Item 1A. Risk Factors 10
Item 1B. Unresolved Staff Comments 20
Item 2. Properties 20
Item 3. Legal Proceedings 20
Item 4. Mine Safety Disclosures 20
PART II
Item 6. [Reserved] 21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 30
Item 8. Financial Statements and Supplementary Data 31
Item 9A. Controls and Procedures 55
Item 9B. Other Information 56
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 56
PART III
Item 10. Directors, Executive Officers and Corporate Governance 57
Item 11. Executive Compensation 60
Item 14. Principal Accountant Fees and Services 67
PART IV
Item 15. Exhibits and Financial Statement Schedules 68
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.
● Material weaknesses in internal controls.
● 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.
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, 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. We are headquartered in Fort Lee, New Jersey and operate 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 investments in product development and expansion of our manufacturing, 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”).
T&D
Solutions Segment
We design, manufacture, integrate and sell a wide range of distribution and transmission equipment. Our focus since approximately 2020
has been to address the Distributed Generation (“DG”) and Electric Vehicle Charging Infrastructure (“EVCI”) markets.
We primarily compete in these markets with our E-Bloc product. E-Bloc combines an automatic transfer switch, circuit protection and special
programmable controls into an integrated, compact outdoor system. We believe that demand for our solutions is driven primarily by new
installations, customer growth and the global transition to lower carbon emissions.
In
addition, we distinguish ourselves by producing a wide range of highly engineered power solutions, 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, data center developers and owners, distributed
energy resource developers, EPC contractors and renewable energy developers and producers.
Our
focus, nevertheless, has been on expanding the sales of our E-Bloc power solution, and as a result, in December 2021, we received a $12
million order for use by one of the largest mass merchandise retailers in the world. This order was secured through one of our distributed
energy resource developers and was approximately 75% completed in 2022. The balance of the contract is expected to be completed and recognized
in the first quarter of 2023.
Summary
of T&D Solutions Segment Offerings
Product Category Solutions
We
engineer, 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. Our field service organization services
more than 2,700 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, profitability 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, water treatment facilities, data centers and independent
power producers which have growth characteristics exceeding the norm in our industry.
We
intend to build our revenue and net income at rates exceeding industry norms through internal growth initiatives. 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 infrastructure
and original equipment manufacturers (“OEMs”) equipment solutions and continuing to invest in marketing and engineering resources 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 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. Since November 2021, we have been aggressively marketing our e-Boost mobile EV charging
products to electric bus and truck manufacturers, fleet management companies, municipalities and EV infrastructure providers.
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:
Customers
For the years ended December 31, 2022 and 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 years ended December
31, 2022 and 2021, we sold our electrical equipment and services to over 900 individual customers and our twenty largest customers represented
approximately 78% and 68% of our consolidated revenue, respectively.
Approximately
45% of our sales during the year ended December 31, 2022 were made to Enchanted Rock Electric, LLC and we did not sell any equipment
to Enchanted Rock Electric, LLC during the year ended December 31, 2021. The majority of our sales to Enchanted Rock Electric, LLC were
made pursuant to contract terms and conditions for each project.
Approximately 22% of our sales during the year ended December 31, 2021 were made to CleanSpark Inc (“CleanSpark”). The majority
of our sales to CleanSpark were made pursuant to the Contract Manufacturing Agreement we entered into with CleanSpark in January 2019
(the “Contract Manufacturing Agreement”). Pursuant to the terms of the Contract Manufacturing Agreement, the Company manufactured
parallel switchgear, 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.
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 served as our exclusive distributor of the Products within
any geographic region in which CleanSpark conducts its business.
On
June 3, 2022, the Company and CleanSpark entered into a termination agreement (the “Termination Agreement”) to terminate
the Distribution Agreement. Pursuant to the Termination Agreement, the Company agreed to, amongst others, (i) release CleanSpark from
further liabilities due under the Distribution Agreement, including for certain future amounts due under the Distribution Agreement and
certain accounts payable invoices, (ii) assume the responsibility of billing and collecting payment from Enchanted Rock Electric, LLC,
a third party and mutual client of both the Company and CleanSpark for all open sales orders amounts under its outstanding agreements
for Products that have or will be manufactured by the Company, and (iii) return portions of certain deposits advanced to the Company
pursuant to the Distribution Agreement.
CleanSpark
additionally transferred the services and maintenance agreements and associated rights and liabilities it had related to switchgear products
manufactured by the Company, and the Company assumed all liability and responsibility for all claims of the Products including, but not
limited to, all repairs, defects, and warranty liability of the Products that were previously manufactured by the Company and then distributed
or sold by CleanSpark.
Additionally,
approximately 19% of our sales during the year ended December 31, 2021 were made to a large international container shipping company
in Hawaii.
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. Our direct sales force, as well as our authorized manufacturers’ representatives, market 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 or been completed. Our sales backlog as of December 31, 2022 was approximately $37.2 million, as compared
to $22.8 million as of December 31, 2021. During the year ended December 31, 2022, the Company experienced a surge in orders for its
E-Bloc power system which was the primary driver for the 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, RESA Power, LLC, Eaton Corporation, Switchgear
Power Systems, 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.
Raw
Materials and Suppliers
The
principal raw materials purchased by us are steel, copper, sensors, circuit breakers, meters, cassettes 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, 2022,
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, 2022 included Industrial Connections
& Solutions, LLC, Royal Industrial Solutions, B&B Metals, Inc., Eaton Corporation, and Thyssenkrupp Materials NA.
Employees
As
of December 31, 2022, we had 99 employees consisting of 32 salaried staff and 67 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 Securities and Exchange Commissions (“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.
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.
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, 2022 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.
● 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.
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;
● 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, RESA Power, LLC, Eaton Corporation, Switchgear
Power Systems, LLC, Myers Power Products, Inc. and Powell Industries, Inc. Some 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 one customer. Material or significant loss of business from this customer
could have an adverse effect on our business, financial condition and operating results.
We
depend on one customer for a large portion of our business, and any change in the level of orders from this customer could have a significant
impact on our results of operations. Enchanted Rock Electric, LLC accounted for 45% of our total sales in the year ended December 31,
2022. Loss of business from this customer could have an adverse effect on our business, financial condition and operating results. The
majority of our sales to Enchanted Rock Electric, LLC were made pursuant to contract terms and conditions for each project. 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.
We have two business units (PCEP and Titan), and
these two units have been unable to earn positive income and generate positive cash flow in their recent history. With $10.3 million
of cash as of December 31, 2022, 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 54% and 53% of our revenues for the years ended December 31, 2022 and 2021, 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.
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, 2022, our order backlog was $37.2 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 and recognized as revenue. 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.
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 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 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.
The COVID-19 pandemic and its ongoing effects
may adversely affect our business.
The global coronavirus pandemic and its ongoing effects
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 and its ongoing effects continues to evolve as the date of this report. As such, it continues to be 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, 2022, the Company was able to operate substantially at capacity during the COVID-19 pandemic. Given the daily
evolution of the COVID-19 pandemic, its ongoing effects, and the global responses to the continuing crisis, we are not able to estimate
the full effects of the COVID-19 pandemic and its ongoing effects at this time, however, if the ongoing effects of the COVID-19 pandemic
continue or worsen, it may 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.
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 and
other rights and limitations of the preferred stock. Accordingly, we may issue shares of preferred stock with a preference over our common
stock with respect to dividends or distributions on liquidation or dissolution, or that may otherwise adversely affect the voting or
other rights of the holders of common stock. Issuances of preferred stock, depending upon the rights, preferences and designations of
the preferred stock, may have the effect of delaying, deterring or preventing a change of control, even if that change of control might
benefit our stockholders. In addition, we are subject to Section 203 of the Delaware General Corporation Law. Section 203 generally prohibits
a public Delaware corporation from engaging in a “business combination” with an “interested stockholder” for
a period of three years after the date of the transaction in which the person became an interested stockholder, unless (i) prior to the
date of the transaction, the board of directors of the corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder; (ii) the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding
(a) shares owned by persons who are directors and also officers and (b) shares owned by employee stock plans in which employee participants
do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer;
or (iii) on or subsequent to the date of the transaction, the business combination is approved by the board and authorized at an annual
or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock which is not owned by the interested stockholder.
Section
203 could delay or prohibit mergers or other takeover or change in control attempts with respect to us and, accordingly, may discourage
attempts to acquire us even though such a transaction may offer our stockholders the opportunity to sell their stock at a price above
the prevailing market price.
We
have identified a material weakness in our internal control over financial reporting, and if we are unable to achieve and maintain effective
internal control over financial reporting or effective disclosure controls, this could have a material adverse effect on our business.
As
discussed in Item 9A “Controls and Procedures”, we concluded there is a material weakness of our internal control over financial
reporting. A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements
will not be prevented or detected on a timely basis by the company’s internal controls.
We
cannot assure you that we will be able to remediate our existing material weakness in a timely manner, if at all, or that in the future
additional material weaknesses will not exist, reoccur or otherwise be discovered, a risk that is significantly increased in light of
the complexity of our business. If our efforts to remediate these material weaknesses, as described in Item 9A “Controls and Procedures”,
are not successful or if other deficiencies occur, our ability to accurately and timely report our financial position, results of operations,
cash flows or key operating metrics could be impaired, which could result in late filings of our annual and quarterly reports under the
Exchange Act, restatements of our consolidated financial statements or other corrective disclosures. Additional impacts could include
a decline in our stock price, suspension of trading or delisting of our common stock by the Nasdaq Capital Market, or other material
adverse effects on our business, reputation, and results of operations, financial condition or liquidity. Furthermore, if we continue
to have this existing material weakness, other material weaknesses or significant deficiencies in the future, it could create a perception
that our financial results do not fairly state our financial condition or results of operations. Any of the foregoing could have an adverse
effect on the value of our stock.
Risks
Relating to our Common Stock
The
trading volume of our common stock has recently increased to a level that is significantly higher than our historical average. If the
trading volume of our common stock decreases, we will not be able to ensure investors that an active market for our common stock will
be sustained.
The
trading volume of our common stock spiked significantly in Fiscal 2022 and Fiscal 2021, and our common stock has continued to trade at
higher volumes than our historical average. We do not know why the trading volume of our common stock has spiked significantly; we believe,
however, that the sharp spike in the trading volume of our common stock is the result of a number of factors outside our control, including
recent volatility in the stock market, which continues to remain unpredictable. There has been no recent change in our financial condition
or results of operations that is consistent with the increase in the trading volume of our common stock, and the recent spike in the
trading volume of our common stock may not be sustained.
In
the event of a rapid decrease in the trading volume of our common stock, there can be no assurance that an active trading market in our
common stock could be maintained, and any illiquidity resulting from such a decrease in the trading volume of our common stock may result
in the market price not accurately reflecting our relative value. If our common stock were to be thinly traded, even limited trading
in our common stock could lead, as it has at times in the past, to dramatic fluctuations in share price, and investors might not be able
to liquidate their investment in us at all or at a price that reflects the value of the business.
General
Risk Factors
Our
stock price may be volatile, which could result in substantial losses for investors.
The
market price of our common stock is highly volatile and could fluctuate widely in response to various factors, many of which are beyond
our control, including the following:
● sales of our common stock, including management shares;
● our ability to execute our business plan;
● operating results that fall below expectations;
● loss of any strategic relationship;
● industry developments;
● economic and other external factors;
● period-to-period fluctuations in our financial results; and
● announcements of acquisitions.
In
addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. These market fluctuations may also significantly affect the market price of our common
stock.
Our
risk management activities may leave us exposed to unidentified or unanticipated risks.
Although
we maintain insurance policies for our business, these policies contain deductibles and limits of coverage. We estimate our liabilities
for known claims and unpaid claims and expenses based on information available as well as projections for claims incurred but not reported.
However, insurance liabilities are difficult to estimate due to various factors and we may be unable to effectively anticipate or measure
potential risks to our company. If we suffer unexpected or uncovered losses, any of our insurance policies or programs are terminated
for any reason or are not effective in mitigating our risks, we may incur losses that are not covered by our insurance policies or that
exceed our accruals or that exceed our coverage limits and could adversely impact our consolidated results of operations, cash flows
and financial position.
Regulatory,
environmental, monetary and other governmental policies could have a material adverse effect on our profitability.
We
are subject to international, federal, provincial, state and local laws and regulations governing environmental matters, including emissions
to air, discharge to waters and the generation and handling of waste. We are also subject to laws relating to occupational health and
safety. The operation of manufacturing plants involves a high level of susceptibility in these areas, and there is no assurance that
we will not incur material environmental or occupational health and safety liabilities in the future. Moreover, expectations of remediation
expenses could be affected by, and potentially significant expenditures could be required to comply with, environmental regulations and
health and safety laws that may be adopted or imposed in the future. Future remediation technology advances could adversely impact expectations
of remediation expenses. We can give no assurance that any lawsuits or claims brought in the future will not have an adverse effect on
our financial condition, liquidity or operating results. Types of potential litigation cases include product liability, contract, employment-related,
labor relations, personal injury or property damage, intellectual property, stockholder claims and claims arising from any injury or
damage to persons, property or the environment from hazardous substances used, generated or disposed of in the conduct of our business.
Adverse outcomes in some or all of these claims may result in significant monetary damages that could adversely affect our ability to
conduct our business.