 ) Total stockholders’ equity 19,552 13,859 Total liabilities and stockholders’ equity $ 27,927 $ 21,287 The accompanying notes are an integral part of these consolidated financial statements. 33 PIONEER POWER SOLUTIONS, INC. Consolidated Statements of Cash Flows (In thousands) For the Year Ended December 31, 2021 2020 Operating activities Net loss $ ( 2,167 ) $ ( 2,986 ) Depreciation 153 203 Amortization of right-of-use assets 285 261 Amortization of imputed interest ( 428 ) ( 448 ) Interest expense from PPP Loan 4 9 Gain on forgiveness of PPP Loan ( 1,417 ) — Non-cash cost of operating leases 580 622 Change in receivable reserves 71 ( 57 ) Change in inventory reserves 127 ( 535 ) Write down of inventory — 546 Change in long term payables — 4 Proceeds from insurance receivable 95 1,705 Gain on investments — ( 968 ) Stock-based compensation 186 3 Other — 3 Changes in current operating assets and liabilities: Accounts receivable 115 1,158 Inventories ( 1,883 ) 2,139 Prepaid expenses and other assets ( 195 ) ( 692 ) Income taxes 397 ( 501 ) Accounts payable and accrued liabilities 27 ( 3,352 ) Deferred revenue 1,709 ( 727 ) Net cash used in operating activities ( 2,341 ) ( 3,613 ) Investing activities Additions to property, plant and equipment ( 237 ) — Proceeds from sale of investments — 2,436 Change in notes receivable — 194 Net cash (used in) / provided by investing activities ( 237 ) 2,630 Financing activities Bank overdrafts — ( 374 ) Funding from PPP Loan — 1,404 Payment of deferred purchase price — ( 397 ) Payment of deferred payroll taxes ( 100 ) — Net proceeds from the exercise of options for common stock 58 — Net proceeds from issuance of common stock 8,663 — Dividend paid to shareholders ( 1,047 ) — Principal repayments of financing leases ( 864 ) ( 296 ) Net cash provided by financing activities 6,710 337 Increase / (decrease) in cash and restricted cash 4,132 ( 646 ) Cash, and restricted cash, beginning of year 7,567 8,213 Cash, and restricted cash, end of period $ 11,699 $ 7,567 Supplemental cash flow information: Interest paid 3 28 Income taxes paid, net of refunds ( 395 ) 507 Non-cash investing and financing activities: Acquisition of right-of-use assets 1,598 — The accompanying notes are an integral part of these consolidated financial statements. 34 PIONEER POWER SOLUTIONS, INC. Consolidated Statements of Stockholders’ Equity (Amounts in thousands, except share amounts) Accumulated Additional other compre- Total Common Stock paid-in hensive Accumulated stockholders’ Shares Amount capital income deficit equity Balance - January 1, 2020 (Revised) 8,726,045 $ 9 $ 23,978 $ 14 $ ( 7,159 ) $ 16,842 Net loss — — — — ( 2,986 ) ( 2,986 ) Stock-based compensation — — 3 — — 3 Balance - December 31, 2020 8,726,045 $ 9 $ 23,981 $ 14 $ ( 10,145 ) $ 13,859 Balance - January 1, 2021 8,726,045 $ 9 $ 23,981 $ 14 $ ( 10,145 ) $ 13,859 Net loss — — — — ( 2,167 ) ( 2,167 ) Stock-based compensation — — 186 — — 186 Dividend to shareholders — — ( 1,047 ) — — ( 1,047 ) Exercise of stock options 26,000 — 58 — — 58 Issuance of common stock, net of transaction costs 888,500 1 8,662 — — 8,663 Balance - December 31, 2021 9,640,545 $ 10 $ 31,840 $ 14 $ ( 12,312 ) $ 19,552 The accompanying notes are an integral part of these consolidated financial statements. 35 PIONEER POWER SOLUTIONS, INC. Notes to Consolidated Financial Statements 1. BASIS OF PRESENTATION Pioneer Power Solutions, Inc. and its wholly owned subsidiaries (referred to herein as the “Company,” “Pioneer,” “Pioneer Power,” “we,” “our” and “us”) design, manufacture, integrate, refurbish, service, distribute and sell electric power systems, distributed energy resources, used and new 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 ( 3 ) additional locations in the U.S. for manufacturing, service and maintenance, engineering, sales and administration. NASDAQ Listing On September 24, 2013, the Company completed an underwritten public offering of 1,265,000 shares of its common stock at a gross sales price of $ 7.00 per share, resulting in net proceeds to the Company of approximately $ 7.9 million , after deducting underwriting discounts and commissions and other offering expenses. In connection with the public offering, the Company’s common stock began trading on the Nasdaq Capital Market under the symbol PPSI. Segments In determining operating and reportable segments in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 280, Segment Reporting (“ASC 280”), the Company concluded that it has two reportable segments, which are also our operating segments: Transmission & Distribution Solutions (“T&D Solutions”) and Critical Power Solutions (“Critical Power”). Financial information about the Company’s segments is presented in Note 15 - Business Segment, Geographic and Customer Information. Sale of Transformer Business Units On June 28, 2019, the Company entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”), by and among the Company, Electrogroup Canada, Inc., a wholly owned subsidiary of the Company (“Electrogroup”), Jefferson Electric, Inc., a wholly owned subsidiary of the Company (“Jefferson”), JE Mexican Holdings, Inc., a wholly owned subsidiary of the Company (“JE Mexico,” and together with Electrogroup and Jefferson, the “Disposed Companies”), Nathan Mazurek (Chief Executive Officer of the Company), Pioneer Transformers L.P. (the “US Buyer”) and Pioneer Acquireco ULC (the “Canadian Buyer,” and together with the US Buyer, the “Buyer”). Pursuant to the terms of the Stock Purchase Agreement, the Company agreed to sell (i) all of the issued and outstanding equity interests of Electrogroup to the Canadian Buyer and (ii) all of the issued and outstanding equity interests of Jefferson and JE Mexico to the US Buyer (the “Equity Transaction”), for a purchase price of $ 68 .0 million. Included in the purchase price, the Company received two subordinated promissory notes, issued by the Buyer, in the aggregate principal amount of $ 5 .0 million and $ 2.5 million, for a total aggregate principal amount of $ 7.5 million (the “Seller Notes”). During the fourth quarter of 2019, the Company and the Buyer, pursuant to the Stock Purchase Agreement, completed the net working capital adjustment, which resulted in the Company paying the Buyer $ 1.8 million in cash and reducing the principal amount of the $ 5 .0 million Seller Note to $ 3.2 million. During the second quarter of 2020, the Company recognized an additional reduction to the principal amount of the Seller Note of $ 194 for a valid claim paid by the Buyer on behalf of the Company. Including the reduction to the principal amount for the valid claim, the Company has revalued the Seller Notes for an appropriate imputed interest rate, resulting in a change to the value of the Seller Notes at December 31, 2021 of $ 428 , for a carrying value of $ 5.8 million, which is included within notes receivable (see Note 8 - Notes Receivable). Presentation The accompanying audited consolidated financial statements of the Company have been prepared pursuant to the rules of the SEC and reflect the accounts of the Company as of December 31, 2021. Certain information and footnote disclosures, normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), have been condensed or omitted pursuant to those rules and regulations. We believe that the disclosures made are adequate to make the information presented not misleading to the reader. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to fairly state the financial position, results of operations and cash flows with respect to the audited consolidated financial statements have been included. These audited consolidated financial statements include the accounts of Pioneer and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. 36 Liquidity The accompanying financial statements have been prepared on a basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements as of the year ended December 31, 2021, the Company had $ 9.9 million of cash on hand and working capital of $ 18.6 million. The cash on hand was 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. 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. On June 1, 2021 , the board of directors of the Company 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 additional paid-in capital (“APIC”). On October 20, 2020, we entered into an At The Market Sale Agreement with H.C. Wainwright & Co., LLC (“Wainwright”), pursuant to which we may offer and sell our common shares having an aggregate price of up to $ 9 .0 million from time to time through Wainwright, acting as agent or principal (the “ATM Program”). Shares of common stock are offered pursuant to a sales agreement prospectus included in the Company’s shelf registration on Form S-3 filed with the Securities and Exchange Commission on October 20, 2020, which 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. 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. In November 2016, the FASB issued amended guidance to 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 audited 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 COVID-19 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. 37 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. Rounding All dollar amounts (except share and per share data, and with respect to Item 11, Agreements with Executive Officers) presented are stated in thousands of dollars, unless otherwise noted. Amounts may not foot due to rounding. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The financial statements include estimates based on currently available information and management’s judgment as to the outcome of future conditions and circumstances. Significant estimates in these financial statements include allowance for doubtful accounts receivable, inventory provision, useful lives and impairment of long-lived assets and income tax provision. Changes in the status of certain facts or circumstances could result in material changes to the estimates used in the preparation of the financial statements and actual results could differ from the estimates and assumptions. Revenue Recognition Revenue is recognized when (1) a contract with a customer exists, (2) performance obligations promised in a contract are identified based on the products or services that will be transferred to the customer, (3) the transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring products or services to the customer, (4) the transaction price is allocated to the performance obligations in the contract and (5) the Company satisfies performance obligations. 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. 38 Cost of Goods Sold Cost of goods sold for the T&D Solutions and Critical Power segments primarily includes charges for materials, direct labor and related benefits, freight (inbound and outbound), direct supplies and tools, purchasing and receiving costs, inspection costs, internal transfer costs, warehousing costs and utilities related to production facilities and, where appropriate, an allocation of overhead. Cost of goods sold also includes indirect labor and infrastructure cost related to the provision of field services. Financial Instruments The Company’s financial instruments consist primarily of cash, restricted cash, receivables, payables and debt instruments. The carrying values of these financial instruments approximate their respective fair values as they are either short-term in nature or carry interest rates which are periodically adjusted to market rates. Unless otherwise indicated, the carrying value of these financial instruments approximates their fair market value. Concentrations 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, as follows: At December 31, 2021 and 2020, two customers represented approximately 43 % and 42 % of accounts receivable, respectively. For the year ended December 31, 2021, two customers represented approximately 41 % of revenue. For the year ended December 31, 2020, one customer represented approximately 34 % of revenue. Cash and Cash Equivalents Cash and cash equivalents comprise cash on hand, demand deposits and investments with an original maturity at the date of purchase of three months or less. Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash deposits. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $ 250 . As of December 31, 2021 and 2020, the Company had balances of $ 9.7 million and $ 7.3 million in excess of the FDIC insured limits, respectively. The Company reduces exposure to credit risk by maintaining cash deposits with major financial institutions. The Company has not experienced any losses on these accounts and conclude the credit risk to be minimal. Restricted Cash Restricted Cash consists of a cash collateral security agreement with a commercial bank which required the Company to pledge cash collateral as security for all unpaid reimbursement obligations owing to the commercial bank for an irrevocable standby letter of credit. Accounts Receivable The Company accounts for trade receivables at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history and current economic conditions. The Company writes off trade receivables when they are deemed uncollectible. The Company records recoveries of trade receivables previously written off when it receives them. Management considers the Company’s allowance for doubtful accounts, which was $ 140 and $ 69 as of December 31, 2021 and 2020, respectively, to appropriately measure the uncertainty in certain accounts receivable. Long-Lived Assets Depreciation and amortization for property, plant and equipment, and finite life intangible assets, is computed and included in cost of goods sold and in selling and administrative expense, as appropriate. Long-lived assets, consisting primarily of property, plant and equipment, are stated at cost less accumulated depreciation. Property, plant and equipment are depreciated using the straight line method, based on the estimated useful lives of the assets (buildings - 25 years, machinery and equipment - 5 to 15 years, computer hardware and software - 3 to 5 years, furniture & fixtures 5 to 7 years, leasehold improvements – term of lease). Depreciation commences in the year the assets are ready for their intended use. Historically, finite life intangible assets have consisted primarily of customer relationships in multiple categories that are specific to the businesses acquired and for which estimated useful lives were determined based on actual historical customer attrition rates. These finite life intangible assets were amortized by the Company over periods ranging from four to ten years. Long-lived assets and finite life intangible assets are reviewed for impairment whenever events or circumstances have occurred that indicate the remaining useful life of the asset may warrant revision or that the remaining balance of the asset may not be recoverable. Upon indications of impairment, or in the normal course of annual testing, assets and liabilities are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The measurement of possible impairment is generally estimated by the ability to recover the balance of an asset group from its expected future operating cash flows on an undiscounted basis. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value thereof. Determining asset groups and underlying cash flows requires the use of significant judgment. 39 Income Taxes The Company accounts for income taxes under the asset and liability method, based on the income tax laws and rates in the countries in which operations are conducted and income is earned. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. Developing the provision for income taxes requires significant judgment and expertise in federal, international and state income tax laws, regulations and strategies, including the determination of deferred tax assets and liabilities and, if necessary, any valuation allowances that may be required for deferred tax assets. The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. The Company believes that the deferred asset, net recorded as of December 31, 2021 and 2020 is realizable through future reversals of existing taxable temporary differences. If the Company was to subsequently determine that it would be able to realize deferred tax assets in the future in excess of its net recorded amount, an adjustment to deferred tax assets would increase net income for the period in which such determination was made. The Company will continue to assess the adequacy of the valuation allowance on a quarterly basis. The Company’s tax filings are subject to audit by various taxing authorities. The objective of accounting for income taxes is to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences or events that have been recognized in the Company’s financial statements or tax returns. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position (see “Unrecognized Tax Benefits” below). Income tax related interest and penalties are grouped with interest expense on the consolidated statement of operations. Unrecognized Tax Benefits The Company accounts for unrecognized tax benefits in accordance with FASB ASC “Income Taxes” (“ASC 740”). ASC 740 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. ASC 740 contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon ultimate settlement with a taxing authority, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. Additionally, ASC 740 requires the Company to accrue interest and related penalties, if applicable, on all tax positions for which reserves have been established consistent with jurisdictional tax laws. The Company’s policy is to recognize interest and penalties related to income tax matters as interest expense. See Note 14 - Income Taxes. Share-Based Payments The Company accounts for share based payments in accordance with the provisions of FASB ASC 718 “Compensation – Stock Compensation” and accordingly recognizes in its financial statements share based payments at their fair value. In addition, it recognizes in the financial statements an expense based on the grant date fair value of stock options granted to employees and directors. The expense is recognized on a straight line basis over the expected option life while taking into account the vesting period and the offsetting credit is recorded in additional paid-in capital. Upon exercise of options, the consideration paid together with the amount previously recorded as additional paid-in capital is recognized as capital stock. The Company estimates its forfeiture rate in order to determine its compensation expense arising from stock based awards. The Company uses the Black-Scholes Merton option pricing model to determine the fair value of the options. Non-employee members of the Board of Directors are deemed to be employees for the purposes of recognizing share-based compensation expense. Inventories Inventories are stated at the lower of cost or net realizable value using weighted average method and include the cost of materials, labor and manufacturing overhead. The Company uses estimates in determining the level of reserves required to state inventory at the lower of cost or market. The Company estimates are based on market activity levels, production requirements, the physical condition of products and technological innovation. Changes in any of these factors may result in adjustments to the carrying value of inventory. See Note 6 - Inventories. 40 Income (Loss) Per Share Basic income (loss) per share is computed by dividing the income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share is computed by dividing the income (loss) for the period by the weighted average number of common and common equivalent shares outstanding during the period. (See Note 16 - Basic and Diluted Net Loss Per Share). 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. 3. FAIR VALUE MEASUREMENTS ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The fair value standard also establishes a three level hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels are defined as follows: ● Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for an identical asset or liability in an active market. ● Level 2 - inputs to the valuation methodology include quoted prices for a similar asset or liability in an active market or model derived valuations in which all significant inputs are observable for substantially the full term of the asset or liability. ● Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement of the asset or liability. On January 22, 2019, we entered into an Agreement and Plan of Merger with Merger Sub, which resulted in the Company receiving financial instruments that included the right to receive (i) 175,000 shares of CleanSpark Common Stock, (ii) a five -year warrant to purchase 50,000 shares of CleanSpark Common Stock at an exercise price of $ 16.00 per share, and (iii) a five -year warrant to purchase 50,000 shares of CleanSpark Common Stock at an exercise price of $ 20.00 per share. The share quantities and exercise prices of warrants reflect the 10:1 reverse stock split which was completed by CleanSpark in December 2019. During the year ended December 31, 2020, the Company sold all of the CleanSpark Common Stock and warrants to purchase CleanSpark Common Stock it received in connection with the Merger Agreement and recorded proceeds of $ 2.4 million . The gain from the sale was partially offset by a mark to market adjustment of $ 1.4 million resulting in a net gain of $ 968 to other income in the accompanying statements of operations. Warrants at fair value were previously recorded at inception as long term within other assets. No other changes in valuation techniques or inputs occurred during the year ended December 31, 2021 and 2020. No transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy occurred during the year ended December 31, 2021 and 2020. 41 4. REVENUES Nature of our products and services Our principal products and services include electric power systems, distributed energy resources, used and new power generation equipment and mobile electric vehicle (“EV”) charging solutions. Products Our T&D Solutions business provides electric power systems, including e-Bloc, 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 new and refurbished 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. 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. 42 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 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. During the year ended December 31, 2021, the Company recognized $ 3.5 million of revenue over time and incurred costs of $ 3.1 million related to a single contract for a highly customized large equipment order. Additionally, the Company recognized $ 7.9 million of revenue at a point in time from the sale of our products during the year ended December 31, 2021. 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 $ 6.9 million of service revenue during the year ended December 31, 2021. During the year ended December 31, 2021, the Company recognized approximately $ 714 of revenue that was recognized as deferred revenue at December 31, 2020, as compared to $ 1.4 million during the year ended December 31, 2020. 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 the years ended December 31, 2021 and 2020 were insignificant. The following table presents our revenues disaggregated by revenue discipline: For the Year Ended December 31, 2021 2020 Products $ 11,375 $ 11,831 Services 6,936 7,659 Total revenue $ 18,311 $ 19,490 See Note 15 - Business Segment, Geographic and Customer Information. 5. 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 income was $ 1.3 million , as compared to other income of $ 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. For the year ended December 31, 2020, included in other income was a gain of $ 968 related to the sale and mark to market adjustment on the fair value of the CleanSpark Common Stock and warrants. 6. INVENTORIES The components of inventories are summarized below: December 31, 2021 2020 Raw materials $ 1,354 $ 1,719 Work in process 3,233 1,420 Provision for excess and obsolete inventory ( 427 ) ( 736 ) Total inventories $ 4,160 $ 2,403 Inventories are stated at the lower of cost or a net realizable value determined on a weighted average method. 43 7. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are summarized below: December 31, 2021 2020 Machinery and equipment $ 1,396 $ 1,210 Furniture and fixtures 205 205 Computer hardware and software 541 669 Leasehold improvements 322 337 2,464 2,421 Less: accumulated depreciation ( 1,948 ) ( 1,988 ) Total property, plant and equipment, net $ 516 $ 433 Depreciation expense was $ 153 and $ 203 for the period ended December 31, 2021 and 2020, respectively. 8. NOTES RECEIVABLE In connection with the sale of the transformer business units in August 2019, amongst other consideration, we received two subordinated promissory notes in the aggregate principal amount of $ 5 .0 million and $ 2.5 million, for a total aggregate principal amount of $ 7.5 million (the “Seller Notes”), subject to certain adjustments. The Seller Notes accrue interest at a rate of 4.0 % per annum, with a final payment of all unpaid principal and interest becoming fully due and payable at December 31, 2022 . The Company determined the fair value of the Seller Notes based on market conditions and prevailing interest rates. During the fourth quarter of 2019, the Company and the Buyer, pursuant to the Stock Purchase Agreement, completed the net working capital adjustment, which resulted in the Company paying the Buyer $ 1.8 million in cash and reducing the principal amount of the $ 5 .0 million Seller Note to $ 3.2 million. During the second quarter of 2020, the Company recognized an additional reduction to the principal amount of the Seller Note of $ 194 for a valid claim paid by the Buyer on behalf of the Company. The Company has revalued the Seller Notes for an appropriate imputed interest rate, resulting in a net change to the value of the Seller Notes at December 31, 2021 of $ 428 for a carrying value of $ 5.8 million. 9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES The components of accounts payable and accrued liabilities are summarized below: December 31, 2021 2020 Accounts payable $ 2,089 $ 2,233 Accrued liabilities 1,263 1,079 Current portion of lease liabilities 807 715 Total accounts payable and accrued liabilities $ 4,159 $ 4,027 Accrued liabilities primarily consist of accrued insurance, accrued sales commissions and accrued compensation and benefits. At December 31, 2021 and 2020, accrued insurance was $ 481 and $ 445 , respectively. Accrued sales commissions at December 31, 2021 and 2020 were $ 247 and $ 122 , respectively. At December 31, 2021 accrued compensation and benefits were $ 270 compared to $ 256 at December 31, 2020. The remainder of accrued liabilities are comprised of several insignificant accruals in connection with normal business operations. 10. DEBT 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 first quarter of 2021 and recognized a $ 1.4 million gain on extinguishment and forgiveness of debt in other income (see Note 5 - Other Income). At December 31, 2020, $ 633 of principal payments due were recorded as long-term debt and $ 780 as current debt in accordance with the enactment of the Paycheck Protection Program Flexibility Act of 2020. Schedule of debt December 31, 2021 2020 PPP Loan $ — $ 1,413 Less: current portion — 780 Total long-term obligations $ — $ 633 44 11. COMMITMENTS AND CONTINGENCIES Leases The Company leases certain offices, facilities and equipment under operating and financing leases. Our leases have remaining terms ranging from less than 1 year to 5 years some of which contain options to extend up to 5 years. As of December 31, 2021 and 2020, assets recorded under finance leases were $ 1.6 million and $ 1.4 million , respectively, and accumulated amortization associated with finance leases were $ 1.1 million and $ 776 , respectively. As of December 31, 2021 and 2020, assets recorded under operating leases were $ 3.9 million and $ 2.5 million , respectively, and accumulated amortization associated with operating leases were $ 2.3 million and $ 1.7 million , respectively. During the third quarter of 2021, the Company executed an extension of its operating lease for the manufacturing facility in Santa Fe Springs, California. After adjusting for a weighted average discount rate, the Company recognized a right-of-use asset and lease liability of approximately $ 1.4 million within the consolidated balance sheets. The components of the lease expense were as follows: For the Year Ended December 31, 2021 2020 Operating lease cost $ 641 $ 669 Finance lease cost Amortization of right-of-use asset $ 285 $ 261 Interest on lease liabilities 41 53 Total finance lease cost $ 326 $ 314 Other information related to leases was as follows: Supplemental Cash Flows Information December 31, 2021 2020 Cash paid for amounts included in the measurement of lease liabilities Operating cash flow payments for operating leases $ 632 $ 677 Operating cash flow payments for finance leases 41 53 Financing cash flow payments for finance leases 292 235 Right-of-use assets obtained in exchange for lease obligations Operating lease liabilities arising from obtaining right of use assets 1,418 390 Capitalized lease obligations 180 295 Weighted Average Remaining Lease Term December 31, 2021 2020 Operating leases 3 years 3 years Finance leases 2 years 2 years Weighted Average Discount Rate December 31, 2021 2020 Operating leases 5.50 % 5.50 % Finance leases 6.75 % 6.72 % 45 Future minimum lease payments under non-cancellable leases as of December 31, 2021 were as follows: Operating Finance Leases Leases 2022 684 236 2023 610 298 2024 446 61 2025 95 77 Thereafter 24 — Total future minmum lease payments 1,859 672 Less imputed interest ( 146 ) ( 59 ) Total future minmum lease payments $ 1,713 $ 613 Reported as of December 31, 2021: Operating Finance Leases Leases Right-of-use assets $ 565 $ 1,672 Operating Finance Leases Leases Accounts payable and accrued liabilities $ 605 $ 202 Other long-term liabilities 1,108 411 Total $ 1,713 $ 613 Litigation and Claims From time to time, we may become involved in lawsuits, investigations and claims that arise in the ordinary course of business. On January 11, 2016, Myers Power Products, Inc., a specialty electrical products manufacturer, filed suit with the Superior Court of the State of California, County of Los Angeles, against us, PCEP and two PCEP employees who are former employees of Myers Power Products, Inc., Geo Murickan, the president of PCEP (“Murickan”), and Brett DeChellis (“DeChellis”), alleging, among other things, that Murickan wrongly used and retained confidential business information of Myers Power Products, Inc. for the benefit of us and PCEP, in breach of their confidentiality agreement and/or employment agreement entered into with Myers Power Products, Inc., and that we and PCEP knowingly received and used such confidential business information. Myers Power Products, Inc. sought injunctive relief enjoining us, PCEP and our employees from using its confidential business information and compensatory damages of an unspecified unlimited amount; however, the Company recognized approximately $ 1.2 million for expected costs related to this litigation prior to fiscal 2020. On October 4, 2019, the dividend that was payable by the Company was enjoined by court order of the Superior Court of California related to the foregoing case. On October 16, 2019, Myers Power Products, Inc. filed an ex parte application arguing the Company had violated, or intended to violate the modified preliminary injunction and sought an order from the court for the Company to post a bond in an amount of $ 30,000 or more (which was not granted). The Company cancelled the dividend as the result of this court order. There were also two related appeals in the California Court of Appeal for the Second Appellate District (“Court of Appeal”). Case no. B301494 was an appeal of the October 4, 2019 order modifying a previously issued preliminary injunction. Case no. B302943 was an appeal of the November 26, 2019 order requiring Pioneer Power Solutions, Inc. and Pioneer Custom Electrical Products Corp. to obtain and post a $ 12 million bond. On April 10, 2020, the Court of Appeal granted our motion to combine the two appeals. On November 20, 2020, the Company entered into a settlement and release agreement with Myers Power Products, Inc. As part of the settlement, all injunctions were dissolved, and all litigation and appeals related to the action were dismissed with prejudice. The parties executed full releases of all known and unknown claims, thereby eliminating all such restrictions on the Company. Terms of the settlement were not disclosed; however, the Company agreed to pay Myers Power Products, Inc. an amount that did not differ significantly from the $ 1.2 million of expected costs the Company recognized as a legal contingency during the year ended December 31, 2018. This payment was made during the fourth quarter of 2020. 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. 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 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. 46 12. STOCKHOLDERS’ EQUITY Common Stock The Company had 9,640,545 and 8,726,045 shares of common stock, $ 0.001 par value per share, outstanding as of December 31, 2021 and December 31, 2020, respectively. Preferred Stock The board of directors is authorized, subject to any limitations prescribed by law, without further vote or action by the shareholders, to issue from time to time up to 5,000,000 shares of preferred stock, $ 0.001 par value, in one or more series. Each such series of preferred stock shall have such number of shares, designations, preferences, voting powers, qualifications, and special or relative rights or privileges as shall be determined by the board of directors, which may include, among others, dividend rights, voting rights, liquidation preferences, conversion rights and preemptive rights. 13. STOCK-BASED COMPENSATION On December 2, 2009, the Company adopted the 2009 Equity Incentive Plan (the “2009 Plan”) for the purpose of issuing incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended, non-qualified stock options, restricted stock, stock appreciation rights, performance unit awards and stock bonus awards to employees, directors, consultants and other service providers. A total of 320,000 shares of common stock are reserved for issuance under the 2009 Plan. Options may be granted under the 2009 Plan on terms and at prices as determined by the board of directors or by the plan administrators appointed by the board of directors. On May 11, 2011, the board of directors of the Company adopted the Pioneer Power Solutions, Inc. 2011 Long-Term Incentive Plan (the “2011 Plan”) which was subsequently approved by stockholders of the Company on May 31, 2011. The 2011 Plan replaces and supersedes the 2009 Plan. The Company’s outside directors and employees, including the Company’s principal executive officer, principal financial officer and other named executive officers, and certain contractors are all eligible to participate in the 2011 Plan. The 2011 Plan allows for the granting of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, dividend equivalent rights, and other awards, which may be granted singly, in combination, or in tandem, and upon such terms as are determined by the Board or a committee of the Board that is designated to administer the Plan. Subject to certain adjustments, the maximum number of shares of the Company’s common stock that may be delivered pursuant to awards under the 2011 Plan is 700,000 shares. As of December 31, 2021, there were no shares available for future grants under the Company’s 2011 Long-Term Incentive Plan. The Company’s 2011 Long-Term Incentive Plan expired during the second quarter of 2021. On October 13, 2021, our board of directors adopted the 2021 Long-Term Incentive Plan (the “2021 Plan”), subject to stockholder approval, which was obtained on November 11, 2021. Our outside directors and our employees, including the principal executive officer, principal financial officer and other named executive officers, and certain contractors are all eligible to participate in the 2021 Plan. The 2021 Plan allows for the granting of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, dividend equivalent rights, and other awards, which may be granted singly, in combination, or in tandem, and upon such terms as are determined by the board or a committee of the board that is designated to administer the 2021 Plan. Subject to certain adjustments, the maximum number of shares of the Company’s common stock that may be delivered pursuant to awards under the 2021 Plan is 900,000 shares. As of December 31, 2021, there were 900,000 shares available for future grants under the Company’s 2021 Plan. The 2021 Plan was initially administered by our board of directors, but it has been administered by the compensation committee following the creation of such committee in the first quarter of 2022. Stock-based compensation expense recorded for the year ended December 31, 2021 and 2020 was approximately $ 186 and $ 3 , respectively. All of the stock-based compensation expense is included in selling, general and administrative expenses in the accompanying consolidated statements of operations. At December 31, 2021, the Company had total stock-based compensation expense remaining to be recognized in the consolidated statements of operations of approximately $ 77 . The fair value of the stock options granted was measured using the Black-Scholes valuation model with the following assumptions: Year Ended December 31, 2021 2020 Expected volatility 31.1 % 31.1 % Expected life in years 5.5 5.5 Risk-free interest rate 2.1 % 0.5 % 47 A summary of stock option activity for the years ended December 31, 2021 and 2020, and changes during the years then ended is presented below: Stock Options Weighted average exercise price Weighted average remaining contractual term Aggregate intrinsic value Outstanding as of January 1, 2020 379,800 $ 7.54 6.10 $ — Granted 70,000 1.68 — — Exercised — — Forfeited ( 9,400 ) 8.55 — Outstanding as of January 1, 2021 440,400 $ 6.58 5.80 $ 155 Granted 236,667 3.31 Exercised ( 26,000 ) 1.10 Forfeited ( 3,400 ) 12.00 Outstanding as of December 31, 2021 647,667 $ 5.53 6.40 $ 1,442 Exercisable as of December 31, 2021 411,000 $ 6.81 4.80 $ 451 Intrinsic value is the difference between the market value of the stock at December 31, 2021 and the exercise price which is aggregated for all options outstanding and exercisable. A summary of the weighted-average grant-date fair value of options, total intrinsic value of options exercised, and cash receipts from options exercised is shown below: Year Ended December 31, 2021 2020 Weighted-average fair value of options granted (per share) $ 0.97 $ 0.49 Intrinsic value gain of options exercised 137 — Cash receipts from exercise of options 58 — 14. INCOME TAXES The components of loss before income taxes are summarized below: Year Ended Decmber 31, 2021 2020 Loss before income taxes U.S. operations $ ( 2,183 ) $ ( 2,981 ) Loss before income taxes $ ( 2,183 ) $ ( 2,981 ) The components of the income tax provision were as follows : Year Ended Decmber 31, 2021 2020 Current State $ ( 16 ) $ 5 Total income tax provision $ ( 16 ) $ 5 48 A reconciliation from the statutory U.S. income tax rate and the Company’s effective income tax rate, as computed on loss before taxes, is as follows: Year Ended December 31, 2021 2020 Federal income tax at statutory rate $ ( 459 ) $ ( 626 ) State and local income tax, net ( 108 ) ( 120 ) Other permanent items ( 379 ) 5 Expired foreign tax credits 178 — Valuation allowance 611 748 True-up 143 — Other ( 2 ) ( 2 ) Total $ ( 16 ) $ 5 The Company’s provision for income taxes reflects an effective tax rate on loss before income taxes of 0.7 % in 2021, as compared to ( 0.2 ) % in 2020. The net deferred income tax asset (liability) was comprised of the following: December 31, 2021 2020 Noncurrent deferred income taxes Total assets $ 82 $ 68 Total liabilities ( 82 ) ( 68 ) Net noncurrent deferred income tax asset — — Net deferred income tax asset $ — $ — The tax effect of temporary differences between GAAP accounting and federal income tax accounting creating deferred income tax assets and liabilities were as follows: December 31, 2021 2020 Deferred tax assets U.S. net operating loss carry forward $ 2,600 $ 1,367 Non-deductible reserves 1,390 1,609 Tax credits 4,454 4,631 Fixed assets 24 15 Intangibles 1,738 1,959 Valuation allowance ( 10,124 ) ( 9,513 ) Net deferred tax assets 82 68 Deferred tax liabilities Fixed assets ( 45 ) ( 28 ) Other ( 37 ) ( 40 ) Net deferred tax liabilities ( 82 ) ( 68 ) Deferred asset, net $ — $ — 49 The assessment of the amount of value assigned to our deferred tax assets under the applicable accounting rules is judgmental. We are required to consider all available positive and negative evidence in evaluating the likelihood that we will be able to realize the benefit of our deferred tax assets in the future. Such evidence includes scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and the results of recent operations. Since this evaluation requires consideration of events that may occur some years into the future, there is an element of judgment involved. Realization of our deferred tax assets is dependent on generating sufficient taxable income in future periods. We do not believe that it is more likely than not that future taxable income will be sufficient to allow us to recover any of the value assigned to our deferred tax assets. Accordingly, we have provided for a valuation allowance of the Company’s foreign tax credits as we do not anticipate generating sufficient foreign source income. In addition, we have provided for a full valuation allowance on the domestic deferred tax assets as the combined effect of future domestic source income and the future reversals of future tax assets and liabilities will likely be insufficient to realize the full benefits of the assets. As of December 31, 2021, the Company has a net operating loss carryforward of $ 10.3 million . The Company has $ 10.1 million of deferred tax assets on which it is taking a full valuation allowance. The total valuation allowance recorded is $ 10.1 million , representing an increase of $ 611 from December 31, 2020. The Company has approximately $ 4.4 million of foreign tax credits for which it has provided a full valuation allowance and $ 39 of research and development credits which expire in 2032. Section 382 of the Internal Revenue Code of 1986, as amended imposes an annual limitation on the amount of net operating loss carryforwards that may be used to offset federal taxable income and federal tax liabilities when a corporation has undergone significant changes in its ownership. If the Company experiences an ownership change as a result of future events, the use of tax attributes may be limited. Management believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. The tax years subject to examination by major tax jurisdiction include the years 2015 and forward by the U.S. Internal Revenue Service and most state jurisdictions, and the years 2016 and forward for the Canadian jurisdiction. 50 15. BUSINESS SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION The Company follows ASC 280 - Segment Reporting in determining its reportable segments. The Company considered the way its management team, most notably its chief operating decision maker, makes operating decisions and assesses performance and considered which components of the Company’s enterprise have discrete financial information available. As the Company makes decisions using a manufactured products vs. distributed products and services group focus, its analysis resulted in two reportable segments: T&D Solutions and Critical Power. The Critical Power reportable segment is the Company’s Titan Energy Systems, Inc. business unit. The T&D Solutions reportable segment is the Company’s Pioneer Custom Electrical Products Corp. business unit. 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 new and used 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 loss: Schedule of information about segment income and loss and segment assets For the Year Ended December 31, 2021 2020 Revenues T&D Solutions Switchgear $ 9,484 $ 10,257 9,484 10,257 Critical Power Solutions Equipment 1,891 1,574 Service 6,936 7,659 8,827 9,233 Consolidated $ 18,311 $ 19,490 For the Year Ended December 31, 2021 2020 Depreciation and amortization T&D Solutions $ 61 $ 113 Critical Power Solutions 349 319 Unallocated corporate overhead expenses 28 32 Consolidated $ 438 $ 464 For the Year Ended December 31, 2021 2020 Operating loss T&D Solutions $ ( 1,060 ) $ ( 1,934 ) Critical Power Solutions ( 385 ) ( 430 ) Unallocated corporate overhead expenses ( 2,417 ) ( 1,920 ) Consolidated $ ( 3,862 ) $ ( 4,284 ) The following table presents information which reconciles segment assets to consolidated total assets: December 31, 2021 2020 Assets T&D Solutions $ 6,490 $ 3,443 Critical Power Solutions 3,573 3,705 Corporate 17,864 14,139 Consolidated $ 27,927 $ 21,287 Corporate assets consisted primarily of cash, restricted cash and notes receivable. 51 Revenues are attributable to countries based on the location of the Company’s customers: For the Year Ended December 31, 2021 2020 Revenues United States $ 18,311 $ 19,490 Sales to CleanSpark accounted for approximately 22 % and 34 % of the Company’s total sales in 2021 and 2020, respectively. The distribution of the Company’s property, plant, and equipment by geographic location is approximately as follows: December 31, 2021 2020 Property, plant and equipment United States $ 516 $ 433 16. BASIC AND DILUTED LOSS PER COMMON SHARE Basic and diluted loss per common share is calculated based on the weighted average number of shares outstanding during the period. The Company’s employee and director stock option awards, as well as incremental shares issuable upon exercise of warrants, are not considered in the calculations if the effect would be anti-dilutive. The following table sets forth the computation of basic and diluted loss per share (in thousands, except per share data): For the Year Ended December 31, 2021 2020 Numerator: Net loss $ ( 2,167 ) $ ( 2,986 ) Denominator: Weighted average basic shares outstanding 8,858 8,726 Effect of dilutive securities - equity based compensation plans — — Denominator for diluted net loss per common share 8,858 8,726 Net loss per common share: Basic $ ( 0.24 ) $ ( 0.34 ) Diluted $ ( 0.24 ) $ ( 0.34 ) As of December 31, 2021 and 2020, diluted loss per share excludes 411 and 370 potentially dilutive common shares related to vested option awards, as their effect was anti-dilutive. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable.