Pioneer Power Solutions, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unless noted otherwise, financial amounts below are in thousands of dollars. Pioneer manufactures and services electrical distribution and backup-power equipment. Its continuing businesses are T&D Solutions (switchgear) and Critical Power (equipment and field services). Transformer manufacturing operations were sold in August 2019 and are presented as discontinued operations in comparative periods.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $5,087 | $5,360 | $10,088 | $8,378 |
| Gross profit (loss) | $(297) | $521 | $(120) | $778 |
| Operating loss, continuing operations | $(1,184) | $(1,550) | $(2,932) | $(2,993) |
| Net income (loss), including discontinued operations | $(660) | $(4,023) | $(3,581) | $1,625 |
| Basic and diluted EPS | $(0.08) | $(0.46) | $(0.41) | $0.19 |
Q2 revenue declined 5.1% year over year, while six-month revenue rose 20.4%. Q2 gross margin fell to negative 5.8% from 9.7%; six-month margin was negative 1.2% versus 9.3%. The company attributed margin pressure chiefly to lower-margin T&D shipments, customer discounts, and a $546 inventory write-down tied to rationalizing traditional products. Critical Power margins also weakened, primarily after losing the higher-margin Verizon preventive-maintenance business.
Q2 T&D revenue increased 9.1% to $2,987; Critical Power revenue fell 20.0% to $2,100, including a 20.4% decline in service revenue. For the six months, T&D revenue increased 53.9% to $5,864, while Critical Power revenue decreased 7.5% to $4,224. Lower SG&A and interest costs helped reduce operating losses, but did not offset weak gross profit. Q2 other income included a $384 gain from remeasurement of CleanSpark shares and warrants; the six-month period included a $759 mark-to-market loss. The 2019 comparisons include discontinued-operation income and, for the first six months, a $4,207 gain on sale of a subsidiary.
Cash, liquidity and debt
- At June 30, cash and cash equivalents were $7,537; short-term investments were $453; working capital was $8,327. At December 31, 2019, cash was $8,213 and working capital was $10,530 (MD&A rounds this to $10.1 million).
- Six-month operating cash flow was negative $1,207, compared with positive $1,407 in 2019. Investing activities provided $194; financing activities provided $337. Cash decreased by $676 to $7,537.
- Long-term debt was $1,407, consisting of a PPP loan received in April. The company had no revolving credit facility; prior credit-facility borrowings were repaid with divestiture proceeds in 2019. PPP forgiveness was possible but not assured; repayment was scheduled to begin in Q3 2021.
- Total assets were $21,961 and total liabilities $8,698. Seller notes from the transformer-business sale had a $5,136 carrying value, with final payment due December 31, 2022, subject to contractual adjustments and potential offsets.
- No property, plant and equipment additions were made in the first half of 2020; management reported no major capital projects or significant replacement spending planned for the remainder of 2020.
Outlook, risks and unusual items
- Management provided no quantified revenue or earnings guidance. It said the full COVID-19 impact could not be estimated. Demand declined and social-distancing measures affected productivity, although operations continued substantially at capacity. Further pandemic effects could adversely affect 2020 results, liquidity, supply availability and workforce capacity.
- Order backlog was $12,145 at June 30, down from $14,700 at March 31 and $15,856 at December 31, 2019. T&D backlog fell to $4,725 from $7,632 at March 31; Critical Power backlog was $7,420.
- The company received a $1.4 million PPP loan and intended to use proceeds for payroll, employee retention and eligible occupancy and utility costs. It stated it might qualify for partial or full forgiveness but gave no assurance of applying for or receiving forgiveness.
- Myers Power Products litigation remains material. A preliminary-injunction order requires a $12 million bond; the company canceled a dividend rather than post the bond and is appealing. The company has recorded approximately $1.2 million for expected litigation costs. The appeals’ expected hearing timing is described inconsistently in the filing (early 2021 in one section and later in 2021 in another).
- The company revised prior-period tax accounting related to the divestiture, increasing December 2019 equity by $407 and adjusting related tax balances. It said the revision was not material to prior periods, but correcting it in Q2 2020 would have been material, so the prior balance sheet was revised.
- Other cited risks include dependence on CleanSpark for a significant portion of business, competitive and input-cost pressures, and the CEO’s majority voting control. The filing reports disclosure controls were effective at a reasonable-assurance level and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether gross margins recover after the inventory rationalization and what continuing inventory reserves or write-downs may be required.
- Trends in T&D and Critical Power orders, backlog conversion, and the effect of the lost Verizon service contract and COVID-19 on demand.
- Cash burn and liquidity, including PPP loan forgiveness status, any required repayments, and collections on seller notes.
- Developments in the Myers Power Products litigation, the $12 million bond order, dividend restrictions and appellate schedule.
- The valuation volatility of CleanSpark shares and warrants and any further tax-accounting revisions or seller-note offsets.