Polestar(PLSAY) - 2022 Q4 - Annual Report

PART I Key Information The company faces significant risks across its business, operations, and financing, including a history of net losses and material weaknesses in internal controls Risk Factors Polestar's operations are subject to a wide array of risks including dependency on partners, supply chain issues, intense competition, and regulatory challenges - The company has incurred net losses each year since its inception and had an accumulated deficit of $3.7 billion as of December 31, 2022[136] - Polestar's independent auditors have included a 'going concern' explanatory paragraph in their report, indicating substantial doubt about the company's ability to continue operations without securing additional funding[137] - The company relies heavily on agreements with strategic partners Volvo Cars and Geely for R&D, IP licensing, purchasing, and manufacturing, and any disruption could materially harm its ability to operate[104][105][106] - Operations are subject to significant risks specific to China, including reliance on Chinese manufacturing facilities and suppliers, potential government intervention, and complex data security laws[91][158][162] - Four material weaknesses in internal control over financial reporting were identified as of December 31, 2022, related to personnel, revenue recognition, intangible assets, and inventory controls[346] Information on the Company Polestar operates as a premium electric car brand with an asset-light model, leveraging partners for manufacturing while developing a product portfolio of six vehicles by 2026 History and Development of the Company The company became public in June 2022 through a business combination and has made significant capital expenditures in production tooling and R&D Capital Expenditures (in TUSD) | Year | Amount (TUSD) | | :--- | :--- | | 2022 | 380,457 | | 2021 | 504,774 | | 2020 | 400,793 | - Capital expenditures in 2023 are anticipated to be financed through a mix of equity or debt instruments, credit facilities, and related-party loans[393] Business Overview The company is a Swedish premium electric car brand accelerating sustainable mobility through an asset-light model and a direct-to-consumer sales approach Revenue by Type (in TUSD) | Revenue Type | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Sales of vehicles | 2,404,246 | 1,290,031 | 542,783 | | Sales of software and performance engineered kits | 21,308 | 25,881 | 35,434 | | Sales of carbon credits | 10,984 | 6,299 | 27,141 | | Vehicle leasing revenue | 16,719 | 6,217 | — | | Other revenue | 8,639 | 8,753 | 4,887 | | Total | 2,461,896 | 1,337,181 | 610,245 | Revenue by Geographical Region (in TUSD) | Region | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Europe, the Middle East, and Africa | 1,619,046 | 1,029,058 | 568,311 | | North America | 609,058 | 265,661 | 28,084 | | Asia and Australia | 233,792 | 42,462 | 13,850 | | Total | 2,461,896 | 1,337,181 | 610,245 | - Polestar plans to introduce three new electric vehicles by 2026: Polestar 4 (2023), Polestar 5 (2024), and Polestar 6 (2026)[398][399] - The company utilizes a digital-first, direct-to-consumer sales model, supported by 158 physical Polestar Spaces and 1,116 service points via the Volvo Cars network as of Dec 31, 2022[402] - A key long-term goal is the Polestar 0 project, aiming to create a truly climate-neutral production car by 2030[400][449] - Polestar delivered approximately 12,000 vehicles in Q1 2023[412] Organizational Structure Polestar Automotive Holding UK PLC is the parent company with significant subsidiaries across Europe, North America, and Asia for sales and service - The company operates through a network of wholly-owned subsidiaries in key regions, including Polestar Holding AB (Sweden) and Polestar Automotive USA Inc[517][518] Property, Plants and Equipment The company employs an asset-light manufacturing model, using partner facilities in China and the US for current and future vehicle production - Polestar vehicles are currently manufactured at a plant in Luqiao, China, which is owned and operated by Volvo Cars[521] - Future production of the Polestar 3 will occur at Volvo Cars' facilities in Chengdu, China, and Charleston, South Carolina, USA[521][522] - As of the report date, Polestar has committed to a plan to sell its own low-volume manufacturing facility in Chengdu, China[465][524] Operating and Financial Review and Prospects Revenue grew 84% to $2.46 billion in 2022, but the company recorded a net loss of $466 million and faces liquidity challenges requiring external financing Results of Operations Revenue increased 84% to $2.46 billion in 2022, while the net loss improved to $466 million due to a significant non-cash gain from earn-out rights Consolidated Statement of Loss Summary (in TUSD) | | 2022 | 2021 | 2020 | |:---|---:|---:|---:| | Revenue | 2,461,896 | 1,337,181 | 610,245 | | Cost of sales | (2,342,453) | (1,336,321) | (553,724) | | Gross profit | 119,443 | 860 | 56,521 | | Selling, general and administrative expense | (864,598) | (714,724) | (314,926) | | Research and development expense | (167,242) | (232,922) | (183,849) | | Listing expense | (372,318) | — | — | | Operating loss | (1,286,280) | (994,839) | (440,488) | | Fair value change - Earn-out rights | 902,068 | — | — | | Net loss | (465,789) | (1,007,454) | (484,858) | - Revenue increased by 84% in 2022, driven by higher sales volumes of the Polestar 2 across key markets[569][570] - Gross profit margin improved in 2022 due to higher fixed cost absorption from expanded production, though partially offset by unfavorable currency exchange rates[578] - The 2022 net loss was significantly reduced by a non-cash gain of $902.1 million from the fair value change of earn-out rights and a $35.1 million gain from the fair value change of Class C Shares[567][586][587] Liquidity and Capital Resources The company's liquidity is a critical concern, with negative operating cash flows and a heavy reliance on external financing to fund its growth and operations - Management has determined there is substantial doubt about Polestar's ability to continue as a going concern due to recurring net losses and negative cash flows[590][1066] Cash and Cash Equivalents (in TUSD) | As of December 31, | 2022 | 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | 973,877 | 756,677 | Consolidated Cash Flows Summary (in TUSD) | | 2022 | 2021 | 2020 | |:---|---:|---:|---:| | Cash used for operating activities | (1,083,423) | (312,156) | (57,050) | | Cash used for investing activities | (715,973) | (129,672) | (243,707) | | Cash provided by financing activities | 2,083,029 | 909,572 | 359,643 | - The SPAC merger in June 2022 provided net cash proceeds of $1.42 billion, a primary source of financing during the year[548][624] - On November 3, 2022, Polestar entered into an 18-month term loan facility with shareholder Volvo Cars for up to $800 million[612] Contractual Obligations and Commitments as of Dec 31, 2022 (in TUSD) | | Total | Less than 1 year | 1-5 years | After 5 years | |:---|---:|---:|---:|---:| | Capital commitments | 396,261 | 283,400 | 112,861 | — | | Credit facilities, including sale leasebacks | 1,328,752 | 1,328,752 | — | — | | Lease obligations | 120,465 | 21,717 | 69,135 | 29,613 | | Total | 1,845,478 | 1,633,869 | 181,996 | 29,613 | Non-GAAP Financial Measures The company uses non-GAAP measures like Adjusted Operating Loss and Free Cash Flow to provide a clearer view of underlying business trends Reconciliation of GAAP and Non-GAAP Results (in TUSD) | Measure | 2022 | 2021 | 2020 | |:---|---:|---:|---:| | Operating loss (GAAP) | (1,286,280) | (994,839) | (440,488) | | Listing expense | 372,318 | — | — | | Adjusted operating loss (Non-GAAP) | (913,962) | (994,839) | (440,488) | | Net loss (GAAP) | (465,789) | (1,007,454) | (484,858) | | Adjustments for Adjusted EBITDA | (319,812) | (724,492) | 252,913 | | Adjusted EBITDA (Non-GAAP) | (785,601) | (724,492) | (231,945) | | Adjustments for Adjusted Net Loss | (564,840) | — | — | | Adjusted net loss (Non-GAAP) | (1,030,629) | (1,007,454) | (484,858) | | Net cash used for operating activities (GAAP) | (1,083,423) | (312,156) | (57,050) | | Additions to PP&E and intangible assets | (713,473) | (129,672) | (243,707) | | Free cash flow (Non-GAAP) | (1,796,896) | (441,828) | (300,757) | Directors, Senior Management and Employees The company is led by an experienced executive team and board, with compensation tied to performance and exemptions from certain Nasdaq governance rules Directors and Executive Officers Polestar's leadership team and board comprise members with extensive experience in the automotive, technology, and financial sectors from major corporations - The executive team consists of Thomas Ingenlath (CEO), Johan Malmqvist (CFO), and Dennis Nobelius (COO)[674] - The Board of Directors is chaired by Håkan Samuelsson, former President and CEO of Volvo Cars[679] Executive Officer and Director Compensation Executive compensation includes salary, performance-based bonuses, and long-term equity incentives, while non-employee directors receive a fixed annual fee - The aggregate compensation for the three executive officers for the year ended Dec 31, 2022, was approximately SEK 35.4 million (or $3.4 million)[699] - The 2022 annual bonus program was based on five KPIs and resulted in a payout of 106% of the target bonus levels[701] - Non-employee directors receive an annual fee of $200,000 ($350,000 for the chair), with half of the net fee used to purchase company ADSs[713] - The company adopted the 2022 Omnibus Incentive Plan and the 2022 Employee Stock Purchase Plan to provide long-term equity incentives[715][717][735] Board Practices The Board of Directors is divided into three staggered classes and has three standing committees, with exemptions from certain Nasdaq rules as a foreign private issuer - The Board is divided into three classes (Class I, II, III) with staggered three-year terms[761] - The Board has three committees: Audit, Compensation, and Nominating and Governance, with the Audit Committee consisting entirely of independent directors[767][768] - As a 'foreign private issuer' and a 'controlled company,' Polestar is exempt from certain Nasdaq corporate governance requirements[779][784] Employees As of year-end 2022, Polestar employed over 2,377 people globally and adheres to local collective bargaining requirements in several European countries - As of December 31, 2022, the company had more than 2,377 employees[785] - Collective bargaining agreements are in place in Sweden, Finland, the Netherlands, and Austria[786] Major Shareholders and Related Party Transactions The company has a highly concentrated ownership structure and its operations are deeply integrated with related parties Volvo Cars and Geely through extensive agreements Major Shareholders Ownership is highly concentrated, with Li Shufu as the ultimate beneficial owner of approximately 88.5% of the company's shares, giving him significant control - As of December 31, 2022, Li Shufu is the beneficial owner of 1,866,576,927 shares, representing approximately 88.5% of outstanding shares[794][795] - The company has a dual-class share structure where Class B shares have ten votes per share, concentrating voting power with Class B shareholders[352][790] Related Party Transactions Polestar's business model relies heavily on a wide range of transactions with its related parties, Volvo Cars and Geely, for core operational functions - Polestar has a term loan facility with Snita (a Volvo Cars subsidiary) for up to $800 million, available for 18 months from November 3, 2022[810] - The company has numerous agreements with Volvo Cars and Geely for R&D, IP licensing, manufacturing engineering, logistics, and component supply[468][812][822] - Polestar 2 is manufactured under contract at the Luqiao plant operated by Volvo Cars, with Polestar 3 production planned for Volvo Cars' plants in China and the US[830][473] - Key shareholders have declared their intent to subscribe for their pro rata share of any equity offerings by the company until March 31, 2024[892] Financial Information The company provides consolidated financial statements, is subject to legal proceedings in the normal course of business, and does not intend to pay dividends - The company has not paid any cash dividends to date and does not intend to pay any in the foreseeable future, expecting to reinvest earnings into operations[900] - Polestar is subject to various legal proceedings from the normal course of business, but no specific material unfavorable rulings are reported as having occurred[899] The Offer and Listing The company's Class A ADSs and Class C-1 ADSs are listed on the Nasdaq Stock Market under the ticker symbols 'PSNY' and 'PSNYW' - Class A ADSs are listed on Nasdaq under the symbol 'PSNY'[902] - Class C-1 ADSs are listed on Nasdaq under the symbol 'PSNYW'[902] Additional Information This section provides details on corporate governance, material contracts, and key tax considerations for security holders, including its non-PFIC status for 2022 Taxation The company outlines material U.S. and U.K. tax considerations, including its status as a non-U.S. corporation and its belief that it was not a PFIC in 2022 - Polestar does not believe it was classified as a Passive Foreign Investment Company (PFIC) for its taxable year ended December 31, 2022[295][947] - The company does not expect to be treated as a U.S. corporation for U.S. federal income tax purposes under Section 7874 rules[297][924] - Dividends paid by the company are not expected to be subject to U.K. withholding tax[957] - Transfers of ADSs through the Depository Trust Company (DTC) are not expected to attract U.K. stamp duty or stamp duty reserve tax (SDRT)[292][959] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks inherent to its global business operations, including foreign currency, interest rate, credit, and liquidity risks - The company is exposed to market risks including foreign exchange risk, interest rate risk, credit risk, and liquidity risk[657] Description of Securities Other Than Equity Securities Holders of the company's American Depositary Shares (ADSs) are responsible for various fees for issuance, cancellation, and other services ADS Holder Fees and Charges | Service | Fee | | :--- | :--- | | ADS Issuance (excluding initial deposit) | Up to US$0.05 per ADS issued | | ADS Cancellation | Up to US$0.05 per ADS cancelled | | Cash Distribution | Up to US$0.05 per ADS held | | Stock Dividend / Rights Distribution | Up to US$0.05 per ADS held | | Annual ADS Service Fee | Up to US$0.05 per ADS held on record date | - ADS holders are also responsible for paying taxes, registration fees, currency conversion costs, and other reasonable out-of-pocket expenses[972] PART II Controls and Procedures Management concluded that disclosure controls were not effective as of year-end 2022 due to four material weaknesses in internal control over financial reporting - Management concluded that as of December 31, 2022, the company's disclosure controls and procedures were not effective[982] - Four material weaknesses in internal control over financial reporting were identified related to insufficient qualified personnel, revenue recognition, intangible assets, and inventory controls[982] - Remediation actions completed in 2022 include designing an internal control framework and strengthening the finance function with new personnel[984] Corporate Governance and Other Matters The company has an audit committee financial expert, has adopted a code of conduct, and is exempt from certain Nasdaq governance rules as a foreign private issuer - The Board has determined that Carla De Geyseleer qualifies as an 'audit committee financial expert'[988] Principal Accountant Fees (in TUSD) | Fee Type | 2022 | 2021 | | :--- | :--- | :--- | | Audit fees | 11,159 | 491 | | Audit-related fees | 412 | — | | Tax fees | — | — | | All other fees | — | 2,306 | | Total | 11,571 | 2,797 | - As a foreign private issuer, Polestar is exempt from certain Nasdaq corporate governance rules, such as requiring fully independent compensation and nominating committees[998] PART III Financial Statements The audited consolidated financial statements reflect significant revenue growth alongside continued net losses, with the auditor's report noting a going concern uncertainty Consolidated Statement of Financial Position Summary (in TUSD) | | Dec 31, 2022 | Dec 31, 2021 | |:---|---:|---:| | Total assets | 3,942,451 | 3,309,693 | | Total current assets | 2,180,334 | 1,606,986 | | Cash and cash equivalents | 973,877 | 756,677 | | Total liabilities | (4,076,094) | (3,187,197) | | Total current liabilities | (3,252,502) | (3,040,716) | | Total equity | 133,643 | (122,496) | - The independent auditor's report includes a 'Going Concern' paragraph, noting that the company's need for additional financing raises substantial doubt about its ability to continue[1030] - Critical audit matters identified by the auditor include revenue recognition for vehicle sales and the existence, completeness, and valuation of inventories[1035][1039] - The merger with GGI was accounted for as a reverse recapitalization, resulting in a non-cash, one-time listing expense of $372.3 million[1057][1283] Exhibits This section provides an index of all exhibits filed with the annual report, including foundational corporate documents and various material contracts - The exhibits include the company's Articles of Association, ADS Deposit Agreements, and the Business Combination Agreement[1008][1009] - Numerous material contracts are filed as exhibits, including service, license, and manufacturing agreements with Volvo Car Corporation and various Geely entities[1010][1011][1012] - Certifications by the Principal Executive Officer and Principal Financial Officer pursuant to the Sarbanes-Oxley Act are included[1018]