PIONEER POWER SOLUTIONS, INC. 10-K

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 consolidated financial statements and related notes appearing elsewhere in this annual report on Form 10-K. 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, service and sell distributed energy resources, on site 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, Federal and State government entities, package delivery business’, school bus fleet operators, EV charging infrastructure developers and owners, and distributed energy developers. We are headquartered in Fort Lee, New Jersey and operate from two (2) additional locations in the United States for manufacturing, service and maintenance, engineering, and sales and administration. 18 We intend to grow our business through continued internal investments in product development and expansion of our manufacturing, engineering, sales and marketing personnel. Following the sale of our PCEP business unit in October 2024, described below under “Recent Developments”, we currently have one reportable segment: Critical Power. Our Critical Power business provides customers with our suite of mobile e-Boost© EV charging solutions, power generation equipment and all forms of preventative maintenance, repairs, remote monitoring and other service on our customers’ equipment. These products and services are marketed by our operations headquartered in Minnesota, currently doing business under the Titan, Pioneer eMobility and Pioneer Critical Power brand names. U.S. dollars are reported in thousands, except for share and per share amounts (unless otherwise noted). Recent Developments On October 29, 2024, we entered into an Equity Contribution and Purchase Agreement (the “Equity Purchase Agreement”), by and among us, PCEP, Voltaris Power LLC (the “Buyer”) and Pioneer Investment LLC (“Investment”). Pursuant to the terms of the Equity Purchase Agreement, we agreed to: (i) contribute 4% of all of the issued and outstanding equity interests of PCEP to Investment (the “Rollover Interests”) in exchange for Investment issuing $2,000 of common units (representing approximately 6% of Investment’s issued and outstanding common units on the Closing Date (as defined below)) (the “Rollover Units”) to us; and (ii) sell all of the issued and outstanding equity interests of PCEP other than the Rollover Interests to the Buyer ((i) and (ii) being, the “Equity Transaction”). The Equity Transaction included total consideration of (i) $48,000 in cash, subject to adjustment pursuant to the terms of the Equity Purchase Agreement, and (ii) $2,000 in equity pursuant to Investment’s issuance of the Rollover Units to us. The Equity Transaction contains customary terms and conditions and are subject to working capital adjustments. Following the execution of the Equity Purchase Agreement, the Equity Transaction was consummated on October 29, 2024 (the “Closing Date”). PCEP represented the entirety of our Electrical Infrastructure segment. The PCEP Sale was a result of a strategic change to the operations of our business. Critical Accounting Estimates The preparation of consolidated financial statements and related disclosures are in conformity with U.S. GAAP. These accounting principles require us to make estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenue and expense during the periods presented. We believe that the estimates and judgments upon which we rely are reasonable based upon information available to us at the time that we make these estimates and judgments. To the extent that there are material differences between these estimates and actual results, our financial results will be affected. We consider an accounting estimate to be critical if: (i) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (ii) changes in the estimate that are reasonably likely to occur from period to period or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations. As of December 31, 2024, no critical accounting estimates have been identified. In addition, there are other items within our consolidated financial statements that require estimation but are not deemed critical, as defined above. Changes in estimates used in these and other items could have a material impact on our consolidated financial statements. Our significant accounting policies are more fully described in Note 3 – Summary of Significant Accounting Policies, in our consolidated financial statements included elsewhere in this Annual Report. 19 RESULTS OF OPERATIONS Overview of December 31, 2024, and 2023 Operating Results Selected financial and operating data for our reportable business segment for the most recent two years is summarized below. This information, as well as the selected financial data provided in Note 13 and our Consolidated Financial Statements and related notes included in this Annual Report on Form 10-K, should be referred to when reading our discussion and analysis of results of operations below. Our summary of operating results during the years ended December 31, 2024, and 2023 are as follows (in thousands): For the Years Ended December 31, 2024 2023 Revenues Critical Power Solutions $ 22,879 $ 11,116 Cost of goods sold Critical Power Solutions 17,365 8,891 Gross profit 5,514 2,225 Selling, general and administrative 9,672 8,190 Depreciation and amortization 40 185 Research and development 1,050 885 Total operating expenses 10,762 9,260 Operating loss from continuing operations (5,248 ) (7,035 ) Interest income 431 232 Other income, net 50 524 Loss before income taxes (4,767 ) (6,279 ) Income tax benefit (1,418 ) - Net loss from continuing operations (3,349 ) (6,279 ) Income from discontinued operations, net of income taxes 35,204 4,381 Net income (loss) $ 31,855 $ (1,898 ) Backlog . Revenue backlog, which consists of purchase orders and contracts from customers that we believe to be firm, reflects the amount of revenue that we expect to realize in the future upon the satisfaction of customer orders for our products or services that are not yet complete or for which work has not yet begun. Backlog may vary significantly from reporting period to reporting period due to the timing of customer commitments. Our revenue backlog as of December 31, 2024, from our Critical Power business was $19,762, an increase of $3,094, or 18.6%, when compared to $16,668 as of December 31, 2023. The following table represents the progression of our backlog as of December 31, 2024 and 2023 (in thousands): December 31, 2024 2023 Critical Power Solutions $ 19,762 $ 16,668 Order backlog 19,762 16,668 Discountinued operation - 28,497 Total order backlog $ 19,762 $ 45,165 20 Revenue The following table represents our revenues by major product category for the periods indicated (in thousands, except percentages): For the Years Ended December 31, 2024 2023 Variance % Critical Power Solutions Equipment 12,262 3,413 8,849 259.3 Service 10,617 7,703 2,914 37.8 Total revenue $ 22,879 $ 11,116 $ 11,763 105.8 For the year ended December 31, 2024, our revenue from our Critical Power segment increased by $11,763, or 105.8% to $22,879, up from $11,116 during the year ended December 31, 2023, primarily due to an increase in shipments and rentals of our suite of mobile EV charging equipment, e-Boost©. Gross Profit and Margin The following table represents our gross profit for the periods indicated (in thousands, except percentages): For the Years Ended December 31, 2024 2023 Variance % Critical Power Solutions Gross profit 5,514 2,225 3,289 147.8 Gross margin % 24.1 20.0 4.1 For the year ended December 31, 2024, our gross margin from our Critical Power segment increased to 24.1% of revenues, as compared to 20.0% during the year ended December 31, 2023. The increase was predominately due to the increase in sales of our e-Boost equipment from our Pioneer eMobility business. 21 Operating Expenses The following table represents our operating expenses for the periods indicated (in thousands, except percentages): For the Years Ended December 31, 2024 2023 Variance % Selling, general and administrative $ 9,712 $ 8,375 $ 1,337 16.0 Research and development 1,050 885 165 18.6 Total operating expense $ 10,762 $ 9,260 $ 1,502 16.2 Selling, General and Administrative Expense . For the year ended December 31, 2024, consolidated selling, general and administrative expense increased by approximately $1,337, or 16.0%, to $9,712, as compared to $8,375 during the year ended December 31, 2023, primarily due to an increase in payroll related expense. As a percentage of our consolidated revenue, selling, general and administrative expense decreased to 42.4% in the year ended December 31, 2024, as compared to 75.3% in the year ended December 31, 2023 primarily due to the increase in total revenue during the year ended December 31, 2024. R&D Expenses. Research and development expenses in our Critical Power segment consists of costs incurred in performing research and development activities, including salaries, benefits, overhead costs, depreciation, contract services and other related costs. During the year ended December 31, 2024, we incurred $1,050 of R&D expenses related to developing our mobile e-Boost EV charging solutions as compared to $885 for the year ended December 31, 2023. Income from Discontinued Operations Income from discontinued operations, net of tax was $35,204 during the year ended December 31, 2024, as compared to $4,381 during the year ended December 31, 2023. The increase is primarily due to the gain on the sale of our Electrical Infrastructure segment. 22 Operating Income (Loss) from Continuing Operations The following table represents our operating loss for the periods indicated (in thousands): For the Years Ended December 31, 2024 2023 Variance % Operating loss from continuing operations $ (5,248 ) $ (7,035 ) $ 1,787 25.4 During the year ended December 31, 2024, our operating loss from continuing operations decreased by approximately $1,787, or 25.4%, to $5,248, as compared to $7,035 during the year ended December 31, 2023, primarily due to an increase in sales and rentals of our e-Boost equipment from our Pioneer eMobility business in addition to an increase in service sales. Non-Operating Income from Continuing Operations Interest Income . For the year ended December 31, 2024, we had interest income of approximately $431, as compared to interest income of approximately $232 during the year ended December 31, 2023. We generated the majority of our interest income from our cash on hand during the year ended December 31, 2024. 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, 2024, other non-operating income was $50, as compared to other non-operating expense of $524 during the year ended December 31, 2023. Included in other non-operating income during the year ended December 31, 2023, was a settlement gain of $525 related to a legal matter and no such gain was recognized during the year ended December 31, 2024. Provision for Income Taxes . Our provision for income taxes reflects an effective tax rate on loss before taxes of 29.7% for the year ended December 31, 2024, as compared to 0.0% for the year ended December 31, 2023, as set forth below (in thousands): For the Years Ended December 31, 2024 2023 Variance Loss before income taxes $ (4,767 ) $ (6,279 ) $ 1,512 Income tax income (1,418 ) - (1,418 ) Effective income tax rate % (29.7 ) - (29.7 ) Net Loss per Share from Continuing Operations We generated a net loss from continuing operations of $4,767 for the year ended December 31, 2024, as compared to $6,279 during the year ended December 31, 2023. Our net loss from continuing operations per basic and diluted share for the year ended December 31, 2024, was $0.31, compared to a net loss from continuing operations per basic and diluted share of $0.63 for the year ended December 31, 2023. 23 LIQUIDITY AND CAPITAL RESOURCES General . 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 shares of common stock from time to time through Wainwright, acting as sales agent or principal (the “ATM Program”). Since October 20, 2020, and through December 31, 2024, we sold an aggregate of 1,835,616 shares of common stock for aggregate gross proceeds of approximately $14,051, before any sales agent fees and expenses payable by us under the ATM Program. During the year ended December 31, 2024, we sold an aggregate of 919,557 shares of common stock for an aggregate consideration of approximately $5,147, before any sales agent fees and expenses payable by us under the ATM Program. As of December 31, 2024, $69,853 of common stock remained available for issuance under the ATM Program. As of December 31, 2024, we had $41,622 of cash on hand generated from the PCEP Sale and the sale of common stock under the ATM Program. On October 29, 2024, we closed on the PCEP Sale for gross cash proceeds of $48,000. The continuing impacts of the rising interest rates, inflation, changes in foreign currency exchange rates and geopolitical developments, such as the ongoing conflict between Russia and Ukraine, and the ongoing conflict between Israel and Hamas, have resulted, and may continue to result, in a global slowdown of economic activity, which may decrease demand for a broad variety of goods and services, including those provided by our clients, while also disrupting supply channels, sales channels and advertising and marketing activities for an unknown period of time. Additionally, recent changes to U.S. policy implemented by the U.S. Congress, the Trump administration or any new administration have impacted and may in the future impact, among other things, the U.S. and global economy, international trade relations, unemployment, immigration, healthcare, taxation, the U.S. regulatory environment, inflation and other areas. As a result of the current uncertainty in economic activity, we are unable to predict the potential size and duration of the impact on our revenue and our results of operations, if any. The extent of the potential impact of these macroeconomic factors on our operational and financial performance will depend on a variety of factors, including the extent of geopolitical disruption and its impact on our clients, partners, industry, and employees, all of which are uncertain at this time and cannot be accurately predicted. We continue to monitor the effects of these macroeconomic factors and intend to take steps deemed appropriate to limit the impact on our business. During the year ended December 31, 2024, we were able to operate substantially at capacity. There can be no assurance that precautionary measures, whether adopted by us or imposed by others, will be effective, and such measures could negatively affect our sales, marketing, and client service efforts, delay and lengthen our sales cycles, decrease our employees’, clients’, or partners’ productivity, or create operational or other challenges, any of which could harm our business and results of operations. The cash flows related to the discontinued operations have not been segregated and are included in the consolidated statements of cash flows. Cash Used in Operating Activities . Cash used in our operating activities was $6,212 during the year ended December 31, 2024, as compared to cash used in our operating activities of $3,895 during the year ended December 31, 2023. The increase in cash used in operating activities is primarily due to working capital fluctuations. Cash Provided by/ Used in Investing Activities. Cash provided by investing activities during the year ended December 31, 2024, was $38,876, as compared to cash used in our investing activities of $2,496 during the year ended December 31, 2023. The increase in cash provided by investing activities is primarily due to the PCEP Sale during the year ended December 31, 2024. During the years ended December 31, 2024 and 2023, additions to our property and equipment were $3,759 and $2,496, respectively. Cash Provided by/ Used in Financing Activities. Cash provided by our financing activities was $5,376 during the year ended December 31, 2024, as compared to cash used in our financing activities $323 during the year ended December 31, 2023. The increase in cash provided by financing activities is primarily due to the sale of common stock under the ATM Program. Working Capital . As of December 31, 2024, we had working capital of $26,679, including $41,622 of cash, compared to working capital of $9,421, including $3,582 of cash on hand as of December 31, 2023. Assessment of Liquidity . As of December 31, 2024, we had $41,622 of cash on hand generated primarily from the PCEP Sale and the sale of common stock under the ATM Program. We have historically met our cash needs through a combination of cash flows from operating activities and bank borrowings, the completion of the sale of the transformer business units in August 2019 and the sale of common stock under the ATM Program. Historically, our cash requirements 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 operating activities. We expect our cash requirements to be generally for operating activities, capital improvements and product development. We expect that product development and promotional activities related to our new initiatives will continue in the near future and we expect to continue to incur costs related to such activities. We expect that our cash balance is sufficient to fund operations for the next twelve months from the date our consolidated financial statements are issued. 24 As of December 31, 2024, we had no off-balance sheet transactions, arrangements, obligations (including contingent obligations), or other relationships with unconsolidated entities or other persons that had, or that may have, a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Capital Expenditures Our additions to property and equipment were $3,759 during the year ended December 31, 2024, as compared to $2,496 additions during the year ended December 31, 2023. 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. In addition, the consequences of the ongoing geopolitical conflicts, such as the ongoing conflict between Russia and Ukraine and the ongoing conflict between Israel and Hamas, including related sanctions and countermeasures, and the effects of rising global inflation, are difficult to predict, and could adversely impact geopolitical and macroeconomic conditions, the global economy, and contribute to increased market volatility, which may in turn adversely affect our business and operations. Additionally, recent changes to U.S. policy implemented by the U.S. Congress, the Trump administration or any new administration have impacted and may in the future impact, among other things, the U.S. and global economy, international trade relations, unemployment, immigration, healthcare, taxation, the U.S. regulatory environment, inflation and other areas. Although we cannot predict the impact, if any, of these changes to our business, they could adversely affect our business. We predominately sell to customers in the industrial production 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 “Special Note Regarding Forward-Looking Statements.” New Accounting Pronouncements The information required by this Item is provided in “Note 2 - Summary of Significant Accounting Policies” to our consolidated financial statements for the year ended December 31, 2024, included in this Annual Report on Form 10-K. Recent Accounting Pronouncements There have been no recent accounting pronouncements not yet adopted by us which would have a material impact on our consolidated financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. 25