Polestar(PLSAY) - 2023 Q4 - Annual Report

PART I Key Information The company faces significant risks related to partner dependency, capital needs, competition, and internal control weaknesses Risk Factors Key risks include heavy reliance on strategic partners, the need for substantial additional capital, intense market competition, and identified material weaknesses in financial controls - Polestar's future growth is heavily dependent on the successful and timely production of new models like the Polestar 3 and 4[47] - The company's reliance on partners like Volvo Cars and Geely for manufacturing, R&D, and logistics creates significant operational vulnerabilities[50] - Polestar has incurred net losses since inception, requires substantial additional capital, and has substantial doubt about its ability to continue as a going concern[54][55] - The company has identified material weaknesses in its internal control over financial reporting, which could impact financial statement accuracy and investor confidence[88] - A dual-class voting structure gives certain shareholders disproportionate voting power, limiting the influence of other ADS holders[89] Company Information This section details Polestar's history, asset-light business model, global operations, and expanding electric vehicle portfolio History and Development of the Company Polestar became a public company in June 2022 and has made significant capital expenditures financed through equity, debt, and credit facilities Capital Expenditures (TUSD) | Year | Amount (TUSD) | | :--- | :--- | | 2023 | 475,710 | | 2022 | 380,709 | | 2021 | 503,308 | - The company was established as a premium electric car brand by Volvo Cars and Geely in 2017 and became publicly listed on June 23, 2022[99][101] Business Overview Polestar is a design-led EV brand with an asset-light model, a direct-to-consumer approach, and a goal to create a climate-neutral car by 2030 - Polestar's strategy focuses on expanding its product portfolio to four models by 2025, improving profitability, and diversifying its manufacturing footprint[108] Vehicle Portfolio and Timeline | Model | Type | Status | Production Start | | :--- | :--- | :--- | :--- | | Polestar 1 | Hybrid GT | Production ended 2021 | 2019 | | Polestar 2 | Performance Fastback | In production | 2020 | | Polestar 3 | Performance SUV | Production started | Early 2024 | | Polestar 4 | SUV Coupe | Production started | Late 2023 | | Polestar 5 | Luxury 4-door GT | Planned | 2025 | | Polestar 6 | Roadster | Planned | Early 2027 | - As of December 31, 2023, Polestar operates in 27 markets, utilizing 192 Polestar Spaces and over 1,150 service points via the Volvo Cars network[101][128] - A joint venture with Xingji Meizu in China aims to develop a unique operating system (Polestar OS) to strengthen its position in the Chinese market[59][128] Revenue by Type (TUSD) | Revenue Type | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Sales of vehicles | 2,319,947 | 2,386,454 | 1,299,196 | | Sales of software and performance kits | 18,994 | 21,308 | 25,881 | | Sales of carbon credits | 1,452 | 10,984 | 6,299 | | Vehicle leasing revenue | 17,421 | 16,719 | 6,217 | | Other revenue | 20,748 | 8,640 | 8,754 | | Total | 2,378,562 | 2,444,105 | 1,346,347 | Organizational Structure Polestar Automotive Holding UK PLC is the parent company of a global group with key subsidiaries in Sweden and Singapore - The company operates through a network of wholly-owned subsidiaries across key regions, with Polestar Holding AB (Sweden) and Polestar Automotive (Singapore) Pte. Ltd. being central to the structure[155][159] Property, Plants and Equipment The company employs an asset-light model by using partner-owned manufacturing facilities and is expanding its production footprint globally - Polestar leverages partner manufacturing facilities to maintain an asset-light business model[160][161] Key Manufacturing Locations | Facility | Operator | Model(s) | Status | | :--- | :--- | :--- | :--- | | Taizhou, China | Volvo Cars | Polestar 2 | In Production | | Chengdu, China | Volvo Cars | Polestar 3 | Production started early 2024 | | Charleston, SC, USA | Volvo Cars | Polestar 3 | Production expected summer 2024 | | Hangzhou Bay, China | Geely | Polestar 4 | In Production | | Busan, South Korea | Renault Korea Motors (Geely JV) | Polestar 4 | Production expected H2 2025 | | Chongqing, China | Geely/Polestar | Polestar 5 & 6 | Production expected 2025/2027 | Operating and Financial Review and Prospects The company's financial performance shows declining revenue and widening losses, with significant doubt about its ability to continue as a going concern Results of Operations In 2023, revenue decreased slightly while a significant increase in cost of sales led to a gross loss of $413.1 million and a net loss of $1.19 billion Consolidated Statement of Loss (TUSD) | | 2023 | 2022 (Restated) | 2021 (Restated) | | :--- | :--- | :--- | :--- | | Revenue | 2,378,562 | 2,444,105 | 1,346,347 | | Cost of sales | (2,791,643) | (2,343,302) | (1,336,688) | | Gross (loss) profit | (413,081) | 100,803 | 9,659 | | Selling, general and administrative expense | (949,683) | (838,367) | (685,049) | | Research and development expense | (158,406) | (174,916) | (234,019) | | Operating loss | (1,479,966) | (1,285,103) | (960,125) | | Net loss | (1,194,831) | (477,455) | (969,298) | - Global vehicle deliveries grew 6% to approximately 54,600 cars in 2023 from 51,549 in 2022[106][183] - The 2023 gross loss was primarily driven by impairments totaling over $440 million related to intangible assets, PPE, and inventory[202] Liquidity and Capital Resources The company's liquidity is under pressure due to negative operating cash flows, requiring heavy reliance on external and related-party financing Cash and Cash Equivalents (TUSD) | As of December 31 | 2023 | 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | 768,927 | 973,877 | Consolidated Cash Flows (TUSD) | | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Cash used for operating activities | (1,859,842) | (1,089,295) | (314,555) | | Cash used for investing activities | (439,399) | (709,044) | (126,937) | | Cash provided by financing activities | 2,093,304 | 2,082,486 | 909,237 | - Polestar secured significant related-party financing, including a $1 billion term loan from Volvo Cars and a $250 million term loan from Geely[173][217] - Total contractual obligations and commitments as of December 31, 2023, amount to approximately $4.87 billion, with $3.18 billion due in less than one year[227] Critical Accounting Estimates Financial statements rely on critical estimates for revenue recognition, asset impairment testing, and fair value measurements of financial instruments - Polestar changed its revenue allocation method in Q4 2023 to an expected cost-plus-margin approach, reflecting more mature sales data[239][481] - The company identified four distinct Cash Generating Units (CGUs) for impairment testing, a change from the previous single-CGU approach[241][506] - An impairment loss of $351.2 million was recognized for the Polestar 2 CGU in 2023 due to decreased forecasted demand[241][506] - Fair value of financial liabilities is measured using complex models with significant unobservable inputs (Level 2 and 3), making them sensitive to market changes[243][244] Directors, Senior Management and Employees This section details the company's board structure, executive compensation, incentive plans, and employee base - The Board of Directors is divided into three classes with staggered three-year terms, and a majority must be independent for three years post-business combination[297] - Aggregate compensation for executive officers in 2023 was approximately SEK 39.5 million (approx. $3.9 million USD)[272] - Non-employee directors receive an annual fee of $200,000 ($350,000 for the chair), with 50% of the net fee used to purchase company ADSs[280] - As of December 31, 2023, the company had over 2,515 employees, with a significant presence in Sweden, China, the UK, and the USA[310] Major Shareholders and Related Party Transactions The company is a controlled entity with extensive operational and financial agreements with its major shareholders, Volvo Cars and Geely Major Shareholder Ownership (as of Dec 31, 2023) | Name of Beneficial Owner | Approximate Percentage of Outstanding Shares | | :--- | :--- | | Li Shufu | 81.8% | - Polestar has extensive related party agreements with Volvo Cars and Geely for R&D, IP licensing, manufacturing, and other core services[136][326] - Polestar has a $1 billion term loan facility with Snita (Volvo Cars) and a $250 million term loan facility with Geely, both featuring equity conversion options[326][327] Financial Information This section references the consolidated financial statements and notes the company's policy of not paying dividends - The company has not paid any cash dividends to date and does not intend to in the foreseeable future, expecting to reinvest earnings into operations[350] The Offer and Listing Polestar's ADSs and warrants are listed on the Nasdaq stock market under the symbols 'PSNY' and 'PSNYW' - Class A ADSs are listed on Nasdaq under the symbol 'PSNY'[352] - Class C-1 ADSs (warrants) are listed on Nasdaq under the symbol 'PSNYW'[352] Additional Information This section covers material tax considerations for ADS holders, including PFIC status, and notes the absence of exchange controls - The company does not believe it was a Passive Foreign Investment Company (PFIC) for the 2023 taxable year but notes the determination is complex[75][371] - Dividends paid by the company are not expected to be subject to U.K. withholding tax[374] - Transfers of ADSs through DTC are not expected to attract U.K. stamp duty, but transfers of the underlying ordinary shares generally will[75][375] Quantitative and Qualitative Disclosures about Market Risk The company is exposed to market risks including foreign currency, interest rate, credit, and significant liquidity risk - The company is primarily exposed to foreign exchange risk from fluctuations in CNY/SEK, GBP/SEK, and USD/SEK rates[247][528] - A 1% parallel shift in interest rate curves would impact profit or loss by approximately $10.0 million as of Dec 31, 2023[251][534] - Liquidity risk is significant, as the company depends on short-term credit facilities and flexible payment terms from related parties[255][537] Description of Securities Other Than Equity Securities This section outlines the fees payable by ADS holders to the Depositary for various services ADS Holder Fees | Service | Fee per ADS | | :--- | :--- | | Issuance of ADSs | Up to US$0.05 | | Cancellation of ADSs | Up to US$0.05 | | Cash distributions | Up to US$0.05 | | Annual Service Fee | Up to US$0.05 | PART II Controls and Procedures Management and the independent auditor identified material weaknesses in internal controls, resulting in an adverse opinion on their effectiveness - Management concluded that disclosure controls and procedures were not effective as of December 31, 2023[386] - The independent auditor, Deloitte AB, issued an adverse opinion on the effectiveness of the company's internal control over financial reporting[398][399] - Material weaknesses were identified in four components of the COSO framework: Control Environment, Control Activities, Information and Communication, and Monitoring[389] - Specific deficiencies include a lack of sufficient accounting expertise, inadequate segregation of duties, and ineffective controls over key financial areas[390][391][394] - Management is undertaking remediation efforts, including hiring additional finance resources and enhancing policies and procedures[396] Principal Accountant Fees and Services This section details the fees paid to the principal external auditor, Deloitte AB, for audit and other services in 2022 and 2023 Principal Accountant Fees (TUSD) | Fee Type | 2023 | 2022 | | :--- | :--- | :--- | | Audit fees | 15,720 | 11,159 | | Audit-related fees | 268 | 412 | | Tax fees | 3 | — | | All other fees | 10 | — | | Total | 16,001 | 11,571 | Corporate Governance As a foreign private issuer and controlled company, Polestar follows most Nasdaq rules but utilizes certain governance exemptions - Polestar is a foreign private issuer and a controlled company, exempting it from certain Nasdaq governance rules[410][309] - The company voluntarily complies with most Nasdaq rules but does not require its compensation and nominating committees to be composed entirely of independent directors[410] Cybersecurity The company maintains a cybersecurity program with board oversight and has experienced no material incidents in the last fiscal year - Polestar's cybersecurity risk management is integrated into its enterprise risk program, with oversight from the Audit Committee[413][414] - A dedicated Information Security Team, led by a CISO, and a third-party 24/7 Security Operations Center (SOC) are in place to manage threats[413][415] - No material cybersecurity incidents were experienced during the last fiscal year[413] PART III Financial Statements This section presents the audited consolidated financial statements, which include an adverse opinion on internal controls and a going concern warning - The auditor's report expresses an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting[440] - The auditor's report notes that the need for additional financing raises substantial doubt about the company's ability to continue as a going concern[441][468] - The financial statements for 2022 and 2021 have been restated to correct immaterial errors primarily related to inventory and expense accounting[182][473] Exhibits This section lists all exhibits filed with the annual report, including material contracts and corporate documents