Pioneer Power Solutions, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Dollar amounts below are in millions unless stated otherwise. Pioneer manufactures and services electrical distribution and on-site power equipment through its T&D Solutions and Critical Power segments. The transformer manufacturing businesses were sold in August 2019 and are presented as discontinued operations; Pioneer retained switchgear and Critical Power operations.
Financial performance
- Revenue: Q3 revenue was $4.05 million, down 27.3% from $5.57 million. Nine-month revenue was $14.14 million, up 1.4% from $13.95 million. Q3 switchgear revenue fell 42.0%, partly because Q3 2019 included a one-time $1.1 million shipment. Nine-month service revenue fell 13.6%, primarily following the loss of the Verizon preventative-maintenance business.
- Profit and margins: Q3 gross profit was $0.74 million (18.2% margin), versus $0.26 million (4.6%) a year earlier. Nine-month gross profit was $0.62 million (4.4%), down from $1.03 million (7.4%). The nine-month margin decline reflected a $0.55 million inventory write-down and lower Critical Power margins. Operating loss improved to $0.45 million in Q3 from $3.59 million; nine-month operating loss narrowed to $3.38 million from $6.58 million.
- Net results: Q3 continuing-operations net income was $1.34 million, or $0.15 per share, compared with a $3.25 million loss, or $0.37 per share, in Q3 2019. Q3 2020 included $1.7 million of other income from selling CleanSpark shares and warrants. Nine-month continuing-operations net loss was $2.24 million, or $0.26 per share, versus a $3.07 million loss in 2019. Including discontinued operations, nine-month net loss was $2.24 million, compared with net income of $8.62 million in 2019, which included a $17.21 million gain on sale of the transformer businesses.
- Cash flow: Operating activities used $1.33 million in the first nine months, versus $2.04 million used in 2019. Investing activities provided $2.63 million, mainly from CleanSpark investment sales; 2019 investing cash flow of $41.78 million included proceeds from the transformer-business sale. Financing activities provided $0.12 million, including the PPP loan, versus $26.46 million used in 2019, largely for debt repayment.
- Liquidity and debt: Cash was $9.63 million at September 30, 2020, compared with $8.21 million at year-end 2019. Working capital was $9.7 million, versus $10.5 million. Total assets were $24.19 million and total liabilities $9.59 million. The company recorded a $1.41 million PPP loan ($0.30 million current and $1.11 million long term); its former revolving credit facility had been paid off in 2019. Seller notes from the transformer sale had a $5.24 million carrying value and mature in 2022.
Changes, outlook and risks
- Backlog was $11.34 million at September 30, down from $12.55 million a year earlier and $14.70 million at March 31, 2020. Management reported lower market demand during COVID-19 but said operations continued substantially at capacity; the pandemic’s full effects remained uncertain, with potential adverse impacts on demand, productivity, suppliers, results and liquidity. The filing provides no specific financial guidance.
- Management attributed lower operating expenses partly to reduced payroll and professional fees; Q3 2019 included one-time executive bonuses. Segment operating results improved in Q3, but both segments recorded operating losses over the first nine months.
- The company may qualify for full or partial PPP loan forgiveness, but gave no assurance it would apply for or obtain forgiveness. It said proceeds were intended for payroll, employee retention and eligible occupancy costs.
- Litigation: Myers Power Products litigation remained ongoing, with a trial underway in November 2020 and two appeals pending. A court order required a $12 million bond; the company cancelled a previously declared dividend rather than post the bond and said the injunction remained in place. The company had recognized approximately $1.2 million for expected litigation costs and warned an adverse outcome could affect liquidity and financial condition.
- Potential equity issuance: After quarter-end, Pioneer registered a shelf offering of up to $25 million of securities and entered an at-the-market agreement to sell up to $9 million of common stock. No shares had been sold under the agreement as of the report.
- The filing disclosed a $407,000 revision to the December 2019 financial statements relating to tax accounting for the transformer-business sale. Management said it was not material to prior periods but corrected the comparative balance sheet and related figures.
Most important facts for investors to verify
- Progress and outcome of the Myers Power Products trial and appeals, including the status and potential liquidity impact of the $12 million bond order.
- Subsequent backlog, order trends and COVID-19 effects, particularly in switchgear and service revenue.
- Whether the PPP loan is forgiven, and the timing and amount of any repayment.
- Any share sales under the $9 million ATM agreement and the resulting dilution.
- Realizability and collection of the $5.24 million seller notes, including potential offsets or indemnification claims.
- Underlying operating performance excluding non-operating CleanSpark investment gains and the prior-year discontinued-business sale gain.