Part I [Business](index=5&type=section&id=Item%201.%20Business) Polar Power, Inc. designs, manufactures, and sells DC power systems primarily for the telecommunications market, achieving record revenues in 2018 - The company's primary business is designing and selling DC power systems for the telecommunications market, providing power for off-grid or backup applications[11](index=11&type=chunk) 2018 Key Business Highlights | Metric | Value | Note | | :--- | :--- | :--- | | **Net Sales** | $24.0 million | Record level | | **Backlog (Year-End)** | $16.0 million | Record level | | **New Tier-1 Customer** | T-Mobile | Accounted for 22% of net sales | | **International Expansion** | Installations in Sri Lanka & Namibia | Demonstrating off-grid capabilities | | **Military Project** | U.S. Army Robotic Mule | Delivered 20 mobile DC power systems | - The company's business strategy focuses on penetrating the U.S. telecommunications market, expanding globally, and developing new power systems and renewable offerings[51](index=51&type=chunk)[52](index=52&type=chunk)[53](index=53&type=chunk) - Research and development expenses **increased by 67% to $1.91 million in 2018** from $1.33 million in 2017, driven by new product development[91](index=91&type=chunk) [Risk Factors](index=19&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks from high customer concentration, supply chain dependencies, and the CEO's majority ownership Customer Concentration Risk (2018 & 2017) | Customer | 2018 % of Total Revenue | 2017 % of Total Revenue | | :--- | :--- | :--- | | **AT&T** | 53% | 15% | | **T-Mobile** | 22% | N/A | | **Verizon Wireless** | 10% | 71% | - The company is substantially dependent on three key engine suppliers: Yanmar, Kubota, and Perkins, which collectively represented **20% of total cost of sales in 2018** and **54% in 2017**[120](index=120&type=chunk) - Chairman, President, and CEO, Arthur D. Sams, beneficially owns approximately **55% of outstanding common stock**, giving him significant influence[153](index=153&type=chunk) - As a "controlled company" under NASDAQ rules due to CEO's majority ownership, the company may be exempt from certain corporate governance requirements[154](index=154&type=chunk) [Unresolved Staff Comments](index=36&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments from the Securities and Exchange Commission - There are no unresolved staff comments[184](index=184&type=chunk) [Properties](index=36&type=section&id=Item%202.%20Properties) The company leases three facilities in Gardena, California, totaling 84,000 square feet for its operations - The company leases three facilities in Gardena, California, totaling **84,000 square feet** for its corporate, manufacturing, R&D, and storage needs[185](index=185&type=chunk) [Legal Proceedings](index=36&type=section&id=Item%203.%20Legal%20Proceedings) The company is not currently involved in any material legal proceedings that would adversely affect its business - The company is not currently involved in any material legal proceedings[186](index=186&type=chunk) [Mine Safety Disclosures](index=36&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company's operations - Mine safety disclosures are not applicable[187](index=187&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=37&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on NASDAQ, has never paid dividends, and intends to retain earnings for growth - The company's common stock trades on The NASDAQ Capital Market under the symbol **"POLA"**[190](index=190&type=chunk) Quarterly Stock Price Range (2017-2018) | Period | High ($) | Low ($) | | :--- | :--- | :--- | | **2017** | | | | Q1 | 9.07 | 7.64 | | Q2 | 9.11 | 4.64 | | Q3 | 6.16 | 4.17 | | Q4 | 5.85 | 4.79 | | **2018** | | | | Q1 | 5.26 | 4.01 | | Q2 | 6.85 | 4.87 | | Q3 | 6.65 | 5.07 | | Q4 | 6.20 | 4.50 | - The company has never declared or paid cash dividends and plans to retain future earnings for business operations and growth[193](index=193&type=chunk) [Selected Financial Data](index=38&type=section&id=Item%206.%20Selected%20Financial%20Data) This item is not applicable to the company - Selected Financial Data is not applicable[199](index=199&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=38&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) In FY2018, revenues increased by 67% to $24.0 million, but net loss widened due to higher operating expenses and production inefficiencies Financial Performance Summary (FY 2018 vs. FY 2017) | Metric | FY 2018 | FY 2017 | Change (%) | | :--- | :--- | :--- | :--- | | **Net Sales** | $24,046,354 | $14,418,726 | +67% | | **Gross Profit** | $7,431,780 | $4,761,168 | +56% | | **Gross Margin** | 30.9% | 33.0% | -2.1 p.p. | | **Loss from Operations** | ($1,098,788) | ($801,960) | +37% | | **Net Loss** | ($848,252) | ($757,416) | +12% | - The **67% increase in revenue** was a direct result of increased sales to U.S. Tier-1 telecommunications customers, with AT&T, T-Mobile, and Verizon Wireless representing **53%, 22%, and 10% of total net sales**, respectively[218](index=218&type=chunk)[221](index=221&type=chunk) - Cost of sales increased from 67% to **69% of net sales** due to volume discounts and short-term labor inefficiencies from rapid production ramp-up[222](index=222&type=chunk) - The company's backlog as of December 31, 2018, was approximately **$16 million**, with **92% attributable to U.S. Tier-1 telecommunications customers**[218](index=218&type=chunk)[244](index=244&type=chunk) Cash Flow Summary (FY 2018 vs. FY 2017) | Activity | FY 2018 | FY 2017 | | :--- | :--- | :--- | | **Net Cash Used In Operating Activities** | ($7,847,693) | ($1,587,130) | | **Net Cash Used In Investing Activities** | ($574,990) | ($342,121) | | **Net Cash Used In Financing Activities** | ($138,402) | ($111,744) | | **Net Decrease in Cash** | ($8,561,085) | ($2,040,995) | [Quantitative and Qualitative Disclosures About Market Risk](index=46&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This item is not applicable to the company - Quantitative and Qualitative Disclosures About Market Risk are not applicable[245](index=245&type=chunk) [Financial Statements and Supplementary Data](index=46&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section refers to the full financial statements and supplementary data, which begin on page F-1 - This item references the financial statements which begin on page F-1 of the Annual Report[246](index=246&type=chunk) [Changes in and Disagreements With Accountants on Accounting and Financial Disclosure](index=46&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20With%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - There were no changes or disagreements with accountants[247](index=247&type=chunk) [Controls and Procedures](index=46&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018 - Based on an evaluation as of December 31, 2018, the principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective[248](index=248&type=chunk) - Management concluded that as of December 31, 2018, the company's internal control over financial reporting was effective, based on the COSO framework[251](index=251&type=chunk) [Other Information](index=47&type=section&id=Item%209B.%20Other%20Information) No other information was reported in this section - No other information was reported[254](index=254&type=chunk) Part III [Directors, Executive Officers and Corporate Governance](index=48&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) The company's board includes independent directors, and despite CEO's majority ownership, it does not use "controlled company" exemptions Executive Officers and Directors | Name | Age | Position | | :--- | :--- | :--- | | **Arthur D. Sams** | 66 | Chairman, President, CEO, Secretary | | **Rajesh Masina** | 35 | Chief Operating Officer | | **Luis Zavala** | 49 | Chief Financial Officer | | **Keith Albrecht** | 66 | Director | | **Matthew Goldman** | 40 | Director | | **Peter Gross** | 67 | Director | - The Board of Directors has determined that a majority of its members are independent under NASDAQ listing rules[271](index=271&type=chunk) - The board has three standing committees: Audit, Compensation, and Nominating and Corporate Governance, each composed of independent directors[274](index=274&type=chunk)[275](index=275&type=chunk)[276](index=276&type=chunk)[278](index=278&type=chunk) [Executive Compensation](index=53&type=section&id=Item%2011.%20Executive%20Compensation) Executive compensation in 2018 included base salaries, cash bonuses based on performance, and stock option grants vesting over three years 2018 Summary Compensation Table | Name and Principal Position | Year | Salary ($) | Option Awards ($) | Bonus ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | :--- | | **Arthur D. Sams**, CEO | 2018 | 275,000 | 421,555 | 104,500 | 801,055 | | **Rajesh Masina**, COO | 2018 | 175,000 | 262,881 | 66,500 | 504,381 | | **Luis Zavala**, CFO | 2018 | 175,000 | 262,881 | 66,500 | 504,381 | - On April 2, 2018, base salaries were increased for the CEO to **$275,000** and for the COO and CFO to **$175,000** each[297](index=297&type=chunk)[307](index=307&type=chunk) - The 2018 non-equity incentive plan allowed executives to earn up to **100% of their base salary** based on seven performance goals[299](index=299&type=chunk)[300](index=300&type=chunk) - On April 2, 2018, incentive stock options were granted for **150,000 shares to the CEO** and **90,000 shares each to the COO and CFO**[304](index=304&type=chunk)[305](index=305&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=66&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) CEO Arthur D. Sams beneficially owns 54.7% of common stock, giving him significant control over the company - Arthur D. Sams, Chairman, President, and CEO, beneficially owns **5,626,676 shares**, representing **54.7% of the class** as of April 1, 2019[362](index=362&type=chunk) - All directors and executive officers as a group beneficially own **6,359,310 shares**, representing **61.8% of the class**[362](index=362&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=68&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) The company has a related party transaction with Smartgen Solutions, Inc., 40% owned by COO Rajesh Masina, for field services - The company has a Subcontractor Installer Agreement with Smartgen Solutions, Inc., a company **40% owned by COO Rajesh Masina**[367](index=367&type=chunk) Transactions with Smartgen Solutions, Inc. | Transaction Type | 2018 Amount | 2017 Amount | | :--- | :--- | :--- | | **Field services performed by Smartgen for Polar** | $174,290 | $186,392 | | **Goods/services purchased by Smartgen from Polar** | $496 | $1,136 | - The Board of Directors has adopted a written policy for the review and approval of related person transactions, managed by the Audit Committee[373](index=373&type=chunk) [Principal Accountant Fees and Services](index=71&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Weinberg & Company, P.A. served as the independent auditor, with total fees of $177,999 in 2018, all pre-approved by the Audit Committee Accountant Fees (Weinberg & Company, P.A.) | Fee Type | 2018 | 2017 | | :--- | :--- | :--- | | **Audit Fees** | $133,854 | $174,110 | | **Audit-Related Fees** | $820 | $2,634 | | **Tax Fees** | $43,325 | $60,226 | | **Total** | **$177,999** | **$236,970** | - The Audit Committee has a policy to pre-approve all audit and non-audit services performed by the independent auditor[385](index=385&type=chunk) Part IV [Exhibits, Financial Statement Schedules](index=71&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists the financial statements and exhibits filed as part of the Form 10-K, with financial statements beginning on page F-1 - This section references the financial statements beginning on page F-1 and lists all exhibits filed with the report[387](index=387&type=chunk)[390](index=390&type=chunk) [Form 10-K Summary](index=72&type=section&id=Item%2016.%20Form%2010-K%20Summary) No Form 10-K summary is provided - No summary is provided for the Form 10-K[391](index=391&type=chunk) Financial Statements [Report of Independent Registered Public Accounting Firm](index=74&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) Weinberg & Company, P.A. issued an unqualified opinion on the financial statements, confirming fair presentation in accordance with U.S. GAAP - The auditor, Weinberg & Company, P.A., provided an unqualified opinion on the financial statements, indicating they are presented fairly in accordance with U.S. GAAP[397](index=397&type=chunk) [Financial Statements Tables](index=75&type=section&id=Financial%20Statements%20Tables) Total assets increased to $25.2 million in 2018, while net loss widened to $848,252 on revenues of $24.0 million Key Balance Sheet Data (as of Dec 31) | Account | 2018 | 2017 | | :--- | :--- | :--- | | **Total Current Assets** | $23,023,348 | $23,612,468 | | Cash and cash equivalents | $5,640,078 | $14,201,163 | | Accounts receivable | $7,726,919 | $3,058,266 | | Inventories, net | $8,471,769 | $5,487,053 | | **Total Assets** | **$25,240,106** | **$24,524,040** | | **Total Current Liabilities** | $1,933,546 | $1,494,420 | | **Total Liabilities** | **$2,858,085** | **$1,621,238** | | **Total Stockholders' Equity** | **$22,382,021** | **$22,902,802** | Key Income Statement Data (for year ended Dec 31) | Account | 2018 | 2017 | | :--- | :--- | :--- | | **Net sales** | $24,046,354 | $14,418,726 | | **Gross profit** | $7,431,780 | $4,761,168 | | **Loss from operations** | ($1,098,788) | ($801,960) | | **Net Loss** | **($848,252)** | **($757,416)** | | **Net loss per share** | ($0.08) | ($0.07) | [Notes to Financial Statements](index=79&type=section&id=Notes%20to%20Financial%20Statements) Notes detail accounting policies, revenue disaggregation, a $1 million unused credit facility, and a full valuation allowance against deferred tax assets - The company adopted the new revenue recognition standard ASC 606 on January 1, 2018, with no material impact on its financial statements[419](index=419&type=chunk)[422](index=422&type=chunk) Disaggregation of Net Sales by Customer Type | Customer Type | 2018 | 2017 | | :--- | :--- | :--- | | **Telecom** | $21,552,950 | $12,714,164 | | **Government/Military** | $1,477,121 | $1,244,267 | | **Marine** | $177,909 | $278,254 | | **Other** | $838,374 | $182,041 | | **Total net sales** | **$24,046,354** | **$14,418,726** | - The company has a **$1,000,000 revolving credit facility** with Citibank, which was unused as of December 31, 2018[453](index=453&type=chunk)[455](index=455&type=chunk) - The company established a **full valuation allowance** against its net deferred tax assets of approximately **$570,000**[475](index=475&type=chunk)

Polar Power, Inc. (NASDAQ:POLA) Q4 2018 Earnings Conference Call March 26, 2019 4:30 PM ET Company Participants Shawn Severson - Integra IR Arthur Sams - CEO Rajesh Masina - COO Luis Zavala - CFO Conference Call Participants Jeff Kobylarz - Diamond Bridge Capital Tim Chatard - Quantum Capital Ashok Kumar - ThinkEquity Operator Good day and welcome to the Polar Power's Fourth Quarter 2018 Financial Results Conference Call. Today’s conference is being recorded. At this time, I'd like to turn the conference ov ...