Pioneer Power Solutions, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Financial amounts below are in millions unless stated otherwise. Pioneer designs, manufactures, services and sells electrical power systems, distributed energy resources, power-generation equipment and mobile EV charging solutions. Its reportable segments are Transmission & Distribution Solutions (T&D) and Critical Power Solutions.
Financial results and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $6.251 | $5.685 | $17.476 | $14.813 |
| Gross profit / margin | $0.861 / 13.8% | $0.713 / 12.5% | $1.847 / 10.6% | $1.368 / 9.2% |
| Operating loss | $(1.444) | $(0.518) | $(4.789) | $(2.370) |
| Net loss | $(1.311) | $(0.434) | $(4.586) | $(0.769) |
| Basic and diluted loss per share | $(0.13) | $(0.05) | $(0.47) | $(0.09) |
- Revenue increased 9.9% in Q3 and 18.0% year to date. T&D revenue rose 25.9% in Q3 and 25.8% year to date, led by power systems. Critical Power revenue declined 7.9% in Q3 but rose 8.8% year to date.
- Consolidated gross margin improved, reflecting T&D’s stronger product mix and manufacturing productivity. Critical Power margins fell, which management attributed mainly to higher material and overhead costs.
- SG&A before depreciation and amortization increased 88.3% in Q3 to $2.273 million and 78.8% year to date to $6.550 million. Management cited payroll and stock compensation, professional fees, and e-Boost/E-Bloc development costs.
- Cash was $7.210 million at September 30, down from $9.924 million at year-end 2021; restricted cash was zero. Working capital was $14.2 million, versus $18.6 million at year-end.
- Operating cash use was $3.936 million for the nine months, compared with $0.991 million in 2021, primarily due to working-capital changes, including a $4.319 million inventory increase. Investing cash use was $0.391 million; financing cash use was $0.162 million. Capital expenditures were $0.391 million.
- Total liabilities were $13.603 million, including $12.299 million current liabilities and lease obligations. The balance sheet does not separately report a conventional borrowing balance. Management said cash and working capital were expected to fund operations for the next 12 months.
Material changes and notable items
- Backlog reached $27.896 million at September 30, 2022, up from $10.855 million a year earlier and $24.259 million at June 30, 2022. E-Bloc accounted for approximately $13.8 million, or 49%, of total backlog. Backlog is not a guarantee of future revenue.
- The company revised its first- and second-quarter 2022 statements after determining that a customer contract’s performance obligations should be recognized over time. For the first half, the revision added $0.900 million of revenue and $0.870 million of cost, increasing reported gross profit and reducing net loss by $0.030 million. Management deemed the revision immaterial to those prior periods.
- The company disclosed a material weakness in controls over revenue recognition for nonroutine and complex ASC 606 contracts. The weakness resulted in revenue-account misstatements in the first and second quarters; management began enhancing contract review and engaging external accounting specialists. Controls were not considered remediated as of the filing.
- Revenue and receivables were concentrated: three customers represented approximately 40%, 21% and 13% of accounts receivable at quarter-end. The filing’s risk discussion also identifies Enchanted Rock as a significant customer and notes that loss of major customers could adversely affect results.
- A $6.1 million carrying value of seller notes receivable and accrued interest was outstanding, with final principal and interest due December 31, 2022. The notes bear 4% stated interest and arose from the 2019 transformer-business sale.
- The prior-year nine-month comparison included a $1.4 million gain from forgiveness of the PPP loan; no comparable gain was recorded in 2022. The PPP loan was fully forgiven in 2021.
Outlook, risks and contingencies
- No specific revenue, earnings or margin guidance was provided. Management expects continuing costs for product development and promotion, particularly for e-Boost and E-Bloc, and stated that available cash was sufficient for the next 12 months.
- Management identified risks from economic and end-market demand, customer concentration, competition, backlog conversion, raw-material and labor costs, supply disruptions, and operating efficiency. It also cited uncertainty from COVID-19, inflation, and the Russia-Ukraine conflict.
- The company reported a full valuation allowance against net deferred tax assets and anticipated a 0% annual effective tax rate due to projected operating losses.
- Management reported no material legal proceedings and no material off-balance-sheet arrangements. The filing also states there were no defaults upon senior securities.
Important facts for investors to verify
- Progress and effectiveness of remediation of the revenue-recognition control weakness, and whether further contract-related revisions are needed.
- Collection of the $6.1 million seller notes by the December 31, 2022 due date.
- Conversion of the $27.9 million backlog into revenue, including its timing, margins and customer concentration.
- Cash burn, inventory growth, deferred revenue and working-capital needs relative to management’s 12-month liquidity assessment.
- Whether higher SG&A, development spending and Critical Power cost pressures can be contained as revenue grows.