Polar Power(POLA) - 2022 Q4 - Annual Report

Part I Business Polar Power designs and sells DC power systems for telecom and diversified markets, focusing on off-grid and backup power - The company designs, manufactures, and sells DC power systems for telecommunications, military, EV charging, marine, and industrial markets, focusing on prime power and backup applications[17][18] - In 2022, the company received purchase orders totaling $6.2 million from a South Pacific telecommunications customer and $1.1 million for solar hybrid systems from another customer in the same region[23][25] - A master service agreement with the largest customer was renewed in September 2022, which accounted for 66% of total net sales in 2022[24] - Approximately 72% of net sales in 2022 were from DC power systems supporting 5G networks[29] | Category | Percentage of Backlog (as of Dec 31, 2022) | | :--- | :--- | | Largest U.S. Telecom Customer | 47% | | Other U.S. Telecom Customers | 16% | | International Telecom Customers | 32% | | Marine Industry | 1% | | Military Markets | 1% | | Other Markets | 3% | | Total Backlog | $12,001 (in thousands) | Risk Factors The company faces risks from COVID-19, customer concentration, supply chain, competition, and CEO ownership influence - The COVID-19 pandemic has negatively impacted sales, operations, and supply chains, and its ultimate impact remains uncertain[136] - The company is highly dependent on its largest customer in the U.S. telecommunications market, AT&T, and any adverse change in this relationship could materially affect results[144] - The company has a history of significant net losses, including a $5.6 million loss in 2022 and a $1.4 million loss in 2021[143] - The company faces risks from raw material shortages and price increases, particularly for components like engines from suppliers such as Yanmar, Perkins, and Toyota, with whom there are no long-term contracts[154][164] - The Chairman, President, and CEO, Arthur D. Sams, beneficially owns approximately 44% of the outstanding common stock, giving him significant influence over corporate matters[197] Unresolved Staff Comments The company reports that there are no unresolved staff comments - There are no unresolved staff comments[223] Properties The company's principal offices and main manufacturing facility are located in a leased 40,000 square foot space in Gardena, California. It also leases a 29,000 square foot second manufacturing facility and a 20,000 square foot warehouse nearby. Management believes these facilities are sufficient for the next twelve months - The company leases three facilities in Gardena, CA: a 40,000 sq ft main office/manufacturing/R&D center, a 29,000 sq ft manufacturing facility, and a 20,000 sq ft warehouse[224] Legal Proceedings The company is not currently involved in any legal proceedings that are expected to have a material adverse effect on its business, financial condition, or results of operations - The company is not currently a party to any material legal proceedings[225] Mine Safety Disclosures This item is not applicable to the company - Mine safety disclosures are not applicable[227] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock is traded on The Nasdaq Capital Market under the symbol "POLA". As of March 31, 2023, there were 12,949,550 shares of common stock outstanding, held by approximately 21 stockholders of record. The company reported no recent sales of unregistered securities - Common stock trades on The Nasdaq Capital Market under the symbol "POLA"[230] - As of March 31, 2023, there were 12,949,550 shares of common stock outstanding[230] Management Discussion and Analysis of Financial Condition and Results of Operations Net sales decreased in 2022 due to supply issues, resulting in a significant net loss and reduced liquidity | Metric | 2022 (in thousands) | 2021 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Net Sales | $16,056 | $16,896 | (5)% | | Gross Profit | $2,125 | $3,445 | (38)% | | Loss from Operations | ($5,533) | ($3,098) | (79)% | | Net Loss | ($5,584) | ($1,414) | (295)% | - Net sales decreased by 5% in 2022 due to labor shortages and supply chain constraints, which postponed approximately $3.5 million of shipments into 2023[254][260] - Gross margin decreased from 20.4% in 2021 to 13.2% in 2022, primarily due to decreased factory overhead absorption from lower sales volume[265] - The sales backlog as of December 31, 2022, was $12.0 million, with the majority expected to ship within the next twelve months[290] - Working capital decreased by $4.4 million to $17.4 million at the end of 2022, with cash and cash equivalents falling to $0.2 million from $5.1 million at the end of 2021[274] Quantitative and Qualitative Disclosures About Market Risk This item is not applicable to the company - This section is not applicable[292] Financial Statements and Supplementary Data This section refers to the company's financial statements, which begin on page F-1 of the Annual Report on Form 10-K - This item references the financial statements beginning on page F-1[293] Changes in and Disagreements with Accountants on Accounting and Finance Disclosure The company reports that there have been no changes in or disagreements with its accountants on accounting and finance disclosure - There were no disagreements with accountants on accounting and financial disclosure[294] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of December 31, 2022. Management also concluded that the company's internal control over financial reporting was effective as of the same date, based on the COSO 2013 framework. No material changes to internal controls were identified during the fourth quarter of 2022 - Management concluded that as of December 31, 2022, the company's disclosure controls and procedures were effective[296] - Management concluded that as of December 31, 2022, the company's internal control over financial reporting was effective[299] Other Information The company reports no other information for this item - There is no information to report under this item[303] Part III Directors, Executive Officers and Corporate Governance The company's executive team includes Arthur D. Sams as Chairman, President, CEO, and Secretary, and Luis Zavala as CFO. The Board of Directors consists of four members, with three (Keith Albrecht, Peter Gross, and Katherine Koster) determined to be independent. The Board has established an Audit Committee, a Compensation Committee, and a Nominating and Corporate Governance Committee, each with defined responsibilities and composed of independent directors. The company has also adopted a Code of Business Conduct and Ethics applicable to all directors, officers, and employees - The executive officers are Arthur D. Sams (Chairman, President, CEO, Secretary) and Luis Zavala (CFO)[307] - The Board of Directors has four members, three of whom are independent: Keith Albrecht, Peter Gross, and Katherine Koster[320][324] - The Board has three standing committees: Audit, Compensation, and Nominating and Corporate Governance, all composed of independent directors[326] - A written code of business conduct and ethics has been adopted for all directors, officers, and employees[335] Executive Compensation Executive compensation for 2022 consisted of base salary, potential non-equity cash bonuses, and long-term equity incentives. Base salaries for the CEO ($275k) and CFO ($175k) were set based on a peer group analysis. The non-equity incentive plan allowed for bonuses up to 100% of base salary based on achieving revenue, gross margin, EBITDA, customer concentration, and international sales targets; however, no performance goals were met for 2022. Long-term incentives are granted via the 2016 Omnibus Incentive Plan. Employment agreements are in place for executive officers, outlining terms for termination and change in control | Name and Principal Position | Year | Salary ($) | Stock Compensation ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | | Arthur D. Sams, President, CEO | 2022 | 275,000 | 55,000 | 330,000 | | Luis Zavala, CFO | 2022 | 175,000 | 35,000 | 210,000 | | Rajesh Masina, Former COO | 2022 | 175,000 | — | 175,000 | - Executive compensation includes base salary, non-equity incentives (cash bonuses), and long-term equity incentives[346] - For 2022, none of the performance goals for the non-equity incentive plan were met, which included targets for revenue, gross margin, EBITDA, customer concentration, and international sales[352] - The company has a 2016 Omnibus Incentive Plan for granting equity awards like stock options and restricted stock to attract, retain, and motivate employees, officers, and directors[366][367] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of March 31, 2023, Arthur D. Sams, the Chairman and CEO, beneficially owned 43.4% of the company's common stock. All directors and executive officers as a group beneficially owned 44.1% of the common stock. The company's 2016 Omnibus Incentive Plan, approved by security holders, had 140,000 outstanding options with a weighted-average exercise price of $5.22 and 1,453,038 securities remaining available for future issuance as of December 31, 2022 | Name of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percent of Class | | :--- | :--- | :--- | | Arthur D. Sams | 5,643,600 | 43.4% | | All directors and executive officers as a group (5 persons) | 5,751,739 | 44.1% | | Plan Category | Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | :--- | | Equity Compensation Plans Approved by Security Holders (2016 Plan) | 140,000 | $5.22 | 1,453,038 | Certain Relationships and Related Transactions, and Director Independence The company had a Subcontractor Installer Agreement with Smartgen Solutions, Inc., a company partially owned by the former COO, Rajesh Masina. Under this agreement, Smartgen performed field services for Polar Power, amounting to $0 in 2022 and $88,000 in 2021. This agreement was terminated effective January 31, 2023. The company has a formal written policy for reviewing and approving related person transactions, managed by the Audit Committee, to ensure they are on arm's-length terms and in the best interests of the company - The company had a service agreement with Smartgen Solutions, Inc., an entity related to former COO Rajesh Masina. Smartgen performed $0 in services in 2022 and $88k in 2021. The agreement was terminated in January 2023[420][423] - The company has adopted a written policy for the review, approval, or ratification of related person transactions, managed by the Audit Committee[426] Principal Accountant Fees and Expenses The company's principal accountant, Weinberg & Company, P.A., billed a total of $247,000 in 2022 and $281,000 in 2021. These fees primarily consisted of audit fees and tax fees. All services were pre-approved by the Audit Committee, which has a policy for pre-approving all audit and non-audit services | Fee Type | 2022 (in thousands) | 2021 (in thousands) | | :--- | :--- | :--- | | Audit Fees | $198 | $222 | | Audit-Related Fees | $3 | $2 | | Tax Fees | $46 | $57 | | Total | $247 | $281 | - The Audit Committee pre-approves all audit and permissible non-audit services provided by the independent auditor[437] Part IV Exhibits, Financial Statement Schedules This section provides references to the financial statements, which are included starting on page F-1, and the exhibits, which are listed in the Index to Exhibits. No financial statement schedules were filed - This section refers to the financial statements on page F-1 and the exhibit list[439][441] Form 10-K Summary No Form 10-K summary was provided - This section is noted as 'None'[442] Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm The independent auditor, Weinberg & Company, P.A., issued an unqualified opinion on the financial statements for the years ended December 31, 2022 and 2021, stating they are presented fairly in all material respects. The report highlights two critical audit matters: the valuation of inventory, due to significant management judgment in estimating future demand, and the assessment of the company's ability to continue as a going concern, given its net losses and cash usage, which required significant judgment in forecasting future cash flows - The auditor issued an unqualified opinion, stating the financial statements are fairly presented in conformity with U.S. GAAP[446] - Critical Audit Matters identified were Inventory Valuation and the Assessment of the Company's Ability to Continue as a Going Concern[450] Financial Statements Financial statements show decreased assets, increased liabilities, a significant net loss, and cash used in operations | Balance Sheet (in thousands) | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $23,317 | $25,154 | | Cash and cash equivalents | $211 | $5,101 | | Inventories, net | $15,460 | $9,017 | | Total Liabilities | $6,007 | $3,930 | | Total Stockholders' Equity | $18,181 | $23,250 | | Statement of Operations (in thousands) | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | | :--- | :--- | :--- | | Net sales | $16,056 | $16,896 | | Gross profit | $2,125 | $3,445 | | Loss from operations | ($5,533) | ($3,098) | | Net Loss | ($5,584) | ($1,414) | | Statement of Cash Flows (in thousands) | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | | :--- | :--- | :--- | | Net Cash Used In Operating Activities | ($6,507) | ($9,380) | | Net Cash Used In Investing Activities | ($25) | ($71) | | Net Cash Provided By Financing Activities | $1,642 | $12,906 | Notes to Financial Statements Notes detail liquidity, revenue concentration, credit facility, and significant NOLs with a full valuation allowance - Management concluded that despite a net loss of $5.6 million in 2022, the company has adequate cash flow and credit availability to continue as a going concern for at least one year[470][471] | Net Sales by Customer Type (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Telecom | $15,357 | $14,953 | | Government/Military | $38 | $995 | | Marine | $205 | $76 | | Other | $456 | $872 | | Total net sales | $16,056 | $16,896 | - The company has a line of credit with Pinnacle Bank with a maximum of $4 million. As of Dec 31, 2022, $1.884 million was outstanding[513][514] - The company has federal and state Net Operating Loss (NOL) carryforwards of approximately $10.6 million and $14.8 million, respectively, but a full valuation allowance has been recorded against the resulting deferred tax assets[539][540] - The company qualified for approximately $2 million in Employee Retention Credits (ERC) for 2021, which is recorded as a receivable as of December 31, 2022[545]