Power Solutions Sees Downgrades After SEC Investigation, Trading Halt

Power Solutions International Inc PSIX was downgraded by three analysts Monday after the company’s shares lost more than half their value Friday and trading was temporarily halted.

Power Solutions is under investigation by the Securities and Exchange Commission, according to a January 4 corporate filing. The company said the investigation is believed to center on revenue recognition practices and resulting accounting errors.

About $18 million in revenue was erroneously recognized in Power Solutions’ 2015 financial statements, the company said in the same SEC filing.

Downgrades

Lake Street Capital Markets downgraded Power Solutions to Sell on Monday and suspended its price target, citing negatives such as the resignation of the company’s chief financial officer Michael Lewis and Power Solution’s outside auditor, which stated it could no longer rely on the representations of the company’s management.

Wunderlich also downgraded Power Solutions on Monday, from Buy to Hold.

Barrington Research downgraded the stock from Outperform to Underperform. Given the unreliability of Power Solutions’ financial statements, said Barrington analyst Rudolf A. Hokanson, “we have no credible financial reports upon which to base a financial analysis, even speculative.”

‘A Meaningful Risk Of Bankruptcy’

The Wooddale, Illinois-based producer of non-diesel power systems faces “a meaningful risk of bankruptcy,” said Robert Brown, a senior research analyst at Lake Street.

Power Solutions carries a $135 million debt load and is headed toward a “liquidity cliff” in May 2018 when debt services come due, Brown said in his report.

Power Solutions shares rapidly lost more than half their value Friday afternoon before trading was halted, then were up more than 42 percent in Monday morning trading.

The resignation of Power Solutions’ auditing firm and CFO are likely to further delay financial reporting, Brown said, adding that a delay of four to six quarters is possible before a new auditor is in place and financial results have been restated.

“Further, shares risk being delisted while these efforts are underway,” Brown said.

The company’s financial picture could be brightened by favorable debt restructuring; winning new, large contracts; and a quick hiring of a new auditor and subsequent completion of restated financials, Brown said.