Item 1. Business
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”).
●
Our
T&D Solutions business provides equipment solutions that help customers effectively and efficiently protect, control, transfer,
monitor and manage their electric energy requirements. These solutions are marketed principally through our Pioneer Custom Electrical
Products Corp. (“PCEP”) brand name.
●
Our
Critical Power business provides customers with our suite of mobile e-Boost© EV charging solutions, power generation equipment
and all forms of service and maintenance on our customers’ power generation equipment. These products and services are marketed
by our operations headquartered in Minnesota, currently doing business under both the Titan Energy Systems Inc. (“Titan”)
and Pioneer Critical Power brand names.
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.
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Summary
of T&D Solutions Segment Offerings
Product
Category
Solutions
Power
Systems
▪ Integrated
Power Centers (“IPC”): indoor and outdoor power systems integrating any combinations of the following, but not limited
to: switchgear, controls, engine generator sets, energy storage, fuel cells, solar power and EV charging solutions marketed and
internally designated as “E-Bloc” power solutions.
Circuit
Protective Equipment
▪
Low and medium voltage switchgear, switchboards and automatic transfer switches.
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
Suite
of
e-Boost
Products
▪
e-Boost G.O.A.T. (Generator on a Truck) is a truck-mounted option that brings on-demand, high-capacity charging to EV truck and car
owners at any convenient location.
▪
e-Boost Mobile is a trailer-mounted solution that provides multiple options for towing and can be available at specific businesses,
large sports and cultural events and can be relocated with minimal effort on short notice.
▪
e-Boost Pod is a stationary EV charging solution with customizable higher capacity that can also service other power needs especially
in emergency situations, such as a power outage, serving as a back-up power source with convenient power connectors and outlets available
on board.
Power
Generation
Equipment
▪
Engine-generator sets: power generation equipment with up to 2 MW of power output per genset, sourced from several manufacturers
and available for install by our expert, licensed technicians.
▪
Available individually or in multi-unit paralleled configurations. Fuel options include liquid propane, natural gas, diesel and bi-fuel.
▪
Uninterruptible Power Supply (UPS) systems.
Service
▪
Scheduled preventative maintenance, and 24/7 repair and support services provided for all makes and models of power generation equipment
under one to five year contracts.
▪
Regional service and maintenance: provided by our technicians in the Midwest and Florida.
▪
National service and maintenance: provided by our technicians and a network of field service providers throughout the United States
for multi-site, multi-state power generation equipment owners.
▪
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 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.
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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:
●
Establishing
a scalable organizational infrastructure to support our expected growth;
●
Investing
in our capabilities to provide progressively more advanced equipment and service solutions;
●
Continuously
applying our manufacturing and service resources to their highest and best uses;
●
Combining
and streamlining our business unit supply chains and administrative functions; and
●
Improving
business processes to deliver consistency, quality and value to our customers.
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.
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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:
●
Aging
and Overburdened North American Power Grid — The aging and overburdened North American power grid is expected to require
significant capital expenditures to upgrade the existing infrastructure over the next several years to maintain adequate levels of
reliability and efficiency. Significant capital investment will be required to relieve congestion, meet growing demand, achieve targets
for efficiency, emissions and use of renewable sources, and to replace components of the U.S. power grid operating at, near or past
their planned service lives.
●
Increasing
Long-Term Demand for Electricity and Reliable Power — The Department of Energy’s Energy Information Administration,
or EIA, forecasts that total electricity use in the U.S. will increase by approximately 28% from 2011 to 2040. This increase is driven
by anticipated population growth, economic expansion, increasing dependence on computing power throughout the economy and the increased
use of electrical devices in the home. In order to meet growing demand for electricity in North America, substantial investment in
increased electrical grid capacity and efficiency will be required, as well as the addition of specialized equipment to help ensure
the reliability and quality of electricity for critical applications. In response to these challenges, there is an increasing trend
among commercial and industrial companies to invest in on-site power sources, both for standby purposes in the event of a catastrophic
power outage, or to reduce the amount of electricity they draw from the utility grid during peak periods.
●
Rapidly
Expanding Electric Vehicle (EV) and Charging Infrastructure Market — A report from Allied Market Research in 2020 projected
that the global electric vehicle market will reach $803 billion by the year 2027, registering a compound annual growth rate (CAGR)
of 22.6%. North America is estimated to reach $194 billion by 2027, at a significant CAGR of 27.5%. In 2010, only about 17,000 electric
vehicles were on the world’s roads. By 2019, that number had swelled to 7.2 million and is increasing rapidly according to
the International Energy Agency (IEA). Furthermore, in order for EV’s to grow at such a rapid pace, it is necessary that infrastructure
be built to allow for such growth. In 2019, there were about 7.3 million chargers worldwide compared to an insignificant amount ten
years ago, and the EV infrastructure has become a global priority as major governments and corporations have committed to spending
billions of dollars towards building EV charging infrastructure. In order to meet the rapidly growing demand for EV’s and the
infrastructure supporting it, substantial investment in grid connectivity and enhancement will be required.
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.
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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.
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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.
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