Item 1A. Risk Factors 7
Item 1B. Unresolved Staff Comments 17
Item 1C. Cybersecurity 17
Item 2. Properties 18
Item 3. Legal Proceedings 19
Item 4. Mine Safety Disclosures 19
PART II
Item 6. [Reserved] 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 28
Item 8. Financial Statements and Supplementary Data 29
Item 9A. Controls and Procedures 59
Item 9B. Other Information 60
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 60
PART III
Item 10. Directors, Executive Officers and Corporate Governance 61
Item 11. Executive Compensation 65
Item 14. Principal Accountant Fees and Services 73
PART IV
Item 15. Exhibits and Financial Statement Schedules 74
EXPLANATORY
NOTE
We are filing this comprehensive Annual Report on
Form 10-K for the fiscal years ended December 31, 2023 and 2022 (“Comprehensive Form 10-K”). This Comprehensive Form 10-K
contains our audited financial statements for the fiscal year ended December 31, 2023, as well as restatements of the following previously
filed periods: (i) audited consolidated financial statements as of and for the fiscal year ended December 31, 2022, originally included
in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “2022 10-K”), and (ii) unaudited condensed
consolidated financial statements for the quarterly periods ended March 31, 2022 through September 30, 2023, originally included in our
Quarterly Reports on Form 10-Q for the periods ended March 31, 2023, June 30, 2023 and September 30, 2023 (collectively, the “Form
10-Qs” and together with the 2022 10-K, the “Prior Financial Statements”).
Restatement
Background
As previously disclosed in our Current Report on Form
8-K filed with the Securities and Exchange Commission (the “SEC”) on June 6, 2024, in connection with the preparation of our
consolidated financial statements for the fiscal year ended December 31, 2023, we, in consultation with the Audit Committee (the “Committee”)
of our Board of Directors, concluded that the Prior Financial Statements should no longer be relied upon due to errors in such consolidated
financial statements and should be restated to correct the misstatements therein.
During 2022 and 2023, we recognized revenues associated
with customer contracts with performance obligations satisfied over time (“Over Time Contracts”) using labor hours as the
measure of progress. Our underlying estimates of total labor hours required to complete Over Time Contracts were materially different
from the actual labor hours required, which was determined to represent an error, and, as a result, the percentage of completion used
to recognize revenue in the Prior Financial Statements is materially different from the percentage of completion using actual labor hours
incurred. As a result, we have restated revenues during the Prior Financial Statements to adjust the percentage of completion based upon
the actual labor hours incurred to complete each Over Time Contract (the “Revenues Adjustment”).
Additionally, we have determined that costs from Over
Time Contracts should be recognized as incurred and, as a result, we have recorded an adjustment to our consolidated financial statements
during the Prior Financial Statements (together with the Revenues Adjustment, the “Restatement Adjustments”). As a result
of this error, the Restatement Adjustments result in the recognition of cost of revenues in the Prior Financial Statements for which the
recognition of a portion of the corresponding revenues have been deferred to future periods. For those Over Time Contracts that have been
completed by us during the Prior Financial Statements, the Restatement Adjustments have the effect of derecognizing amounts in one period
and recognizing corresponding amounts in another period within the Prior Financial Statements. Cumulatively, these adjustments will net to zero over time.
Restatement Overview
Other sections impacted by the restatement of the
Prior Financial Statements are:
● Part I, Item 1A. Risk Factors
● Part II, Item 8. Financial Statements and Supplementary Data
● Part II, Item 9A. Controls and Procedures
We have not filed, and do not intend to file, amendments
to the previously filed Form 10-Qs, nor the previously filed 2022 10-K. Accordingly, investors should rely only on the financial information
and other disclosures regarding the restated periods in this Comprehensive Form 10-K or in future filings with the SEC (as applicable),
and not on any previously issued or filed reports, earnings releases or similar communications relating to these periods.
Refer to Note 2 – Restatement of
Previously Issued Consolidated Financial Statements and Note 4 – Restatement of Previously Issued Unaudited Interim Condensed
Consolidated Financial Statements in the accompanying consolidated financial statements included in Part II, Item 8 for additional
information.
Internal
Control Considerations
In
connection with the Restatement Adjustments, management has evaluated its disclosure controls and procedures and internal control over
financial reporting as of December 31, 2023. As a result of that assessment, management has concluded that an additional material weakness
existed as of December 31, 2023 as follows:
The
Company did not maintain effective controls over the revenue recognition of over-time contracts and associated costs. The
Company’s underlying estimates of total labor hours required to complete over time contracts were materially different from
the actual labor hours required, which was determined to represent an error, and, as a result, the percentage of completion used to
recognize revenue was materially different from the percentage of completion using actual labor hours incurred. Additionally, the
Company did not properly account for recognition of costs incurred by contract. This material weakness resulted in the restatement
of the Company’s consolidated financial statements for the year ended December 31, 2022, as well as its interim consolidated
financial statements for the three months ended March 31, 2022 and 2023, the three and six months ended June 30, 2022 and 2023 and
the three and nine months ended September 30, 2022 and 2023.
For a discussion of management’s consideration of disclosure controls and procedures, internal controls over
financial reporting, and the material weaknesses identified, see Part II, Item 9A.
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 United States for manufacturing, service and maintenance, engineering, and sales and administration.
Description
of Business Segments
We
have two reportable segments: Electrical Infrastructure Equipment (“Electrical Infrastructure”) and Critical Power Solutions
(“Critical Power”).
Electrical
Infrastructure Segment
We
design, manufacture, integrate and sell a wide range of electrical distribution and control equipment. Our focus since approximately
2020 has been to address the Distributed Generation (“DG”) and Electric Vehicle Charging Infrastructure 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 Electrical Infrastructure solutions is driven primarily
by customers’ demands to improve the cost of electricity, electrical resilience and reliability, and the world-wide transition
to lower carbon emissions.
In
addition, we distinguish ourselves by producing a wide range of highly engineered power solutions, typically integrating circuit protection,
metering and transmission schemes, as well as unitized medium and low voltage substations. Electrical Infrastructure equipment is 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 integrators, data
center developers and owners, distributed energy resource developers, contractors, and renewable energy developers and producers.
Summary
of Electrical Infrastructure 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 distributing new power generation equipment, refurbishing and reselling used power generation equipment, and performing service and
maintenance on our customers’ existing 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
▪ Uninterruptible Power Supply (“UPS”) systems.
▪ UPS systems from major manufacturers.
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 a quick-response, 24/7 service
capabilities that can effectively repair and maintain any make and model of back-up power equipment. Our field service organization services
more than 2,400 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, revenue, 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 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:
Electrical
Infrastructure Segment
We
intend to accomplish our growth objectives within our Electrical Infrastructure segment by concentrating on our ability to deliver scalable
solutions for the EV infrastructure, DG, and microgrid markets. Our Electrical Infrastructure equipment can be used in many applications
and large vertical markets, including but not limited to, electrical, gas and water utilities, EV charging infrastructure integrators,
and solar, microgrid and data center developers.
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 Electrical Infrastructure 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 United States.
We
believe that several of the key industry trends supporting future growth in our industry are as follows:
Customers
For
the years ended December 31, 2023 and 2022, 100% of our sales were to U.S. customers, represented in large part by companies involved
in DG, regulated and non-regulated utilities, and industrial and wholesale business. During the years ended December 31, 2023 and 2022,
we sold our electrical equipment and services to over 900 individual customers, and our twenty largest customers represented approximately
82% and 77% of our consolidated revenue, respectively.
Approximately
42% and 20% of our sales during the year ended December 31, 2023 were made to Enchanted Rock Electric, LLC and Sequel Electrical
Supply, LLC, respectively. Approximately 43% and 10% of our sales during the year ended December 31, 2022 were made to Enchanted
Rock Electric, LLC and Southern California Gas Company, respectively. The majority of our sales to customers were made pursuant to
specific contract terms and conditions for each project.
Marketing,
Sales and Distribution
A
substantial portion of the products and services we offer are sold directly to customers by our marketing and sales personnel operating
from our office locations in the United States. Our direct sales force and authorized representatives market our products and services
to end users and third parties, such as original equipment manufacturers, EPC firms, electrical wholesalers, energy developers and value-added
integrators.
Revenue
Backlog
Revenue
backlog, which consists of purchase orders and contracts from customers that we believe to be firm, reflects the amount of revenue that
we expect to realize in the future upon the satisfaction of customer orders for our products or services that are not yet complete or
for which work has not yet begun. Our revenue backlog as of December 31, 2023 was approximately $45,165, as compared to $38,278 as of
December 31, 2022. During the year ended December 31, 2023, we experienced a surge in orders and contracts for our mobile EV charging solutions, e-Boost, which was the primary driver for the increase in our revenue backlog.
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 Electrical Infrastructure segment
includes Crown Electric Engineering and Manufacturing, LLC, Industrial Electric Machinery, LLC, RESA Power, LLC, 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. Our largest suppliers during the year
ended December 31, 2023 included Industrial Connections & Solutions, LLC, Royal Industrial Solutions, Schweitzer Engineering Laboratories,
Inc., Eaton Corporation and Thyssenkrupp Materials NA.
Research
and Development
Because
the industries in which we compete are characterized by rapid technological advances, our ability to compete successfully depends heavily
upon our ability to ensure a continual and timely flow of competitive products, services and technologies to the marketplace. We continue
to develop new technologies to enhance existing products and services, and to expand the range of our offerings through research and
development (“R&D”), licensing of intellectual property and acquisition of third-party businesses and technology. During
the year ended December 31, 2023, we incurred $885 of R&D costs related to our mobile EV charging solutions, e-Boost. We did not
incur any R&D costs during the year ended December 31, 2022.
Employees
As
of December 31, 2023, we had 143 employees consisting of 41 salaried staff and 102 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 2027.
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 Commission (“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 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, 2023 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 the Restatement of the Prior Financial Statements
We have concluded that certain of our previously
issued financial statements should not be relied upon and have restated certain of our previously issued financial statements which was
time-consuming and expensive and could expose us to additional risks that could have a negative effect on us.
As discussed in the Explanatory Note of this Comprehensive
Form 10-K and in Note 2, “Restatement of Previously Issued Consolidated Financial Statements”
under Item 8 of this Comprehensive Form 10-K, we have concluded that the Prior Financial Statements should not be relied upon. We have
restated our previously issued (i) audited consolidated financial statements as of and for the fiscal year ended December 31, 2022, included
in the 2022 10-K, and (ii) unaudited condensed consolidated financial statements for the quarterly periods ended March 31, 2022, through
September 30, 2023, included in the Form 10-Qs. The restatement process was time consuming and expensive and could expose us to additional
risks that could have a negative effect on us. In particular, we incurred substantial unanticipated expenses and costs, including audit,
legal and other professional fees, in connection with the restatement of the Prior Financial Statements and the ongoing remediation of
material weaknesses in our internal control over financial reporting. We are in the process of implementing certain remediation actions
(see Part II, Item 9A, Controls and Procedures of this Comprehensive Form 10-K for a description of these remediation measures). To the
extent these steps are not successful, we could be required to incur additional time and expense. Our management’s attention was
also diverted from some aspects of the operation of our business in connection with the restatement of the Prior Financial Statements
and these ongoing remediation efforts. In addition, the restatement and related matters could impair our reputation and could cause our
counterparties to lose confidence in us. Each of these occurrences could have an adverse effect on our business, results of operations,
financial condition and stock price.
The restatement of the Prior Financial Statements
may lead to future stockholder litigation.
Lawsuits may be commenced against the Company and
its officers and directors based in part or whole on allegations related to the restatement of the Prior Financial Statements. As with
any substantial litigation, the Company expects to devote significant time, attention and resources to the defense of the litigation,
which may have a material adverse effect on the Company even if the litigation is resolved in a manner favorable to the Company, and cannot
predict when or how the litigation will be resolved or estimate what the potential loss or range of loss would be, if any.
We
have identified material weaknesses in our internal control over financial reporting which could, if not remediated, adversely affect
our ability to report our financial condition and results of operations in a timely and accurate manner, which may adversely affect investor
confidence in our company and, as a result, the value of our common stock.
Section 404 of the Sarbanes-Oxley Act of 2002 requires
that public companies evaluate and report on their systems of internal control over financial reporting. As disclosed in Part II, Item
9A, Controls and Procedures of this Comprehensive Form 10-K, our management, including our Chief Executive Officer and our Chief Financial
Officer, has determined that we had material weaknesses in our internal control over financial reporting as of December 31, 2023, due to
the following material weaknesses: (i) the accounting for revenues and
costs associated with over-time contracts, which resulted in material misstatements relating to the percentage of completion used to recognize
revenue; (ii) the accounting for inventory and related cost of sales and (iii) lack of sufficient accounting personnel which negatively
impacted the Company’s ability to maintain appropriate segregation of duties, and close, consolidate and file financial statements
on a timely basis to meet SEC regulations. These material weaknesses resulted in identified material misstatements
to the financial statements, and the Prior Financial Statements are restated in this filing. As a result of these material weaknesses,
the Company’s management, under the supervision of the Audit Committee and with participation of the Company’s Chief Executive
Officer and Chief Financial Officer, concluded that the Company’s internal control over financial reporting was not effective as
of December 31, 2023.
Although we are working to remedy the material
weaknesses and ineffectiveness of the Company’s internal control over financial reporting and disclosure controls and procedures,
there can be no assurance as to when the remediation plan will be fully developed and implemented or the outcome of such remediation
efforts, 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. Until our remediation plan is fully implemented, our management will continue to
devote significant time, attention and financial resources to these efforts. If we do not complete our remediation in a timely fashion,
or at all, or if our remediation plan is inadequate, there will continue to be an increased risk that our future consolidated financial
statements could contain errors that will be undetected. If we continue to have these existing material weaknesses, 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. See “Part II. Item 9A – Controls and Procedures.” These material weaknesses
could adversely affect our business, reputation, revenues, results of operations, financial condition, and liquidity. They could also
adversely affect our ability to timely file periodic reports under the Exchange Act, and limit our ability to access the capital markets
through equity or debt issuances. Additional impacts could include a decline in our stock price, suspension of trading or delisting of
our common stock by the Nasdaq Capital Market. Any of the foregoing could have an adverse effect on the value of our stock. For more
information relating to the Company’s internal control over financial reporting, the material weaknesses that existed as of December
31, 2023, and the remediation activities undertaken by us, see Part II, Item 9A, Controls and Procedures of this Comprehensive Form 10-K.
See also “—Failure to establish and maintain
effective internal control over financial reporting may result in us not being able to accurately report our financial results, which
could result in a loss of investor confidence and adversely affect the market price of our common stock.”
Failure to establish and maintain effective
internal control over financial reporting may result in us not being able to accurately report our financial results, which could result
in a loss of investor confidence and adversely affect the market price of our common stock.
We are responsible for establishing and maintaining
adequate internal control over financial reporting, which is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP (as defined below).
Because we are continuing to implement remedial actions to strengthen our financial control and management systems, our internal control
over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate. A failure to prevent or detect errors or misstatements may result in a decline in the price of our common
stock and harm our ability to raise capital in the future.
If our management is unable to certify the
effectiveness of our internal controls or if material weaknesses or significant deficiencies in our internal controls are
identified, we could be subject to regulatory scrutiny and a loss of public confidence, which could harm our business and cause a
decline in the price of our common stock. As disclosed under “Item 9A. Controls and Procedures” in this Comprehensive
Form 10-K, in connection with preparing our financial statements for the year ended December 31, 2023, management concluded that
material weaknesses existed in our internal control over financial reporting due to the following material weaknesses: (i) the
accounting for revenues and costs associated with over-time contracts, which resulted in material misstatements relating to the
percentage of completion used to recognize revenue; (ii) the accounting for inventory and related cost of sales and (iii) lack of
sufficient accounting personnel which negatively impacted the Company’s ability to maintain appropriate segregation of duties,
and close, consolidate and file financial statements on a timely basis to meet SEC regulations. In addition, due to the
same material weaknesses, we determined that our disclosure controls and procedures were not effective as of December 31, 2023. See
“—We have identified material weaknesses in our
internal control over financial reporting which could, if not remediated, adversely affect our ability to report our financial
condition and results of operations in a timely and accurate manner, which may adversely affect investor confidence in our company
and, as a result, the value of our common stock.”
In addition, if we do not maintain adequate financial
and management personnel, processes and controls, we may not be able to accurately report our financial performance on a timely basis,
which could cause a decline in the price of our common stock and harm our ability to raise capital. Failure to accurately report our financial
performance on a timely basis could also jeopardize our listing on Nasdaq. Delisting of our common stock on any exchange would reduce
the liquidity of the market for our common stock, which would reduce the price of, and increase the volatility of, our common stock. See
also “—Risks Relating to Our Organization— We have identified material weaknesses 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.”
We do not expect that our disclosure controls and
procedures and internal control over financial reporting will prevent all error or fraud. A control system, no matter how well designed
and implemented, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further,
the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered
relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance
that all control issues within an organization will be detected. The inherent limitations include the realities that judgments in decision-making
can be faulty and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by individual acts
of certain persons, by collusion of two or more people or by management override of the controls. Due to the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and may not be detected in a timely manner or at all. See
also “—General Risk Factors— There are inherent limitations in all control systems, and misstatements due to error
or fraud may occur and not be detected.” If we cannot provide reliable financial reports or prevent fraud, our reputation and
operating results could be materially adversely affected, which could also cause investors to lose confidence in our reported financial
information, which in turn could result in a reduction in the price of our common stock.
In addition, acquisitions can pose challenges in
implementing the required processes, procedures and controls in the new operations. Companies that are acquired by us may not have disclosure
controls and procedures or internal control over financial reporting that are as thorough or effective as those required by the securities
laws that currently apply to us.
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 include Crown Electric Engineering
and Manufacturing, LLC, Industrial Electric Machinery, LLC, RESA Power, LLC, 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 two customers. Material or significant loss of business from 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 these customers could have a
significant impact on our results of operations. Approximately 42% and 20% of our sales during the year ended December 31, 2023 were
made to Enchanted Rock Electric, LLC and Sequel Electrical Supply, LLC, respectively. Loss of business from these customers could have
an adverse effect on our business, financial condition and operating results. The majority of our sales to Enchanted Rock Electric, LLC
and Sequel Electrical Supply, LLC were made pursuant to contract terms and conditions for each project. See “Item 1. Business -
Customers”.
Certain
of our 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 $3,582 of cash as of December 31, 2023, 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 38% and 50% of our revenues for the years ended December 31, 2023 and 2022, respectively.
The principal raw materials purchased by us are metal, 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, 2023, our order backlog was $45,165. 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,
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: