Pioneer Power Solutions, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing was signed March 30, 2020. Unless stated otherwise, financial amounts below are in U.S. dollars and millions; the filing presents most financial statements in thousands.
Business context and reporting period
Pioneer manufactures specialty electrical distribution equipment and provides service for backup power systems. Its continuing businesses are switchgear manufacturing (T&D Solutions) and generator maintenance and related services (Critical Power).
During 2019, the Company sold its transformer businesses, completed August 16, and disposed of PCPI to CleanSpark in January. The transformer businesses are reported as discontinued operations. Accordingly, the continuing-operations revenue figures below exclude the transformer business; its 2019 revenue through the sale was $46.6 million, compared with $86.3 million for 2018.
Key financial results and position
| Metric | FY2019 | FY2018 |
|---|---|---|
| Continuing-operations revenue | $20.6 million | $20.1 million |
| Gross profit / margin | $1.2 million / 5.7% | $1.9 million / 9.4% |
| Operating loss from continuing operations | $(11.8) million | $(9.1) million |
| Net loss from continuing operations | $(12.0) million | $(9.3) million |
| Income from discontinued operations, net of tax | $10.6 million | $3.6 million |
| Net loss | $(1.4) million | $(5.7) million |
| Operating cash flow | $(5.6) million | $2.2 million |
Continuing revenue rose 2.3%. Critical Power revenue increased 1.9% to $11.6 million, as service revenue grew 3.9% to $10.2 million while equipment revenue declined 10.4%. T&D switchgear revenue increased 2.7% to $9.0 million. Gross margin fell mainly because T&D took lower-margin work, offered customer discounts, faced higher skilled-labor costs, and recorded a $0.4 million inventory write-down. Critical Power gross margin improved to 14.7% from 13.4%.
Operating expenses increased 17.2% to $12.9 million, including a $3.0 million goodwill impairment in Critical Power, attributed partly to the Verizon contract loss. The $2.8 million other expense principally reflects a fair-value loss on CleanSpark shares and warrants. A $4.2 million gain on the PCPI disposition was recorded in continuing operations; the transformer sale produced a $13.7 million gain in discontinued operations. Basic and diluted net loss per share was $0.17, versus $0.65 in 2018; continuing-operations loss per share was $1.38, versus $1.07.
Cash and cash equivalents were $8.2 million at year-end, versus $0.2 million in 2018; working capital was $10.1 million, versus a $5.5 million deficit. Investing activities provided $39.8 million, primarily from the transformer sale, while financing activities used $26.2 million, primarily for debt repayment. The Company reported no outstanding bank debt at year-end; prior revolving facilities were repaid and terminated in August 2019. Remaining operating and finance lease liabilities totaled approximately $1.9 million.
Total assets were $28.1 million and stockholders’ equity was $16.4 million at December 31, 2019. Backlog was $15.9 million, nearly unchanged from $15.7 million for continuing operations in 2018; most was expected to be delivered in 2020. No quantified earnings or revenue guidance was provided.
Material changes, outlook, risks and unusual items
- Business divestitures and proceeds: The transformer businesses were sold for a stated base price of $68.0 million, including $60.5 million cash and seller notes. After working-capital adjustments and sale expenses, reported net proceeds were $45.2 million. The notes carry 4% interest and mature December 31, 2022; their year-end carrying value was $5.1 million. The sale involved CEO Nathan Mazurek and related entities as buyer parties, making the transaction’s terms and related-party aspects important to review.
- Customer concentration: Verizon represented 13% of 2019 sales and CleanSpark 18%. Verizon notified the Company its preventive-maintenance agreement would not be renewed after March 31, 2020. The CleanSpark manufacturing agreement was due to expire July 22, 2020; an extension was anticipated but not assured. Management warned losing Verizon could materially harm results absent replacement business or cost reductions.
- Litigation and contingent exposure: Myers Power Products litigation seeks injunctive relief and unspecified damages. The Company recorded approximately $1.2 million for expected costs, but outcomes remain uncertain. A court order enjoined a declared approximately $12 million dividend and ordered the Company and PCEP to obtain and post a $12 million bond; appeals were pending. The case was scheduled for trial in the second quarter of 2020, and the filing states the PCEP sale could not proceed until resolution.
- Other unusual items: A June 2019 flood damaged inventory at the Reynosa facility. The Company recorded an estimated $1.8 million insurance receivable; $1.4 million was received after year-end. It also reported substantial doubt about collecting $2.3 million from a former Asian manufacturing partner and recorded a reserve. The CleanSpark securities’ value declined, and the Company wrote off $0.6 million of older secured loans as recovery was considered unlikely.
- Liquidity and operating risks: Continuing businesses had historically generated operating losses and negative cash flows. The Company expected to rely on working capital and operating cash flow after termination of its credit facilities. Raw materials were approximately 55% of revenue in 2019, exposing margins to cost and supply changes. The 2019 cash-flow profile depended substantially on divestiture proceeds.
- COVID-19: Management said it could not estimate the pandemic’s financial effects, but warned that continuing disruption could adversely affect 2020 operations, liquidity, suppliers, workforce, and demand. The Company stated it was considered an essential business under then-current CISA guidance.
- Controls and audit: Management concluded disclosure controls and internal control over financial reporting were effective at year-end after remediation of a previously identified material weakness. BDO USA, LLP issued an unqualified opinion on the financial statements; it did not audit internal-control effectiveness.
Important facts for investors to verify
- Whether the Company replaced or reduced the revenue and profit contribution of Verizon after March 31, 2020, and whether the CleanSpark manufacturing agreement was extended after July 22, 2020.
- The status and potential financial consequences of the Myers Power Products case, the $12 million bond order, and the related appeals; compare potential exposure with the recorded $1.2 million reserve and available liquidity.
- Actual cash conversion and operating performance of the remaining switchgear and Critical Power businesses, including whether backlog converted to revenue and positive cash flow.
- Collection and repayment terms for the $5.1 million carrying value of seller notes, and receipt of the remaining flood-insurance proceeds.
- The impact of COVID-19 and customer concentration on 2020 results, cash needs, and Nasdaq listing compliance; the filing provides no quantified outlook.
- The related-party sale disclosures and purchase-price adjustments, including the $1.7 million working-capital payment and the final net proceeds and seller-note balances.