Item 1A. Risk Factors 8
Item 1B. Unresolved Staff Comments 17
Item 2. Properties 17
Item 3. Legal Proceedings 18
Item 4. Mine Safety Disclosures 18
PART II
Item 6. [Reserved] 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 28
Item 8. Financial Statements and Supplementary Data 29
Item 9A. Controls and Procedures 52
Item 9B. Other Information 53
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 53
PART III
Item 10. Directors, Executive Officers and Corporate Governance 54
Item 11. Executive Compensation 57
Item 14. Principal Accountant Fees and Services 64
PART IV
Item 15. Exhibits and Financial Statement Schedules 65
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K contains “forward-looking statements,” which include information relating to future events,
future financial performance, financial projections, strategies, expectations, competitive environment and regulation. Words such
as “may,” “should,” “could,” “would,” “predicts,” “potential,”
“continue,” “expects,” “anticipates,” “future,” “intends,” “plans,”
“believes,” “estimates,” and similar expressions, as well as statements in future tense, identify forward-looking
statements. Forward-looking statements should not be read as a guarantee of future performance or results and may not be accurate
indications of when such performance or results will be achieved. Forward-looking statements are based on information we have
when those statements are made or management’s good faith belief as of that time with respect to future events, and are
subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in
or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited
to:
● Our ability to realize revenue reported in our backlog.
● The liquidity and trading volume of our common stock.
The
foregoing does not represent an exhaustive list of matters that may be covered by the forward-looking statements contained herein
or risk factors that we are faced with that may cause our actual results to differ from those anticipated in our forward-looking
statements. Moreover, new risks regularly emerge and it is not possible for us to predict or articulate all risks we face, nor
can we assess the impact of all risks on our business or the extent to which any risk, or combination of risks, may cause actual
results to differ from those contained in any forward-looking statements. Except to the extent required by applicable laws or
rules, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information,
future events or otherwise. You should review carefully the risks and uncertainties described under the heading “Item 1A.
Risk Factors” in this Annual Report on Form 10-K for a discussion of the foregoing and other risks that relate to our business
and investing in shares of our common stock.
1
PART
I
ITEM
1. BUSINESS.
Overview
Pioneer
Power Solutions, Inc. and its wholly owned subsidiaries (referred to herein as the “Company,” “Pioneer,”
“Pioneer Power,” “we,” “our” and “us”) design, manufacture, integrate, refurbish,
service, distribute and sell electric power systems, distributed energy resources, used and new power generation equipment and
mobile electric vehicle (“EV”) charging solutions. Our products and services are sold to a broad range of customers
in the utility, industrial and commercial markets. Our customers include, but are not limited to, electric, gas and water utilities,
data center developers and owners, EV charging infrastructure developers and owners, and distributed energy developers. The Company
is headquartered in Fort Lee, New Jersey and operates from three (3) additional locations in the U.S. for manufacturing, service
and maintenance, engineering, and sales and administration.
We
intend to grow our business through continued internal product development and expansion of our engineering, sales and marketing
personnel.
Description
of Business Segments
We
have two reportable segments: Transmission & Distribution Solutions (“T&D Solutions”) and Critical Power Solutions
(“Critical Power”).
Disposition of Business Units
Sale of Pioneer Critical Power, Inc.
On January 22, 2019, Pioneer Critical Power,
Inc., a Delaware corporation (“PCPI”), a wholly-owned subsidiary of the Company within the T&D Solutions segment,
CleanSpark and CleanSpark Acquisition, Inc., a Delaware corporation (“Merger Sub”), entered into an Agreement and Plan
of Merger (the “Merger Agreement”), pursuant to which, among other things, Merger Sub merged with and into PCPI, with
PCPI becoming a wholly-owned subsidiary of the CleanSpark and the surviving company of the merger (the “Merger”).
At the effective date of the Merger, all
of the issued and outstanding shares of common stock of PCPI, par value $0.01 per share, were converted into the right to receive
(i) 175,000 shares of common stock, par value $0.001 per share (“CleanSpark Common Stock”), of CleanSpark, (ii) a five-year
warrant to purchase 50,000 shares of CleanSpark Common Stock at an exercise price of $16.00 per share, and (iii) a five-year warrant
to purchase 50,000 shares of CleanSpark Common Stock at an exercise price of $20.00 per share. The share quantities and exercise
prices of warrants reflect the 10:1 reverse stock split completed by CleanSpark in December 2019.
During the year ended December 31, 2020,
the Company sold all of the CleanSpark Common Stock and warrants to purchase CleanSpark Common Stock it received in connection
with the Merger Agreement and recorded proceeds of $2.4 million. The gain from the sale was partially offset by a mark to market
adjustment of $1.4 million resulting in a net gain of $968 to other (income) expense in the accompanying statements of operations.
Warrants at fair value were previously recorded at inception as long term within other assets.
In connection with the Merger Agreement,
the Company, CleanSpark and PCPI entered into an Indemnity Agreement (the “Indemnity Agreement”), dated January 22,
2019, pursuant to which the Company agreed to assume the liabilities and obligations related to the claims made by Myers Powers
Products, Inc. in the then-pending case titled Myers Power Products, Inc. v. Pioneer Power Solutions, Inc., Pioneer Custom Electrical
Products, Corp., et al., Los Angeles County Superior Court Case No. BC606546 (the “Myers Power Case”) as they may
relate to PCPI or CleanSpark after the closing of the Merger.
In connection with entry into the Merger
Agreement, the Company and CleanSpark entered into a Contract Manufacturing Agreement (the “Contract Manufacturing Agreement”),
dated as of January 22, 2019, pursuant to which the Company will manufacture paralleling switchgear, automatic transfer switches
and related control and circuit protective equipment (collectively, “Products”) exclusively for purchase by CleanSpark.
CleanSpark will purchase the Products via purchase orders issued to the Company at any time and from time to time. The price for
the Products payable by CleanSpark to the Company will be negotiated on a case by case basis. The Contract Manufacturing Agreement
had a term of 18 months and expired during the third quarter of 2020.
In connection with entry into the Merger
Agreement, the Company and CleanSpark entered into a Non-Competition and Non-Solicitation Agreement (the “Non-Compete Agreement”),
dated January 22, 2019, pursuant to which the Company agreed not to, among other things, own, manage, operate, finance, control,
advise, render services to or guarantee the obligations of any person or entity that engages in or plans to engage in the design,
manufacture, distribution and service of paralleling switchgear, automatic transfer switches, and related products (the “Restricted
Business”). The Company agreed not to engage in the Restricted Business within any state or county within the United States
in which CleanSpark or the surviving company of the Merger conducts such Restricted Business for a period of four (4) years from
the date of the Non-Compete Agreement.
In addition, the Company also agreed, for
a period of four (4) years from the date of the Non-Compete Agreement, not to, among other things, directly or indirectly (i) solicit,
induce, or attempt to induce customers, suppliers, licensees, licensors, franchisees, consultants of the Restricted Business as
conducted by the Company, CleanSpark or the surviving company to cease doing business with the surviving company or CleanSpark
or (ii) solicit, recruit, or encourage any of the surviving company’s or CleanSpark’s employees, or independent contractors
to discontinue their employment or engagement with the surviving company or CleanSpark.
The Merger resulted in the deconsolidation
of PCPI and a gain of $4.2 million in the first quarter of 2019. The fair value of the investment in the CleanSpark Common Stock
was determined using quoted market prices, and the fair value of the investment in the warrants was established using a Black Scholes
model.
Sale of Transformer Business Units
On June 28, 2019, the Company entered into
a Stock Purchase Agreement (the “Stock Purchase Agreement”), by and among the Company, Electrogroup Canada, Inc., a
wholly owned subsidiary of the Company (“Electrogroup”), Jefferson Electric, Inc., a wholly owned subsidiary of the
Company (“Jefferson”), JE Mexican Holdings, Inc., a wholly owned subsidiary of the Company (“JE Mexico,”
and together with Electrogroup and Jefferson, the “Disposed Companies”), Nathan Mazurek (Chief Executive Officer of
the Company), Pioneer Transformers L.P. (the “US Buyer”) and Pioneer Acquireco ULC (the “Canadian Buyer,”
and together with the US Buyer, the “Buyer”). Pursuant to the terms of the Stock Purchase Agreement, the Company agreed
to sell (i) all of the issued and outstanding equity interests of Electrogroup to the Canadian Buyer and (ii) all of the issued
and outstanding equity interests of Jefferson and JE Mexico to the US Buyer (the “Equity Transaction”), for a purchase
price of $68.0 million. Included in the purchase price, the Company received two subordinated promissory notes, issued by the Buyer,
in the aggregate principal amount of $5.0 million and $2.5 million, for a total aggregate principal amount of $7.5 million (the
“Seller Notes”). During the fourth quarter of 2019, the Company and the Buyer, pursuant to the Stock Purchase Agreement,
completed the net working capital adjustment, which resulted in the Company paying the Buyer $1.8 million in cash and reducing
the principal amount of the $5.0 million Seller Note to $3.2 million. During the second quarter of 2020, the Company recognized
an additional reduction to the principal amount of the Seller Note of $194 for a valid claim paid by the Buyer on behalf of the
Company. Including the reduction to the principal amount for the valid claim, the Company has revalued the Seller Notes for an
appropriate imputed interest rate, resulting in a change to the value of the Seller Notes at December 31, 2021 of $428, for a carrying
value of $5.8 million, which is included within notes receivable (see Note 8 - Notes Receivable).
The transaction was consummated on August
16, 2019. Pioneer sold to the Buyer all of the assets and liabilities associated with its liquid-filled transformer and dry-type
transformer manufacturing businesses within the Company’s T&D Solutions segment. Pioneer Power retained its switchgear
manufacturing business within the T&D Solutions segment, as well as all of the operations associated with its Critical Power
segment.
T&D
Solutions Segment
We
design, manufacture, integrate and sell a wide range of distribution and transmission equipment, including e-Bloc, and our emphasis
is to provide custom engineered power solutions, including EV charging solutions, which we estimate currently represents all of
our T&D revenue. We believe that demand for our solutions is driven primarily by new installations, customer growth and the
global transition to renewable energy.
We
distinguish ourselves by producing a wide range of engineered-to-order equipment, sold either directly to end users, engineering,
procurement and construction (“EPC”) firms or through electrical distributors. We serve customers in a variety of
industries including, but not limited to, utilities, EV charging infrastructure and data center developers and owners, distributed
energy resource developers, EPC contractors and renewable energy developers and producers.
Our
focus has been on expanding the sales of our e-Bloc power solutions, and as a result, in December 2021, we received a $12 million order for use by one of the largest mass merchandisers retailers in the world. This order was secured through one of our
distributed energy resource developers and is expected to ship during 2022.
Summary
of T&D Solutions Segment Offerings
Product Category Solutions
3
We
design, manufacture and integrate these offerings at our facility in Southern California.
Critical
Power Segment
Our
Critical Power business designs, manufactures and sells mobile EV charging solutions under our E-BOOST suite of products, in addition
to refurbishing and reselling used power generation equipment, distributing new power generation equipment and performing service
and maintenance on our customers’ existing power generation equipment. Many of these systems are used to maintain reliable,
primary, peak shaving or emergency standby power at facilities where it is required or where the potential consequences of
a power outage make it necessary, such as at major national retailers, hospitals, data centers, communications facilities, factories,
military sites, office complexes and other critical operations.
Summary
of Critical Power Segment Offerings
Product Category Solutions
Power
generation systems represent considerable investments that require proper maintenance and service in order to operate reliably
during a time of emergency. Our power maintenance programs provide preventative maintenance, repair and support service
for our customers’ power generation systems. To support our customers in managing their critical infrastructure, we
maintain inventories of repair parts, a fleet of service vehicles and a staff of certified field service technicians
in the Midwest and Florida. To complete our geographic coverage, we maintain a network of field service partners located
in other regions, enabling us to provide quick-response, 24/7 service capability that can effectively service and maintain any
make and model of back-up power equipment in any city of the United States. Our field service organization services more than
3,000 generators owned by more than 900 customers located throughout the United States and its territories, including for multi-site,
multi-state customers.
We
recognize discrete revenue streams from service contracts, sales, installation, maintenance and repair services, and we offer
service contracts to all owners of power generation and related equipment, whether or not the equipment was originally sold by
us. Our service agreements have terms ranging from one to five years in duration, providing the Company with a recurring
revenue stream.
Business
Strategy
We
believe we have established a stable platform from which to develop and grow our business lines, revenues, net income and shareholder
value. We are focused on internal growth through operating efficiencies, new product development, customer focus and our continued
migration towards more highly-engineered products and specialized services. We intend to significantly increase the percentage
of our sales derived from engineered-to-order products and differentiated services and believe this can be accomplished by targeting
market segments such as EV charging infrastructure, microgrid developers, national and regional retailers, telecom towers, farming
and agriculture, data centers and independent power producers, which have growth characteristics exceeding the norm in our industry.
4
We
intend to build our revenue and net income at rates exceeding industry norms through internal growth initiatives and complementary
acquisitions. Accomplishing these financial goals will be dependent on a number of factors including our ability to execute the
following strategies and actions:
T&D
Solutions Segment
We
intend to accomplish our growth objectives within our T&D Solutions business by emphasizing our capabilities in EV charging
and original equipment manufacturers (“OEMs”) equipment solutions and continuing to invest in marketing and engineering
resources and product development to increase our pipeline of recurring order customers that demand custom solutions for their
power needs.
Critical
Power Segment
Within
our Critical Power business, we intend to increase the number of national account customers we have by leveraging our scalable,
nationwide network of partners which allows us to service and maintain standby power systems anywhere in the United States. We
are actively marketing our preventive maintenance services to new national accounts including: major national retailers, telecommunications
companies, data centers, banks, hospitals and health care facilities, educational institutions and property management companies.
Additionally, we are actively marketing our recently introduced suite of mobile E-BOOST products, launched in November 2021, and
our new and used power generation equipment intended to ensure access to uninterrupted power during times of emergency.
Our
Industry
The
market for T&D equipment and Critical Power solutions is very fragmented due to the range of equipment types, electrical and
mechanical properties, technological standards and service parameters required by different categories of end users for their
specific applications. Many orders are custom-engineered and tend to be time-sensitive since other critical work is frequently
being coordinated around the customer’s electrical equipment installation. The vast majority of North American demand for
the types of solutions we provide is satisfied by thousands of producers and service companies in the U.S.
We
believe several of the key industry trends supporting future growth in our industry are as follows:
5
Customers
For
the year ended December 31, 2021, 100% of our sales were to U.S. customers, represented in large part by companies involved in
distributed generation, regulated and non-regulated utilities and industrial and wholesale business. During the year ended December
31, 2021, we sold our electrical equipment and services to over 900 individual customers and our twenty largest customers
represented approximately 68% of our consolidated revenue.
For
the year ended December 31, 2020, 100% of our sales were to U.S. customers, represented in large part by companies involved in
distributed generation, regulated and non-regulated utilities and industrial and wholesale business. During the year ended December
31, 2020, we sold our electrical equipment and services to over 900 individual customers and our twenty largest customers
represented approximately 74% of our consolidated revenue.
Approximately
22% and 34% of our sales in the year ended December 31, 2021 and 2020, respectively, were made to CleanSpark Inc. The majority of our
sales to CleanSpark Inc. were made pursuant to the Contract Manufacturing Agreement that was made in January 2019. As previously reported,
on January 22, 2019, we entered into a Contract Manufacturing Agreement, dated as of January 22, 2019 (the “Contract Manufacturing
Agreement”), by and among us and CleanSpark. Pursuant to the terms of the Contract Manufacturing Agreement, the Company manufactured
parallel switchgears, automatic transfer switches and related products (collectively, “Products”) exclusively for purchase
by CleanSpark. The Contract Manufacturing Agreement had a term of 18 months and expired on the 18-month anniversary of the execution
of the Contract Manufacturing Agreement. Additionally, approximately 19% of our sales in the year ended December 31, 2021 were made
to a large international container shipping company in Hawaii.
In connection with the expiry of the Contract
Manufacturing Agreement, we entered into a Distribution Agreement with CleanSpark (the “Distribution Agreement”), dated
as of May 31, 2021, pursuant to which CleanSpark will serve as our exclusive distributor of the Products within any geographic
region in which CleanSpark conducts its business (the “Sales Channel”). We will serve as CleanSpark’s sole source
of the Products, and of any similar goods or products that would reasonably be deemed as interchangeable with such Products for
sale within the Sales Channel. CleanSpark will purchase the Products via written purchase orders to us. The price for the Products
sold under the Distribution Agreement will be determined on a job-by-job basis, provided that CleanSpark shall pay us 97% of the
contract sales price of the Products to all end-use customers. The Distribution Agreement terminates on December 31, 2023 and may
be extended by mutual agreement of us and CleanSpark.
While the loss of a significant number
of customers would have a material adverse effect on our business, we do not believe that the loss of any specific customer would
have a material adverse effect on our business.
Marketing,
Sales and Distribution
A
substantial portion of the products we offer are sold directly to customers by our marketing and sales personnel operating from
our office locations in the U.S. Following the sale of the transformer business units, we no longer have office locations or employees
in Canada. Our direct sales force, as well as our authorized manufacturers’ representatives, markets to end users and to
third parties, such as OEMs, EPC firms, electrical wholesalers, energy developers and value added integrators.
Sales
Backlog
Backlog
reflects the amount of revenue we expect to realize upon the shipment of customer orders for our products that are not yet complete
or for which work has not yet begun. Our sales backlog as of December 31, 2021 was approximately $22.8 million, as compared to
$12.7 million as of December 31, 2020. During the year ended December 31, 2021, the Company experienced a surge in orders for
its e-Bloc power system of almost $13 million. This was the primary driver of the 80% increase in the Company’s
year over year ending backlog. Orders included in our sales backlog are represented by customer purchase orders and contracts
that we believe to be firm.
Competition
We
experience intense competition from a large number of electrical equipment manufacturers and from distributors and servicers of
such equipment. The number and size of our competitors varies considerably by product line and service category, with many of
our competitors tending to be small, highly specialized or focused on a certain geographic market area or customer. However, several
of our competitors have substantially greater financial and technical resources than us, including some of the world’s largest
electrical products and industrial equipment manufacturing companies. A representative list of our direct competitors in our T&D
Solutions segment includes Crown Electric Engineering and Manufacturing, LLC, Industrial Electric Machinery, LLC, Myers Power
Products, Inc. and Powell Industries, Inc.
We
believe that we compete primarily on the basis of technical support and application expertise, engineering, manufacturing and
service capabilities, equipment rating, quality, scheduling and price. In all our businesses, our objective is to focus our efforts
on more specialized, challenging and complex applications. Accordingly, a critical element to the success of our business is responsiveness
and flexibility in providing custom-engineered solutions to satisfy customer needs. As a result of our long-time presence in the
industry, we possess a number of special designs and libraries of programming code for our equipment that were engineered and
developed specifically for our customers. We believe these factors give us a competitive advantage and that they are a major contributor
to our frequency of repeat customer orders and the longevity of our customer relationships.
6
Raw
Materials and Suppliers
The principal raw materials purchased by
us are steel, copper, sensors, circuit breakers, meters and relays. We also purchase certain electrical components such as switches,
fuses, protectors and circuit breakers from a variety of suppliers. These raw materials and components are available from and supplied
by numerous sources at competitive prices. Unanticipated increases in raw material prices or disruptions in supply could increase
production costs and adversely affect our profitability. During the year ended December 31, 2021, we experienced an increase in
raw material costs as a result of disruptions to our supply chain. These disruptions were initially generated by the recovery from
the coronavirus pandemic that had caused many suppliers and sub-suppliers to temporarily reduce or close down excess facilities.
The restart of the world economy created initial pressures on the said facilities reaching their pre-pandemic capacity. More recently,
geopolitical conflicts have further pressured material costs such as aluminum and nickel. These supply pressures have, and continue
to, make it more difficult for us to secure all the material we need in a timely manner in order to meet our obligations and forecasts
regarding our customers’ orders. Our largest suppliers during the year ended December 31, 2021 included Industrial Connections
& Solutions, LLC, Royal Industrial Solutions, B&B Metals, Inc., Eaton Corporation, and Thyssenkrupp Materials NA.
Employees
As
of December 31, 2021, we had 91 employees consisting of 31 salaried staff and 60 hourly workers. Certain of our employees
located at our manufacturing facility in Santa Fe Springs, California are covered by a collective bargaining agreement with Local
Union 1710 of the International Brotherhood of Electrical Workers, AFL-CIO that expires in June 2024.
Environmental
We
are subject to numerous environmental laws and regulations concerning, among other areas, air emissions, discharges into waterways
and the generation, handling, storing, transportation, treatment and disposal of waste materials. These laws and regulations are
constantly changing and it is impossible to predict with accuracy the effect they may have on us in the future. Like many other
industrial enterprises, our manufacturing operations entail the risk of noncompliance, which may result in fines, penalties and
remediation costs, and there can be no assurance that such costs will be insignificant. To our knowledge, we are in substantial
compliance with all federal, state, provincial and local environmental protection provisions, and believe that the future compliance
cost should not have a material adverse effect on our capital expenditures, net income or competitive position. However, legal
and regulatory requirements in these areas have been increasing and there can be no assurance that significant costs and liabilities
will not be incurred in the future due to regulatory noncompliance.
Corporate
History
We
were originally formed in the State of Nevada in 2008. On November 30, 2009, we merged with and into Pioneer Power Solutions,
Inc., a Delaware corporation, for the sole purpose of changing our state of incorporation from Nevada to Delaware and changing
our name to “Pioneer Power Solutions, Inc.” On September 24, 2013, we completed an underwritten public offering
and our common stock began trading on the Nasdaq Capital Market under the symbol “PPSI”.
Available
Information
Our
corporate website is located at www.pioneerpowersolutions.com. On the investor relations section of our website, we make
available, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments
to those reports as soon as reasonably practicable after we electronically file them with or furnish them to the SEC. The SEC
maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers, such
as us, that file electronically with the SEC at www.sec.gov.
We webcast our earnings calls and certain
events we participate in with members of the investment community on our investor relations website. Additionally, we provide notifications
of news or announcements regarding our financial performance, including SEC filings, investor events and press and earnings releases
as part of the investor relations section of our website. The contents of and the information on or accessible through our corporate
website, including the investor relations portion of our website, are not a part of, and are not intended to be incorporated into,
this report or any other report or document we file with or furnish to the SEC, and any references to our website are intended
to be an inactive textual references only.
7
ITEM
1A. RISK FACTORS
Investing
in our common stock involves a high degree of risk. Before investing in our common stock you should carefully consider the following
risks, together with the financial and other information contained in this Annual Report on Form 10–K for the year ended
December 31, 2021 and our other periodic filings with the Securities and Exchange Commission. Additional risks and uncertainties
that we are unaware of may become important factors that affect us. If any of the following events occur, our business, financial
conditions and operating results may be materially and adversely affected. In that event, the trading price of our common stock
may decline, and you could lose all or part of your investment.
Summary of Risk Factors
Below is a summary of the principal
factors that make an investment in our common stock speculative or risky. This summary does not address all of the risks that we
face. Additional discussion of the risks summarized in this risk factor summary, and other risks that we face, can be found below
under the heading “Risk Factors” and should be carefully considered, together with other information in this Form 10-K
and our other filings with the SEC, before making an investment decision regarding our common stock.
● The ongoing COVID-19 pandemic may adversely affect our business;
● Our industry is highly competitive;
● The departure or loss of key personnel could disrupt our business;
● We may not be able to fully realize the revenue value reported in our backlog;
● We are subject to pricing pressure from our larger customers;
● We may be unable to generate internal growth; and
Risks
Relating to Our Business and Industry
We
are vulnerable to economic downturns in the commercial construction market, which may reduce the demand for some of our products
and adversely affect our sales, net income, cash flow or financial condition.
A
large portion of our business involves sales of our products in connection with commercial and industrial construction. Our sales
to this sector are affected by the level of discretionary business spending. During economic downturns in this sector, the level
of business discretionary spending may decrease. This decrease in spending will likely reduce the demand for some of our products
and may adversely affect our sales, net income, cash flow or financial condition.
The
ongoing COVID-19 pandemic may adversely affect our business.
The ongoing global coronavirus pandemic
could have a negative impact on our revenues and operating results. This pandemic could result in disruptions and damage to our
business, caused by both the negative impact to our ability to obtain cost effective raw materials, supplies and component parts
necessary to operate our business and the negative impact on our ability to operate our facility should the coronavirus spread
more broadly in the regions we are located, thereby creating an increased risk of exposure to our workforce which cannot operate
our facility remotely. The full impact of the COVID-19 pandemic continues to evolve as the date of this report. As such, it is
uncertain as to the full magnitude that the pandemic will have on our financial condition, liquidity, and future results of operations.
During the year ended December 31, 2021, the Company experienced an impact to productivity as a result of implementing social distancing
guidelines and personal protective measures. Notwithstanding, the Company has been able to operate substantially at capacity during
the COVID-19 pandemic. Given the daily evolution of the COVID-19 pandemic and the global responses to contain its spread, we are
not able to estimate the full effects of the COVID-19 pandemic at this time, however, if the pandemic continues, it may continue
to have an adverse effect on the Company’s results of operations, financial condition, or liquidity. Mitigation efforts will
not completely prevent our business from being adversely affected, and the longer the pandemic impacts supply and demand and the
more broadly the pandemic spreads, it is more likely that the impact on our business, revenues and operating results will become
increasingly negative.
In
addition, the continuation of the COVID-19 pandemic or a significant outbreak of other infectious diseases could result in a widespread
health crisis that could adversely affect the economies and financial markets worldwide, resulting in an economic downturn that
could impact our business, financial condition and results of operations.
Our
operating results may vary significantly from quarter to quarter, which makes our operating results difficult to predict and can
cause our operating results in any particular period to be less than comparable quarters and expectations from time to time.
Our
quarterly results may fluctuate significantly from quarter to quarter due to a variety of factors, many of which are outside our
control and have the potential to materially and adversely affect our results. Factors that affect our operating results include
the following:
● the timing and volume of work under new agreements;
● the spending patterns of customers;
● customer orders received;
● a change in the mix of our products having different margins;
● a change in the mix of our customers, contracts and business;
● increases in design and manufacturing costs;
● the length of our sales cycles;
● the rates at which customers renew their contracts with us;
10
● our ability to control costs, including operating expenses;
● losses experienced in our operations not otherwise covered by insurance;
● the ability and willingness of customers to pay amounts owed to us;
● costs related to the acquisition and integration of companies or assets;
● future accounting pronouncements and changes in accounting policies.
Accordingly,
our operating results in any particular quarter may not be indicative of the results that you can expect for any other quarter
or for an entire year.
Our
industry is highly competitive.
The
electrical equipment manufacturing industry is highly competitive. Principal competitors in our markets in the T&D Solutions
segment include Crown Electric Engineering and Manufacturing, LLC, Industrial Electric Machinery, LLC, and RESA Power, LLC, Powell
Industries, Inc. Many of these competitors, as well as other companies in the broader electrical equipment manufacturing and service
industry where we expect to compete, are significantly larger and have substantially greater resources than we do and are able
to achieve greater economies of scale and lower cost structures than us and may, therefore, be able to provide their products
and services to customers at lower prices than we are able to. Moreover, our competitors could develop the expertise, experience
and resources to offer products that are superior in both price and quality to our products. While we seek to compete by providing
more customized, highly-engineered products, there are few technical or other barriers to prevent much larger companies in our
industry from putting more emphasis on this same strategy. Similarly, we cannot be certain that we will be able to market our
business effectively in the face of competition or to maintain or enhance our competitive position within our industry, maintain
our customer base at current levels or increase our customer base. Our inability to manage our business in light of the competitive
forces we face could have a material adverse effect on our results of operations.
We currently derive a significant
portion of our revenues from two customers. Loss of business from either of these customers could have an adverse effect on our
business, financial condition and operating results.
We depend on two customers for a large portion of
our business, and any change in the level of orders from either of these customers could have a significant impact on our results of operations.
CleanSpark accounted for 22% of our total sales in the year ended December 31, 2021. Additionally, approximately 19% of our sales in the
year ended December 31, 2021 were made to a large international container shipping company in Hawaii. Loss of business from either of
these customers could have an adverse effect on our business, financial condition and operating results. The majority of our sales to
CleanSpark were made pursuant to the Contract Manufacturing Agreement that was entered into as part of the Merger Agreement. The Contract
Manufacturing agreement expired during the third quarter of 2020. In connection with the expiry of the Contract Manufacturing Agreement,
we entered into a Distribution Agreement with CleanSpark dated as of May 31, 2021, pursuant to which CleanSpark will serve as our exclusive
distributor of the Products within any geographic region in which CleanSpark conducts its business. See “Item 1. Business—Customers”.
Our
remaining business units have historically generated operating losses and negative cash flows, which may result in the usage of
our cash.
After
the completion of the Equity Transaction during the year ended December 31, 2019, we have two business units remaining (PCEP and
Titan). These two units have been unable to earn positive income and generate positive cash flow in their recent history. With
$9.9 million of cash as of December 31, 2021, any such losses will negatively impact our cash balance.
The
departure or loss of key personnel could disrupt our business.
We
depend heavily on the continued efforts of Nathan J. Mazurek, our principal executive officer, and on other senior officers who
are responsible for the day-to-day management of our operating subsidiaries. In addition, we rely on our current electrical and
mechanical design engineers, many of whom are important to our operations and would be difficult to replace. We cannot be certain
that any of these individuals will continue in their respective capacities for any particular period of time. The departure or
loss of key personnel, or the inability to hire and retain qualified employees, could negatively impact our ability to manage
our business.
Fluctuations
in the price and supply of raw materials used to manufacture our products may reduce our profits.
Our
raw material costs represented approximately 53% and 54% of our revenues for the years ended December 31, 2021 and 2020, respectively.
The principal raw materials purchased by us are copper, sensors, breakers, meters, relays, switches, fuses, protectors and circuit
breakers. These raw materials and components are available from, and supplied by, numerous sources at competitive prices. Unanticipated
increases in raw material prices or disruptions in supply could increase production costs and adversely affect our profitability.
We cannot provide any assurances that we will not experience difficulties sourcing our raw materials in the future.
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We
may not be able to fully realize the revenue value reported in our backlog.
We
routinely have a backlog of work to be completed on contracts representing a significant portion of our annual sales. As of December
31, 2021, our order backlog was $22.8 million. Orders included in our backlog are represented by customer purchase orders and
service contracts that we believe to be firm. Backlog consists of customer orders that either (1) have not yet been started or
(2) are in progress and are not yet completed. In the latter case, the revenue value reported in backlog is the remaining value
associated with work that has not yet been billed. From time to time, customer orders are canceled that appeared to have a high
certainty of going forward at the time they were recorded as new business taken. In the event of a customer order cancellation,
we may be reimbursed for certain costs but typically have no contractual right to the total revenue reflected in our backlog.
In addition to us being unable to recover certain direct costs, canceled customer orders may also result in additional unrecoverable
costs due to the resulting underutilization of our assets.
We
are subject to pricing pressure from our larger customers.
We
face significant pricing pressures in all of our business segments from our larger customers. Because of their purchasing size,
our larger customers can influence market participants to compete on price terms. Such customers also use their buying power to
negotiate lower prices. If we are not able to offset pricing reductions resulting from these pressures by improved operating efficiencies
and reduced expenditures, those price reductions may have an adverse impact on our financial results.
Deterioration
in the credit quality of several major customers could have a material adverse effect on our operating results and financial condition.
A significant asset included in our working
capital is accounts receivable from customers. If customers responsible for a significant amount of accounts receivable become
insolvent or are otherwise unable to pay for products and services, or become unwilling or unable to make payments in a timely
manner, our operating results and financial condition could be adversely affected. A significant deterioration in the economy could
have an adverse effect on these accounts receivable, which could result in longer payment cycles, increased collection costs and
defaults in excess of management’s expectations. Deterioration in the credit quality of our major customers could have a
material adverse effect on our operating results and financial condition.
We
rely on third parties for key elements of our business whose operations are outside our control.
We
rely on arrangements with third-party shippers and carriers such as independent shipping companies for timely delivery of our
products to our customers. As a result, we may be subject to carrier disruptions and increased costs due to factors that are beyond
our control, including labor strikes, inclement weather, natural disasters and rapidly increasing fuel costs. If the services
of any of these third parties become unsatisfactory, we may experience delays in meeting our customers’ product demands
and we may not be able to find a suitable replacement on a timely basis or on commercially reasonable terms. Any failure to deliver
products to our customers in a timely and accurate manner may damage our reputation and could cause us to lose customers.
We
also utilize third-party distributors to sell, install and service certain of our products. While we are selective in whom we
choose to represent us, it is difficult for us to ensure that our distributors consistently act in accordance with the standards
we set for them. To the extent any of our end-customers have negative experiences with any of our distributors or manufacturer’s
representatives; it could reflect poorly on us and damage our reputation, thereby negatively impacting our financial results.
Supply chain and shipping disruptions
may result in shipping delays, a significant increase in shipping costs, and could increase product costs and result in lost sales
and reputational damage, which may have a material adverse effect on our business, operating results and financial condition.
Our third-party
manufacturers and suppliers have experienced, and expect to continue to experience, supply chain disruption and shipping disruptions,
including disruptions or delays in loading container cargo in ports of origin or off-loading cargo at ports of destination, as
a result of the COVID-19 pandemic, congestion in port terminal facilities, labor supply and shipping container shortages, inadequate
equipment and persons to load, dock and offload container vessels and for other reasons. These disruptions may impact our ability
to receive materials and products from our manufacturers and suppliers, to distribute our products to our customers in a cost-effective
and timely manner and to meet customer demand, all of which could have an adverse effect on our financial condition and results
of operations. There can be no assurance that further unforeseen events impacting the supply chain will not have a material adverse
effect on us in the future. Additionally, the impacts that supply chain disruptions have on our third-party manufacturers and suppliers
are not within our control. It is not currently possible to predict how long it will take for these supply chain disruptions to
cease or ease. Prolonged supply chain disruptions that may impact us or our manufacturers and suppliers could interrupt product
manufacturing, increase raw material and product lead times, increase raw material and product costs, impact our ability to meet
customer demand and result in lost sales and reputational damage, all of which could have a material adverse effect on our business,
financial condition and results of operations.
Our
business may face cybersecurity risk generally associated with our information technology systems which could materially affect
our business, and our results of operations could be materially affected if our information technology systems (or third-party
systems we rely on) are interrupted, damaged by unforeseen events, or fail for any extended period of time.
We
rely on information systems (“IS”) in our business to obtain, rapidly process, analyze, manage and store data to among
other things:
● receive, process and ship orders on a timely basis; and
● manage the accurate billing and collections from our customers.
IS
risks have generally increased in recent years, and a cyberattack that bypasses our IS security systems causing an IS security
breach may lead to a material disruption of our business operations and/or the loss of business information resulting in a material
effect on our business.
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In
addition, we develop products and provide services to our customers that are technology-based, and a cyberattack that bypasses
the IS security systems of our products or services causing a security breach and/or perceived security vulnerabilities in our
products or services could also cause significant reputational harm, and actual or perceived vulnerabilities may lead to claims
against us by our customers. Perceived or actual security vulnerabilities in our products or services, or the perceived or actual
failure by us or our customers who use our products to comply with applicable legal requirements, may not only cause us significant
reputational harm, but may also lead to claims against us by our customers and involve fines and penalties, costs for remediation,
and settlement expenses.
Our
IS utilize certain third-party service organizations that manage a portion of our information systems, and our business may be
materially affected if these third-party service organizations are subject to an IS security breach. Risks associated with these
and other IS security breaches may include, among other things:
We
have various insurance policies, covering risks in amounts that we consider adequate. There can be no assurance that the insurance
coverage we maintain is sufficient or will be available in adequate amounts or at a reasonable cost. Successful claims for misappropriation
or release of confidential or personal data brought against us in excess of available insurance or fines or other penalties assessed
or any claim that results in significant adverse publicity against us could have a material adverse effect on our business and
our reputation.
Our
business requires skilled labor, and we may be unable to attract and retain qualified employees.
Our
ability to maintain our productivity and profitability will be limited by our ability to employ, train and retain skilled personnel
necessary to meet our requirements. We may experience shortages of qualified personnel. We cannot be certain that we will be able
to maintain an adequate skilled labor force necessary to operate efficiently and to support our growth strategy or that our labor
expenses will not increase as a result of a shortage in the supply of skilled personnel. Labor shortages, increased labor costs
or loss of our most skilled workers could impair our ability to deliver on time to our customers (thereby creating a risk that
we lose our customers to competition) and would inhibit our ability to maintain our business or grow our revenues, and may adversely
impact our profitability.
An overall tightening and increasingly
competitive labor market, notably in response to the COVID-19 pandemic, has been recently observed in the U.S. A sustained labor
shortage or increased turnover rates within our employee base, caused by the COVID-19 pandemic or as a result of general macroeconomic
factors, could lead to increased costs, such as increased wage rates to attract and retain employees, and could negatively affect
our ability to efficiently operate our manufacturing facilities and overall business. If we are unable to hire and retain employees
capable of performing at a high-level, or if mitigation measures we may take to respond to a decrease in labor availability, such
as overtime and third-party outsourcing, have unintended negative effects, our business could be adversely affected. An overall
labor shortage, lack of skilled labor, increased turnover or labor inflation, caused by the COVID-19 pandemic or as a result of
general macroeconomic factors, could have a material adverse impact on our operations, results of operations, liquidity or cash
flows.
Our
business operations are dependent upon our ability to engage in successful collective bargaining with our unionized workforce.
If
we are unable to renew our collective bargaining agreements, or if additional segments of our workforce become unionized, we may
be subject to work interruptions or stoppages. Strikes or labor disputes with our employees may adversely affect our ability to
conduct our business.
Risks
Relating to Our Organization
Delaware
law and our corporate charter and bylaws contain anti-takeover provisions that could delay or discourage takeover attempts that
stockholders may consider favorable.
Our
board of directors is authorized to issue shares of preferred stock in one or more series and to fix the voting powers, preferences