PIONEER POWER SOLUTIONS, INC. - Quarter Report: 2023 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-35212

PIONEER POWER SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

(212) 867-0700

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act:

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares outstanding of the registrant’s common stock, $0.001 par value, as of November 13, 2023 was 9,930,022.

PIONEER POWER SOLUTIONS, INC.

Form 10-Q

For the Quarterly Period Ended September 30, 2023

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

PIONEER POWER SOLUTIONS, INC.

Consolidated Statements of Operations

(In thousands, except for share and per share amounts)

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

PIONEER POWER SOLUTIONS, INC.

Consolidated Balance Sheets

(In thousands, except for share amounts)

The accompanying notes are an integral part of these consolidated financial statements.

PIONEER POWER SOLUTIONS, INC.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

PIONEER POWER SOLUTIONS, INC.

Consolidated Statements of Changes in Stockholders’ Equity

(In thousands, except for share amounts)

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

PIONEER POWER SOLUTIONS, INC.

Notes to Unaudited Consolidated Financial Statements for the Quarterly Period Ended September 30, 2023

(in thousands, except for share and per share amounts)

1. BUSINESS ORGANIZATION, NATURE OF OPERATIONS, RISKS AND UNCERTAINTIES

Pioneer Power Solutions, Inc. and its wholly owned subsidiaries (referred to herein as the “Company,” “Pioneer,” “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. The Company is headquartered in Fort Lee, New Jersey and operates from three (3) additional locations in the U.S. for manufacturing, service and maintenance, engineering, sales and administration.

We have two reportable segments as defined in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange Commission (the “SEC”) on April 11, 2023: Transmission and Distribution Solutions (“T&D Solutions”) and Critical Power Solutions (“Critical Power”).

Presentation

The accompanying unaudited interim consolidated financial statements of the Company have been prepared pursuant to the rules of the SEC and reflect the accounts of the Company as of September 30, 2023. Certain information and footnote disclosures, normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), have been condensed or omitted pursuant to those rules and regulations. We believe that the disclosures made are adequate to make the information presented not misleading to the reader. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to fairly state the financial position, results of operations and cash flows with respect to the interim consolidated financial statements have been included. The results of operations for the interim period are not necessarily indicative of the results for the entire fiscal year. The year-end balance sheet data was derived from audited financial statements but this filing does not include all disclosures required by U.S. GAAP for a year-end balance sheet.

All dollar amounts (except share and per share data) presented in the notes to our unaudited interim consolidated financial statements are stated in thousands of dollars, unless otherwise noted. ASC 740-270 requires the use of an estimated annual effective tax rate to compute the tax provision during an interim period unless certain exceptions are met. We have used a discrete-period computation method to calculate taxes for the fiscal three and nine-month period ended September 30, 2023. The Company anticipates that its annual effective tax rate will be 0% for the year ending December 31, 2023. As of September 30, 2023, the Company continues to provide a 100% valuation allowance against its net deferred tax assets since the Company believes it is more likely than not that its deferred tax assets will not be realized.

These unaudited interim consolidated financial statements include the accounts of Pioneer and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

These unaudited interim consolidated financial statements should be read in conjunction with the risk factors under the heading “Part II - Item 1A. Risk Factors” and the risk factors and the audited consolidated financial statements and notes thereto of the Company and its subsidiaries included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

Liquidity

The accompanying financial statements have been prepared on a basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements, as of September 30, 2023, the Company had $7,581 of cash on hand and working capital of $13,702. The cash on hand was generated primarily from the sale of common stock under the ATM Program (as defined below), payment of all unpaid principal and interest from the two subordinated promissory notes we received in connection with the sale of the transformer business units in August 2019 for an aggregate principal amount of $7,500 (the “Seller Notes”) during the year ended December 31, 2022, and cash flows from operating activities. On October 20, 2020, we entered into an At the Market Sale Agreement with H.C. Wainwright & Co., LLC (“Wainwright”), pursuant to which we may offer and sell our shares of common stock from time to time through Wainwright, acting as sales agent or principal (the “ATM Program”). Since October 20, 2020, and through September 30, 2023, the Company sold an aggregate of 916,059 shares of common stock for aggregate gross proceeds of approximately $9,183, before any sales agent fees and expenses payable by us under the ATM Program. During the three and nine months ended September 30, 2023, the Company sold an aggregate of 27,559 shares of common stock for an aggregate consideration of approximately $184, before any sales agent fees and expenses payable by us.

We have historically met our cash needs through a combination of cash flows from operating activities and bank borrowings, the completion of the Equity Transaction, proceeds from the sale of the CleanSpark common stock and warrants to purchase CleanSpark common stock, sale of common stock under the ATM Program and collecting all unpaid principal and interest from the Seller Notes. Historically, our cash requirements were generally for operating activities, debt repayment, capital improvements and acquisitions. We expect to meet our cash needs with our working capital and cash flows from our operating activities. We expect our cash requirements to be generally for operating activities, product development and capital improvements. The Company expects that its current cash balance is sufficient to fund operations for the next twelve months.

On December 13, 2021, we filed a prospectus supplement to a prospectus which forms a part of our registration statement on Form S-3 (File No. 333-249569) (the “Prior Shelf Registration Statement”), that was declared effective by the SEC on October 27, 2020 (the “Prior ATM Prospectus”), in connection with the offer and sale of up to an aggregate offering amount of $8,600 of common stock that may be issued and sold under the ATM Program. Prior to the expiration of the Prior Shelf Registration Statement at the end of its three-year term, we sold an aggregate of 27,559 shares of common stock for an aggregate consideration of approximately $184, before any sales agent fees and expenses payable by us, under the Prior ATM Prospectus. On August 30, 2023, we filed a new registration statement on Form S-3 (File No. 333-274266) to replace the Prior Shelf Registration Statement, including a base prospectus which covers the offering, issuance and sale of up to $150,000 of common stock, preferred stock, warrants and/or units; and a sales agreement prospectus covering the offering, issuance and sale of up to a maximum aggregate offering price of $75,000 of common stock that may be issued and sold under the ATM Program (the “New ATM Prospectus”). The new registration statement was declared effective by the SEC on September 8, 2023. As of September 30, 2023, $75,000 of common stock remained available for issuance under the New ATM Prospectus.

Risks and Uncertainties

The World Health Organization determined that COVID-19 no longer fit the definition of a public health emergency and the U.S. government announced that the declaration of a public health emergency associated with COVID-19 expired on May 11, 2023. However, COVID-19 has remained and is expected to continue to remain as a serious endemic threat for an indefinite future period and may continue to adversely affect the global economy. The continuing impacts of the COVID-19 endemic, as well as rising interest rates, inflation, changes in foreign currency exchange rates and geopolitical developments, such as the ongoing conflict between Russia and Ukraine, and the ongoing conflict between Israel and Hamas, have resulted, and may continue to result, in a global slowdown of economic activity, which may decrease demand for a broad variety of goods and services, including those provided by the Company’s clients, while also disrupting supply channels, sales channels and advertising and marketing activities for an unknown period of time. As a result of the current uncertainty in economic activity, the Company is unable to predict the potential size and duration of the impact on its revenue and its results of operations, if any. The extent of the potential impact of these macroeconomic factors on the Company’s operational and financial performance will depend on a variety of factors, including the continuing impacts of the COVID-19 endemic and the extent of geopolitical disruption and their respective impacts on the Company’s clients, partners, industry, and employees, all of which are uncertain at this time and cannot be accurately predicted. The Company continues to monitor the effects of these macroeconomic factors and intends to take steps deemed appropriate to limit the impact on its business. During the nine months ended September 30, 2023, the Company was able to operate substantially at capacity.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

There have been no material changes to the significant accounting policies included in Note 2 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, except as disclosed in this note. 

Recent Accounting Pronouncements

There have been no recent accounting pronouncements not yet adopted by the Company which would have a material impact on the Company’s financial statements.

Accounting Standards Update (“ASU”) 2023-03, “Presentation of Financial Statements (Topic 205), Income Statement - Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation - Stock Compensation (Topic 718): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 Emerging Issues Task Force (“EITF”) Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280 - General Revision of Regulation S-X: Income or Loss Applicable to Common Stock.” ASU 2023-03 amends the ASC for SEC updates pursuant to SEC Staff Accounting Bulletin No. 120; SEC Staff Announcement at the March 24, 2022 EITF Meeting; and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280 - General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. These updates were immediately effective and did not have a significant impact on our financial statements.

Accounts Receivable

On January 1, 2023, the Company adopted ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” using a modified retrospective approach. The standard amends several aspects of the measurement of credit losses related to certain financial instruments, including the replacement of the existing incurred credit loss model and other models with the current expected credit losses model. The cumulative effect of adoption did not result in an adjustment to the allowance for credit loss, and accordingly, the Company’s accumulated deficit as of January 1, 2023.

The Company accounts for trade receivables at original invoice amount less an estimate made for expected credit losses. The Company’s allowance for expected credit losses on accounts receivable reflects management’s estimate of credit losses over the remaining expected life of such assets, measured primarily using historical experience, as well as current conditions and forecasts that affect the collectability of the reported amount. There were no allowances for expected credit losses as of September 30, 2023 and December 31, 2022.

Deferred Financing Costs

Certain legal, accounting and other third-party fees that are directly associated with equity financings are capitalized as deferred financing costs and included as a non-current asset on the balance sheet until such financings are consummated. After consummation of the equity financing, these costs will be recorded in the stockholders’ equity section of the consolidated balance sheets as a reduction of additional paid-in capital generated as a result of the offering, to the extent there are sufficient proceeds. Should the equity financing no longer be considered probable of being consummated, all deferred financing costs would be charged to operating expenses in the consolidated statements of operations.

3. REVENUES

Nature of our products and services

Our principal products and services include electric power systems, distributed energy resources, power generation equipment and mobile EV charging solutions.

Products

Our T&D Solutions business provides electric power systems and distributed energy resources that help customers effectively and efficiently protect, control, transfer, monitor and manage their electric energy requirements.

Our Critical Power business provides customers with our suite of mobile e-Boost electric vehicle charging solutions and power generation equipment.

Services

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.

Our principal source of revenue is derived from sales of products and fees for services. We measure revenue based upon the consideration specified in the customer arrangement, and revenue is recognized when the performance obligations in the customer arrangement are satisfied. A performance obligation is a promise in a contract to transfer a distinct product or service to the customer. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the customer receives the benefit of the performance obligation. Customers typically receive the benefit of our products when the risk of loss or control for the product transfers to the customer and for services as they are performed. Under ASC 606, revenue is recognized when a customer obtains control of promised products or services in an amount that reflects the consideration we expect to receive in exchange for those products or services.

During the three months ended September 30, 2023, the Company recognized $8,919 of revenue over time and incurred costs of $6,408. During the three months ended September 30, 2022, the Company recognized $2,410 of revenue over time and incurred costs of $2,100. Additionally, the Company recognized $1,461 and $1,788 of revenue at a point in time from the sale of our products during the three months ended September 30, 2023 and 2022, respectively.

Service revenues include maintenance contracts that are recognized over time based on the contract term and repair services which are recognized as services are delivered. The Company recognized $2,063 and $2,053 of service revenue during the three months ended September 30, 2023 and 2022, respectively.

During the nine months ended September 30, 2023, the Company recognized $18,963 of revenue over time and incurred costs of $13,195. During the nine months ended September 30, 2022, the Company recognized $3,309 of revenue over time and incurred costs of $2,881. Additionally, the Company recognized $8,103 and $8,723 of revenue at a point in time from the sale of our products during the nine months ended September 30, 2023 and 2022, respectively.

Service revenues include maintenance contracts that are recognized over time based on the contract term and repair services which are recognized as services are delivered. The Company recognized $6,014 and $5,444 of service revenue during the nine months ended September 30, 2023 and 2022, respectively.

During the three months ended September 30, 2023, the Company recognized approximately $2,569 of revenue that was classified as deferred revenue as of December 31, 2022, as compared to $81 of revenue recognized during the three months ended September 30, 2022 that was classified as deferred revenue at December 31, 2021.

During the nine months ended September 30, 2023, the Company recognized approximately $8,336 of revenue that was recognized as deferred revenue at December 31, 2022, as compared to $2,137 of revenue during the nine months ended September 30, 2022 that was recognized as deferred revenue at December 31, 2021.

The Company manages its accounts receivable credit risk by performing credit evaluations and monitoring amounts due from the Company’s customers. The Company had certain customers whose revenue individually represented 10% or more of the Company’s total revenue, or whose accounts receivable balances individually represented 10% or more of the Company’s total accounts receivable.

As of September 30, 2023, three customers represented approximately 36%, 16% and 14% of the Company’s accounts receivable. At December 31, 2022, three customers represented approximately 57%, 13% and 11% of the Company’s accounts receivable.

For the three months ended September 30, 2023, two customers represented approximately 54% and 17% of the Company’s revenue. For the three months ended September 30, 2022, one customer represented approximately 54% of the Company’s revenue.

For the nine months ended September 30, 2023, two customers represented approximately 42% and 22% of the Company’s revenue. For the nine months ended September 30, 2022, two customers represented approximately 31% and 12% of the Company’s revenue.

Return of a product requires that the buyer obtain permission in writing from the Company. When the buyer requests authorization to return material for reasons of their own, the buyer will be charged for placing the returned goods in saleable condition, restocking charges and for any outgoing and incoming transportation paid by the Company. The Company warrants title to the products, and also warrants the products on date of shipment to the buyer, to be of the kind and quality described in the contract, merchantable, and free of defects in workmanship and material. Returns and warranties during the three and nine months ended September 30, 2023 and 2022 were insignificant.

The following table presents our revenues disaggregated by revenue discipline:

 SCHEDULE OF REVENUE DISAGGREGATED

See “Note 9 - Business Segment and Geographic Information”.

4. INVENTORIES

The components of inventories are summarized below:

 SCHEDULE OF INVENTORIES

Inventories are stated at the lower of cost or a net realizable value determined on a weighted average method.

5. PROPERTY AND EQUIPMENT, NET

Property and equipment are summarized below:

SCHEDULE OF PROPERTY AND EQUIPMENT 

Depreciation expense was $143 and $40 for the three months ended September 30, 2023 and 2022, respectively.

Depreciation expense was $370 and $113 for the nine months ended September 30, 2023 and 2022, respectively.

6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

The components of accounts payable and accrued liabilities are summarized below:

 SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accrued liabilities primarily consist of accrued legal settlement costs, accrued sales commissions, accrued compensation and benefits, accrued sales and use taxes and accrued insurance. As of September 30, 2023 and December 31, 2022, accrued legal settlement costs were $3,500 and $0, respectively. See Note 10 for details. As of September 30, 2023 and December 31, 2022, accrued sales commissions were $366 and $278, respectively. Accrued compensation and benefits as of September 30, 2023 and December 31, 2022 were $312 and $213, respectively. Accrued sales and use taxes as of September 30, 2023 and December 31, 2022 were $30 and $258, respectively, and there was no accrued insurance as of September 30, 2023 compared to $559 at December 31, 2022. The remainder of accrued liabilities are comprised of several insignificant accruals in connection with normal business operations.

As of September 30, 2023 and December 31, 2022, none of the Company’s suppliers represented more than 10% of the Company’s accounts payable.

7. STOCK-BASED COMPENSATION

Stock-Based Compensation

A summary of stock option activity during the nine months ended September 30, 2023 is as follows:

 SCHEDULE OF STOCK OPTION ACTIVITY

A summary of RSU activity during the nine months ended September 30, 2023 is as follows:

 SUMMARY OF RESTRICTED STOCK ACTIVITY

During the three and nine months ended September 30, 2023, the Company issued 10,000 shares of its common stock for consulting services with a fair value of $64,900.

During the nine months ended September 30, 2023, the Company issued 100,000 shares of common stock to its Chief Executive Officer (“CEO”) in connection with the vesting of 100,0000 restricted stock units (“RSU”) on May 11, 2023. The fair value of the RSUs on the date of grant was $575, which was recognized immediately.

During the nine months ended September 30, 2023, the Company issued 250,000 shares of common stock to its Chief Financial Officer (“CFO”) in connection with the vesting of 125,000 RSUs on May 1, 2022 and 125,000 RSUs on May 1, 2023.

During the three and nine months ended September 30, 2023, the CEO and CFO each individually agreed to surrender shares of common stock to the Company, totaling an aggregate of 117,082 shares with a fair value of $720 in connection with income and payroll tax obligations paid by the Company in connection with the vesting of the above mentioned RSUs. The shares were subsequently cancelled and retired by the Company.

Stock-based compensation expense recorded for the three and nine months ended September 30, 2023 was approximately $285 and $1,246, respectively. Stock-based compensation expense recorded for the three and nine months ended September 30, 2022 was approximately $143 and $859, respectively. As of September 30, 2023, there was $638 of stock-based compensation expense remaining to be recognized in the consolidated statements of operations over a weighted average remaining period of 1.1 years.

8. BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE

Basic and diluted income (loss) per common share is calculated based on the weighted average number of vested shares outstanding during the period. The Company’s employee and director equity awards, as well as incremental shares issuable upon exercise of warrants, are not considered in the calculations if the effect would be anti-dilutive. The following table sets forth the computation of basic and diluted income (loss) per share (in thousands, except per share data):

 SCHEDULE OF BASIC AND DILUTED LOSS PER SHARE

As of September 30, 2023 and 2022, diluted income (loss) per share excludes potentially dilutive common shares related to 718,167 and 670,667 shares underlying stock options, respectively, and 125,000 and 250,000 shares underlying nonvested RSUs, respectively, as their effect was anti-dilutive.

9. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION

The Company follows ASC 280 - Segment Reporting in determining its reportable segments. The Company considered the way its management team, most notably its chief operating decision maker, makes operating decisions and assesses performance and considered which components of the Company’s enterprise have discrete financial information available. As the Company makes decisions using a manufactured products vs. distributed products and services group focus, its analysis resulted in two reportable segments: T&D Solutions and Critical Power. The Critical Power reportable segment is the Company’s Titan Energy Systems, Inc. business unit. The T&D Solutions reportable segment is the Company’s Pioneer Custom Electrical Products Corp. business unit.

The T&D Solutions segment is involved in the design, manufacture and sale of circuit protection and controls equipment used primarily by large industrial and commercial operations to manage their electrical power distribution needs. The Critical Power segment provides mobile high capacity charging equipment, power generation equipment and aftermarket field-services in order to help customers secure fast vehicle charging where fixed charging infrastructure does not exist, and additionally to ensure smooth, uninterrupted power to operations during times of emergency.

The following tables present information about segment income and loss:

 SCHEDULE OF SEGMENT INCOME AND LOSS

Revenues are attributable to countries based on the location of the Company’s customers:

 SCHEDULE OF REVENUES ARE ATTRIBUTABLE TO COUNTRIES BASED ON THE LOCATION

10. COMMITMENTS AND CONTINGENCIES

Litigation and Claims

From time to time, the Company is a defendant or plaintiff in various legal actions that arise in the normal course of business. Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.

On June 15, 2023, two individuals (the “Plaintiffs”) filed a complaint in the U.S. District Court, District of Nebraska naming the Company, its wholly-owned subsidiary, Titan Energy Systems, Inc., and an individual acting in his capacity as an employee of the Company, collectively as defendants. Plaintiffs filed an amended complaint on July 7, 2023 alleging negligent driving, negligent entrustment, and negligent hiring, training and supervision, as a result of a car accident that occurred on September 9, 2019 involving the Plaintiffs and the individual. According to the amended complaint, the Plaintiffs are seeking special damages related to the injuries sustained by Plaintiffs. On July 27, 2023, the defendants filed an Answer to Plaintiff’s Amended Complaint. On October 6, 2023, a mediation was held, but the parties did not reach a settlement. The parties are in the beginning stages of the discovery process and are working to schedule a settlement conference before the end of 2023. As of September 30, 2023, the Company recognized a liability of $3,500 related to this matter, which was included within accounts payable and accrued liabilities, with a corresponding insurance receivable of $3,500 related to the loss recovery, which was deemed to be probable and included within prepaid expenses and other current assets on the consolidated balance sheet.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying consolidated interim financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the Securities and Exchange Commission on April 11, 2023.

Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to the “Company,” “Pioneer,” “we,” “our” and “us” refer to Pioneer Power Solutions, Inc. and its subsidiaries.

U.S. dollars are reported in thousands except for share and per share amounts.

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q 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:

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 “Part II - Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q and “Part I - Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 for a discussion of the foregoing and other risks that relate to our business and investing in shares of our common stock.

Business Overview

We 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.

Description of Business Segments

We have two reportable segments: Transmission & Distribution Solutions (“T&D Solutions”) and Critical Power Solutions (“Critical Power”).

Critical Accounting Policies and Estimates

Our financial statements have been prepared in accordance with U.S. GAAP. The preparation of our financial statements requires us to make estimates and assumptions that affect the amounts and disclosures in the financial statements. Our estimates are based on our historical experience, knowledge of current events and actions we may undertake in the future, and on various other factors that we believe are reasonable under the circumstances. Our critical accounting policies and estimates are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” in our Annual Report on Form 10-K filed with the SEC on April 11, 2023. There were no material changes to our accounting policies during the nine months ended September 30, 2023.

RESULTS OF OPERATIONS

Overview of the Three and Nine Months Results

Selected financial and operating data for our reportable business segments for the most recent reporting period is summarized below. This information, as well as the selected financial data provided in “Note 9 - Business Segment and Geographic Information” and in our unaudited Consolidated Financial Statements and related notes included in this Quarterly Report on Form 10-Q, should be referred to when reading our discussion and analysis of results of operations below.

Our summary of operating results during the three and nine months ended September 30, 2023 and 2022 are as follows:

Backlog

Our backlog is based on firm orders from our customers expected to be delivered in the future, most of which is expected to occur during the next twelve months. Backlog may vary significantly from reporting period to reporting period due to the timing of customer commitments. 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. As of September 30, 2023, backlog from our E-Bloc power systems and related equipment was approximately $13,771, or 41% of the total backlog.

The following table represents the progression of our backlog, by reporting segment, as of the end of the last five quarters:

Revenue

The following table represents our revenues by reporting segment and major product category for the periods indicated (in thousands, except percentages):

For the three months ended September 30, 2023, our consolidated revenue increased by $6,192, or 99.1%, to $12,443, up from $6,251 during the three months ended September 30, 2022, primarily due to an increase in sales of our power systems from our T&D Solutions segment and an increase in sales of our equipment from our Critical Power Solutions segment during the three months ended September 30, 2023.

For the nine months ended September 30, 2023, our consolidated revenue increased by $15,604, or 89.3%, to $33,080, up from $17,476 during the nine months ended September 30, 2022, primarily due to an increase in sales of our power systems from our T&D Solutions segment and an increase in equipment and service sales from our Critical Power Solutions segment during the nine months ended September 30, 2023.

T&D Solutions. During the three months ended September 30, 2023, revenue from our power systems product lines increased by $5,802, or 153.8%, as compared to the three months ended September 30, 2022, primarily due to increased sales of our E-Bloc power systems and medium and low voltage equipment during the three months ended September 30, 2023.

During the nine months ended September 30, 2023, revenue from our power systems product lines increased by $14,530, or 144.9%, as compared to the nine months ended September 30, 2022, primarily due to increased sales of our E-Bloc power systems and automatic transfer switches, in addition to an increase in sales of our medium and low voltage equipment during the nine months ended September 30, 2023.

Critical Power. For the three months ended September 30, 2023, revenue for our Critical Power segment increased by $315, or 12.7%, as compared to the three months ended September 30, 2022, primarily due to an increase in sales of our new and refurbished generation equipment during the three months ended September 30, 2023.

For the nine months ended September 30, 2023, revenue for our Critical Power segment increased by $1,009, or 13.6%, as compared to the nine months ended September 30, 2022, primarily due to an increase in sales of our new and refurbished generation equipment and the cyclicality of our preventative maintenance schedules during the nine months ended September 30, 2023.

Gross Profit and Margin

The following table represents our gross profit by reporting segment for the periods indicated (in thousands, except percentages):

For the three months ended September 30, 2023, our consolidated gross margin increased to 29.8% of revenues, as compared to 13.8% during the three months ended September 30, 2022.

For the nine months ended September 30, 2023, our consolidated gross margin increased to 26.1% of revenues, as compared to 10.6% during the nine months ended September 30, 2022.

T&D Solutions. For the three months ended September 30, 2023, our gross margin percentage increased by 21.1%, from 12.8% to 33.9%, as compared to the three months ended September 30, 2022. The increase was primarily due to the significant increase in sales our E-Bloc power systems and medium and low voltage equipment, a reduction in input costs and improved productivity from our manufacturing facility during the three months ended September 30, 2023.

For the nine months ended September 30, 2023, our gross margin percentage increased by 21.3%, from 7.2% to 28.5%, as compared to the nine months ended September 30, 2022. The increase was also primarily due to the significant growth in sales our E-Bloc power systems and medium and low voltage equipment, reduced input costs and improved productivity from our manufacturing facility during the nine months ended September 30, 2023.

Critical Power Solutions. For the three months ended September 30, 2023, our gross margin increased by 0.4%, to 15.7%, from 15.3% for the three months ended September 30, 2022.

For the nine months ended September 30, 2023, our gross margin increased by 4.0%, to 19.1%, from 15.1% for the nine months ended September 30, 2022. The increase was also primarily due to a favorable sales mix and the acceptance of price increases from our customers.

Operating Expenses

The following table represents our operating expenses by reportable segment for the periods indicated (in thousands, except percentages):

Selling, General and Administrative Expense. For the three months ended September 30, 2023, consolidated selling, general and administrative expense, before depreciation and amortization, increased by approximately $453, or 19.9%, to $2,726, as compared to $2,273 during the three months ended September 30, 2022, primarily due to an increase in payroll related costs, including stock-based compensation, third party commissions and product development costs related to our e-Boost initiative. As a percentage of our consolidated revenue, selling, general and administrative expense, before depreciation and amortization, decreased to 21.9% during the three months ended September 30, 2023, as compared to 36.4% in the three months ended September 30, 2022.

For the nine months ended September 30, 2023, consolidated selling, general and administrative expense, before depreciation and amortization, increased by approximately $1,266, or 19.3%, to $7,816, as compared to $6,550 during the nine months ended September 30, 2022, primarily due to an increase in payroll related costs, including stock-based compensation, travel related costs, third party commissions and product development costs related to our e-Boost initiative. As a percentage of our consolidated revenue, selling, general and administrative expense, before depreciation and amortization, decreased to 23.6% during the nine months ended September 30, 2023, as compared to 37.5% in the nine months ended September 30, 2022.

Depreciation and Amortization Expense. Depreciation and amortization expense consists primarily of depreciation of fixed assets and amortization of right-of-use assets related to our finance leases, and excludes amounts included in cost of sales. For the three months ended September 30, 2023, consolidated depreciation and amortization expense remained the same at $32, as compared to the three months ended September 30, 2022.

For the nine months ended September 30, 2023, consolidated depreciation and amortization expense increased by $102, or 118.6%, as compared to the nine months ended September 30, 2022, primarily due to an increase in depreciation as a result of placing certain e-Boost assets into service.

Income (Loss) From Operations

The following table represents our operating income (loss) by reportable segment for the periods indicated (in thousands, except percentages):

T&D Solutions. Operating income from our T&D Solutions segment increased by $2,507 during the three months ended September 30, 2023, as compared to the three months ended September 30, 2022, primarily due to an increase in sales of our power systems equipment, reduced input costs and improved productivity from our manufacturing facility during the three months ended September 30, 2023.

Operating income from our T&D Solutions segment increased by $5,912 during the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022, primarily due to the significant increase in revenue, reduced input costs and improved productivity from our manufacturing facility during the nine months ended September 30, 2023.

Critical Power Solutions. Operating loss from our Critical Power segment decreased by $144, or 18.8%, during the three months ended September 30, 2023, primarily due to a favorable sales mix and the acceptance of price increases from our customers during the three months ended September 30, 2023.

Operating loss from our Critical Power segment decreased by $112, or 6.7%, during the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022, primarily due to a favorable sales mix and the acceptance of price increases from our customers during the nine months ended September 30, 2023.

General Corporate Expense. Our general corporate expenses consist primarily of executive management, corporate accounting and human resources personnel, corporate office expenses, financing and corporate development activities, payroll and benefits administration, treasury, tax compliance, legal, stock-based compensation, public reporting costs and costs not specifically allocated to reportable business segments.

During the three months ended September 30, 2023, our unallocated corporate overhead expense increased by $254, or 29.9%, as compared to the three months ended September 30, 2022, primarily due to an increase in payroll related costs, including stock-based compensation, professional fees and costs related to investor relations.

During the nine months ended September 30, 2023, our unallocated corporate overhead expense increased by $604, or 20.6%, as compared to the nine months ended September 30, 2022, primarily due to an increase in payroll related costs, including stock-based compensation, professional fees and costs related to investor relations.

Non-Operating (Income) Expense

Interest Income. For the three and nine months ended September 30, 2023, we had interest income of approximately $60 and $192, respectively, as compared to interest income of approximately $116 and $322 during the three and nine months ended September 30, 2022, respectively. We generated the majority of our interest income from our cash on hand during the nine months ended September 30, 2023. During the nine months ended September 30, 2022, we generated the majority of our interest income from the Seller Notes we received from the sale of the transformer business units, which were paid off during the year ended December 31, 2022, in addition to our cash on hand.

Other (Income) Expense. Other (income) expense in the consolidated statements of operations reports certain gains and losses associated with activities not directly related to our core operations.

For the three and nine months ended September 30, 2023, other non-operating income was $11 and $4, respectively, as compared to other non-operating income of $17 and other non-operating expense of $112 during the three and nine months ended September 30, 2022, respectively.

Provision for Income Taxes. Our effective income tax rate for the three months ended September 30, 2023 and 2022 was 0.0%.

Our provision reflects an effective tax rate on income before taxes of 0.0% for the nine months ended September 30, 2023, as compared to (0.2)% for the nine months ended September 30, 2022, as set forth below:

Net Income (Loss) per Share

We generated net income of $1,024 during the three months ended September 30, 2023, as compared to a net loss of $1,311 during the three months ended September 30, 2022.

Our net income per basic and diluted share for the three months ended September 30, 2023 was $0.10, as compared to a net loss per basic and diluted share of $0.13 for the three months ended September 30, 2022.

We generated net income of $827 during the nine months ended September 30, 2023, as compared to a net loss of $4,586 during the nine months ended September 30, 2022.

Our net income per basic and diluted share for the nine months ended September 30, 2023 was $0.08, as compared to a net loss per basic and diluted share of $0.47 for the nine months ended September 30, 2022.

LIQUIDITY AND CAPITAL RESOURCES

General. On October 20, 2020, we entered into an At the Market Sale Agreement with H.C. Wainwright & Co., LLC (“Wainwright”), pursuant to which we may offer and sell our shares of common stock from time to time through Wainwright, acting as sales agent or principal (the “ATM Program”). As of September 30, 2023, we had $7,581 of cash on hand generated primarily from the sale of common stock under the ATM Program, payment of all unpaid principal and interest from the Seller Notes during the year ended December 31, 2022, and cash flows from operating activities. Since October 20, 2020, and through September 30, 2023, we sold an aggregate of 916,059 shares of common stock for an aggregate gross proceeds of approximately $8,904, before any sales agent fees and expenses payable by us under the ATM Program. During the three and nine months ended September 30, 2023, we sold an aggregate of 27,559 shares of common stock for an aggregate consideration of approximately $184, before any sales agent fees and expenses payable by us.

On December 13, 2021, we filed a prospectus supplement to the prospectus which forms a part of our registration statement on Form S-3 (File No. 333-249569) (the “Prior Shelf Registration Statement”), that was declared effective by the SEC on October 27, 2020 (the “Prior ATM Prospectus”), in connection with the offer and sale of up to an aggregate offering amount of $8,600 of common stock that may be issued and sold under the ATM Program. Prior to the expiration of the Prior Shelf Registration Statement at the end of its three-year term, we sold an aggregate of 27,559 shares of common stock for an aggregate consideration of approximately $184, before any sales agent fees and expenses payable by us, under the Prior ATM Prospectus. On August 30, 2023, we filed a new registration statement on Form S-3 (File No. 333-274266) to replace the Prior Shelf Registration Statement, including a base prospectus which covers the offering, issuance and sale of up to $150,000 of common stock, preferred stock, warrants and/or units; and a sales agreement prospectus covering the offering, issuance and sale of up to a maximum aggregate offering price of $75,000 of common stock that may be issued and sold under the ATM Program (the “New ATM Prospectus”). The new registration statement was declared effective by the SEC on September 8, 2023. As of September 30, 2023, $75,000 of common stock remained available for issuance under the New ATM Prospectus.

The World Health Organization determined that COVID-19 no longer fit the definition of a public health emergency and the U.S. government announced that the declaration of a public health emergency associated with COVID-19 expired on May 11, 2023. However, COVID-19 has remained and is expected to continue to remain as a serious endemic threat for an indefinite future period and may continue to adversely affect the global economy. The continuing impacts of the COVID-19 endemic, as well as rising interest rates, inflation, changes in foreign currency exchange rates and geopolitical developments, such as the ongoing conflict between Russia and Ukraine, and the ongoing conflict between Israel and Hamas, have resulted, and may continue to result, in a global slowdown of economic activity, which may decrease demand for a broad variety of goods and services, including those provided by the Company’s clients, while also disrupting supply channels, sales channels and advertising and marketing activities for an unknown period of time. As a result of the current uncertainty in economic activity, the Company is unable to predict the potential size and duration of the impact on its revenue and its results of operations, if any. The extent of the potential impact of these macroeconomic factors on the Company’s operational and financial performance will depend on a variety of factors, including the continuing impacts of the COVID-19 endemic and the extent of geopolitical disruption and their respective impacts on the Company’s clients, partners, industry, and employees, all of which are uncertain at this time and cannot be accurately predicted. The Company continues to monitor the effects of these macroeconomic factors and intends to take steps deemed appropriate to limit the impact on its business. During the nine months ended September 30, 2023, the Company was able to operate substantially at capacity.

There can be no assurance that precautionary measures, whether adopted by the Company or imposed by others, will be effective, and such measures could negatively affect its sales, marketing, and client service efforts, delay and lengthen its sales cycles, decrease its employees’, clients’, or partners’ productivity, or create operational or other challenges, any of which could harm its business and results of operations.

Cash Used in Operating Activities. Cash used in our operating activities was $228 during the nine months ended September 30, 2023, as compared to $3,936 during the nine months ended September 30, 2022. The decrease in cash used in operating activities is primarily due to the decrease in our net loss and working capital fluctuations.

Cash Used in Investing Activities. Cash used in our investing activities during the nine months ended September 30, 2023 was $2,345, as compared to $391 during the nine months ended September 30, 2022. Additions to property and equipment during the nine months ended September 30, 2023 were $2,345, as compared to $391 of additions during the nine months ended September 30, 2022.

Cash Used in Financing Activities. Cash used in our financing activities was $142 during the nine months ended September 30, 2023, as compared to $162 during the nine months ended September 30, 2022. The primary use of cash in financing activities for the nine months ended September 30, 2023 and 2022 was repayments of financing leases.

Working Capital. As of September 30, 2023, we had working capital of $13,702, including $7,581 of cash on hand, compared to working capital of $14,074, including $10,296 of cash on hand at December 31, 2022.

Assessment of Liquidity. At September 30, 2023, we had $7,581 of cash on hand generated primarily from the sale of common stock under the ATM Program, payment of all unpaid principal and interest from the Seller Notes during the year ended December 31, 2022 and cash flows from operating activities. We have historically met our cash needs through a combination of cash flows from operating activities and bank borrowings, proceeds from the sale of the CleanSpark Common Stock and warrants to purchase CleanSpark Common Stock, sale of common stock under the ATM Program and collecting all unpaid principal and interest from the Seller Notes. Historically, our cash requirements were generally for operating activities, debt repayment, capital improvements and acquisitions.

We expect to meet our cash needs with our working capital and cash flows from operating activities. We expect our cash requirements to be generally for operating activities, capital improvements and product development. We expect that product development and promotional activities related to our new initiatives will continue in the near future and we expect to continue to incur costs related to such activities. We expect that our cash balance is sufficient to fund operations for the next twelve months.

As of September 30, 2023, we had no off-balance sheet transactions, arrangements, obligations (including contingent obligations), or other relationships with unconsolidated entities or other persons that had, or that may have, a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Capital Expenditures

The Company had $2,345 of additions to property and equipment during the nine months ended September 30, 2023, as compared to $391 of additions to property and equipment during the nine months ended September 30, 2022.

Known Trends, Events, Uncertainties and Factors That May Affect Future Operations

We believe that our future operating results will continue to be subject to quarterly variations based upon a wide variety of factors, including the cyclical nature of the electrical equipment industry and the markets for our products and services. Our operating results could also be impacted by changing customer requirements and exposure to fluctuations in prices of important raw supplies, such as copper, steel and aluminum. We have various insurance policies, including cybersecurity, covering risks in amounts that we consider adequate. In addition to these measures, we attempt to recover other cost increases through improvements to our manufacturing efficiency and through increases in prices where competitively feasible. Lastly, other economic conditions we cannot foresee may affect customer demand. The continuing impacts of the COVID-19 endemic are currently indeterminable, and has affected and may continue to affect the global economy. In addition, the consequences of the ongoing geopolitical conflicts, such as the ongoing conflict between Russia and Ukraine and the ongoing conflict between Israel and Hamas, including related sanctions and countermeasures, and the effects of rising global inflation, are difficult to predict, and could adversely impact geopolitical and macroeconomic conditions, the global economy, and contribute to increased market volatility, which may in turn adversely affect our business and operations. We predominately sell to customers in the industrial production and commercial construction markets. Accordingly, changes in the condition of any of our customers may have a greater impact than if our sales were more evenly distributed between different end markets. For a further discussion of factors that may affect future operating results see the sections entitled “Special Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q and “Part I - Item 1A. Risk Factors” in our Annual Report on Form 10-K.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of September 30, 2023. Our disclosure controls and procedures are designed to provide reasonable assurance that information we are required to disclose in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosures, and is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Based on this evaluation, and as a result of the material weakness described below, our CEO and CFO have concluded that our disclosure controls and procedures were not effective as of September 30, 2023. In light of this determination, our management has performed additional analyses, reconciliations, and other post-closing procedures and has concluded that, notwithstanding the material weakness in our internal control over financial reporting, the unaudited interim condensed consolidated financial statements for the periods covered by and included in this Quarterly Report on Form 10-Q fairly state, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP.

Material Weakness

As of December 31, 2022, we identified a material weakness in our internal control over financial reporting due to not having the appropriate controls in place over our revenue recognition process for nonroutine and complex revenue transactions in accordance with ASC 606, “Revenue from Contracts with Customers”, which continued to exist as of September 30, 2023.

In order to remediate this material weakness, management has expanded and improved our process for reviewing customer contracts and revenue recognition inputs, including through the engagement of third-party accounting professionals with expertise in evaluating customer contracts to obtain guidance on large and/or unique contracts in order to ensure that ASC 606 is accurately applied and documented.

Although we began implementing the enhancements described above at the end of 2022 and have been continuing our remediation efforts through September 30, 2023, the material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded that these controls are operating effectively.

Changes in Internal Control over Financial Reporting

Except as described above, there were no changes in our internal control over financial reporting during the three months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we may become involved in lawsuits, investigations and claims that arise in the ordinary course of business.

On June 15, 2023, two individuals (the “Plaintiffs”) filed a complaint in the U.S. District Court, District of Nebraska naming the Company, its wholly-owned subsidiary, Titan Energy Systems, Inc., and an individual acting in his capacity as an employee of the Company, collectively as defendants. Plaintiffs filed an amended complaint on July 7, 2023 alleging negligent driving, negligent entrustment, and negligent hiring, training and supervision, as a result of a car accident that occurred on September 9, 2019 involving the Plaintiffs and the individual. According to the amended complaint, the Plaintiffs are seeking special damages related to the injuries sustained by Plaintiffs. On July 27, 2023, the defendants filed an Answer to Plaintiff’s Amended Complaint. On October 6, 2023, a mediation was held, but the parties did not reach a settlement. The parties are in the beginning stages of the discovery process and are working to schedule a settlement conference before the end of 2023.

As of the date hereof, we are not aware of or a party to any other legal proceedings to which we or any of our subsidiaries is a party or to which any of our property is subject, nor are we aware of any such threatened or pending litigation or any such proceedings known to be contemplated by governmental authorities that we believe could have a material adverse effect on our business, financial condition or operating results.

We can give no assurance that any other lawsuits or claims brought in the future will not have an adverse effect on our financial condition, liquidity or operating results.

We are not aware of any material proceedings in which any of our directors, officers or affiliates or any registered or beneficial shareholder of more than 5% of our common stock is an adverse party or has a material interest adverse to our interest.

ITEM 1A. RISK FACTORS

A description of the risks associated with our business, financial condition and results of operations is set forth in “Item 1A. Risk Factors” of our annual report on Form 10-K for the fiscal year ended December 31, 2022, as filed with the Securities and Exchange Commission on April 11, 2023, and are supplemented with the following revised risk factor:

We face risks associated with litigation and claims, which could impact our financial results and condition.

Our business, results of operations and financial condition could be affected by significant litigation or claims adverse to us. Types of potential litigation cases include product liability, contract, employment-related, labor relations, personal injury or property damage, intellectual property, trade secret or unfair competition claims, 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. We are currently involved in a legal proceeding in which plaintiffs are alleging negligence claims and seeking special damages for personal injuries. See “Part II. Item 1 – Legal Proceedings.”

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES

On August 22, 2023, the Company issued 10,000 shares of common stock to a vendor in exchange for consulting services with a fair value of $64,900.

The issuance of the shares of common stock as described above was not registered under the Securities Act, or the securities laws of any state, and the shares of common stock were issued in reliance on the exemption from registration under the Securities Act pursuant to Section 4(a)(2) of the Securities Act.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

See the Exhibit Index following the signature page to this Quarterly Report on Form 10-Q for a list of exhibits filed or furnished with this report, which Exhibit Index is incorporated herein by reference.

EXHIBIT INDEX