Pioneer Power Solutions, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed May 15, 2020. The company manufactures and services electrical distribution and on-site power equipment. Following its August 2019 sale of its liquid-filled and dry-type transformer businesses, remaining operations are reported in T&D Solutions (switchgear) and Critical Power Solutions (equipment and field services). Unless otherwise noted, dollar amounts below are in thousands.
Financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $5,001 | $3,017 |
| Gross profit / margin | $177 / 3.5% | $256 / 8.5% |
| Operating loss | $(1,747) | $(1,444) |
| Net income (loss) | $(2,921) | $5,647 |
| EPS, basic and diluted | $(0.33) | $0.65 |
| Cash from (used in) operations | $(1,036) | $871 |
- Revenue rose 65.8%, led by T&D switchgear revenue of $2,877, up 168.1%. Critical Power revenue increased 9.3% to $2,124, including service revenue of $1,869, up 5.5%.
- Gross margin fell to 3.5%. T&D Solutions recorded a $95 gross loss, citing lower-margin work, customer discounts, and inventory write-downs; Critical Power gross profit increased to $272, helped by higher-margin service activity.
- SG&A increased 15.7% to $1,895, including higher T&D legal costs related to the Myers Power litigation. Operating loss widened by $303.
- Non-operating results included $1,281 of other expense, principally a $1.1 million mark-to-market loss on CleanSpark shares and warrants. Q1 2019 included $4,207 gain on sale of a subsidiary and $3,342 other income, including a CleanSpark investment gain. The prior-year comparison also included $1,312 net income from discontinued transformer operations.
Cash, liquidity and balance sheet
- At March 31, cash and cash equivalents were $6,758, down from $8,213 at year-end; working capital was $7.4 million, versus $10.1 million at December 31, 2019.
- Current assets were $16,173 and current liabilities $8,745. Total liabilities were $10,174 and stockholders’ equity $13,516.
- Cash declined $1,455 during the quarter. Operating activities used $1,036; financing activities used $419, mainly for finance-lease repayments; there was no investing cash flow or capital expenditure in the quarter.
- The company reported no outstanding bank borrowings or revolving credit facility; prior credit-facility balances were repaid with proceeds from the 2019 transformer-business sale. Lease liabilities remained, including $726 of finance-lease obligations and $950 of operating-lease obligations.
- Sale-related seller notes had a March 31 carrying value of $5,207, with principal and accrued interest due December 31, 2022. The notes bear 4% interest and are subordinated.
Changes, outlook and risks
- Backlog was $14.7 million at March 31, down from $15.9 million at December 31, 2019 and up from $14.2 million a year earlier. Management says most backlog is expected to be delivered within 12 months, but conversion is not assured.
- No quantitative earnings or revenue guidance was provided. Management expected to fund needs from working capital and operating cash flow and reported no major capital projects planned for the rest of 2020.
- Management stated that the COVID-19 pandemic’s effects could not yet be estimated. The filing reports declines in service sales and equipment purchase commitments, alongside possible supply, workforce, demand, liquidity, and market-access impacts. The company was considered an essential business under then-current CISA guidance.
- On April 13, 2020, after quarter-end, the company received a $1.4 million PPP loan. It intended to use proceeds for payroll, employee retention, rent, and utilities; forgiveness was possible but not assured. Management said it would reassess eligibility if guidance changed.
- Myers Power Products litigation remained a significant contingency. The company disclosed an approximately $1.2 million reserve, a scheduled Q3 2020 trial, and appeals concerning a modified injunction and an order requiring a $12 million bond. The company said the outcome was uncertain and could adversely affect its financial position. A court order also continued to block a previously payable dividend.
- Additional risks include dependence on CleanSpark for a significant portion of business, competitive pricing and margin pressure, raw-material and supply disruptions, backlog realization, and the CEO’s majority voting control.
Important facts for investors to verify
- Whether COVID-related declines in service sales and equipment commitments persist, and how they affect liquidity, margins, and backlog conversion.
- Developments in the Myers Power case, including trial timing, the injunction and $12 million bond order, potential losses, and the status of the dividend restriction.
- PPP loan eligibility, use of proceeds, and whether any portion is ultimately forgiven.
- Recoverability and timing of payment on the seller notes, and the volatility and valuation of CleanSpark shares and warrants.
- Whether revenue growth can translate into improved gross margins, particularly in T&D Solutions, and whether Critical Power service growth continues.