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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from ____________ to _____________
Commission
file number: 001-37960
Polar
Power, Inc.
(Exact
name of registrant as specified in its charter)
Delaware |
|
33-0479020 |
(State
or other jurisdiction
of incorporation or organization) |
|
(I.R.S.
Employer
Identification Number) |
|
|
|
249
E. Gardena Blvd., Gardena, California |
|
90248 |
(Address
of principal executive offices) |
|
(Zip
Code) |
Registrant’s
telephone number, including area code: (310) 830-9153
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class |
|
Trading
Symbol |
|
Name
of exchange on which registered |
Common
Stock, $0.0001 par value |
|
POLA |
|
The
Nasdaq Stock Market LLC
(Nasdaq
Capital Market) |
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No
☒
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 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.
Large
Accelerated Filer ☐ |
Accelerated
Filer ☐ |
Non-Accelerated
Filer ☒ |
Smaller
Reporting Company ☒ |
|
Emerging
Growth Company ☐ |
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 has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The
aggregate market value of the registrant’s voting common equity held by non-affiliates as of the last business day of the registrant’s
most recently completed second quarter was $65,944,935.
The
number of shares outstanding of the Registrant’s common stock, $0.0001 par value, as of March 31, 2022 was 12,788,203.
DOCUMENTS
INCORPORATED BY REFERENCE
None
Table
of Contents
FORWARD
LOOKING AND CAUTIONARY STATEMENTS
All
statements included or incorporated by reference in this Annual Report on Form 10-K, other than statements or characterizations of historical
fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act,
and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Examples of forward-looking statements include,
but are not limited to, statements concerning projected net sales, costs and expenses and gross margins; our accounting estimates, assumptions
and judgments; the demand for our products; the effect and consequences of the novel coronavirus, or COVID-19, pandemic on matters including
U.S., local and foreign economies, wars and international conflicts including the current military actions involving the Russian Federation
and Ukraine, our business operations, the ability of financing and the health and productivity of our employees; the competitive
nature of and anticipated growth in our industry; production capacity and goals; our ability to consummate acquisitions and integrate
their operations successfully; and our prospective needs for additional capital. These forward-looking statements are based on our current
expectations, estimates, approximations and projections about our industry and business, management’s beliefs, and certain assumptions
made by us, all of which are subject to change. Forward-looking statements can often be identified by words such as “anticipates,”
“expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,”
“estimates,” “may,” “will,” “should,” “would,” “could,” “potential,”
“continue,” “ongoing,” similar expressions and variations or negatives of these words. These statements are not
guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our
actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors,
some of which are listed under “Risk Factors” in Item 1A of this Annual Report on Form 10-K. These forward-looking statements
speak only as of the date of this Annual Report on Form 10-K. We undertake no obligation to revise or update publicly any forward-looking
statement for any reason, except as otherwise required by law.
FINANCIAL
PRESENTATION
All
dollar amounts in this Annual Report on Form 10-K are presented in thousands, except share and per share data and where otherwise noted.
PART
I
Overview
We
design, manufacture, and sell DC power generators, renewable energy and cooling systems for applications primarily in the telecommunications
market and, to a lesser extent, in other markets, including military, electric vehicle, marine and industrial. We are continuously diversifying
our customer base and are selling our products into non-telecommunication markets and applications at an increasing rate. The changes
in customer diversity are reported in the financial section.
Within
the various markets we service, our DC power systems provide reliable and low-cost DC power to service applications that do not
have access to the utility grid (i.e., prime power and mobile applications) or have critical power needs and cannot be without
power in the event of utility grid failure (i.e., back-up power applications).
It’s more efficient to build
power systems around the DC generator because it’s simpler to integrate with battery storage and solar photovoltaics which also operate
on DC. Many applications in communications, water pumping, lighting, vehicle and vessel propulsion, security systems operate on DC power
only. Many micro-grids and energy storage are DC based and use inverters to convert the DC to AC.
Serving
these various markets, we offer the following configurations of our DC power systems, with output power ranging from 5 kW to 50
kW:
|
● |
Base
power systems. These stationary
systems integrate a DC generator and automated controls with remote monitoring, which are typically contained within an environmentally
regulated enclosure. |
|
|
|
|
● |
Hybrid
power systems. These systems
incorporate lithium-ion batteries (or other advanced battery chemistries) with our proprietary battery management system into our
standard DC power systems. |
|
|
|
|
● |
DC
solar hybrid power systems. These stationary systems incorporate photovoltaic and other sources of renewable energy
into our DC hybrid power systems. |
|
|
|
|
● |
Mobile power systems. These are very light
weight and compact power systems used for EV charging, robotics, communications, security. |
Our
DC power systems are available in diesel, natural gas, LPG / propane and renewable fuel formats, with diesel, natural gas and propane
gas being the predominant formats.
We
were incorporated in 1979 in the State of Washington as Polar Products, Inc., and in 1991 we reincorporated in the State of California
under the name Polar Power, Inc. In December 2016, Polar Power, Inc. reincorporated in the State of Delaware. Our internet website address
is https://polarpower.com/.
Recent
Business Events
The
COVID-19 pandemic has negatively impacted business and industries all over the world since March 2020. As
a key supplier to critical infrastructure projects, we have worked to maintain ongoing operations. We operate our business in
compliance with applicable state and local laws and are observing recommended public health and governmental authority guidelines to
minimize the risk of spreading the COVID-19 virus including implementing, where possible, safe-distancing, work-from-home procedures,
and additional sanitization efforts where facilities remain open to provide necessary services. This allows us to continue to serve our
customers.
The
pandemic has resulted in temporary stay-at-home mandates, labor shortages, disruptions in the chain of supply, higher material costs,
travel restrictions, and postponement or cancellation of tradeshows and other marketing events. These disruptions negatively affected
our U.S. Tier-1 telecommunications customers which, in turn, resulted in a significant reduction in our new equipment orders and slow-down
in shipments in 2020.
During
2021, public health and governmental authorities have taken progressive action to help control the spread of COVID-19. Currently, approximately
64% of the U.S. population is considered fully vaccinated with the COVID-19 vaccine which was initially released to the general public
in the U.S. in December 2020. In addition, several COVID-related shutdowns and restrictions have been lifted. We believe these actions
have improved our customers’ ability to deploy new systems which resulted in an increase in our net sales during 2021. We experienced
an 89% increase in net revenues in 2021 as compared to 2020.
During
2021, the implementation of 5G networks by Tier-1 telecommunication customers in the U.S. has also resulted in a significant increase
in shipments of our DC power systems. Our net sales to telecommunications customers in the U.S. increased by 93% to $13.8 million in
2021 as compared to $7.1 million in 2020.
During
the pandemic, we focused on diversifying our sales efforts to increase sales to the U.S. military, advanced mobility customers in the
U.S, and international telecommunications customers. During the second half of 2020 and throughout 2021, we experienced measurable success
in our diversification strategy. During this period, we received a $3.0 million purchase order from a new advanced mobility customer,
which we expect to start shipping in mid-year 2022. During 2021, our shipments to military customers also increased to $798 as compared to $120 in 2020.
For
the three-year period prior to the pandemic, we experienced high double-digit sales growth which resulted in us making strategic investments
to increase our production capacity to $50 million annual revenue through an increase in plant space and the addition of automation equipment.
The unanticipated drop in sales during 2020 caused a disproportionate distribution of fixed and semi-fixed overhead costs across much
lower revenues. During 2021, the increase in product shipments resulted in a decrease in our cost of sales as a percentage of total net
sales. This was primarily because of improved labor efficiencies and increased absorption of manufacturing overhead resulting from higher
volume in net sales. We believe our investments in state-of the-art equipment, additions to manufacturing plant space, and employee training
will continue to yield improvements in our gross margins as sales volumes continue to increase and as the economy normalizes from the
impact of the pandemic and other known and unknown factors affecting the global economy.
Markets
We
primarily operate within the telecommunications market and, to a lesser extent, in other markets, including military, electric vehicle
charging, marine and industrial. We are continuously diversifying our customer base and are selling our products into non-telecommunication
markets and applications at an increasing rate.
Telecommunications
We
provide power generation equipment for the telecommunications markets. Our equipment provides backup power to grid connected mobile tower
sites during power outages resulting from severe weather like hurricanes, wildfires, and floods. Most telecommunications towers are equipped
with battery backup for short term power outages. Our DC power generators are installed to address longer-term disruptions in power.
We also deliver products that provide prime power for off-grid telecommunications tower sites installed in remote and rural areas where
reliability of the power grid is suspect. Since 2012, the telecommunications market is our largest market segment and has contributed
over 87% of our annual revenues.
Since
2012, we developed products and configurations that target telecommunications applications with key features like high fuel efficiency,
light weight and compact design when compared to our competitors’ products. These features allow our telecommunications customers
to install equipment requiring a smaller footprint on building roof tops and compact commercial sites while also requiring less fuel
storage due to the fuel efficiency of our products. In the past five years, we have gained approval and certifications from four top
Tier-1 telecommunications operators in the U.S. market. With over 90% of the world’s telecommunication towers located in non-U.S.
territories, we decided to establish international sales offices in Poland, Romania, Australia, U.A.E., Dominican Republic and
South Africa to provide long term growth. In 2017, we began investments into international markets and have recorded a steady increase
in sales every year since.
In
the U.S. market, over 95% of the telecommunications towers are connected to a power grid, thereby only requiring backup power generation
in equipment in case of an emergency loss of power, while in the emerging markets of Africa and Asia, a significant percentage of telecommunications
towers are not connected to the grid thereby requiring fuel-efficient prime power equipment to provide power by charging the batteries.
Most prime power sites also require integration with solar and storage batteries to utilize renewable energy during the day while generators
and batteries provide power during nights and/or on cloudy days. In the U.S., telecommunications companies have focused their efforts
on adding generators to provide backup power at existing sites, while in the international market telecommunications companies are in
expansion phase of adding new sites to the infrastructure to provide coverage in rural and remote areas.
During
2019, the telecommunications infrastructure in the U.S. and other developed nations was known to have sufficient capacity to satisfy
the needs of average smart phone users. However, the advent of 5G technology has resulted in a digital revolution within both the commercial
and consumer sectors leading to an exponential increase in data usage. We believe that the need for backup power equipment in the telecommunications
services industry which consists of digital infrastructure (e.g., fiber, telecommunications towers, active networks and data centers),
operators (e.g., mobile and fixed broadband, data centers and cloud computing) and applications (e.g., broadband connections, telephones,
video streaming and e-commerce), holds promising growth opportunities as 5G use expands in the near and long term.
The
next generation of wireless network capabilities offer potential revolutionary applications far beyond smart phones and mobile devices.
The 5G mobile network is intended to converge connectivity, intelligent edge and Internet of Things (IoT) technologies which is expected
to result in an increase in telecommunications tower sites in both the U.S. and abroad. In the near term, 5G will deliver broadband-like
services such as high-definition streaming video to a cell phone. Businesses will benefit from using 5G for data monitoring and cloud-native
5G networks to compute and store data locally. All of these applications dramatically scale up data usage which requires an increase
in infrastructure and an increase in power and backup generators.
The
pervasiveness of 5G, including reliance by users on, among other things, local weather, traffic conditions, self-driving vehicles, wearable
health monitoring devices that automatically informs doctors, stores automatically ordering items sold on virtual carts, farmers automated
irrigation system with tracking sensors, will require robust backup equipment at telecommunications sites. We believe higher data usage
will require higher reliability backup systems that are fuel efficient and are located in proximity to the point of use. In urban environments,
roof-top space, weight of the equipment and the amount of fuel storage are critical factors in the selection of backup equipment. As
one of the leading providers of DC power generation equipment, we have demonstrated these benefits to telecommunications providers for
decades and we are therefore encouraged with the prospect of infrastructure expansion in this space that requires fuel efficient and
lower emission power generation equipment.
Military
Since
1979, we have been developing and marketing products to the U.S. military and large defense contractors in the U.S. and international
markets. The need for low voltage DC power generation systems are vital for military operations and commonly used to charge storage batteries,
provide backup emergency power, or provide startup power for aircrafts or weapon systems. During the past decade, digitization of the
military accelerated exponentially to support modern information, communication, and weapon systems. The need to process information
rapidly has led to digitization of command, control, communications, computers and intelligence across both combat support and service
support. This expansion in data transfer and storage has led to an increase in energy needs, which requires efficient power generation
equipment that can charge batteries or directly power these systems.
A
digitized battlefield includes sensors, information processing, data distribution, electronic countermeasures, all requiring with few
exceptions, 28 volts DC or 48 volts energy at point of use. Our DC generators designed for military applications provide:
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enhanced
mobility, reliability and maintainability; |
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improved
fuel efficiency; |
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reduced
system size and weight; |
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reduced
infrared and acoustic signatures; |
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increased
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In
2016, the military began the Advanced Medium Mobile Power Sources, or AMMPS, a U.S. Department of Defense program to develop and deliver
5 kW-50 kW output ranging generators in either a skid, trailer mounted, or microgrid configurations to replace legacy standalone AC generators.
The new generation of mobile power generators combined with solar and wind power can function as sustainable sources of DC and AC power
in remote areas. The new generation of AMMPS power systems are required to provide 21% higher fuel efficiency, lower noise, weight, 90%
reliability and be capable of performing in extreme environments. During 2020, we directly and jointly partnered with defense contractors,
provided DC hybrid power systems, with integrated controls providing higher fuel efficiency than legacy AC generators currently in use.
Improvements
in sensors, navigation and communication technologies have led to increased integration of situational awareness systems that allow all
combat assets to communicate and coordinate both defensive and offensive efforts during combat. In earlier combat vehicle designs, these
surveillance systems were powered by the main auxiliary vehicle battery, which required the vehicle’s main engine to continue operating
to power auxiliary battery systems. A decade ago, we began delivering compact 3 kW – 15 kW DC auxiliary batteries to power these
communication and reconnaissance systems thereby improving fuel efficiency of the combat and vehicles when deployed. During the decade
we have delivered several configurations of these auxiliary power units to the military, which vary in function from battery charging
to supplying power to weapon systems.
We are currently in the process of development of next-generation higher output power DC power system. After conclusion of
the testing of this higher power DC power system, we plan to introduce a configuration of this product to the residential and commercial
microgrid market in emerging markets. We believe 50 kW standalone DC power system, powered by natural gas or LPG would be ideal for rural
communities in emerging markets such as Africa and Asia. The capacity of 50 kW is sufficiently large enough to power a small rural hospital,
dairy farm and a cluster of houses in a small village. The ease of connecting our DC power system with solar, battery packs or any other
source of energy like wind can introduce a sustainable cost-effective solution in emerging markets.
The
50 kW generator will provide roadside emergency charging services for electric vehicles.
Electric
Vehicle Charging
According
to Presedence Research, a market research company, the electric vehicle market is expected to register a compound annual growth rate
(CAGR) of 40.7% during the forecast period 2022 to 2027. The firm estimates the global electric vehicle market at $7 billion USD in 2021
and is expected to reach $802.81 billion USD by 2027. The primary growth factors driven by significant number of government incentives
such as tax rebates, subsidies, and grants. This increase will require approximately 29 million additional charging stations globally
to support the cumulative growth of electric vehicles.
A
2018 article by McKinsey & Company entitled “The potential impact of electric vehicles on global energy systems”
stated that although a modest increase in electric vehicle sales of 5% will not lead to a shortage in electricity since most new capacity
can be delivered by renewables like solar, wind, and gas-powered generation. This modest increase in sales may have a significant impact
on peak loads, especially in concentration points of electric vehicle charging and during the evening peak times when most electric vehicle
users connect their vehicles for charging. The report claims unmanaged peak load increases due to electric vehicle charging will require
increases in costly sub-station upgrades. We believe that the more cost-effective option will be investing into battery storage at the
utility level to manage the peak loads or flexible electricity costs for electric vehicle charging in an effort to discourage peak load
charging.
Regardless
of how the peak charging issue is resolved, most homes have not been designed to allow for fast charging of electric vehicles. In order
to address this issue, in 2020 we completed the design of our natural gas-powered electric vehicle charger and backup generator. Our
electric vehicle chargers, being independent of the grid, are designed to automatically fast charge connected electric vehicles at home
on a daily basis while providing backup power during power outages. In addition, the heat generated while charging is captured and delivered
to heat the home, heat water for laundry, or heat the pool.
Our electric vehicle charger
was initially designed in 2009 as a diesel-fueled mobile charger for EV manufacturers to aid in testing their vehicles in the
field. We have supplied these mobile chargers to five of the leading automakers in the USA. We are presently improving this
product by replacing the diesel engine with a heavy duty 60,000-hour plus lifetime Toyota natural gas or propane engine.
This product targets residential customers that own or are expected to own electric vehicles during the next five years.
With
the anticipated stress on utility grids due to an increase in the number of electric vehicles that require charging, combined with the
fact that most homes are unable to provide fast charging, we believe that an independent natural gas-powered electric vehicle charger
would be ideal and cost effective. Currently, many electric vehicle owners exceed the base power usage at home resulting in peak hour
usage penalties which diminishes anticipated cost savings of using electric vehicles. Our residential natural gas-powered EV charger
eliminates these costs while also providing backup power in case of emergencies.
The
benefits of fast charging with a natural gas generator, as opposed to using the electric grid, includes avoids peak rate charges, a reduced
carbon footprint and the opportunity to provide heating and air conditioning, through combined heat and power or CHP systems that utilize
waste heat from the generator/charger which we believe is a compelling market opportunity for our new product.
Residential
and Commercial Power – Mini-Grid
Increased
use of electricity worldwide is directly related to humanity’s improvement in the quality of life. Increased global urbanization
has resulted in many governments investing in power plants and providing infrastructure to satisfy the growing demand for electricity.
Similar needs of the rural populations have been largely ignored worldwide due to the isolation, low density and population spread over
vast areas resulting in an increased cost of infrastructure. Even in rural areas where the infrastructure was built to deliver electricity,
frequent blackout and infrastructure failures are commonplace and often not repaired for long periods.
According
to recent World Bank data, 13% of the world’s population, approximately 950 million, still lack electricity compared to 25% in
1994. While 47% of the world’s population still lives in rural areas, about 25% of those living in rural areas lack electricity.
Globally, 954 million people live without electricity of which 547 million are located in Sub-Saharan Africa, 254 million are located
in South Asia, 71 million are located in East Asia, and 82 million in other areas.
During
the past decade, developments in renewable energy and battery storage have provided an alternate method to resolve this energy inequity
between rural and urban populations worldwide. However, due to weather and costs of such systems and technologies are still at an early
stage of mass adoption. We envision a hybrid system with natural gas or LPG integrated with a solar and battery system to generate power
during peaks and valleys of demand that we believe would be more cost effective and reliable than the current systems in place. These
“Mini-Grid” hybrid systems would generate between 5kW – 25kW of power on 24/7 basis and provide electricity for a small
housing unit, commercial facility or a school building.
Our
Mini-Grid system uses natural gas or LPG as primary fuel source, the same fuel as cooking fuel in rural and remote regions worldwide.
For decades, many governments have been allocating resources to eliminate solid fuels like wood, solid waste as cooking fuels from rural
and remote communities. Significant progress has been made by providing economic subsidies for use of natural gas or LPG as cooking fuel
to reduce pollution. In 2017, we established sales offices near the emerging growth countries of Australia and U.A.E. setup to develop
strategic alliances with distributors to promote our residential solutions to communities living in bad-grid and off-grid areas.
Our
Competitive Strengths
We
have over a 40-year history and have developed a reputation as a proven supplier of reliable and advanced proprietary technology products
to customers within the telecommunications, military, commercial, industrial and marine markets. We have invested significant capital
and engineering expertise to develop power generation systems that are environmentally friendly and fuel-efficient. We further believe
our success will be based on the following key competitive strengths:
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Proprietary
Technologies. Our decades of research and development has led to the development of DC power systems with output ranging
from 5 kW – 50 kW. Our DC power systems integrates our proprietary DC alternator with electronic controls to monitor
and control the power being outputted to the equipment, which is then coupled to an engine assembly and cooling systems. Our DC power
system output voltage can be configured between 12 V – 800 VDC to match the precise application needs (e.g., telecom
equipment, robotic propulsion drives, electric drives for marine vessels, electric vehicle chargers, etc.). Over the
past decades we have developed proprietary charge algorithms for most commercially available batteries and match charge algorithms
to battery model or chemistry prior to initiating a charge cycle. Unlike AC power systems, our DC power systems are directly connected
to the battery source and therefore optimized for efficiently and safely charging a particular battery chemistry. AC power
systems are indirectly connected to commercially available battery chargers that convert the AC output to DC voltage making
it less efficient, higher in cost, and require considerably more space. |
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Engineering
Expertise. Over the past four decades we have strategically constructed a product portfolio that focuses on improving energy
efficiency by developing DC power output-based equipment where all major components and technologies are developed in-house, and
proprietary manufacturing processes created in-house to ensure product reliability and long life. Our leading competitors approached
the need for DC equipment in the telecom, military, and industrial markets by modifying legacy AC generators with conversion equipment
resulting in significantly lower efficiency when compared to DC power systems. Being one of the first companies to develop DC generators
for telecommunications, we developed proprietary components ranging from alternators, control systems and charging algorithms
for various battery chemistries. We have focused on providing the lowest cost of ownership with demonstrated long life of our equipment
during the past thirty years. Lowest cost of ownership is complemented with the best fuel economy, best in class weather resistance
provided by aluminum enclosures and customized algorithms matching battery chemistries and operational profiles. |
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Manufacturing Competitiveness.
We believe that our vertical integration approach to manufacturing lowers our production costs and improves our overall operational
efficiency. In addition, vertically integrated manufacturing of our proprietary technologies such as DC alternators, charge controls
and battery management systems, provides us with a greater control and protection over our intellectual property. We believe our
modular approach to manufacturing provides us with the lowest manufacturing costs for our proprietary technologies while giving us
the ability to deliver customized solutions to our Tier-1 wireless telecommunications customers. |
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Strong
Customer Base. Our customer base consists of large telecommunications companies, military sub-contractors and industrial
companies. Tier-1 telecommunications customers have represented 62% to 91% of our aggregated sales for the past five years. Initial
demand of our products by telecommunications customers was primarily based on the need to provide backup power during electricity
outages and for off grid remote locations. While our competitors provided and continue to provide legacy AC generators with
DC conversion devices, we elected to invest significant time and capital in the research and development of products with a lowest
cost of ownership. Certification of our products by Tier-1 telecommunications customers was time intensive and takes upwards
of three years of field trials to receive final product acceptance. This thorough approach to vendor selection reduces the number
of vendors selected by our telecommunications customers and has dramatically reduced the number of competitors in the U.S. markets.
Currently, a significant percentage of our U.S. sales are to national Tier-1 telecommunications providers with multiple facilities.
Since 2020, we increased our efforts to diversify our sales efforts to include Tier-2 telecommunications customers, off-grid remote
area products and residential charging. In the international markets, our customers are regional Tier-1 telecommunications providers.
We have established sales offices in emerging markets like U.A.E., Australia, Poland and the Dominican Republic. Our sales team directly
markets to Tier-1 telecommunications companies in their regions. |
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Experienced
Management Team. Our Chief Executive Officer and key engineers combined have over 100 years of engineering and production
experience in the design and manufacturing of power systems. Our engineers have equipment design experience, as well as hands-on
skills to build prototypes. A key factor demonstrating our management’s abilities and our engineering aptitude can be found
in our successful track record over the last 25 years of executing research, design and engineering contracts, with an average of
four projects per year. |
Business
Strategy
For
the past three decades we have been promoting the use of DC power systems where DC power is the primary power in use. The telecommunications
tower application is the largest user of DC power, in both grid and off-grid connected sites. Furthermore, we believe that the growth
in wireless telecommunications infrastructure in the U.S. and international markets has led to a rapid rise in the need for DC backup
power systems.
With
over 40 years of experience and reputation within the DC power systems market, we are working to increase awareness, availability and
affordability of more efficient DC-based products as a backup power and charging sources within the telecommunications industry. Because
of the increased power outages during emergencies and natural disasters, existing and new wireless installations need to be upgraded
to provide reliable operations during times of emergency. The primary elements of our business strategy include:
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Further
develop U.S. mobile telecommunications market. We continue to invest capital into our sales and marketing efforts to demonstrate
our DC power systems to the top Tier-1 wireless telecommunications providers and more than 500 small wireless and cable operators
in the U.S. Our goal is to further diversify our customer base. We believe the rapid transition towards 5G will result in an increase
in demand for back-up power generators and that our new LPG / natural gas DC power systems will allow us to better compete on an
economic basis with our competitors that provide AC power systems. |
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Expand
global sales to bad-grid or off-grid markets. The increase in telecommunications subscriber base in rural and remote areas
in emerging countries has increased the deployment of telecommunications sites in off-grid and bad-grid areas. During 2021, approximately
82% of our DC power systems sales were to U.S. telecommunications customers, which we believe represents only 4.7% of the total global
telecommunications market. We believe that the lack of a stable electric infrastructure in rural regions of many developing nations
provides significant opportunity for our products in both off-grid and bad-grid location. During 2020, we demonstrated our products
to several prospects in need of off-grid and/or bad-grid solutions which resulted in several initial orders. |
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Further
develop our new LPG and natural gas DC power systems. With the increased growth in off-grid and bad-grid telecommunications
sites, emissions generated by telecommunications towers is beginning to be a major contributor of pollution and greenhouse gases.
Since 2019, we have developed lower emission LPG and natural gas DC power generators for use in rural off-grid and bad-grid sites.
We initiated this development by partnering with world’s largest natural gas engine manufacturer, Toyota Engines, located in
Japan. Subsequently, we integrated engine control systems utilizing control technology from Bosch, located in Germany, and concluded
by receiving certification from the EPA in December 2019 to sell our new product in all 50 states in the U.S. Upon certification,
we began marketing this low emission natural gas solution to telecommunications customers worldwide and in the midst of the COVID-19
pandemic we secured several orders for natural gas configured backup and prime power applications. During 2020, we began shipments
of our DC natural gas generators to several domestic and international Tier-1 telecommunications customers. In 2022, we plan to expand
our sales and service network for our natural gas generators, targeting residential and telecommunications customers in the U.S.
while also targeting Tier-1 telecommunications customers in emerging nations with solar hybrid natural gas generators for off-grid
markets. |
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Expand
renewable solar energy product offerings. Developing regions like Africa, South East Asia and Latin America lack an electric
utility infrastructure to support the installation of grid connected telecommunications towers in remote areas. Due to these challenges,
telecommunications companies are installing hybrid power generation systems that consist of solar panels, batteries and fossil fuel
powered generators. Installing fuel inefficient generators combined with solar and batteries without any integration is proving to
be cost prohibitive. Several local government programs to subsidize the adoption of solar and battery storage along with generators
in off-grid telecommunications towers have failed due to lack of quality components and integration. We believe our hybrid systems
using natural gas fuel powered generators integrated with solar and battery storage offer an ideal solution for this market. |
Our
Technologies
Starting in 1979, Polar began
manufacturing and exporting solar PV vaccine refrigerator/freezers as part of the WHO Cold Chain projects. We developed solar refrigeration
and air conditioning systems that operated directly with DC batteries, along with solar photovoltaic charge controls. Our DC power and
refrigeration technologies drew the attention of various military projects. We manufactured packaged remote home power systems for Arizona
Public Service who in turn provided them to remote customers. The use of remote home power systems drew our attention to the need for
DC generator sets.
In the early 1990’s,
we began introducing DC generators to provide backup and prime power for off-grid and bad-grid applications. Our initial products
were predominantly designed for military applications and used as auxiliary power for vehicles, battlefield tanks and radar sites.
In the late 1990s, we introduced our DC power systems for commercial applications like mobile telecommunications towers, solar refrigerators
and oil field applications.
We introduced our 6200 PMHH
alternator, which combines the attributes of homopolar alternator technology with a permanent magnet. When mounted on an engine and operated
at either a fixed or variable speed, the model 6200 PMHH generates a precise amount of regulated voltage and current. The DC output can
then be used to power electronics or charge batteries.
We developed our own proprietary
DC alternator to improve system efficiency, reduce costs and lower weight. Our design replaced a conventional 4-pole, three-phase designs
with a light weight, low cost 12-pole incorporating either 6 or 3 phases. Another unique aspect of the design of our DC alternators is
the elimination of bearings, internal wiring connections, and an exciter (i.e., a device which supplies the magnetizing current to generate
working flux) to provide a longer life cycle than conventional motor designs in the marketplace.
In
2006, we introduced our next generation 8000 Series alternators designed for higher power and voltage applications, which features our
proprietary 32-pole permanent magnet alternator technology. The 8000 Series offers high efficiency at a lower cost while integrating
our proprietary digital control system, Supra Controller™, that manages and optimizes alternator output. Our Supra Controller™
networks all components via CAN bus communications and software and has the ability to control, analyze, monitor, record and communicate
all key system parameters to ensure efficiency, safety and reliability of the overall system. The ability to remotely monitor and calibrate
each system parameter, receive system alarms and auto-reset the system when a fault is corrected are the key differentiating factors
of our DC power systems.
In
telecommunications tower backup applications, backup generators are used to provide power during grid outages or to charge batteries
to provide longer run times during emergencies. Due to battery costs and availability issues, many telecommunications providers are known
to use various types of chemistries or capacities as storage sources. During the past decade, we have successfully integrated various
battery chemistry charge algorithms into our Supra Controller™ software.
In
2011, we added charge algorithms for various lithium battery chemistries and integrated our proprietary battery management system, or
BMS, with our Supra Controller™ software. In 2013, we further expanded the integration of storage and renewable energy such as
solar and wind into our Supra Controller™ software resulting in the shipment of twenty off-grid telecommunications tower power
systems to Australia.
In
2017 and 2018, we demonstrated our DC hybrid power systems to telecommunications providers in South East Asia and Africa. We believe
that the integration of renewable energy and storage batteries are ideal for off-grid remote locations in rural areas worldwide. During
2022, we plan to continue our research and development efforts to further enhance these integrations for remote telecommunications towers
in South East Asia and Africa.
In
2018, we developed our next generation BMS that enhances our current technology to more accurately measure, monitor, control and integrate
battery performance data with our Supra Controller™. In addition, we enhanced the user interface to allow us the ability to update
or develop new charging algorithms in the field which can be remotely programmed or uploaded.
In
2018, we introduced our Toyota natural gas / propane engine across our product line. The Toyota product is a more advanced engine
used in heat pump applications. We have negotiated a supply agreement with Toyota for the engine and with Bosch for the ignition control.
In December 2019, we received our certificate of conformity from the EPA. These new generators provide power outputs between 5 kW
to 15 kW and incorporate a 60,000- to 90,000-hour life engine with our proprietary control system. We are presently marketing
these stationary generators within the telecommunications, commercial and residential markets.
In
2021, we began development of a higher power natural gas-powered DC backup power system utilizing larger engines and improved emission
control systems. The implementation of 5G networks by Tier-1 telecommunication customers currently have significantly higher power requirements
at cell sites than the previous 4G networks. In addition, use of 5G technology in IoT, video streaming, and data analytics applications
requires cell sites to be operational 100% of the time which, in turn, increases the demand for reliable and fuel-efficient power generation
backup systems. We believe increased power usage of 5G networks and higher fuel prices enhances market opportunities for our fuel-efficient
DC power systems as compared to lower efficiency AC power systems. In March 2022, we received our EPA certification on
our 4Y Toyota engine, which is a larger engine model for used on our 20 to 30 kW DC power systems. We believe being an approved supplier
for the three largest Tier-1 telecommunication providers in the U.S. provides us with additional growth opportunities during the current
rapid 5G expansion in the largest urban centers in the U.S.
Products
and Services
DC
Base Power Systems
Our
DC base power systems are designed for use in prime power and backup power applications. All of our DC power systems are designed to
last 20 years or more in backup applications and meet all UL2200 standards. To maximize operational life, we incorporate (over and above
our competition) the following:
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all
aluminum, powder coated, enclosure with stainless hardware, which is lightweight and corrosion resistant; |
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105
C rated signal wire, tinned copper strands; |
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stainless
steel braided covering hoses for fuel and coolant lines; |
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Class
220 C magnet wire for alternator windings; |
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watertight
connectors in place of terminal strips and other non-sealed connectors; and |
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our
proprietary Supra Controller™ modules that are environmentally sealed. |
We
believe that the number one reliability issue with a generator set is the failure to start. To improve the reliability of our generators,
we remove the engine’s starting battery and replace it with a super capacitor. The super capacitor has a 15- to 20-year service
life, greater cold cranking amps and withstands greater temperature extremes than conventional starting batteries.
To
reduce maintenance and help ensure that there is always adequate oil, we increase the engine’s oil capacity to provide for a 4,300-hour
(natural gas / propane) or 1,500-hour (diesel) maintenance interval. Standard oil intervals for typical generators range from 200
to 500 hours.
DC
Hybrid Power Systems
In
most off-grid or bad-grid outdoor applications where DC loads are required, such as telecommunications towers in rural or remote areas,
generator fuel cost can account for more than 60% of the total operating costs.
In
most backup applications, such as telecommunications and uninterruptable power supply systems, lead acid batteries are used for providing
transitional power prior to the backup generator start-up. In most of our prime power applications (including telecommunications) the
goal is to reduce maintenance and fuel costs. Our Supra Controller™ automatically cycles the generator off when the loads are small
and cycles it on again when the load increases or the battery charge is depleted. This cycling reduces engine maintenance and saves significant
quantities of fuel.
Additional
fuel savings are realized by using lithium-ion batteries in place of lead acid batteries. Lead acid batteries, when compared with lithium-ion
batteries, have high internal resistance, are inherently inefficient during charging or discharging in cyclic load applications and therefore
require longer to charge, resulting in higher fuel costs. In 2011, we completed the design and testing of a hybrid power system, where
our DC power system was integrated with lithium-ion batteries to provide a longer life and higher fuel efficiency for cyclic DC power
applications such as telecommunications towers. In 2019, we implemented our next generation BMS for our lithium battery storage system.
This next generation BMS enhances battery charging accuracy, integrates with engine controls and provides additional protection for the
lithium batteries.
Our
DC hybrid power systems can monitor the charge/discharge cycle of various battery chemistries, including lithium-ion and lead acid batteries.
Our Supra Controller™ system incorporates a CAN bus communications capability that provides communication and control between the
battery and the DC hybrid power system. Each cell in the battery pack is individually monitored for voltage and temperature, ensuring
the safety and longevity of the battery bank. These power systems include enclosures, a lithium-ion battery pack, our proprietary BMS
and our proprietary Supra Controller™ system that controls engine output, battery charging algorithms, cooling system and power
control circuits that optimize DC load outputs.
DC
Solar Hybrid Power Systems
Our
DC solar hybrid power system combines our DC hybrid power system with solar photovoltaic modules and a custom engineered multi power
point tracking charge controller. In most off-grid or bad-grid outdoor applications, such as telecommunications towers in rural or suburban
areas, the fuel costs of operating a generator can account for more than half of the total operating costs. We believe that incorporating
renewable energy sources, such as solar, with our DC hybrid power systems is ideal solution for numerous off-grid and bad-grid applications
worldwide. Our DC solar hybrid power systems incorporate the following features:
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Hybrid
power panel. We produce distribution panel assemblies that make use of punched and plated buss bars to make the heavy current
connections between appliances. The industry standard is using labor intensive hand crimped wires and lugs which are accomplished
in the field. |
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Photovoltaic
Arrays. Our telecommunications customers request photovoltaic array structures to withstand winds of 150 mph and 200 mph exceeding
the industry standard of 120 mph. |
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Shelter.
We provide an all-weather light-weight aluminum walk-in shelter that is easy to transport by truck or helicopter. |
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Lightning
protection. We provide the highest degree of lightning protection through the use of air-coil type inductors designed by us. |
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Air-Conditioning.
We provide DC air-conditioning if required in very hot weather environments. We also provide cooling systems using ambient air. |
During
2019, we developed an environmentally friendly solar hybrid power system based on a combination of solar with LPG and propane power sources
which we believe lowers both capital expenditures and operating expenditures. These new generators have been specifically designed to
run in residential applications and will provide power outputs between 5 kW to 22 kW and which incorporate a 30,000- to 90,000-hour life
engine with our proprietary control system. Our natural gas generators when integrated with battery storage and solar are ideal microgrids
for off-grid and bad grid residential and commercial applications.
Service
and Support
Global
Network Management Tools
We
offer global network management services through our telematics tool, which consists of our Supra Controller™ technology integrated
with monitoring software. This hardware is integrated into each DC power system and collects critical data from the equipment and transmits
this data back to the customer and our service department. This capability allows us and our customers to monitor system performance
remotely and to remotely update the equipment with new revision software in the field.
Our
telematics capabilities and services include:
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automated
and continuous remote monitoring with auto alerts and notifications that can be transmitted via email or text messaging; |
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maintenance
management, which provides ability to schedule preventative maintenance based on actual equipment usage; and |
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real-time,
bi-directional communication capability for remote upgrades, testing and troubleshooting. |
Our
telematics tools also provide information to our customers on specific equipment utilization that provides the abilities to determine
the functional status of the equipment and proactively schedule maintenance. We believe these tools assist in reducing equipment downtime,
thereby reducing the overall cost of ownership. In addition, we plan to use these tools to monitor and provide accurate billing for our
rental equipment deployed at customer facilities.
Aftermarket
and Service Parts
We
offer extensive aftermarket and service parts programs. We maintain an extensive inventory of aftermarket parts and sell parts directly
to customers or through our qualified network of service providers. In addition, we require our regional service providers to maintain
sufficient quantities of aftermarket parts in their inventory to ensure minimum downtime upon product failure.
We
maintain accurate records of bill of materials for each serial number shipped and service our products well beyond their recommended
lives. In the marketplace, our products are known for their long life and durability.
Product
and Warranty Support
We
utilize a nationwide network of dealers and service providers to perform installation and warranty services for our customers. Through
our dealers we offer product commissioning as an added service to all our customers and require the purchase of such services as a condition
for acceptance of any warranty claims in the future. We offer installation of the equipment, preliminary testing, integration of equipment
with other assets located at the site and introductory maintenance and safety training. We offer various levels of fee-based services
to support our products in the field. In addition, we have trained product and application engineers that deliver high quality, responsive
lifetime technical support to all our customers worldwide.
We
further support our customers by using qualified regional independent service providers to perform warranty and aftermarket service and
repair on our products. Our regional service providers are factory trained and certified prior to being authorized to repair or service
our equipment. We generally reimburse regional service providers for the warranty services they perform on our systems.
Sales
and Marketing
Our
sales strategy focuses on using our direct sales force to market our DC backup power products to telecommunications providers in the
U.S. We use local regional sales managers in the U.S. market to demonstrate our products to Tier-1 telecommunications providers. Our
products are purchased by regional centers operated by our telecommunications customers, thereby expanding our overall market into regions
we may not have covered previously.
We
have established a sales and service infrastructure in international markets. We established regional sales offices in Australia, U.A.E.,
Poland and Dominican Republic and established sales and aftermarket service locations in Australia and Romania to manage the South East
Asia and EMEA regions, respectively. Due to a general lack of a reliable power grid, many emerging markets continue to expand their telecommunications
infrastructures at a high rate. We believe that this lack of a reliable power grid, together with our knowledge of integrating renewables
with generators, provides us with an opportunity to enter these emerging markets with our hybrid storage and renewable energy solutions.
We
also market our products through our web site and by exhibiting our products at industry trade shows globally. Our primary sales are
generated through product demonstrations and short-term rentals to demonstrate the capabilities of our products and value proposition
to large mobile network providers worldwide. We believe this strategy of demonstrating our products and technologies to prospective customers
expedites the sales process for our DC power systems.
We
market our products to a large global customer base through actual product demonstrations. In 2020, the spread of COVID-19 led to various
government travel restrictions which resulted in the inability of our sales team to meet with existing or new customers to demonstrate
our products. In addition, our service staff and engineers have generally been unable to travel to customer locations to setup demonstrations
and assist in the integration and optimization of our products to specific customer application needs. During 2021, we have experienced
a modest resumption of sales activity with our U.S. Tier-1 telecommunications customers as their construction activities resume. Given
the daily developments of the COVID-19 pandemic and the global responses to curb its spread, we are not able to accurately estimate all
of the long-term effects of the COVID-19 pandemic on our business.
Distribution
and Service
We
service our products through various service partners that provide initial product installation and maintenance services. The promotion
of our natural gas powered Mini-Grid product, targeting off-grid and bad grid rural areas, will be undertaken by certified independent
dealers. We believe expansion of our dealer network will also provide additional opportunities for our DC power systems in the U.S. and
other countries.
We
utilize a combination of factory trained technicians and independent service providers to provide installation, maintenance, service
and training at customer locations throughout the U.S.
In
the international markets, we utilize local service partners to perform installation and service on our equipment. We have hired trained
personnel in Australia, Romania, and South Africa to assist in regional training of technicians and also in product demonstrations.
Competition
Within
the telecommunications power generation market, we compete with a few manufacturers of AC and DC generators that offer generators with
an output power of 5 kW to 50 kW. In the U.S. market, our competitors are global manufacturers of AC generators designed primarily for
the residential and industrial off-grid power markets. Internationally, our competitors include regional manufacturers of both AC and
DC generators.
In
the U.S. market, our competitors are large volume manufacturers of AC generators with a primary focus on emergency power backup generation
for the residential marketplace. These AC generators are constructed using steel enclosures and are therefore heavier and can rust more
easily in outdoor applications as compared to our products which generally have a smaller footprint and are constructed using aluminum
enclosures. Due to the inherent design of AC motors, their units are approximately 40% larger in size than our DC generators. In order
to monetize on our positives, we targeted telecommunications markets where generators are used to provide backup power during power outages.
Due to the lighter weight and smaller size of our products as compared to AC products, we specifically target customers with the telecommunications
towers located on roof-tops in urban areas. We believe that the smaller size, lighter weight and higher fuel efficiency of our products
are performance parameters that offset the lower price alternative of AC generators. In addition, we believe that our recently introduced
long-life (90,000 hours), natural gas-powered DC generator product line significantly increases our competitive advantage in densely
populated urban markets.
Increased
digitization of our lives has resulted in the need for more power usage in both residential and commercial applications. In the telecommunications
tower market, the majority of the outdoor power needs are DC power since most components are DC powered. Historically, AC generator companies
have utilized conversion technologies to convert AC output to DC output. This conversion results in an approximately 40% loss in energy.
Meanwhile, our DC generators supply DC power directly to the telecommunications tower systems increasing the system’s overall efficiency.
These efficiencies are further enhanced in off-grid and bad-grid applications where more power is being used from the generators due
to the lack of grid power.
Below
are our primary competitors across these applications:
DC
Power: 3Tech Corporate Limited, Ascot Industrial srl, Ausonia srl, and Controllis.
AC
Power: Generac Power Systems, Inc., Kohler Co., Onan, FG Wilson and many other companies.
Manufacturing
and Assembly
A
significant percentage of our business comes from multinational global corporations seeking configured product solutions ready to be
field deployed with a minimum installation time. Our manufacturing process begins with our direct sales force and engineering team defining
customer application needs and concludes with the production of a custom configured product solution. We believe our ability to have
total control over the sales and manufacturing process is a key competitive differentiator in the markets we serve.
By
implementing vertical integration throughout our manufacturing process, we believe that we reduce overall manufacturing costs, thereby
increasing profitability and market competitiveness. Our production processes encompass all aspects of production of our DC power systems,
which includes alternators, aluminum enclosures, engine configurations, control electronics, cooling systems, wiring harnesses, exhaust
systems and final assembly. Manufacturing of our proprietary technologies requires proprietary automated equipment that ensures total
control and agility in our production processes. Over the past decade, we have made significant investments in highly specialized manufacturing
tooling, jigs and fixtures that allow us to manufacture products at lower cost while maintaining the highest quality.
Our
production assembly lines are designed to be flexible, and we utilize advanced manufacturing planning software to predict, monitor and
control demand levels and product mix to provide the shortest delivery time to our customers. We utilize 3-D CAD software to product
design and document assembly instructions throughout our production process. All our products are 100% tested to customer specific application
requirements prior to shipment.
Throughout
our operations we utilize computerized ERP software that integrates all our processes from lead generation to product shipment and aftermarket
support. Our focus on safety, quality and on-time delivery is supported by employee training and information systems that monitor process
and product quality and communicate trends and findings to senior management on a real-time basis.
Design
Engineering/Research and Development
Our
research and development efforts are market driven and are focused on the development of new technologies and product improvements, as
well as reducing costs and improving product quality and reliability. The primary focus of our research and development activities is
the development of lighter-weight, more compact and lower cost DC power generation systems for our Tier-1 wireless provider customers
in the U.S. and international markets. Over the years, we have expended significant resources in enhancing our system controls like our
Supra Controller™ and BMS.
A
significant part of our research and development effort has focused on the development of control software that integrates engine controls,
power management and battery algorithms to fully optimize fuel consumption in both prime power and backup power generation applications.
We use a high level of integration with a single control and communication module, our Supra Controller™, rather than competitive
system designs with a number of independent control modules controlling a single function. Our integrated approach ensures software compatibility,
reduces complexity in wiring, increases reliability and reduces cost. We maintain an in-house design, prototyping, testing and application
engineering capabilities including expertise in 3-D solid modeling and finite element analysis, computer-based modeling and testing,
rapid prototyping, design verification testing and document publication, which includes manufacturing assembly instructions, supplier
drawings and product manuals. In addition, we utilize third party testing laboratories to certify our products’ compliance with
current applicable UL standards.
Our
research and development efforts are key to meeting customer demand and ever-changing power requirements. In 2022, we plan to gradually
increase our team of engineers and continue investing into new product development as part of our strategy to diversify our product lines.
However, it is not possible for us to predict the duration or magnitude of the adverse results
of the outbreak and its effects on our ability to continue our design engineering and research development projects during the remainder
of 2022 and perhaps beyond.
Intellectual
Property
We
possess a broad intellectual property portfolio comprised of electronics, software, engines, alternators, thermal systems and production
techniques. We rely on trademark, copyright and trade secret laws to protect our intellectual property. Currently, we rely on common
law rights to protect our “Polar Power, Inc.” trade name. We protect our trade secrets and other proprietary information
by requiring confidentiality agreements from our employees, consultants and third parties that have access to such information. Despite
these efforts, there can be no assurance that others will not gain access to our trade secrets, or that we can meaningfully protect our
technology. In addition, effective trademark, copyright and trade secret protection may be unavailable or limited in certain foreign
countries.
We
consider our manufacturing process to be a trade secret and have non-disclosure agreements with our employees to protect the trade secrets
held by us. However, such methods may not afford complete protection, and there can be no assurance that others will not independently
develop similar know-how or obtain access to our know-how and manufacturing concepts. We may register patents and trademarks in future
to protect our intellectual property rights and enhance our competitive position.
Suppliers
We
attempt to mitigate the adverse effect of component shortages in our business through detail material planning and by qualifying multiple
vendor sources for key components and outside processes. We conduct supplier audits of all major suppliers for initial qualification
and to ensure reliability, quality, and sustainability of critical components. To meet our customer demands, we forecast the supply of
our long lead time items such as engines, castings and electronic components through use of sales forecasting tools and ERP system.
Our
suppliers are extensively surveyed and audited; and field or process generated non-conformities communicated with our Suppliers to continuously
improve quality. To improve our costs and deliveries, our ERP system invites for all qualified suppliers to participate in relevant bids
to ensure best proposals are selected.
The
outbreak of COVID-19 has taken a toll on the global economy and has disrupted raw material supply chains all over the world. We have
experienced material shortages and delays due to the pandemic; more in 2020 than in 2021. We are actively sourcing the domestic supply
chain for key components to avoid or reduce the risk of future delays or interruptions to our operations or our ability to service customers.
We have also experience price increases on certain materials and freight services. Although we believe we can mitigate a portion of material
price increases by passing through some cost increases to our customers, we believe a fair portion can be mitigated through increases
in efficiency.
Quality
Control
Our
quality control is established to maintain the highest level of quality in the manufacturing of our DC power systems, spare parts, and
services. The foundation of our quality control was initially set in the early 1980s, much of which was required by our customers at
the time, including NASA and Hughes Aircraft. In the late 1980s, we implemented the MIL-I-45208A quality control system monitored by
U.S. Department of Defense, to meet prime source requirements for a contract we received from the U.S. Army Picatinny Arsenal to design
and manufacture an advanced battery and monitoring system for a security device used in nuclear munitions depots around the world. We
are currently in the process of obtaining an ISO 9000 certification.
Certifications
Our
DC generator systems comply with UL2200 safety standards. Our products also comply with applicable regulatory emission standards of the
Environmental Protection Agency, and the California Air Quality Management District.
Product
Warranties
The
Company provides limited warranties for parts and labor at no cost to its customers within a specified time period after the sale. Our
standard warranty on new products is two years from the date of delivery to the customer. We offer a limited extended warranty of up
to five years on our certified DC power systems based on application and usage. Our warranties are of an assurance-type and come standard
with all of our products to cover repair or replacement should a product not perform as expected. Under our standard warranty, provisions
for estimated expenses related to product warranties are made at the time products are sold. These estimates are established using historical
information about the nature, frequency and average cost of warranty claim settlements as well as product manufacturing and recovery
from suppliers.
Information
Systems
We
utilize integrated information systems (i.e., ERP) that link our lead management, sales planning, order entry, purchasing, engineering,
production control, manufacturing, inventory and accounting systems. During the past five years we have made significant investments
to upgrade and customize our information systems to improve productivity and our ability to accurately forecast inventory and manpower
requirements. We plan to invest additional capital in software and information systems to integrate aftermarket sales and service with
our ERP system to improve post sales customer experience with our products and services.
Government
Regulations and Environmental Matters
Our
business operations are subject to certain federal, state, local and foreign laws and regulations. For example, our products, services
and technologies are subject to regulations relating to building codes, public safety, electrical connections, security protocols, and
local and state licensing requirements. The regulations to which we are subject may change, additional regulations may be imposed, or
existing regulations may be applied in a manner that creates special requirements for the implementation and operation of our products
or services that may significantly impact or even eliminate some of our revenues or markets. In addition, we may incur material costs
or liabilities in complying with any such regulations. Furthermore, some of our customers must comply with numerous laws and regulations,
which may affect their willingness and ability to purchase our products, services and technologies.
Additionally,
we are subject to laws, regulations and other governmental actions instituted in response to the COVID-19 outbreak.
The
modification of existing laws and regulations or interpretations thereof or the adoption of future laws and regulations could adversely
affect our business, cause us to modify or alter our methods of operations and increase our costs and the price of our products, services
and technology. In addition, we cannot provide any assurance that we will be able, for financial or other reasons, to comply with all
applicable laws and regulations. If we fail to comply with these laws and regulations, we could become subject to substantial penalties
or restrictions that could materially and adversely affect our business.
Human
Capital
Our
experienced employees and management team are our most valuable resources, and we are committed to attracting, motivating, and retaining
top professionals to service our customers. As of March 31, 2022, we had 104 full time employees, which includes 94 employees in the
U.S. and 10 employees outside the U.S. None of our employees are represented by labor unions. We consider our relationships with our
employees to be generally satisfactory. In addition, from time to time, we utilize outside consultants or contractors for specific assignments.
We
believe our success is directly related to the satisfaction, growth, and development of our employees. We strive to offer a work environment
where employee unique characteristics and opinions are valued and one that provides our employees the opportunities to use and augment
their professional skills. To achieve our human capital goals, we intend to remain focused on providing our personnel with career development
opportunities to expand our business within their areas of expertise and continue to provide our personnel with personal and professional
growth. In addition to salaries, we also provide a 401(k)-retirement plan, healthcare and insurance benefits, health savings accounts,
paid time off, and various services and tools to support our employees’ health and wellness. Our leaders, managers, and eligible
employees are provided an opportunity to participate in our stock option plans. We emphasize a number of measures and objectives in managing
our human capital assets, including, among others, employee safety and wellness, talent acquisition and retention, employee engagement,
development, and training, diversity and inclusion, and compensation and pay equity.
Employee
Engagement, Development, and Training. We provide all employees with the opportunity to share their opinions and feedback on our
culture which helps enhance the employee experience, promote employee retention, drive change, and leverage the overall success of our
organization. We provide all employees a wide range of professional development experiences, both formal and informal, at all stages
in their careers.
Diversity
and Inclusion and Ethical Business Practices. We are committed to fostering work environments that value and promote diversity and
inclusion, including our Diversity and Inclusion Program which focuses on initiatives to increase the diversity of our workforce and
promote an environment of trust where employees feel safe to express their opinions and perspectives without fear of repercussion. This
commitment includes providing equal access to, and participation in, equal employment opportunities, programs, and services without regard
to race, religion, color, national origin, disability, sex, sexual orientation, gender identity, stereotypes or assumptions based thereon.
We pride ourselves in the development and fair treatment of our workforce, including healthcare and benefit programs for our employees,
equal employment hiring practices and policies, anti-harassment, workforce safety, and anti-retaliation policies. We welcome and celebrate
our teams’ differences, experiences, and beliefs, and we are investing in a more engaged, diverse, and inclusive workforce.
COVID-19
and Employee Safety and Wellness. We are actively monitoring the global situation related to the pandemic and how it affects our
financial condition, operations, suppliers, industry, and workforce. Given the daily developments of the pandemic and the global responses
to curb its spread, we are unable to estimate the effects of the pandemic at this time. If the COVID-19 pandemic continues, it may have
an adverse effect on our ability to source qualified employees during the remainder of 2022 and perhaps beyond.
We
foster a strong corporate culture that promotes high standards of ethics and compliance for our businesses, including policies that set
forth principles to guide employee, officer, director, and vendor conduct, such as our Code of Business Conduct and Ethics. We maintain
a whistleblower policy and anonymous hotline for the confidential reporting of any suspected policy violations or unethical business
conduct on the part of our businesses, employees, officers, directors, or vendors and provide training and education to our global workforce
with respect to our Code of Business Conduct and Ethics and anti-corruption and anti-bribery policies.
Facilities
Our
principal offices are located in Gardena, California, where we lease a 40,000 square foot facility that includes our corporate staff
offices, our manufacturing facility, and our research and development center. We also lease a 29,000 square foot facility as our second
manufacturing facility and a 20,000 square foot warehouse facility across the street from our corporate offices. We believe that our
current facilities are sufficient to accommodate our anticipated production volumes for the next twelve months. If required, additional
office and manufacturing space is available within less than three miles from our present location.
Before
deciding to purchase, hold or sell our common stock, you should carefully consider the risks described below in addition to the other
information contained in this Annual Report on Form 10-K and in our other filings with the Securities and Exchange Commission, or the
SEC, including subsequent reports on Forms 10-Q and 8-K. The risks and uncertainties described below are not the only ones we face. Additional
risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. If any of these
known or unknown risks or uncertainties actually occurs with material adverse effects on Polar Power, our business, financial condition,
results of operations and/or liquidity could be seriously harmed. In that event, the market price for our common stock will likely decline,
and you may lose all or part of your investment.
Risks
Related to Our Business and Industry
The
COVID-19 pandemic has had, and will likely continue to have, a significant negative impact on our business, sales, results of operations
and financial condition.
The
COVID-19 pandemic has had a widespread and detrimental effect on the global economy, particularly in the U.S., and actions over the past
twelve months by public health and governmental authorities, businesses, other organizations and individuals to address the outbreak,
including travel bans and restrictions, quarantines, shelter in place, stay at home or total lock-down orders and business limitations
and shutdowns have materially negatively impacted, and could further materially adversely affect, our business, financial condition,
results of operations and cash flows. The ultimate impact of the COVID-19 pandemic on our business and results of operations remains
unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration
and potential resurgence of the COVID-19 pandemic, repeat or cyclical outbreaks and any additional preventative and protective actions
that governments, or we or our customers, may direct, which may result in an extended period of continued business disruption and reduced
operations. Any resulting financial impact cannot be reasonably estimated at this time, but we expect it will continue to have a material
impact on our business, financial condition and results of operations.
The
repercussions of the COVID-19 global pandemic has had and is likely to continue to have, a material and substantial adverse impact on
our results of operations, including a decrease in our sales and delays in sourcing raw materials from suppliers. Our business is directly
dependent upon, and correlates closely with, the marketing levels and ongoing business activities of our existing customers and suppliers.
In the event of a continued economic downturn caused by the COVID-19 pandemic, we will likely experience a reduction in current projects,
longer sales and collection cycles, deferral or delay of purchase commitments for our DC power systems, a reduction in our manufacturing
productivity, higher than normal inventory levels, delay in receipt of raw materials, a reduction in the availability of qualified labor
and increased price competition, all of which could substantially adversely affect our results of operations including our earnings and
cash flows.
In
response to uncertainties associated with the COVID-19 pandemic, we have made certain modifications to our business, including modifications
to employee work locations, cancellation of certain marketing events and the implementation of a cost reduction program to reduce overhead.
During portions of 2021 we also implemented limited remote work policies for many employees, and the resources available to such employees
may not enable them to maintain the same level of productivity and efficiency. Our increased reliance on remote access to our information
systems also increases our exposures to potential cybersecurity breaches. We cannot provide any assurance that these actions, or any
other mitigating actions we may take, will help mitigate the impact of the COVID-19 pandemic on us.
Furthermore,
we cannot provide any assurance that our assumptions used to estimate our liquidity requirements will remain accurate due to the unprecedented
nature of the disruption to our operations and the unpredictability of the COVID-19 global pandemic. As a consequence, our estimates
of the duration of the pandemic and the severity of the impact on our future earnings and cash flows could change and have a material
impact on our results of operations and financial condition. In the event of a sustained market deterioration and continued declines
in net sales, we may need additional liquidity. We cannot provide any assurance that we will be able to obtain additional sources of
financing or liquidity on acceptable terms, or at all.
The
ultimate duration and impact of the COVID-19 pandemic on our business, results of operations, financial condition and cash flows is dependent
on future developments, the duration of the COVID-19 pandemic, including repeat or cyclical outbreaks, additional “waves”
or the spread of “variant” viruses and the related length of its impact on the global economy, which are uncertain and cannot
be predicted at this time. Furthermore, the extent to which our mitigation efforts are successful, if at all, is not presently ascertainable.
However, we expect that our results of operations, including revenues, in future periods will continue to be adversely impacted by the
COVID-19 pandemic and its negative effects on global economic conditions and that, as a result of such effects, we may continue to be
adversely affected even after the COVID-19 pandemic has materially subsided.
Terrorist attacks
and threats of war may impact all aspects of our operations, revenues, costs and stock price in unpredictable ways.
The
recent special military actions of the Russian Federation and its invasion of Ukraine and the resulting geopolitical uncertainty are
likely to have a significant impact on the European Union, the United Kingdom and other countries, including the U.S. The threat
that these military operations may expand beyond Ukraine may have a negative impact as well. Significant increases in the price
of oil and natural gas have occurred and are likely to continue putting additional inflationary pressures on central banks, including
Federal Reserve System (the “FRB”). It is expected that interest rate hikes already announced by the FRB will occur in
2022, but the amount, timing, and frequency of such increases are not fully known at this time. The Russian Federation has also
threatened increased cyberattacks as part of its recent actions which could affect the Bank and its customers. Additionally, the
United States and European nations have imposed very significant financial sanctions on the Russian Republic, including targeted sanctions
on Russian banks and wealthy individuals as well as halting certification of the Nord Stream 2 gas pipeline. They have denied Russian
banks access the Society for Worldwide Interbank Financial Telecommunications or SWIFT which is expected to slow international trade
and make such transactions costlier to accomplish which could also negatively affect the Bank and its customers. In response to
the Russian military actions, many businesses headquartered in the Eurozone and the United States have stopped doing business with Russia,
which may negatively affect the profitability of those companies. The international turmoil has already had and may continue to
have a negative impact on the stock market generally and, in turn, on our stock price. The full impact of the recent actions by the Russian
Federation regarding Ukraine are not known at this time, but they could have a material adverse impact on our business, financial condition,
results of operations, and stock price.
We
have incurred significant losses in the past and we may incur losses in the future, which may hamper our operations and impede us from
expanding our business.
We
have incurred significant losses in the past. For the years ended December 31, 2021 and 2020, we incurred consolidated net losses of
approximately $1.4 million and $10.8 million, respectively. For the year ended December 31, 2021, we incurred a gross profit of approximately
$3.4 million, and for the year ended December 31, 2020, we incurred a gross loss of approximately $5.6 million. We may incur net and
gross losses in the future. We expect to rely on cash on hand, cash, if any, generated from our operations, borrowing availability under
our line of credit and proceeds from our future financing activities, if any, to fund all of the cash requirements of our business. Additional
losses may hamper our operations and impede us from expanding our business.
We
are dependent on, and derive substantially all of our revenue from, sales of our DC base power systems to one customer within the U.S.
telecommunications market. Our efforts to expand our customer base, our product portfolio or markets within which we operate may not
succeed and may reduce our revenue growth rate.
We
derive substantially all our revenues from sales of our DC base power systems to one customer within the telecommunications market, AT&T.
The volume of sales to them may vary significantly from year to year. Any factor adversely affecting sales of these power systems to
this customer or to other customers within this market, including market acceptance, product competition, performance and reliability,
reputation, price competition and economic and market conditions, could adversely affect our business and results of operations.
In
addition, any unfavorable change in our business relationship with our Tier-1 telecommunications wireless carrier customers, or delays
in customer implementation and deployment of our products, could have a material adverse effect on our results of operation and financial
condition. Our plans to invest in the development of electric vehicle chargers, residential and commercial power products and higher
capacity DC hybrid solar systems may not result in an anticipated growth in sales and may reduce our revenue growth rate.
Many
of our DC power systems involve long design and sales cycles, which could have an adverse impact on our results of operations and financial
performance.
The
design and sales cycle for our DC power systems, from initial contact with our potential customer to the shipments of our product, may
be lengthy. Customers generally consider a wide range of factors before making a purchase decision. Prior to purchasing our products,
many of our customers often require a significant technical review, tests and evaluations over long periods of time (i.e., three to twenty-four
months), assessments of competitive products and approval at a number of management levels within their organization. During the time
our customers are evaluating our products, we may incur substantial sales and service, engineering and research and development expenses
to customize our products to meet customer’s application needs. We may also expend significant management efforts, increase manufacturing
capacity, order long-lead-time components or purchase significant amounts of components and other inventory prior to receiving an order.
Even after this evaluation process, a potential customer may not purchase our products.
The
product development time before a customer agrees to purchase our DC power systems can be considerable. Our process for developing an
integrated solution may require use of significant engineering resources, including design, prototyping, modeling, testing and application
engineering. The length of this cycle is influenced by many factors, including the difficulty of the technical specification and complexity
of the design and the customer’s procurement processes. A significant period may elapse between our investment of time and resources
in designing and developing a product for a customer and receipt of revenue from sales of that product. The length of this process, combined
with unanticipated delays in the development cycles and the effects of COVID-19 on our ability to demonstrate our products to current
and potential customers could materially affect our results of operations and financial conditions.
We
do not have long-term commitments for significant revenues with most of our customers and may be unable to retain existing customers,
attract new customers or replace departing customers with new customers that can provide comparable revenues and profits.
Because
we generally do not obtain firm, long-term volume purchase commitments from our customers, most of our sales are derived from individual
purchase orders. We remain dependent upon securing new purchase orders in the future in order to sustain and grow our revenues. Accordingly,
there is no assurance that our revenues and business will grow in the future. Our failure to maintain and expand our customer relationships
could materially and adversely affect our business and results of operations.
The
current high concentration of our sales within the telecommunications market could result in a significant reduction in sales and negatively
affect our profitability if demand for our DC power systems declines within this market before we are able to make significant inroads
with our diversification of markets and customers.
Currently,
we are predominately focused on the manufacturing, marketing and sales of DC power systems to telecommunications companies. We may be
unable to shift our business focus away from these activities to other potential markets for our products. Accordingly, the emergence
of new competing DC power products or lower-cost alternative technologies within the telecommunications market may reduce the demand
for our products. A downturn in the demand for our DC power systems within this market could materially and adversely affect our sales
and results of operations.
We
face inventory risk and may be required to write-off additional inventory in the future.
We
value inventories at the lower of cost or net realizable value. If the estimated net realizable value is determined to be less than the
recorded cost of the inventory, a provision is made to reduce the carrying amount of the inventory item to the lower net realizable value
determination. Determination of the net realizable value may be complex, and therefore, requires management to make assumptions and to
apply a high degree of judgment. In order for management to make the appropriate determination of net realizable value, the following
items are commonly considered: inventory turnover statistics, inventory quantities on hand in our facilities, unfilled customer order
quantities, forecasted consumer demand, current prices, competitive pricing, seasonality factors, consumer trends and performance of
similar products or accessories. Subsequent changes in facts or circumstances do not result in the reversal of previously recorded write-downs.
If
our estimates regarding net realizable value are inaccurate, including our estimates regarding our inventory, or changes in customer
demand for our products in an unforeseen manner, we may experience additional write-downs of our inventory.
The
unavailability or shortage, or increase in the cost, of raw materials and components could have an adverse effect on our sales and profitability.
Our
operations require raw materials, such as aluminum, copper, engines, electronics, and permanent magnets. Commodities such as aluminum
and copper are known to have significant price volatility based on global economic conditions. An increase in global economic outlook
may result in significant price increases in the cost of our raw materials. In addition, we use Neodymium permanent magnets in our alternators,
for which there are a limited number of global suppliers that can meet our standards. Increase in manufacturing of electric vehicles
worldwide can have an adverse effect on the cost or supply of these magnets. At our current production volumes, we are unable to secure
large quantities of these commodities at fixed prices; however, we do have multiple sources of supply for our raw materials to meet our
near term forecasted needs. Various factors could reduce the availability of raw materials and components and shortages may occur from
time to time in the future. An increase in lead times for the supply of raw materials due to a global increase in demand for commodities
or other reasons may significantly increase the timing of receipt of such materials and/or increase the material costs of our products.
For example, as a result of the COVID-19 pandemic, we are currently experiencing both delays in sourcing, and price increases of, certain
key components. As a result of these delays, our standard eight-week delivery time has increased to fourteen weeks. In addition, if production
was interrupted due to unavailability or shortage of raw materials and we were not able to find alternate third-party suppliers or re-engineer
our products to accommodate different components or materials, we could experience disruptions in manufacturing and operations including
product shortages, higher freight costs and re-engineering costs. If our supply of raw materials or components continues to be disrupted
or our lead times extended, our business, results of operations or financial condition could be materially adversely affected.
The
markets within which we compete are highly competitive. Many of our competitors have greater financial and other resources than we do
and one or more of these competitors could use their greater financial and other resources to gain market share at our expense.
If
our business continues to develop as expected, we anticipate that we will grow our revenues in the near future. If, due to capital constraints
or otherwise, we are unable to fulfill our existing backlog in a timely manner and/or procure and timely fulfill our anticipated future
backlog, our customers and potential customers may decide to use competing DC power systems or continue the use of AC power systems.
If we are unable to fulfill the demand for products and services in a timely manner, our customers and potential customers may choose
to purchase products from our competitors. Some of our larger competitors may be willing to reduce prices and accept lower margins in
order to compete with us. In addition, we could face new competition from large international or domestic companies with established
industrial brands and distribution networks that enter our end markets. Demand for our products may also be affected by our ability to
respond to changes in design and functionality, to respond to downward pricing pressure, and to provide shorter lead times for our products
than our competitors. If we are unable to respond successfully to these competitive pressures, we could lose market share, which could
have an adverse impact on our results. We cannot assure that we will be able to compete successfully in our markets or compete effectively
against current and new competitors as our industry continues to evolve.
Rapid
technological changes may prevent us from remaining current with our technological resources and maintaining competitive product and
service offerings.
The
markets in which we and our customers operate are characterized by rapid technological change, especially within the telecommunications
market. Significant technological changes could render our existing and potential new products, services and technology obsolete. Our
future success will depend, in large part, upon our ability to:
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effectively
identify and develop leading energy efficient technologies; |
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continue
to develop our technical expertise; |
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enhance
our current products and services with new, improved and competitive technology; and |
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respond
to technological changes in a cost-effective and timely manner. |
If
we are unable to successfully respond to technological change or if we do not respond to it in a cost-effective and timely manner, then
our business will be materially and adversely affected. We cannot assure you that we will be successful in responding to changing technology.
In addition, technologies developed by others may render our products, services and technology uncompetitive or obsolete. Even if we
do successfully respond to technological advances, the integration of new technology may require substantial time and expense, and we
cannot assure you that we will succeed in adapting our products, services and technology in a timely and cost-effective manner.
If
we are unable to continue to develop new and enhanced products and services that achieve market acceptance in a timely manner, our competitive
position and operating results could be harmed.
Our
future success will depend on our ability to continue to develop new and enhanced DC power systems and related products and services
that achieve market acceptance in a timely and cost-effective manner. The markets in which we and our customers operate are characterized
by frequent introductions of new and enhanced products and services, evolving industry standards and regulatory requirements, government
incentives and changes in customer needs. The successful development and market acceptance of our products and services depends on a
number of factors, including:
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the
impact of the COVID-19 pandemic on the global markets; |
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the
changing requirements and preferences of the potential customers in our markets; |
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the
accurate prediction of market requirements, including regulatory issues; |
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the
timely completion and introduction of new products and services to avoid obsolescence; |
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the
quality, price and performance of new products and services; |
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the
availability, quality, price and performance of competing products and services; |
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our
customer service and support capabilities and responsiveness; |
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the
successful development of our relationships with existing and potential customers; and |
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changes
in industry standards. |
We
may experience financial or technical difficulties or limitations that could prevent us from introducing new or enhanced products or
services. Furthermore, any of these new or enhanced products and services could contain problems that are discovered after they are introduced.
We may need to significantly modify the design of these products and services to correct problems. Rapidly changing industry standards
and customer preferences and requirements may impede market acceptance of our products and services.
Development
and enhancement of our products and services will require significant additional investment and could strain our management, financial
and operational resources. The lack of market acceptance of our products or services or our inability to generate sufficient revenues
from this development or enhancement to offset their development costs could have a material adverse effect on our business. In addition,
we may experience delays or other problems in releasing new products and services and enhancements, and any such delays or problems may
cause customers to forego purchases of our products and services and to purchase those of our competitors.
We
cannot provide assurance that products and services that we have recently developed or that we develop in the future will achieve market
acceptance. If our new products and services fail to achieve market acceptance, or if we fail to develop new or enhanced products and
services s that achieve market acceptance, our growth prospects, operating results and competitive position could be adversely affected.
Natural
disasters and other events beyond our control could materially adversely affect us.
Natural
disasters or other catastrophic events, including the COVID-19 pandemic, may cause damage or disruption to our operations, international
commerce and the global economy, and thus could have a strong negative effect on us. Our business operations are subject to interruption
by natural disasters, fire, power shortages, pandemics and other events beyond our control. Although we maintain crisis management and
disaster response plans, such events could make it difficult or impossible for us to deliver our services to our customers and could
decrease demand for our services.
We
are dependent on relationships with our key material suppliers, and the partial or complete loss of one of these key suppliers, or the
failure to find replacement suppliers or manufacturers in a timely manner, could adversely affect our business.
We
have established relationships with third-party engine suppliers and other key suppliers from which we source components for our power
systems. We purchase standard configurations of engines for our DC power systems and are substantially dependent on timely supply from
our key engine suppliers, Yanmar Engines Company and Toyota Corporation. Engines from Yanmar and Toyota represented approximately 84%
and 6% of our total engines sold as a component of our DC power systems during 2021, respectively, and represented approximately 66%
and 18% of our total engines sold as components of our DC power systems during the same period in 2020, respectively. We also use engines
from Isuzu, Perkins, Kubota and, to a lesser extent, Volvo Penta. In December 2019, we received our certificate of conformity from the
EPA with respect to our small spark-ignition Toyota engines which will be used in our new LPG / natural gas generators. The new Toyota
engine serves as our primary engine in our new LPG products which were launched in 2020. In January 2022, we applied for EPA certification
on our 4Y Toyota engine, which is a larger engine model for used on our 20 to 30 kW DC power systems. We do not have any long-term contracts
or commitments with any of these suppliers. If any of these engine suppliers were to fail to provide emissions certified engines in a
timely manner or fail to supply engines that meet our quality, quantity or cost requirements, or were to discontinue manufacturing any
engines we source from them or discontinue providing any of these engines to us, or the supply chain is interrupted or delayed as a result
of the COVID-19 pandemic or unprecedented event, and we were unable to obtain substitute sources in a timely manner or on terms acceptable
to us, our ability to manufacture our products could be materially adversely affected.
Price
increases in some of the key components in our DC power systems could materially and adversely affect our operating results and cash
flows.
The
prices of some of the key components of our DC power systems are subject to fluctuation due to market forces beyond our control, including
changes in the costs of raw materials incorporated into these components. Such price increases occur from time to time due to spot shortages
of commodities, increases in labor costs or longer-term shortages due to market forces. In particular, the prices of engines can fluctuate
frequently and often significantly. We do not have any long-term contracts or commitments with our two key engine suppliers. Substantial
increases in the prices of raw materials used in components which we source from our suppliers may result in increased prices charged
by our suppliers. If we incur price increases from our suppliers for key components in our DC power systems, our production costs will
increase. Given competitive market conditions, we may not be able to pass all or any of those cost increases on to our customers in the
form of higher sales prices. To the extent our competitors do not suffer comparable component cost increases, we may have even greater
difficulty passing along price increases and our competitive position may be harmed. As a result, increases in costs of key components
may adversely affect our margins and otherwise adversely affect our operating results and cash flows.
A
portion of our key components are sourced in foreign countries, exposing us to additional risks that may not exist in the U.S.
A
portion of our key components, such as engines, magnets and cooling systems, are purchased from suppliers located overseas, primarily
in Asia. Our international sourcing subjects us to a number of potential risks in addition to the risks associated with third-party sourcing
generally. These risks include:
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inflation
or changes in political and economic conditions; |
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unstable
regulatory environments; |
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changes
in import and export duties; |
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currency
rate fluctuations; |
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trade
restrictions; |
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labor
unrest; |
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logistical
and communications challenges; and |
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other
restraints and burdensome taxes. |
These
factors may have an adverse effect on our ability to source our purchased components overseas. In particular, if the U.S. dollar were
to depreciate significantly against the currencies in which we purchase raw materials from foreign suppliers, our cost of goods sold
could increase materially, which would adversely affect our results of operations.
The
unavailability or shortage, or increase in the cost, of raw materials and components could have an adverse effect on our sales and profitability.
Our
operations require raw materials, such as aluminum, copper and permanent magnets. Commodities such as aluminum and copper are known to
have significant price volatility based on global economic conditions. An increase in global economic outlook may result in significant
price increases in the cost of our raw materials. In addition, we use Neodymium permanent magnets in our alternators, for which there
are a limited number of global suppliers that can meet our standards. Increase in manufacturing of electric vehicles worldwide can have
an adverse effect on the cost or supply of these magnets. At our current production volumes, we are unable to secure large quantities
of these commodities at fixed prices; however, we do have multiple sources of supply for our raw materials to meet our near term forecasted
needs. Various factors could reduce the availability of raw materials and components and shortages may occur from time to time in the
future. An increase in lead times for the supply of raw materials due to a global increase in demand for commodities outlined may significantly
increase material costs of our products. If production was interrupted due to unavailability or shortage of raw materials and we were
not able to find alternate third-party suppliers or re-engineer our products to accommodate different components or materials, we could
experience disruptions in manufacturing and operations including product shortages, higher freight costs and re-engineering costs. If
our supply of raw materials or components is disrupted or our lead times extended, our business, results of operations or financial condition
could be materially adversely affected.
We
manufacture and assemble a majority of our products at two facilities. Any prolonged disruption in the operations of this facility would
result in a decline in our sales and profitability.
We
manufacture and assemble our DC power systems at our two production facilities located in Gardena, California. Any prolonged disruption
in the operations of our manufacturing and assembly facilities, whether due to the COVID-19 pandemic, equipment or information technology
infrastructure failure, labor difficulties, destruction of or damage to one or both of these facilities as a result of an earthquake,
fire, flood, other catastrophes, and other operational problems would result in a decline in our sales and profitability. In the event
of a business interruption at our facilities, we may be unable to shift manufacturing and assembly capabilities to alternate locations,
accept materials from suppliers or meet customer shipment needs, among other severe consequences. Such an event could have a material
and adverse impact on our financial condition and results of our operations.
Our
business operations are subject to substantial government regulation.
Our
business operations are subject to certain federal, state, local and foreign laws and regulations. For example, our products, services
and technologies are subject to regulations relating to building codes, public safety, electrical connections, security protocols, and
local and state licensing requirements. The regulations to which we are subject may change, additional regulations may be imposed, or
existing regulations may be applied in a manner that creates special requirements for the implementation and operation of our products
or services that may significantly impact or even eliminate some of our revenues or markets. In addition, we may incur material costs
or liabilities in complying with any such regulations. Furthermore, some of our customers must comply with numerous laws and regulations,
which may affect their willingness and ability to purchase our products, services and technologies. Additionally, we are subject to laws,
regulations and other governmental actions instituted in response to the COVID-19 pandemic.
The
modification of existing laws and regulations or interpretations thereof or the adoption of future laws and regulations could adversely
affect our business, cause us to modify or alter our methods of operations and increase our costs and the price of our products, services
and technology. In addition, we cannot provide any assurance that we will be able, for financial or other reasons, to comply with all
applicable laws and regulations. If we fail to comply with these laws and regulations, we could become subject to substantial penalties
or restrictions that could materially and adversely affect our business.
Certain
of our products are used in critical communications networks which may subject us to significant liability claims.
Because
certain of our products for customers in the telecommunications industry are used in critical communications networks, we may be subject
to significant liability claims if our products do not work properly. We warrant to our customers that our products will operate in accordance
with our product specifications. If our products fail to conform to these specifications, our customers could require us to remedy the
failure or could assert claims for damages. The provisions in our agreements with customers that are intended to limit our exposure to
liability claims may not preclude all potential claims. In addition, any insurance policies we have may not adequately limit our exposure
with respect to such claims. Liability claims could require us to spend significant time and money in litigation or to pay significant
damages. Any such claims, whether or not successful, would be costly and time-consuming to defend, and could divert management’s
attention and seriously damage our reputation and our business.
We
could be adversely affected by our failure to comply with the laws applicable to our foreign activities, including the U.S. Foreign Corrupt
Practices Act and other similar worldwide anti-bribery laws.
The
U.S. Foreign Corrupt Practices Act, or the FCPA, and similar anti-bribery laws in other jurisdictions prohibit U.S.-based companies and
their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. We may pursue
opportunities in certain parts of the world that experience government corruption, and in certain circumstances, compliance with anti-bribery
laws may conflict with local customs and practices. Our policies mandate compliance with all applicable anti-bribery laws. Further, we
require our partners, subcontractors, agents and others who work for us or on our behalf to comply with the FCPA and other anti-bribery
laws. Although we have policies and procedures, and have conducted training, designed to ensure that we, our employees, our agents and
others who work with us in foreign countries comply with the FCPA and other anti-bribery laws, there is no assurance that such policies,
procedures or training will protect us against liability under the FCPA or other laws for actions taken by our agents, employees and
intermediaries. If we are found to be liable for FCPA violations (either due to our own acts or inadvertence, or due to the acts or inadvertence
of others), we could suffer from severe criminal or civil penalties or other sanctions, which could have a material adverse effect on
our reputation, business, results of operations or cash flows. In addition, detecting, investigating and resolving actual or alleged
FCPA violations is expensive and could consume significant time and attention of our senior management.
We
are exposed to risks related to our international sales, and the failure to manage these risks could harm our business. If we fail to
expand our business into international markets, our revenues and results of operations may be adversely affected.
In
addition to our sales to customers within the U.S., we may become increasingly dependent on sales to customers outside the U.S. as we
pursue expanding our business with customers worldwide. During 2021, and 2020, our sales to international customers accounted for 8%
and 17%, respectively, of total revenue. We continue to expect that a significant portion of our future revenues will be from international
sales to customers in less developed or developing countries. As a result, the occurrence of any international, political, economic,
or geographic event could result in a significant decline in revenue. There are significant risks associated with conducting operations
internationally, requiring significant financial commitments to support such operations. These operations present a number of challenges
including oversight of daily operating practices in each location, handling employee benefits and employee behavior. In addition, compliance
with complex foreign and U.S. laws and regulations that apply to our international operations increases our cost of doing business in
international jurisdictions. These numerous and sometimes conflicting laws and regulations include internal control and disclosure rules,
data privacy and filtering requirements, anti-corruption laws, such as the FCPA, and other local laws prohibiting corrupt payments to
governmental officials, and anti-competition regulations, among others.
Violations
of these laws and regulations could result in fines and penalties, criminal sanctions against us, our officers, or our employees, prohibitions
on the conduct of our business and on our ability to offer our products and services in one or more countries, and could also materially
affect our brand, our international expansion efforts, our ability to attract and retain employees, our business, and our operating results.
Although we have implemented policies and procedures designed to ensure compliance with these laws and regulations, there can be no assurance
that our employees, contractors, or agents will not violate our policies.
Some
of the risks and challenges of conducting business internationally include:
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the
impact of COVID-19 on the global markets and the power generation market within the international telecommunications markets; |
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requirements
or preferences for domestic products or solutions, which could reduce demand for our products; |
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unexpected
changes in regulatory requirements; |
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imposition
of tariffs and other barriers and restrictions; |
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restrictions
on the import or export of critical technology; |
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management
communication and integration problems resulting from cultural and geographic dispersion; |
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the
burden of complying with a variety of laws and regulations in various countries; |
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difficulties
in enforcing contracts; |
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the
uncertainty of protection for intellectual property rights in some countries; |
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application
of the income tax laws and regulations of multiple jurisdictions, including relatively low-rate and relatively high-rate jurisdictions,
to our sales and other transactions, which results in additional complexity and uncertainty; |
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tariffs
and trade barriers, export regulations and other regulatory and contractual limitations on our ability to sell products; |
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greater
risk of a failure of foreign employees to comply with both U.S. and foreign laws, including export and antitrust regulations, the
FCPA and any trade regulations ensuring fair trade practices; |
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heightened
risk of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact
financial results and result in restatements of, or irregularities in, financial statements; |
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potentially
adverse tax consequences, including multiple and possibly overlapping tax structures; |
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general
economic and geopolitical conditions, including war and acts of terrorism; |
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lack
of the availability of qualified third-party financing; and |
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currency
exchange controls. |
While
these factors and the impacts of these factors are difficult to predict, any one or more of them could adversely affect our business,
financial condition and results of operations in the future.
Cyberattacks
through security vulnerabilities could lead to disruption of business, reduced revenue, increased costs, liability claims, or harm to
our reputation or competitive position.
Security
vulnerabilities may arise from our hardware, software, employees, contractors or policies we have deployed, which may result in external
parties gaining access to our networks, data centers, cloud data centers, corporate computers, manufacturing systems, and/or access to
accounts we have at our suppliers, vendors, and customers. External parties may gain access to our data or our customers’ data,
or attack the networks causing denial of service or attempt to hold our data or systems in ransom. The vulnerability could be caused
by inadequate account security practices such as failure to timely remove employee access when terminated. To mitigate these security
issues, we have implemented measures throughout our organization, including firewalls, backups, encryption, employee information technology
policies and user account policies. However, there can be no assurance these measures will be sufficient to avoid cyberattacks. If any
of these types of security breaches were to occur and we were unable to protect sensitive data, our relationships with our business partners
and customers could be materially damaged, our reputation could be materially harmed, and we could be exposed to a risk of litigation
and possible significant liability.
Further,
if we fail to adequately maintain our information technology infrastructure, we may have outages and data loss. Excessive outages may
affect our ability to timely and efficiently deliver products to customers or develop new products. Such disruptions and data loss may
adversely impact our ability to fulfill orders and interrupt other processes. Delayed sales or lost customers resulting from these disruptions
could adversely affect our financial results, stock price and reputation.
The
State of California enacted the California Consumer Privacy Act of 2018, or CCPA, effective on January 1, 2020. Our and our business
partners’ or contractors’ failure to fully comply with the CCPA and other laws could lead to significant fines and require
onerous corrective action. In addition, data security breaches experienced by us or our business partners or contractors could result
in the loss of trade secrets or other intellectual property, public disclosure of sensitive commercial data, and the exposure of personally
identifiable information (including sensitive personal information) of our employees, customers, suppliers, contractors and others.
Unauthorized
use or disclosure of, or access to, any personal information maintained by us or on our behalf, whether through breach of our systems,
breach of the systems of our suppliers or vendors by an unauthorized party, or through employee or contractor error, theft or misuse,
or otherwise, could harm our business. If any such unauthorized use or disclosure of, or access to, such personal information was to
occur, our operations could be seriously disrupted, and we could be subject to demands, claims and litigation by private parties, and
investigations, related actions, and penalties by regulatory authorities. In addition, we could incur significant costs in notifying
affected persons and entities and otherwise complying with the multitude of foreign, federal, state and local laws and regulations relating
to the unauthorized access to, or use or disclosure of, personal information. Finally, any perceived or actual unauthorized access to,
or use or disclosure of, such information could harm our reputation, substantially impair our ability to attract and retain customers
and have an adverse impact on our business, financial condition and results of operations.
Risks
Related to Our Intellectual Property
If
we fail to adequately protect our intellectual property rights, we could lose important proprietary technology, which could materially
and adversely affect our business.
Our
success and ability to compete depends, in substantial part, upon our ability to develop and protect our proprietary technology and intellectual
property rights to distinguish our products, services and technology from those of our competitors. The unauthorized use of our intellectual
property rights and proprietary technology by others could materially harm our business.
Historically,
we have relied primarily on a combination of trademark, copyright and trade secret laws, along with non-competition and confidentiality
agreements, contractual provisions, licensing arrangements and proprietary software and manufacturing processes, to establish and protect
our intellectual property rights. Although we hold several unregistered copyrights in our business, we believe that the success of our
business depends more upon our proprietary technology, information, processes and know-how than on patents or trademark registrations.
In addition, much of our proprietary information and technology may not be patentable; if we decided to apply for patents and/or trademarks
in the future, we might not be successful in obtaining any such future patents or in registering any marks.
Despite
our efforts to protect our intellectual property rights, existing laws afford only limited protection, and our actions may be inadequate
to protect our rights or to prevent others from claiming violations of their proprietary rights. Unauthorized third parties may attempt
to copy, reverse engineer or otherwise obtain, use or exploit aspects of our products and services, develop similar technology independently,
or otherwise obtain and use information that we regard as proprietary. We cannot assure you that our competitors will not independently
develop technology similar or superior to our technology or design around our intellectual property. In addition, the laws of some foreign
countries may not protect our proprietary rights as fully or in the same manner as the laws of the U.S.
We
may need to resort to litigation to enforce our intellectual property rights, to protect our trade secrets, and to determine the validity
and scope of other companies’ proprietary rights in the future. However, litigation could result in significant costs and in the
diversion of management and financial resources. We cannot assure you that any such litigation will be successful or that we will prevail
over counterclaims against us. Our failure to protect any of our important intellectual property rights or any litigation that we resort
to in order to enforce those rights could materially and adversely affect our business.
If
we face claims of intellectual property infringement by third parties, we could encounter expensive litigation, be liable for significant
damages or incur restrictions on our ability to sell our products and services.
Although
we are not aware of any present infringement of our products, services or technology on the intellectual property rights of others, we
cannot be certain that our products, services and technologies do not or in the future will not infringe on the valid intellectual property
rights held by third parties. In addition, we cannot assure you that third parties will not claim that we have infringed their intellectual
property rights.
In
recent years, there has been a significant amount of litigation in the U.S. involving patents and other intellectual property rights.
In the future, we may be a party to litigation as a result of an alleged infringement of others’ intellectual property. Successful
infringement claims against us could result in substantial monetary liability, require us to enter into royalty or licensing arrangements,
or otherwise materially disrupt the conduct of our business. In addition, even if we prevail on these claims, this litigation could be
time-consuming and expensive to defend or settle and could result in the diversion of our time and attention and of operational resources,
which could materially and adversely affect our business. Any potential intellectual property litigation also could force us to do one
or more of the following:
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stop
selling, incorporating or using our products and services that use the infringed intellectual property; |
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obtain
from the owner of the infringed intellectual property right a license to sell or use the relevant technology, which license may not
be available on commercially reasonable terms, or at all; or |
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redesign
the products and services that use the technology. |
If
we are forced to take any of these actions, our business may be seriously harmed. Although we carry general liability insurance, our
insurance may not cover potential claims of this type or may not be adequate to indemnify us for all liability that may be imposed.
Risks
Related to Our Common Stock
Our
operating results can fluctuate significantly from period to period, which makes our operating results difficult to predict and can cause
our operating results in any particular period to be less than comparable periods and expectations from time to time.
Our
operating results have fluctuated significantly from quarter-to-quarter, period-to-period and year-to-year during our operating history
and are likely to continue to fluctuate in the future due to a variety of factors, many of which are outside of our control. Certain
factors that may affect our operating results include, without limitation, those set forth under “Management’s Discussion
and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” in this Annual Report on Form
10-K.
Because
we have little or no control over many of these factors, our operating results are difficult to predict. Any adverse change in any of
these factors could negatively affect our business and results of operations.
Our
revenues, net income and other operating results are heavily dependent upon the size and timing of customer orders and projects, and
the timing of the completion of those projects. The timing of our receipt of large individual orders, and of project completion, is difficult
for us to predict. Because our operating expenses are based on anticipated revenues over the mid- and long-term and because a high percentage
of our operating expenses are relatively fixed, a shortfall or delay in recognizing revenues can cause our operating results to vary
significantly from quarter-to-quarter and can result in significant operating losses or declines in profit margins in any particular
quarter. If our revenues fall below our expectations in any particular quarter, we may not be able, or it may not be prudent for us,
to reduce our expenses rapidly in response to the revenue shortfall, which can result in us suffering significant operating losses or
declines in profit margins in that quarter.
Due
to these factors and the other risks discussed in this Annual Report on Form 10-K, you should not rely on quarter-to-quarter, period-to-period
or year-to-year comparisons of our results of operations as an indication of our future performance. Quarterly, period and annual comparisons
of our operating results are not necessarily meaningful or indicative of future performance. As a result, it is likely that, from time
to time, our results of operations or our revenue backlog could fall below historical levels or the expectations of public market analysts
and investors, which could cause the trading price of our common stock to decline significantly.
Our
Chairman, President and Chief Executive Officer owns a significant percentage of our common stock and will exercise significant influence
over matters requiring stockholder approval, regardless of the wishes of other stockholders.
Our
Chairman, President, Chief Executive Officer and Secretary, Arthur D. Sams, beneficially owns approximately 44% of our outstanding shares
of common stock. Mr. Sams therefore has significant influence over management and significant control over matters requiring stockholder
approval, including the annual election of directors and significant corporate transactions, such as a merger or other sale of our company
or our assets, for the foreseeable future. This concentrated control may limit stockholders’ ability to influence corporate matters
and, as a result, we may take actions that our stockholders do not view as beneficial. As a result, the market price of our common stock
could be adversely affected.
The
price of our shares of common stock is volatile, and you could lose all or part of your investment.
The
trading price of our shares of common stock is volatile and could be subject to wide fluctuations in response to various factors, some
of which are beyond our control, including limited trading volume. In addition to the factors discussed in the “Risk Factors”
section and elsewhere in this Annual Report on Form 10-K, these factors include, without limitation:
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competition
from existing technologies and products or new technologies and products that may emerge; |
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the
loss of significant customers, including AT&T and Verizon Wireless; |
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actual
or anticipated variations in our quarterly operating results; |
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failure
to meet the estimates and projections of the investment community or that we may otherwise provide to the public; |
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our
cash position; |
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announcement
or expectation of additional financing efforts; |
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issuances
of debt or equity securities; |
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our
inability to successfully enter new markets or develop additional products; |
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actual
or anticipated fluctuations in our competitors’ operating results or changes in their respective growth rates; |
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sales
of our shares of common stock by us, or our stockholders in the future; |
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trading
volume of our shares of common stock on The Nasdaq Capital Market; |
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market
conditions in our industry; |
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overall
performance of the equity markets and general political and economic conditions; |
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introduction
of new products or services by us or our competitors; |
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additions
or departures of key management, scientific or other personnel; |
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publication
of research reports about us or our industry or positive or negative recommendations or withdrawal of research coverage by securities
or industry analysts; |
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changes
in the market valuation of similar companies; |
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disputes
or other developments related to intellectual property and other proprietary rights; |
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changes
in accounting practices; |
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significant
lawsuits, including stockholder litigation; and |
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events or factors, many of which are beyond our control. |
Furthermore,
the public equity markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market
prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance
of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as
recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of our shares of common
stock.
A
decline in the price of our common stock could affect our ability to raise further working capital, which could adversely impact our
ability to continue operations.
A
prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in
our ability to raise capital. We may attempt to acquire a significant portion of the funds we need in order to conduct our planned operations
through the sale of equity securities; thus, a decline in the price of our common stock could be detrimental to our liquidity and our
operations because the decline may adversely affect investors’ desire to invest in our securities. If we are unable to raise the
funds we require for all of our planned operations, we may be forced to reallocate funds from other planned uses and may suffer a significant
negative effect on our business plan and operations, including our ability to develop new products or services and continue our current
operations. As a result, our business may suffer, and we may be forced to reduce or discontinue operations. We also might not be able
to meet our financial obligations if we cannot raise enough funds through the sale of our common stock and we may be forced to reduce
or discontinue operations.
We
do not anticipate paying cash dividends, and accordingly, stockholders must rely on stock appreciation for any return on their investment.
We
have never declared or paid cash dividends on our capital stock. We intend to retain a significant portion of our future earnings, if
any, to finance the operations, development and growth of our business. Any future determination to declare dividends will be made at
the discretion of our board of directors, subject to applicable laws, and will depend on number of factors, including our financial condition,
results of operations, capital requirements, contractual restrictions, general business conditions and other factors that our board of
directors may deem relevant. As a result, only appreciation of the price of our common stock, which may never occur, will provide a return
to stockholders.
If
securities or industry analysts do not publish research or reports or publish inaccurate or unfavorable research or reports about our
business, our share price and trading volume could decline.
The
trading market for our shares of common stock depends, in part, on the research and reports that securities or industry analysts publish
about us or our business. We do not have any control over these analysts. If no securities or industry analysts undertake coverage of
our company, the trading price for our shares of common stock may be negatively impacted. If we obtain securities or industry analyst
coverage and if one or more of the analysts who covers us downgrades our shares of common stock, changes their opinion of our shares
or publishes inaccurate or unfavorable research about our business, our share price would likely decline. If one or more of these analysts
ceases coverage of us or fails to publish reports on us regularly, demand for our shares of common stock could decrease and we could
lose visibility in the financial markets, which could cause our share price and trading volume to decline.
We
are not subject to the provisions of Section 203 of the Delaware General Corporation Law, which could negatively affect your investment.
We
elected in our certificate of incorporation to not be subject to the provisions of Section 203 of the Delaware General Corporation Law,
or Section 203. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a “business combination”
with an “interested stockholder” for a period of three years after the date of the transaction in which the person became
an interested stockholder, unless the business combination is approved in a prescribed manner. A “business combination” includes
a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder. An “interested stockholder”
is a person who, together with affiliates and associates, owns (or, in certain cases, within three years prior, did own) 15% or more
of the corporation’s voting stock. Our decision not to be subject to Section 203 will allow, for example, Arthur D. Sams, our Chairman,
President, Chief Executive Officer and Secretary (who beneficially owns approximately 44% of our common stock) to transfer shares in
excess of 15% of our voting stock to a third-party free of the restrictions imposed by Section 203. This may make us more vulnerable
to takeovers that are completed without the approval of our board of directors and/or without giving us the ability to prohibit or delay
such takeovers as effectively.
Some
provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others,
even if an acquisition would be beneficial to our stockholders, and may prevent attempts by our stockholders to replace or remove our
current management.
Provisions
in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a third party
to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders. These provisions include:
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a
requirement that special meetings of stockholders be called only by the board of directors, the president or the chief executive
officer; |
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advance
notice requirements for stockholder proposals and nominations for election to our board of directors; and |
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the
authority of the board of directors to issue preferred stock on terms determined by the board of directors without stockholder approval
and which preferred stock may include rights superior to the rights of the holders of common stock. |
These
anti-takeover provisions and other provisions in our certificate of incorporation and bylaws could make it more difficult for stockholders
or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by the then-current board of
directors and could also delay or impede a merger, tender offer or proxy contest involving Polar Power, Inc. These provisions could also
discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing or cause us to
take other corporate actions you desire. Any delay or prevention of a change of control transaction or changes in our board of directors
could cause the market price of our common stock to decline.
Our
certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types
of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable
judicial forum for disputes with us or our directors, officers or other employees.
Our
certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery
of the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii)
any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders,
(iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our certificate of incorporation
or our bylaws, or (iv) any action asserting a claim against us governed by the internal affairs doctrine.
For
the avoidance of doubt, the exclusive forum provision described above does not apply to any claims arising under the Securities Act of
1933, as amended, or the Securities Act, or the Securities Exchange Act of 1934, as amended, or the Exchange Act. Section 27 of the Exchange
Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the
rules and regulations thereunder, and Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over
all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder.
The
choice of forum provision in our bylaws may limit our stockholders’ ability to bring a claim in a judicial forum that they find
favorable for disputes with us or our directors, officers, employees or agents, which may discourage such lawsuits against us and our
directors, officers, employees and agents even though an action, if successful, might benefit our stockholders. The applicable courts
may also reach different judgments or results than would other courts, including courts where a stockholder considering an action may
be located or would otherwise choose to bring the action, and such judgments or results may be more favorable to us than to our stockholders.
With respect to the provision making the Delaware Court of Chancery the sole and exclusive forum for certain types of actions, stockholders
who do bring a claim in the Delaware Court of Chancery could face additional litigation costs in pursuing any such claim, particularly
if they do not reside in or near Delaware. Finally, if a court were to find this provision of our bylaws inapplicable to, or unenforceable
in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving
such matters in other jurisdictions, which could have a material adverse effect on us.
If
we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial
results or prevent fraud. As a result, stockholders could lose confidence in our financial and other public reporting, which would harm
our business and the trading price of our common stock.
Effective
internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure
controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered
in their implementation could cause us to fail to meet our reporting obligations. In addition, any testing by us conducted in connection
with Section 404 of the Sarbanes-Oxley Act, or any subsequent testing by our independent registered public accounting firm, may reveal
deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective
or retroactive changes to our financial statements or identify other areas for further attention or improvement. Inferior internal controls
could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading
price of our common stock.
We
are required to disclose changes made in our internal controls and procedures on a quarterly basis and our management is required to
assess the effectiveness of these controls annually. However, for as long as we are a “non-accelerated filer” under SEC rules,
our independent registered public accounting firm will not be required to attest to the effectiveness of our internal controls over financial
reporting pursuant to Section 404. An independent assessment of the effectiveness of our internal controls could detect problems that
our management’s assessment might not. Undetected material weaknesses in our internal controls could lead to financial statement
restatements and require us to incur the expense of remediation.
We
incur significant costs as a result of operating as a public company and our management expects to devote substantial time to public
company compliance programs.
As
a public company, we incur significant legal, accounting and other expenses due to our compliance with regulations and disclosure obligations
applicable to us, including compliance with the Sarbanes-Oxley Act as well as rules implemented by the SEC and Nasdaq. The SEC and other
regulators have continued to adopt new rules and regulations and make additional changes to existing regulations that require our compliance.
In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was enacted. There are significant
corporate governance and executive compensation related provisions in the Dodd-Frank Act that have required the SEC to adopt additional
rules and regulations in these areas. Stockholder activism, the current political environment, and the current high level of government
intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance
costs and impact, in ways we cannot currently anticipate, the manner in which we operate our business. Our management and other personnel
devote a substantial amount of time to these compliance programs and monitoring of public company reporting obligations and, as a result
of the new corporate governance and executive compensation related rules, regulations, and guidelines prompted by the Dodd-Frank Act
and further regulations and disclosure obligations expected in the future, we will likely need to devote additional time and costs to
comply with such compliance programs and rules. These rules and regulations cause us to incur significant legal and financial compliance
costs and make some activities more time-consuming and costly.
To
comply with the requirements of being a public company, we may need to undertake various activities, including implementing new internal
controls and procedures and hiring new accounting or internal audit staff. The Sarbanes-Oxley Act requires that we maintain effective
disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure
controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file
with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that information
required to be disclosed in reports under the Exchange Act, is accumulated and communicated to our principal executive and financial
officers. Our current controls and any new controls that we develop may become inadequate and weaknesses in our internal control over
financial reporting may be discovered in the future.
Any
failure to develop or maintain effective controls could adversely affect the results of periodic management evaluations and annual independent
registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting which
we may be required to include in our periodic reports we will file with the SEC under Section 404 of the Sarbanes-Oxley Act, harm our
operating results, cause us to fail to meet our reporting obligations, or result in a restatement of our prior period financial statements.
In the event that we are not able to demonstrate compliance with the Sarbanes-Oxley Act, that our internal control over financial reporting
is perceived as inadequate or that we are unable to produce timely or accurate financial statements, investors may lose confidence in
our operating results and the price of our common stock could decline. In addition, if we are unable to continue to meet these requirements,
we may not be able to remain listed on the Nasdaq Capital Market.
We
are not currently required to comply with the SEC rules that implement Section 404 of the Sarbanes-Oxley Act, and are therefore not yet
required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. However,
we are required to comply with certain of these rules, which require management to certify financial and other information in our quarterly
and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting commencing
with our next annual report. This assessment will need to include the disclosure of any material weaknesses in our internal control over
financial reporting identified by our management or our independent registered public accounting firm. We are just beginning the costly
and challenging process of compiling the system and processing documentation needed to comply with such requirements. We may not be able
to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we
identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal
control over financial reporting is effective.
Raising
additional capital, including through future sales and issuances of our common stock, the exercise of warrants or the exercise of rights
to purchase common stock pursuant to our equity incentive plan could result in additional dilution of the percentage ownership of our
stockholders, could cause our share price to fall and could restrict our operations.
We
expect that significant additional capital will be needed in the future to continue our planned operations, including any potential acquisitions,
purchasing of capital equipment, hiring new personnel, and continuing activities as an operating public company. To the extent we seek
additional capital through a combination of public and private equity offerings and debt financings, our stockholders may experience
substantial dilution. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership
interest of our existing stockholders may be diluted, and the terms may include liquidation or other preferences that adversely affect
the rights of our stockholders. Debt and receivables financings may be coupled with an equity component, such as warrants to purchase
shares of our common stock, which could also result in dilution of our existing stockholders’ ownership. The incurrence of indebtedness
would result in increased fixed payment obligations and could also result in certain restrictive covenants, such as limitations on our
ability to incur additional debt and other operating restrictions that could adversely impact our ability to conduct our business. A
failure to obtain adequate funds may cause us to curtail certain operational activities, including sales and marketing, in order to reduce
costs and sustain the business, and would have a material adverse effect on our business and financial condition.
Under
our 2016 Omnibus Stock Incentive Plan, as amended, or 2016 Plan, we may grant equity awards covering up to 1,754,385 shares of our common
stock. As of December 31, 2021, we had granted options to purchase an aggregate of 140,000 shares of common stock under the 2016 Plan.
We have registered 1,754,385 shares of common stock available for issuance under our 2016 Plan. Sales of shares issued upon exercise
of options or granted under our 2016 Plan may result in material dilution to our existing stockholders, which could cause our share price
to fall.
Our
issuance of shares of preferred stock could adversely affect the market value of our common stock, dilute the voting power of common
stockholders and delay or prevent a change of control.
Our
board of directors has the authority to cause us to issue, without any further vote or action by the stockholders, up to 5,000,000 shares
of preferred stock in one or more series, to designate the number of shares constituting any series, and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, voting rights, rights and terms of redemption, redemption price or prices
and liquidation preferences of such series.
The
issuance of shares of preferred stock with dividend or conversion rights, liquidation preferences or other economic terms favorable to
the holders of preferred stock could adversely affect the market price for our common stock by making an investment in the common stock
less attractive. For example, investors in the common stock may not wish to purchase common stock at a price above the conversion price
of a series of convertible preferred stock because the holders of the preferred stock would effectively be entitled to purchase common
stock at the lower conversion price causing economic dilution to the holders of common stock.
Further,
the issuance of shares of preferred stock with voting rights may adversely affect the voting power of the holders of our other classes
of voting stock either by diluting the voting power of our other classes of voting stock if they vote together as a single class, or
by giving the holders of any such preferred stock the right to block an action on which they have a separate class vote even if the action
were approved by the holders of our other classes of voting stock. The issuance of shares of preferred stock may also have the effect
of delaying, deferring or preventing a change in control of our company without further action by the stockholders, even where stockholders
are offered a premium for their shares.
Item
1B. |
Unresolved
Staff Comments. |
None.
Our
principal offices are located in Gardena, California, where we lease a 40,000 square feet facility that includes our corporate staff
offices, our manufacturing facility, and our research and development center. We also lease a 29,000 square foot manufacturing facility
and a 20,000 square foot storage facility near our principal offices. We believe that our current facilities are sufficient to accommodate
our anticipated production volumes for the next twelve months. If required, additional office and manufacturing space is available within
less than three miles from our present location.
Item
3. |
Legal
Proceedings. |
From
time to time, we may be involved in general commercial disputes arising in the ordinary course of our business. We are not currently
involved in legal proceedings that could reasonably be expected to have material adverse effect on our business, prospects, financial
condition or results of our operation.
Item
4. |
Mine
Safety Disclosures. |
Not
applicable.
PART
II
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market
Information
Shares
of our common stock trade on The Nasdaq Capital Market under the symbol “POLA.”
As
of March 31, 2022, we had 12,788,203 shares of common stock outstanding held of record by approximately 10 stockholders. These holders
of record include depositories that hold shares of stock for brokerage firms which, in turn, hold shares of stock for numerous beneficial
owners.
Recent
Sales of Unregistered Securities
None.
Item
6. [RESERVED].
Item
7. Management Discussion and Analysis of Financial Condition and Results of Operations.
You
should read the following discussion and analysis of our financial condition and results of operations together with our financial statements
and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K. In addition to historical
information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our
actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include,
but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” and elsewhere in
this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results to be expected for any future period,
and results for any interim period are not necessarily indicative of the results to be expected for the full year.
Overview
We
design, manufacture, and sell DC power generators, renewable energy and cooling systems for applications primarily in the telecommunications
market and, to a lesser extent, in other markets, including military, electric vehicle charging, marine and industrial. We are continuously
diversifying our customer base. We are selling our products into non-telecommunication markets and applications at an increasing rate.
Within
the telecommunications market, our DC power systems provide reliable and low-cost DC power to service applications that do not have access
to the utility grid (i.e., prime power applications) or have critical power needs and cannot be without power in the event of utility
grid failure (i.e., back-up power applications).
During
the years ended December 31, 2021 and 2020, 89% and 96%, respectively, of our total net sales were within the telecommunications market.
In 2021, we had 67% of our total net sales derived from our largest customer, which is a Tier-1 telecommunications customer in the U.S.
In 2020, our three largest customers represented 52%, 15%, and 14% of our total net sales, respectively, two being telecommunications
customers in the U.S. and one being a telecommunications customer outside the U.S. There was no other revenue from customers in excess
of 10% of total net sales in either period. During those periods, the majority of our sales were of our DC base powers systems. During
2021 and 2020, sales to international customers accounted for 8% and 17% of total revenue, respectively.
Military
sales are growing and adding to our customer diversification. During the years ended December 31, 2021 and 2020, military customers accounted
for 6% and 1% of total net sales, respectively. The military’s increasing use of robotics, drones, and digitization in the field
is driving the demand for battery charging with DC generators. We believe increased sales to military customers provides us long-term
visibility on product demand while helping us understand future commercial uses of our technologies. Historically we have always worked
closely with military to jointly develop next generation of technologies and product configurations which later result in commercial
uses. Military sales are advantageous because of their long-term contracts, and they provide funding to cover the cost of product development.
Advance
Mobility applications require power to charge batteries and appliances within a vehicle. Our DC power systems are smaller in size, lighter
in weight, and operate with greater efficiency than AC power systems, making our product ideal for these applications. Our advance mobility
sales for 2021 and 2020, represented 7% and 2% of total net sales, of which 66% and 79% are included in net sales to military customers,
respectively. Our backlog as of December 31, 2021 includes $3.2 million in orders for DC power systems from a single customer in United
States for use to charge stored batteries within a commercial vehicle while providing energy to operate appliances installed in the vehicle.
We
have supplied our DC generators to many automotive manufactures in support of their remote field testing of electric vehicles. We are
presently in development of natural gas CHP home chargers as a solution to many homes that are not able to support fast charging using
the electric grid. We believe we can compete with the electric utility rates for home and office charging by using natural gas and making
use of surplus heat from the generator in certain bad grid and remote area applications. Our DC mobile EV charging systems can operate
with diesel or propane and are ideal for emergency road service to rapid charge EV’s stranded without a charge. Our DC mobile EV
charging systems offer convenience, faster charging, and lower cost than towing an EV on a flatbed to a charging station. We have shipped
DC mobile EV charging systems used to extend range for specialty vehicles used in applications requiring low emissions. Our DC mobile
EV charging systems provide direct charging to an electric vehicle’s battery.
We
also developed DC power systems for medium to large solar PV applications to provide energy service for irrigation, refrigerated storage
of meat and produce, and micro grid. By combining the energy of solar PV and propane or natural gas, our DC power systems can provide
constant energy 24 hours a day without using expensive energy storage. Propane or natural gas fueled DC power systems are connected in
parallel with the solar array (also a DC energy source) greatly simplifying the means of combining multiple energy sources. This process
is more efficient and lowers both the CAPEX and OPEX of the Solar systems by eliminating battery storage and / or connection to the grid.
Currently, the most popular technologies used in these applications are either grid power, diesel only, or a combination of grid and
solar with a large battery bank. Our proposed technology is more environmentally friendly and lowers the cost of food processing. Currently,
we have sold a limited number of our DC power systems that are undergoing field trials.
We
expect that opportunities in the bad-grid (i.e., areas where wireless towers are connected to an electrical grid that loses power more
than eight hours), and off-grid (i.e., areas where wireless towers are not connected to an electrical grid) applications, which include
telecommunications towers, commercial and residential backup power, electric vehicle charging, “mini-grid” and various other
power applications, will help to expand the market for our natural gas/LPG (propane) product lines domestically and internationally.
We plan to develop new configurations of DC power system, battery storage and solar products to optimize the match between our solutions
and various application needs.
Serving
these various markets, we offer the following three configurations of our DC power systems, with output power ranging from 5 kW to 50
kW:
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DC
base power systems. These systems integrate a DC generator and automated controls with remote monitoring, which are typically
contained within an environmentally regulated enclosure. |
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DC
hybrid power systems. These systems incorporate lithium-ion batteries (or other advanced battery chemistries) with our proprietary
battery management system into our standard DC power systems. |
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DC
solar hybrid power systems. These systems incorporate photovoltaic and other sources of renewable energy into our DC hybrid
power system. |
Our
DC power systems are available in diesel, natural gas, LPG / propane and renewable formats, with diesel, natural gas and propane gas
being the predominate formats.
Critical
Accounting Policies
We
believe that the following critical accounting policies, among others, affect our more significant judgment and estimates used in the
preparation of our financial statements:
Revenue
Recognition. We recognize revenue in accordance with Financial Accounting Standards Board Accounting Standards Codification 606,
Revenue from Contracts with Customers (“ASC 606”). ASC 606 requires entities to recognize revenue through the application
of a five-step model, which includes: identification of the contract; identification of the performance obligations; determination of
the transaction price; allocation of the transaction price to the performance obligations; and recognition of revenue as the entity satisfies
the performance obligations.
Substantially
all of our revenue is derived from product sales. Product revenue is recognized when performance obligations under the terms of a contract
are satisfied, which occurs for us upon shipment or delivery of products or services to our customers based on written sales terms, which
is also when control is transferred. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring
the products or services to a customer. We determine whether delivery has occurred based on when title transfers and the risks and rewards
of ownership have transferred to the customer, which usually occurs when we place the product with the customer’s carrier or deliver
the product to a customer’s location. We regularly review our customers’ financial positions to ensure that collectability
is reasonably assured.
Warranty
Costs. We provide limited warranties for parts and labor at no cost to our customers within a specified time period after the sale.
Our standard warranty on new products is two years from the date of delivery to the customer. We offer a limited extended warranty of
up to five years on our certified DC power systems based on application and usage. Our warranties are of an assurance-type and come standard
with all of our products to cover repair or replacement should product not perform as expected. Provisions for estimated expenses related
to product warranties are made at the time products are sold. These estimates are established using historical information about the
nature, frequency and average cost of warranty claim settlements as well as product manufacturing and recovery from suppliers. Management
actively studies trends of warranty claims and takes action to improve product quality and minimize warranty costs. We estimate the actual
historical warranty claims coupled with an analysis of unfulfilled claims to record a liability for specific warranty purposes.
Inventory.
Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out (“FIFO”)
basis. We record adjustments to our inventory based on an estimated forecast of the inventory demand, taking into consideration, among
others, inventory turnover, inventory quantities on hand, unfilled customer order quantities, forecasted demand, current prices, competitive
pricing, and trends and performance of similar products. If the estimated net realizable value is determined to be less than the recorded
cost of the inventory, the difference is recognized as a loss in the period in which it occurs. Once inventory has been written down,
it creates a new cost basis for inventory that may not subsequently written up.
Stock-Based
Compensation. We periodically issue stock-based compensation to officers, directors, and consultants for services rendered. Such
issuances vest and expire according to terms established at the issuance date. Stock-based payments to employees, directors, and for
acquiring goods and services from nonemployees, which include grants of employee stock options, are recognized in the financial statements
based on their grant date fair values in accordance with ASC 718, Compensation-Stock Compensation. Stock option grants to employees,
which are generally time vested, are measured at the grant date fair value and depending on the conditions associated with the vesting
of the award, compensation cost is recognized on a straight-line or graded basis over the vesting period. Recognition of compensation
expense for non-employees is in the same period and manner as if we had paid cash for the services. The fair value of stock options granted
is estimated using the Black-Scholes option-pricing model, which uses certain assumptions related to risk-free interest rates, expected
volatility, expected life, and future dividends. The assumptions used in the Black-Scholes option pricing model could materially affect
compensation expense recorded in future periods.
Effects
of Inflation
The
impact of inflation and changing prices during 2021 has not been significant on the financial condition or results of operations of our
company. Recent geopolitical factors and rapid changes in the global economy may cause significant
spikes in inflation which may have an impact in our financial condition during 2022 and beyond. Because some of our contracts are at
a fixed price, we face the risk that cost overruns or inflation may exceed, erode or eliminate our expected profit margin, or cause us
to record a loss on certain projects. We are taking actions to manage the potential impacts of these matters and we will continue to
assess the actual and expected impacts and the need for further action.
Impact
of Recent Accounting Pronouncements
See
“Note 1 – Organization and Summary of Significant Accounting Policies – Recent Accounting Pronouncements” of
the Notes to Financial Statements commencing on page F-7 of this Annual Report on Form 10-K for management’s discussion as to the
impact of recent accounting pronouncements.
Financial
Performance Summary – Year Ended December 31, 2021
Our
net sales for the year ended December 31, 2021, were $16,896, as compared to $9,031 for the year ended December 31, 2020. We reported
a net loss of $1,414 for 2021, as compared to net loss of $10,871 for 2020. We believe this increase in revenues is primarily due to
our Tier-1 telecommunications customers increasing their investments in back-up power generators primarily to support expansion of their
5G network infrastructure. We also believe a reduction of COVID-19 safety restrictions and increasing vaccinations have improved our
customers’ ability to deploy new systems.
During
2021, our international sales were $1,278, as compared to $1,522 during 2020.
Our
sales backlog as of December 31, 2021, was $11,807, with 72% of that amount being attributable to our largest U.S. telecommunications
customer, 27% represented purchase orders for advanced mobility applications, and 1% represented
purchase orders to customer in other markets. The recent increase in our backlog is as a result of U.S. Tier-1 wireless carriers increasing
their orders of our DC backup power systems.
In
September 2021, we received notice from Citibank that our request for forgiveness of the Paycheck Protection Program (PPP) loan was approved.
Our PPP loan was forgiven and we recognized a non-cash gain of $1.7 million within Other income (expense) on the statement of operations
for the year ended December 31, 2021.
We
plan to continue to expand our customer base in all market segments. We also anticipate that our sales will increase as the global economy
recovers from the impact of the COVID-19 pandemic. However, the full impact on our financial and operating performance of the COVID-19
pandemic along with recent geopolitical factors and increasing inflation concerns will depend significantly on the duration and severity
of these factors, the actions taken to mitigate their impact, disruption to our supply chain, and the pace with which our clients return
to more normalized purchasing behavior, among others factors beyond our knowledge or control. See “Risk Factors” commencing
on page 16 of this Annual Report on Form 10-K for additional considerations.
Results
of Operations
The
tables presented below, which compare our results of operations from one period to another, present the results for each period, the
change in those results from one period to another in both dollars and percentage change, and the results for each period as a percentage
of net revenues. The columns present the following:
|
● |
The
first two data columns in each table show the absolute results for each period presented. |
|
|
|
|
● |
The
columns entitled “Dollar Variance” and “Percentage Variance” shows the change in results, both in dollars
and percentages. These two columns show favorable changes as a positive and unfavorable changes as negative. For example, when our
net revenues increase from one period to the next, that change is shown as a positive number in both columns. Conversely, when expenses
increase from one period to the next, that change is shown as a negative in both columns. |
|
|
|
|
● |
The
last two columns in each table show the results for each period as a percentage of net revenues. |
Comparison
of the Years Ended December 31, 2021 and 2020 (in thousands)
| |
Year Ended December 31, | | |
Dollar Variance | | |
Percentage Variance | | |
Results as a Percentage of Net Revenues
for the Year Ended December 31, | |
| |
| | |
Favorable | | |
Favorable | | |
| |
| |
2021 | | |
2020 | | |
(Unfavorable) | | |
(Unfavorable) | | |
2021 | | |
2020 | |
Net sales | |
$ | 16,896 | | |
$ | 9,031 | | |
$ | 7,865 | | |
| 87 | % | |
| 100.0 | % | |
| 100.0 | % |
Cost of sales | |
| 13,451 | | |
| 14,654 | | |
| 1,203 | | |
| 8 | % | |
| 79.6 | % | |
| 162.2 | % |
Gross profit (loss) | |
| 3,445 | | |
| (5,623 | ) | |
| 9,068 | | |
| 161 | % | |
| 20.4 | % | |
| (62.2 | )% |
Sales and marketing expenses | |
| 1,488 | | |
| 1,556 | | |
| 68 | | |
| 4 | % | |
| 8.8 | % | |
| 17.2 | % |
Research and development expenses | |
| 1,986 | | |
| 1,723 | | |
| (263 | ) | |
| (15 | )% | |
| 11.8 | % | |
| 19.1 | % |
General and administrative expenses | |
| 3,069 | | |
| 4,062 | | |
| 993 | | |
| 24 | % | |
| 18.2 | % | |
| 45.0 | % |
Total operating expenses | |
| 6,543 | | |
| 7,341 | | |
| 798 | | |
| 11 | % | |
| 38.7 | % | |
| 81.3 | % |
Loss from operations | |
| (3,098 | ) | |
| (12,964 | ) | |
| 9,866 | | |
| 76 | % | |
| (18.3 | )% | |
| (143.5 | )% |
Interest and finance costs | |
| (60 | ) | |
| (60 | ) | |
| — | | |
| — | % | |
| (0.4 | )% | |
| (0.7 | )% |
Gain from PPP loan forgiveness | |
| 1,715 | | |
| — | | |
| 1,715 | | |
| — | | |
| 10.1 | % | |
| — | |
Other income (expense), net | |
| 29 | | |
| 14 | | |
| 15 | | |
| 107 | % | |
| 0.2 | % | |
| 0.2 | % |
Loss before income taxes | |
| (1,414 | ) | |
| (13,010 | ) | |
| 11,596 | | |
| 89 | % | |
| (8.4 | )% | |
| (144.1 | )% |
Income tax benefit | |
| — | | |
| (2,139 | ) | |
| (2,139 | ) | |
| (100 | )% | |
| — | | |
| (23.7 | )% |
Net loss | |
$ | (1,414 | ) | |
$ | (10,871 | ) | |
$ | 9,457 | | |
| 87 | % | |
| (8.4 | )% | |
| (120.4 | )% |
Net
Sales. Net sales increased by $7,865, or 87%, to $16,896 for the year ended December 31, 2021, as compared to $9,031 for the year
ended December 31, 2020. The increase was primarily due to an increase in sales of our DC power systems to U.S. Tier-1 telecommunications
customers. U.S. Tier-1 telecommunications customers accounted for 70% of our total net sales during 2021, as compared to 62% of total
net sales in 2020.
Our
revenue from telecommunications customers, U.S. and international, accounted for 89% of total net sales during 2021 and 96% of total
net sales during 2020. Our largest customer during 2021 is in the telecommunications industry and accounted for 67% of total net sales
for 2021, as compared to our three largest customers in 2020, also customers in the telecommunications industry, each accounting for
52%, 15%, and 14 of total net sales. There was no other revenue from customers in excess of 10% of total net sales in either period.
Net sales to international customers in 2021 and 2020, represented 8% and 17% of total net sales, respectively.
We
believe the increase in revenues during 2021 is primarily due to our Tier-1 telecommunications customers increasing their investments
in back-up power generators primarily to support expansion of their 5G network infrastructure. We also believe a reduction of COVID-19
safety restrictions and increasing vaccinations have improved our customers’ ability to deploy new systems.
Cost
of Sales. Cost of sales decreased by $1,203, or 8%, to $13,451 during 2021, compared to $14,654 during 2020. Cost of sales as a percentage
of net sales decreased from 162.2% in 2020 to 79.6% in 2021 as a result of improved labor efficiencies and increased absorption of manufacturing
overhead resulting from higher volume in net sales in 2021. We were able to capitalize on inherent manufacturing efficiencies resulting
from larger production volumes to meet delivery commitments. In 2020, an inventory reserve of $3,400 has been recorded in cost of
sales.
Our
cost of sales for 2021 includes a $1,300 credit to salaries and benefits expense related to the Employee Retention Credit (“ERC”),
a refundable tax credit recorded in accounts receivable. The ERC assisted business owners and their employees by providing an incentive
to keep workers on the payroll and eligible businesses received a tax credit for a percentage of each eligible employee’s wage.
Gross
Profit (Loss). We recognized a gross profit of $3,445 during 2021, as compared to a gross loss of $5,623 during 2020, which represents
an increase in gross profit of $9,068 or 161%. Gross profit as a percentage of net sales increased to 20.4% in 2021, as compared to (62.2)%
in 2020. The increase in gross profit as a percentage of net sales during 2021 was primarily due an 87% increase in net sales in 2021
while keeping cost of sales relatively flat to 2020 levels resulting from improved labor efficiencies and increased absorption of manufacturing
overhead. In addition, gross profit includes a $1,300 credit to salaries and benefits expense related to the ERC as explained
in cost of sales.
Sales
and Marketing Expenses. Sales and marketing expenses decreased $68 to $1,488 during 2021, as compared to $1,556 during 2020. The
decrease was attributable to a slight decrease in fringe benefits expense during 2021 as compared the same period in 2020. The reduction
in fringe benefits provided for an increase in marketing and tradeshow activities for our DC power systems as part of our ongoing strategy
to expand our customer base.
Research
and Development Expenses. During 2021, research and development expenses increased by $263 to $1,986, as compared to $1,723 during
2020. The increase in 2021 is attributed to an increase in engineering staff and increased investments in several research and development
projects, including customized designs for advanced mobility power applications and for our natural gas/LPG product lines of generators
and hybrid power systems which included our new 20 to 30 kW generator based on a larger Toyota engine.
General
and Administrative Expenses. Our general and administrative expenses decreased by $993 to $3,069 during 2021, as compared to $4,062
during 2020. The decrease was primarily due to a decrease in in legal and consulting fees in 2021 when compared to 2020. In 2020, we
incurred $248 in legal and brokerage fees related to a private placement equity raise and $77 in loan origination expenses related to
our credit facility with Pinnacle Bank.
Our
general and administrative expenses for 2021 includes a $700 credit to salaries and benefits expense related to the ERC, a refundable
tax credit recorded in accounts receivable. The ERC assisted business owners and their employees by providing an incentive to keep workers
on the payroll and eligible businesses received a tax credit for a percentage of each eligible employee’s wage.
Interest
and Finance Costs. Our interest expense was $60 in 2021, as compared to $60 in 2020. In 2021, our equipment financing expense decreased
by $14, bank fees related to our line of credit with Pinnacle Bank increased by $25, and bank fees from the Citibank Supplier Agreement
decreased by $11 in 2021 as a result of closing this account mid-year.
Gain
from PPP Loan Forgiveness. In September 2021, we recognized a non-cash gain of $1,715
within Other income (expense) on the consolidated statement of operations on the forgiveness of our PPP loan.
Other
Income (Expense), Net. During 2021, other income was $29, as compared to $14 during 2020, an increase of $15. The increase was primarily
attributable to refunds of general liability insurance paid during 2020.
Income
Tax Benefit. During 2021, we did not recognize any benefit from income taxes. In 2020, we recognized a benefit from income taxes
of $2,139 attributable to refundable federal and state income taxes.
Net
Loss. As a result of the factors identified above, we generated a net loss of $1,414 for 2021, as compared to net loss of $10,871
for 2020, a decrease loss of $9,457. The decrease in net loss is primarily attributed to an increase in net sales of our of DC power
systems to US telecommunications customers and lower cost of sales as a percentage of total net sales resulting from improved labor efficiencies
and increased absorption of manufacturing overhead in 2021.
Liquidity
and Capital Resources
Sources
of Liquidity
During
the year ended December 31, 2021, we funded our operations primarily from cash on hand. These funds were also used to increase our engineering
staff and inventory to support research and development projects and the launch of our new line of LPG / natural gas generators. As of
December 31, 2021, we had working capital of $21,760, as compared to working capital of $10,123 at December 31, 2020. This $11,637 increase
in working capital is primarily attributable to a $3,455 increase in cash and cash equivalents resulting from net cash of $9,380 used
in operating activities, net cash used in investing activities of $71 from the acquisition of new property and equipment, and net cash
from financing activities of $12,906 which includes net proceeds of $12,466 from closing an underwritten public offering of 750,000
shares of common stock in February 2021. In addition, we received net proceeds of $707 from the exercise of certain of our common stock
warrants.
On
December 31, 2021, and December 31, 2020, our net trade receivables totaled $4,243 and $1,190, respectively. On December 31, 2021, $3,131
(74%) and $624 (15%) represented the two largest open customer account balances, while $1,041 (87%) and $53 (5%) represented the two
largest open customer account balances on December 31, 2020.
At
December 31, 2021, we recognized $2,000 related to the ERC for salaries and benefits expenses incurred during 2021 resulting
in a refundable tax credit. The ERC assist business owners and their employees by providing an incentive to keep workers on the payroll
and eligible businesses received a tax credit for a percentage of each eligible employee’s wage.
Our
available capital resources on December 31, 2021, consisted primarily of $5,101 in cash and cash equivalents, as compared to $1,646 as
of December 31, 2020. We expect our future capital resources will consist primarily of cash on hand, cash generated by operations, if
any, drawdowns on our credit facility with Pinnacle Bank and future debt or equity financings, if any.
Credit
Facility
Effective
September 30, 2020, we entered into a Loan and Security Agreement, or Loan Agreement, with Pinnacle. The Loan Agreement provides for
a revolving credit facility under which Pinnacle may, in its sole discretion upon our request, make advances to us in an amount, subject
to certain limitations and adjustments, of up to (a) 85% of the aggregate net face amount of our accounts receivable and other contract
rights and receivables, plus (b) the lesser of (i) 35% of the lower of cost or wholesale market value of certain of our inventory or
(ii) $2,500. In no event will the aggregate amount of the outstanding advances under the revolving credit facility be greater than $4,000.
Interest
accrues on the daily balance at a rate of 1.25% above the prime rate, or the Standard Interest Rate, but in no event will the Standard
Interest Rate be less than 3.75% per annum. Interest on the portion of the daily balance consisting of advances against inventory accrues
interest at a rate of 2.25% above the prime rate per annum, or the Inventory Interest Rate, but in no event will the Inventory Interest
Rate be less than 4.75% per annum. The Loan Agreement also contains a financial covenant requiring us to attain an effective tangible
net worth, defined as our total assets, excluding all intangible assets, less our total liabilities plus loans to us from our officers,
stockholders or employees that have been subordinated to our obligations to Pinnacle, greater than $6,000 as determined by Pinnacle as
of the end of each fiscal quarter.
We
did not have an outstanding balance under the Loan Agreement at December 31, 2021, and 2020. As of December 31, 2021, we had availability
under the Loan Agreement of $2,943 and we believe that we are in compliance with the terms and conditions of the Loan Agreement.
Paycheck
Protection Program Loan
On
May 4, 2020, we entered into a loan with Citibank, N.A. in an aggregate principal amount of $1,715, or the PPP Loan, pursuant to the
Paycheck Protection Program, or the PPP, under the Coronavirus Aid, Relief and Economic Security Act, or the CARES Act.
The
PPP Loan is evidenced by a promissory note dated May 4, 2020. The PPP Loan matures two years from the disbursement date and bears interest
at a rate of 1% per annum. We filed our application for a full loan forgiveness to Citibank on July 30, 2021 and the application is under
the bank’s review. Interest accrues during the time between the disbursement of the PPP Loan and SBA remittance of the forgiveness
amount. We are responsible for paying the accrued interest on any amount of the loan that is not forgiven. Principal and interest are
payable monthly commencing on loan amounts not forgiven and may be prepaid by us at any time prior to maturity with no prepayment penalties.
We applied ASC 470, Debt, to account for the PPP Loan.
Under
the terms of the CARES Act, recipients of PPP loans can apply for and be granted forgiveness for all or a portion of loans granted under
the PPP. The Company filed its application for a full loan forgiveness to Citibank in July 2021. On September 28, 2021, the Company received
noticed from Citibank indicating that the SBA rendered final decision approving loan forgiveness in the amount of $1,715. As a result,
we recognized a non-cash gain of $1,715 within Other income (expense) on the statement
of operations.
Cash
Flow
The
following table sets forth the significant sources and uses of cash for the periods set forth below (in thousands):
| |
Year Ended December 31, | |
| |
2021 | | |
2020 | |
Net Cash Provided By (Used In): | |
| | | |
| | |
Operating Activities | |
$ | (9,380 | ) | |
$ | (6,548 | ) |
Investing Activities | |
$ | (71 | ) | |
$ | (19 | ) |
Financing Activities | |
$ | 12,906 | | |
$ | 5,373 | |
Net increase (decrease) in cash | |
$ | 3,455 | | |
$ | (1,194 | ) |
Operating
Activities
Net
cash used in operating activities for 2021 was $9,380, as compared to $6,458 for the same period in 2020. This increase in net cash
used in 2021 was primarily due to a net loss of $1,414, an increase in accounts receivable of $3,053, recognition of employee
retention credit receivable of $2,000, an increase in prepaid expenses of $3,648 primarily for Toyota engines, a gain on the
forgiveness of PPP loan payable of $1,715, offset with a decrease in income tax receivable of $1,570.
At
December 31, 2021, we recognized $2.0 million related to the ERC for salaries and benefits expenses incurred during 2021
resulting in a refundable tax credit. Of this amount, cost of sales was reduced by $1.3 million as a result of the ERC, and general &
administrative expenses was reduced by $0.7 million as a result of the ERC. The ERC assist business owners and their employees by providing
an incentive to keep workers on the payroll and eligible businesses received a tax credit for a percentage of each eligible employee’s
wage.
Investing
Activities
Net
cash used in investing activities for 2021 totaled $71, as compared to $19 for 2020, an increase of $52. The net cash used in investing
activities in 2020 was attributable to a slight increase in new manufacturing equipment.
Financing
Activities
Net
cash provided by financing activities totaled $12,906 for 2021, as compared to $5,373 provided by financing activities during 2020, an
increase of $7,533. This increase was primarily due to the issuance and sale of 750,000 shares of our common stock in a firm commitment
underwritten public offering on February 10, 2021. We received net proceeds of approximately $12,466 from the sale of the shares
after deducting underwriting discounts and commissions and other offering expenses payable by us. In addition, we received net proceeds
of $707 from the exercise of common stock warrants issued in our July 2020 private placement.
Backlog
As
of December 31, 2021, we had a backlog of $11,800. The amount of backlog represents revenue that we anticipate recognizing in
the future, as evidenced by purchase orders and other purchase commitments received from customers, but on which work has not yet been
initiated or with respect to which work is currently in progress. Backlog at December 31, 2021, was comprised of the following elements:
72% in purchases of DC power systems by telecommunications customers in the U.S., 27% in purchases by our advanced mobility customer
for commercial vehicles, and 1% in purchases customers in other markets. Due to overall shortage of commodities worldwide caused by COVID,
our largest customers have placed orders with delivery dates up to nine months in the future. We believe this provides us better control
on operational efficiencies and inventory management. We believe the majority of our backlog will be shipped within the next twelve months.
However, there can be no assurance that we will be successful in fulfilling such orders and commitments in a timely manner or that we
will ultimately recognize as revenue the amounts reflected in our backlog.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk.
Not
applicable.
Item
8. Financial Statements and Supplementary Data.
Reference
is made to the financial statements, which begin at page F-1 of this Annual Report on Form 10-K.
Item
9. Changes in and Disagreements with Accountants on Accounting and Finance Disclosure.
None.
Item
9A. Controls and Procedures.
Evaluation
of Disclosure Controls and Procedures
Our
management, with the participation of our principal executive officer and our principal financial officer, evaluated, as of the end of
the period covered by this Annual Report on Form 10-K, the effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our principal executive officer and principal financial officer
have concluded that as of December 31, 2021, our disclosure controls and procedures were effective at the reasonable assurance level.
Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance
of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible
controls and procedures.
Management’s
Report on Internal Control Over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f)
under the Exchange Act. Internal control over financial reporting is a process designed under the supervision and with the participation
of our management, including our Chief Executive Officer and Chief Financial Officer, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable
assurance transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, (b) our receipts and expenditures are being made only in accordance with authorizations of our management and
directors; and (c) regarding the prevention or timely detection of the unauthorized acquisition, use or disposition of assets that could
have a material effect on our financial statements.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
As
of December 31, 2021, our management conducted an evaluation of the effectiveness of our internal control over financial reporting using
the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework
(2013). Based on this evaluation, our management concluded that, as of December 31, 2021, our internal control over financial reporting
was effective.
This
Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control
over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant
to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report on
Form 10-K.
Changes
in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d)
and 15d-15(d) of the Exchange Act that occurred during the quarter ended December 31, 2021 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
Item
9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions
that Prevent Inspections.
Not applicable.
PART
III
Item
10. Directors, Executive Officers and Corporate Governance.
Executive
Officers and Directors
The
following table sets forth the names, ages and positions of our executive officer and directors as of the date of this Annual Report
on Form 10-K.
Name |
|
Age |
|
Positions
Held |
|
|
|
|
|
Executive
Officers |
|
|
|
|
Arthur
D. Sams |
|
70 |
|
Chairman
of the Board, President, Chief Executive Officer and Secretary |
Luis
Zavala |
|
52 |
|
Chief
Financial Officer |
|
|
|
|
|
Non-Employee
Directors |
|
|
|
|
Keith
Albrecht |
|
71 |
|
Director |
Peter
Gross |
|
71 |
|
Director |
Katherine
Koster |
|
59 |
|
Director |
Executive
Officers and Employee Director
Arthur
D. Sams has served as our President, Chief Executive Officer and Chairman of our board of directors since August 1991 and as our
Secretary since October 2016. Under his leadership, we have grown to be a leading brand name in the design and manufacturing of DC power
systems for the telecommunications, military, automotive, marine and industrial markets. He specializes in the design of thermodynamics
and power generation systems. During his early career, he gained vast industry experience while working as a machinist, engineer, project
manager, chief technical officer and consultant for various Fortune 500 companies and the U.S. Department of Defense and the U.S. Department
of Energy. Mr. Sams studied at California State Polytechnic University Pomona and the University California at Irvine with a dual major
in biology and engineering.
In
nominating Mr. Sams, our Board considered his Board and executive level leadership, broad international exposure, and extensive global
experience in engineering and manufacturing as key attributes in his selection. The Board believes that through his experience in product
development and international operations over the past three decades he can provide our company with particular insight into global opportunities
and new markets for our current and planned future product lines.
Luis
Zavala has served as our Chief Financial Officer since April 2018 and previously served as our Vice President Finance from August
2009 to April 2018 and as our Acting Chief Financial Officer from March 2016 to March 2018. Prior to that, Mr. Zavala served as the President
of Sky Limited Enterprises, a general contractor, from June 2006 to August 2009. Prior thereto, Mr. Zavala worked as Director of Finance
for Legacy Long Distance International, a telecommunications operator service provider company, from March 2001 to May 2006. Mr. Zavala
also has over 20 years of experience managing accounting and finance departments in various industries, including banking and telecommunications.
Mr. Zavala has a Bachelor of Arts degree in Business Administration from the California State University, Northridge and an MBA from
the Keller Graduate School of Management, Long Beach.
Rajesh
Masina served as our Chief Operating Officer from April 2018 until January 2022 and previously served as our Vice President Operations
from August 2009 to April 2018. On January 10, 2022, Rajesh Masina notified us of his resignation
from the position of our Chief Operating Officer, effective January 21, 2022. Mr. Masina’s resignation from the Company was not
a result of any disagreement with the Company on any matter related to its operations, policies or practices.
Non-Employee
Directors
Keith
Albrecht has served as a member of our board of directors since May 2016 and serves as a member of each of our Audit Committee, Compensation
Committee and Nominating and Corporate Governance Committee. Mr. Albrecht has extensive experience as a commercial real estate appraiser
for commercial banks and local governments. Mr. Albrecht was an appraiser for commercial buildings for the County of Orange, California,
from 1996 to 2007, where he was responsible for the assessment of property values of shopping malls, office buildings, hotels and apartment
buildings. Prior thereto, Mr. Albrecht was an appraiser for Security Pacific and Bank of America, from 1985 to 1996. Mr. Albrecht is
currently retired and invests in startups and small cap companies. In nominating Mr. Albrecht, our board of directors considered his
commercial real estate appraisal experience, which our board of directors believes gives him particular insight into analysis of income
statements and balance sheets, debt analysis and audits of large commercial institutions.
In
nominating Mr. Albrecht, our Board considered his Board and executive level leadership, high level financial expertise, and extensive
expertise in risk management as key attributes in his selection. The Board believes Mr. Albrecht can provide our Company particular insight
into analysis of financial statements, debt analysis, and risk oversight.
Peter
Gross has served as a member of our Board since December 2018 and serves as a member of each of our Audit Committee, Compensation
Committee and Nominating and Corporate Governance Committee. Mr. Gross is a technology and energy internationally recognized expert whose
career spans over three decades. He has been the managing partner of PMG Associates, a consulting and advisory firm since August 2019.
In addition, he sits on several boards of directors and boards of advisors for public, private and not-for-profit companies. Prior to
PMG Associates, Mr. Gross served as the Vice President of Mission Critical Systems at Bloom Energy, a fuel cell power systems company
located in Sunnyvale, California. Mr. Gross holds a master’s degree in Electrical Engineering from Polytechnic Institute of Bucharest
and an MBA from California State University at Dominguez Hills. Mr. Gross is also a member of the Advisory Board of UCLA’s Institute
of Environment and Sustainability and a member of Southern Methodist University’s Data Center System Engineering Board of Advisors.
In nominating Mr. Gross, our Board considered his significant engineering experience in the power systems industry, especially for data
center and telecommunications applications. Our Board believes that Mr. Gross will provide critical leadership as we expand our DC power
systems within the data and military markets.
In
nominating Mr. Gross, our Board considered his Board and executive level leadership, his extensive energy industry expertise, and experience
with global publicly traded companies as key attributes in his selection. Our Board believes that Mr. Gross will provide critical leadership
as we expand our DC power systems within the data and military markets.
Katherine
Koster has served as a member of our Board since December 2019 and serves as a member of each of our Audit Committee and Nominating
and Corporate Governance Committee. Ms. Koster has been in the field of public finance for over 25 years and has been the managing director
for the Southwest Region at D. A. Davidson & Co. where she assists municipalities in accessing the capital markets to fund critical
infrastructure since February 2021. Ms. Koster was the managing director of public finance at Piper Sandler Companies from June 2008
to February 2021. Ms. Koster holds a Bachelor of Arts Degree in Theater/Business Administration from Pepperdine University and has completed
the “Women in Governance: Preparing for Board Membership” corporate governance program at the UCLA Anderson School of Management.
Ms. Koster holds Series 7 and Series 24 licenses issued by the Financial Industry Regulatory Authority, Series 50 and Series 53 licenses
issued by the Municipal Securities Rulemaking Board and a Series 63 certificate issued by the North American Securities Administrators
Association.
In
nominating Ms. Koster, our Board considered her Board and executive level leadership, extensive experience with capital markets, and
high level financial expertise as key attributes in her selection. Our Board believes that Ms. Koster’s investment banking experience
and her high level of financial literacy and expertise and experience in capital raising activities will provide strategic insight to
financial decisions for future Company initiatives.
Election
of Officers; Family Relationships
Our
executive officers are appointed by, and serve at the discretion of, our board of directors. There are no family relationships among
any of our directors or executive officers.
Board
Composition
Our
board of directors currently consists of four members: Arthur D. Sams, Keith Albrecht, Peter Gross, and Katherine Koster. Our directors
hold office until their successors have been elected and qualified or until the earlier of their resignation or removal.
Our
certificate of incorporation and bylaws provide that the authorized number of directors may be changed only by resolution of the entire
Board. Our certificate of incorporation and bylaws also provide that any vacancy on our Board, including a vacancy resulting from an
expansion of our Board, may be filled only by vote of a majority of our directors then in office, although less than a quorum or by a
sole remaining director.
We
recognize the value of diversity on the Board. Although our priority in selection of board members is identification of members who will
further the interests of our stockholders through his or her established record of professional accomplishment, the ability to contribute
positively to the collaborative culture among board members, knowledge of our business and understanding of the competitive landscape,
we are currently focusing on female candidates and candidates from underrepresented communities in order to meet the requirements of
California SB 826 and AB 979. SB 826 requires public companies headquartered in California to maintain minimum female representation
on their boards of directors as follows: by the end of 2019, at least one woman on its board, by the end of 2020, public company boards
with five members were required to have at least two female directors, and public company boards with six or more members were required
to have at least three female directors. AB 979 requires that by the end of 2021 public companies headquartered in California to have
at least one director on their boards who is from an underrepresented community, defined as “an individual who self-identifies
as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self-identifies
as gay, lesbian, bisexual, or transgender.” By the end of 2022, public company boards with five to eight members will be required
to have at least two directors from underrepresented communities, and public company boards with eight or more members will be required
to have at least three directors from underrepresented communities.
Independence
of our Board of Directors and Board Committees
Rule
5605 of the Nasdaq Listing Rules requires a majority of a listed company’s board of directors to be comprised of “independent
directors,” as defined in such rule, subject to specified exceptions. In addition, the Nasdaq Listing Rules require that, subject
to specified exceptions: each member of a listed company’s audit, compensation and nominating committees be independent as defined
under the Nasdaq Listing Rules; audit committee members also satisfy independence criteria set forth in Rule 10A-3 under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”); and compensation committee members also satisfy an additional independence
test for compensation committee members under the Nasdaq Listing Rules.
Our
Board has evaluated the independence of its members based upon the rules of the Nasdaq Stock Market and the Securities and Exchange Commission.
Applying these standards, our Board determined that none of the directors, other than Mr. Sams, have a relationship that would interfere
with the exercise of independent judgment in carrying out the responsibilities of a director and that each of those directors is “independent”
as that term is defined under Rule 5605(a)(2) of the Nasdaq Listing Rules. Mr. Sams is not considered independent because he is an officer
of Polar Power, Inc. As such, a majority of our Board is comprised of “independent directors” as defined under the Nasdaq
Listing Rules.
Emerging
Growth Company Exemption
We
are no longer an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act. As December 31, 2021 represented
the last day of the fifth fiscal year following our IPO, we no longer qualify for the status of emerging growth company commencing December
31, 2021. Accordingly, the proxy statement we file for the 2022 annual meeting of stockholders will provide our stockholders with a nonbinding
advisory vote on executive compensation, generally known as “say-on-pay” votes, and the desired frequency of say-on-pay votes.
Role
of Board in Risk Oversight Process
One
of the key functions of our Board is informed oversight of our risk management process. Our Board does not have a standing risk management
committee, but rather administers this oversight function directly through the Board as a whole, as well as through its standing committees
that address risks inherent in their respective areas of oversight. In particular, our Board is responsible for monitoring and assessing
strategic risk exposure. Our Audit Committee is responsible for reviewing and discussing our major financial risk exposures and the steps
our management has taken to monitor and control these exposures, including guidelines and policies with respect to risk assessment and
risk management. Our Audit Committee also monitors compliance with legal and regulatory requirements and reviews related party transactions,
in addition to oversight of the performance of our external audit function. Our Board monitors the effectiveness of our corporate governance
guidelines. Our Compensation Committee assesses and monitors whether any of our compensation policies and programs has the potential
to encourage excessive risk-taking. The Board believes its leadership structure is consistent with and supports the administration of
its risk oversight function.
Board
Committees and Meetings
Our
board of directors has established standing committees in connection with the discharge of its responsibilities. These committees include
an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee. The composition and responsibilities
of each committee are described below. Members serve on committees until their resignation or until otherwise determined by our board
of directors. Each of these committees has adopted a written charter that satisfies the applicable standards of the SEC and the Nasdaq
Listing Rules, which we have posted on the investor relations section of our website.
Audit
Committee
The
members of our Audit Committee are Messrs. Albrecht and Gross and Ms. Koster. Mr. Albrecht is the chair of the Audit Committee. Each
member of the Audit Committee satisfies the heightened audit committee independence requirements under the Nasdaq Listing Rules and Rule
10A-3 of the Exchange Act. In addition, our board of directors has determined that Mr. Albrecht qualifies as an audit committee financial
expert, as that term is defined under SEC rules, and possesses the requisite financial sophistication, as defined under the Nasdaq Listing
Rules. Our Audit Committee assists our board of directors in its oversight of our accounting and financial reporting process and the
audits of our financial statements. Under its charter, our Audit Committee is responsible for, among other things:
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overseeing
accounting and financial reporting process; |
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selecting,
retaining and replacing independent auditors and evaluating their qualifications, independence and performance; |
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reviewing
and approving scope of the annual audit and audit fees; |
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discussing
with management and independent auditors the results of annual audit and review of quarterly financial statements; |
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reviewing
adequacy and effectiveness of internal control policies and procedures; |
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approving
retention of independent auditors to perform any proposed permissible non-audit services; |
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overseeing
internal audit functions and annually reviewing audit committee charter and committee performance; |
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preparing
the audit committee report that the SEC requires in our annual proxy statement; and |
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reviewing
and evaluating the performance of the Audit Committee, including compliance with its charter. |
Compensation
Committee
The
members of our Compensation Committee are Messrs. Gross and Albrecht. Mr. Gross is the chair of the Compensation Committee. Each member
of our Compensation Committee is independent as defined under the Nasdaq Listing Rules and satisfies Nasdaq’s additional independence
standards for compensation committee members. Messrs. Gross and Albrecht are non-employee directors within the meaning of Rule 16b-3
under the Exchange Act and outside directors as defined by Section 162(m) of the Internal Revenue Code. Our Compensation Committee assists
our Board in the discharge of its responsibilities relating to the compensation of our executive officers.
Under
its charter, our Compensation Committee is responsible for, among other things:
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developing
and maintaining an executive compensation policy and monitor the results of that policy; |
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recommending
to our board of directors for approval compensation and benefit plans; |
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reviewing
and approving annually corporate and personal goals and objectives to serve as the basis for the CEO’s compensation, evaluating
the CEO’s performance in light of those goals and objectives and determining the CEO’s compensation based on that evaluation; |
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determining
and approving the annual compensation for other executive officers; |
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retaining
or obtaining the advice of a compensation consultant, outside legal counsel or other advisor; |
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approving
any grants of stock options, restricted stock, performance shares, stock appreciation rights, and other equity-based incentives to
the extent provided under our equity compensation plans; |
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reviewing
and making recommendations to our board of directors regarding the compensation of non-employee directors; and |
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reviewing
and evaluating the performance of the Compensation Committee, including compliance with its charter. |
Nominating
and Corporate Governance Committee
The
members of our Nominating and Corporate Governance Committee are Messrs. Gross and Albrecht and Ms. Koster. Mr. Gross is the chair of
the Nominating and Corporate Governance Committee. Each member of our Nominating and Corporate Governance Committee is independent as
defined under the Nasdaq Listing Rules. Under its charter, our Nominating and Corporate Governance Committee is responsible for, among
other things:
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considering
and reviewing periodically the desired composition of our board of directors; |
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establishing
any qualifications and standards for individual directors; |
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identifying,
evaluating and nominating candidates for election to our board of directors; |
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ensuring
that the members of our board of directors satisfy SEC and Nasdaq independence and other requirements relating to membership on our
board of directors and committees; |
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making
recommendations to our board of directors regarding the size of the board of directors, the tenure and classifications of directors,
and the composition of the committees of the board of directors; |
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considering
other corporate governance and related matters as requested by our board of directors; and |
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reviewing
and evaluating the performance of the Nominating and Corporate Governance Committee, including compliance with its charter. |
Compensation
Committee Interlocks and Insider Participation
Since
July 2016, all officer compensation and bonuses for executive officers has been determined by our Compensation Committee which is comprised
of three independent directors.
None
of our executive officers serves, or in the past has served, as a member of our Board or Compensation Committee, or other committee serving
an equivalent function, of any entity that has one or more executive officers serving as members of our Board or our Compensation Committee.
None of the members of our Compensation Committee is or has been an officer or employee of Polar Power, Inc.
Code
of Business Conduct and Ethics
We
have adopted a written code of business conduct and ethics that applies to our directors, officers and employees, including our principal
executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.
A copy of the code is available on the investor relations section of our website, which is located at https://polarpower.com/. If we
make any substantive amendments to, or grant any waivers from, the code of business conduct and ethics for any officer or director, we
will disclose the nature of such amendment or waiver on our website or in a current report on Form 8-K.
Item
11. Executive Compensation.
For
2021, our Compensation Committee established an executive compensation plan for our President and Chief Executive Officer, Chief Financial
Officer and Chief Operating Officer, whom we refer to collectively as our “executive officers,” with the following objectives:
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attract,
retain, motivate and reward our executive officers who are responsible for our success; |
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align
and strengthen the mutual interests of our executive officers, our company and our stockholders; |
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deliver
compensation that reflects our financial and operational performance, while at the same time providing the opportunity for our executive
officers to earn above-targeted total compensation for exceptional individual and company performance; and |
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provide
total compensation to each executive officer that is internally equitable, competitive and influenced by company and individual performance. |
During
2021, compensation of our executive officers was comprised of base salary, non-equity incentives in the form of cash bonuses, and long-term
equity incentives. The cash bonus amounts paid to our executive officers during 2021, as set forth below in “– Summary Compensation
Table,” were approved by our Compensation Committee and were based on a variety of factors regarding our performance during 2021.
Compensation
Philosophy
Our
compensation philosophy and objectives are as follows:
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to
align the interests of our executive officers with those of our stockholders and incent our executive officers to attain our short-
and long-term financial and business goals; |
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to
ensure that our executive compensation structure and total compensation is fair, reasonable and competitive in the marketplace so
that we can attract and retain highly qualified personnel in key positions; and |
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to
provide an executive compensation structure and total compensation that are internally equitable based upon each executive officer’s
role and responsibilities. |
Our
Compensation Committee seeks to make executive compensation decisions that embody this philosophy and that are directed towards attaining
these objectives.
In
implementing our compensation philosophy and objectives, our Compensation Committee reviews and analyzes each executive position, including
the importance and scope of the role and how the position compares to other Polar Power executive officers. With respect to setting base
salaries, our Compensation Committee also compares these positions to similar positions at a number of publicly traded companies listed
on the New York Stock Exchange and Nasdaq that are engaged in the power manufacturing and design industry.
We
believe that structuring our executive officer compensation program to align the interests of our executive officers with our interests
and those of our stockholders, and properly incenting our executive officers to attain our short- and long-term business goals, best
serves the interests of our stockholders and creates stockholder value. We believe this occurs through motivating our executive officers
to attain our short- and long-term business goals and retaining these executive officers by providing compensation opportunities that
are competitive in the marketplace.
Compensation
Governance Practices
Listed
below are some key examples of our compensation governance practices that are intended to align the interests of our executive officers
with our stockholders, incent the attainment of short- and long-term business objectives and retain highly qualified executive officers:
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Pay
for performance. A substantial portion of our compensation is tied to meeting specified company and individual objectives. We
structure total compensation with significant annual cash incentives and a long-term equity component, thereby making a substantial
portion of each executive officer’s targeted total compensation dependent upon company and individual performance as well as
the performance of our stock price. |
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Retention
through long-term equity awards. We employ long-term equity awards through grants of options that vest in the future. These equity
awards are designed to aid in our retention of key personnel in important positions and align the interests of our executive officers
with those of our stockholders. |
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Long
vesting periods. Our equity awards to our executive officers generally vest in annual installments over a three-year period. |
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Linkage
of annual cash incentive compensation plan to our performance. Our annual cash incentive compensation plan links a majority of
targeted and potential payouts to our financial performance. |
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Prohibition
on hedging and pledging common stock Our executive officers, together with all our employees, are prohibited from engaging in
hedging, pledging or similar transactions with respect to our common stock. |
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No
perquisites. Our executive officers are not provided with any perquisites or special benefits other than benefits such as healthcare,
vacation and sick days available to other full-time employees of Polar Power. |
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Change
in control. All executive officers’ unvested equity grants accelerate upon any change in control of Polar Power. |
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No
option re-pricing. Our 2016 Plan does not permit options or stock appreciation rights to be repriced to a lower exercise price
without the approval of our stockholders, except in connection with certain changes to our capital structure. |
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Clawback
policy If we are required as the result of misconduct to restate our financial results due to our material noncompliance with
any financial reporting requirements under the federal securities laws, our Chief Executive Officer and Chief Financial Officer may
be legally required to reimburse us for any bonus or incentive-based or equity-based compensation they receive. |
Role
of our Compensation Committee
Our
Compensation Committee, with input from our management and one or more independent consultants, establishes, updates and administers
our executive compensation program. Our Compensation Committee establishes our compensation philosophy and objectives; oversees the design
and administration of our executive compensation program; establishes the elements and mix of total compensation; sets the parameters
and specific target metrics of our performance-based incentive compensation plan; and determines the target compensation of our executive
officers. Our Compensation Committee has the authority to retain independent counsel, advisors and other experts to assist it in the
compensation-setting process and receives adequate funding to engage those service providers.
Role
of Management
Our
Chief Executive Officer and other executive officers attend Compensation Committee meetings as requested by the Compensation Committee.
These individuals are not present during executive sessions of Compensation Committee meetings except at the invitation of the Compensation
Committee.
Comparable
Company Analysis
Our
Compensation Committee sets base salary compensation of our executive officers using compensation market data as a reference to assist
it in understanding the competitive pay positioning of total compensation and each element of compensation. For 2020, the target for
base salary compensation for our executive officers remained the same as in 2019 and was based on data collected from our peer group
of companies. The peer group of companies selected and used for compensation comparisons is comprised of Nasdaq or NYSE traded power
manufacturing and design companies with revenues below $100 million. The overall composition of the peer group reflects companies of
similar complexity and size to us. As such, we believe that these peer group of companies are reflective of our market for executive
talent. Set forth below is the list of the peer group of companies for 2020:
Company
Name |
|
Description |
Espey
Manufacturing – ESP (NYSE) |
|
Power
electronics design and manufacturing company, products include power supplies, power converters, power distribution equipment. |
Wireless
Telecommunications– WTT (NYSE) |
|
Designs
and manufactures radio frequency and microwave based products for wireless and advance telecommunications industry |
Fuel
Cell Energy – FCEL(Nasdaq) |
|
Designs
and manufactures power generation systems for mobile and stationary power applications. |
The
Compensation Committee reviews the appropriateness of the comparison group used for assessing the compensation of our executive officers
on an annual basis. The data used from our peer group was collected directly from filings made by the peer group of companies with the
SEC.
Elements
of Total Compensation
During
2021, our executive officers’ compensation program included three major elements:
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Base
Salary |
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Non-Equity
Incentives |
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Long-term
Equity Incentives. |
Base
Salary
Our
Compensation Committee reviews the base salary levels for our executive officers annually and makes such adjustments as it deems appropriate
after taking into account the officer’s level and scope of responsibility and experience, company and individual performance, competitive
market data, and internal pay equity considerations.
Outlined
below is the base salary data of the peer group of companies outlined above. For 2021, the Compensation Committee kept the same base
salary structure as in 2020. In determining base salary, the Compensation Committee tabulated the average base salary for the executive
officers in the peer group of companies.
The
Compensation Committee determined on April 2, 2018 that, commencing April 1, 2018, the base salary of our President and Chief Executive
officer be set at approximately 70% of the average base salaries of the peer group of companies and that the base salaries for our Chief
Financial Officer and the Chief Operating Officer be set at approximately 60% of the average base salaries of the peer group of companies,
all of which is reflected in the table set forth below:
Executive | |
Min | | |
Max | | |
Average | | |
2018 | | |
2018 to Avg. | |
CEO (in $,000) | |
| 386 | | |
| 600 | | |
| 400 | | |
| 275 | | |
| 69 | % |
CFO/COO (in$,000) | |
| 220 | | |
| 391 | | |
| 300 | | |
| 175 | | |
| 58 | % |
Non-Equity
Incentives
Annual
non-equity incentive compensation for our executive officers consists of cash awards. Participants are eligible for annual cash incentive
compensation based upon our attainment of pre-established financial and business performance goals. The Compensation Committee believes
that these goals will best incent our executive officers to attain our short- and long-term financial and other business goals.
For
2021, the Compensation Committee determined that each executive officer could earn up to 100% of such executive officer’s base
salary based upon the attainment by us of the five financial and other business performance goals set forth below. The minimum and maximum
payout for each performance goal (measured as a percentage of base salary) are set forth immediately below. The specific pre-established
performance goals are set forth in the table following the table set forth immediately below. Participants are eligible to receive awards
at each level of participation (i.e., Minimum Level, Target Level and Maximum Level) to the extent Polar Power achieves such level. In
the event our performance falls short of a specific performance level, participants will not be eligible to receive an award at that
level. In addition, executive officers had to achieve a minimum of two performance elements in order to qualify for an award in the level.
For example, if at conclusion of 2021 the total revenues were $36 million and none of the additional elements qualified, then the executive
officer would not be eligible for a performance award of 25% of base salary as outlined in the table below.
Company Performance Element | |
Minimum Level | | |
Target Level | | |
Maximum Level | |
Revenue | |
| 20 | % | |
| 25 | % | |
| 30 | % |
Gross Margin | |
| 5 | % | |
| 10 | % | |
| 15 | % |
EBITDA | |
| 5 | % | |
| 10 | % | |
| 15 | % |
Customer Concentration | |
| 8 | % | |
| 15 | % | |
| 23 | % |
International Sales | |
| 7 | % | |
| 12 | % | |
| 17 | % |
Total | |
| 50 | % | |
| 75 | % | |
| 100 | % |
Company Performance Element | |
Minimum Level | | |
Target Level | | |
Maximum Level | | |
2021 Actual | |
Revenue ($ million) | |
$ | 30 | | |
$ | 36 | | |
$ | 42 | | |
$ | 16.9 | |
Gross Margin (% of revenue) | |
| 31 | % | |
| 32 | % | |
| 33 | % | |
| 12.7 | % |
EBITDA (% of revenue) | |
| 5 | % | |
| 7 | % | |
| 9 | % | |
| (26.9 | )% |
Customer Concentration (% of total sales) | |
| 55 | % | |
| 45 | % | |
| 35 | % | |
| 67 | % |
International Sales (% of total sales) | |
| 15 | % | |
| 20 | % | |
| 25 | % | |
| 8 | % |
Long-term
Equity Incentives
Long-term
equity incentive compensation for our executive officers, generally consists of awards of stock options under our 2016 Plan. We believe
that these equity awards offer a balanced and competitive equity compensation arrangement for our executive officers.
The
Compensation Committee approves equity awards for our executive officers in connection with the annual review of their individual performance
and overall compensation. The annual awards are typically made near the end of the first quarter of the following year. Each award is
designed primarily as a retention tool, typically requiring the executive to remain with Polar Power for at least one year to receive
the benefit of one-third of the award on partial vesting and at least three years to receive the full benefit of the award on full vesting.
We believe our equity incentive compensation aligns the interests of our executive officers with those of our stockholders and provides
each executive officer with a significant incentive to manage Polar Power from the perspective of an owner with an equity stake in the
business by tying significant portions of the recipients’ compensation to the market price of our common stock.
In
making long-term equity incentive awards, our Compensation Committee sets a target value for the award for each executive officer based
on its judgment about the factors used in setting executive officer total compensation described under “Compensation Philosophy”
above as well as our Compensation Committee’s judgment regarding the desired mix of base salary, annual non-equity incentives and
long-term equity incentives. Our Compensation Committee also considers outstanding vested and unvested equity awards to executive officers,
the stock ownership levels of executive officers and the potential dilutive effect on our stockholders.
Summary
Compensation Table
The
table and discussion below present compensation information for our following executive officers, which we refer to as our “named
executive officers” (dollar amounts in thousands):
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Arthur
D. Sams, our President, Chief Executive Officer, Secretary and Chairman of the Board; |
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Rajesh
Masina, our former Chief Operating Officer; and |
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Luis
Zavala, our Chief Financial Officer. |
Name and Principal Position | |
Year | | |
Salary ($) | | |
Option Awards ($) | | |
Bonus ($) | | |
Total ($) | |
Arthur D. Sams, President, | |
| 2021 | | |
| 275 | | |
| — | | |
| — | | |
| 275 | |
Chief Executive Officer and Secretary | |
| 2020 | | |
| 275 | | |
| — | | |
| — | | |
| 275 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Rajesh Masina, | |
| 2021 | | |
| 175 | | |
| — | | |
| — | | |
| 175 | |
Former Chief Operating Officer | |
| 2020 | | |
| 175 | | |
| — | | |
| — | | |
| 175 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Luis Zavala, | |
| 2021 | | |
| 175 | | |
| — | | |
| — | | |
| 175 | |
Chief Financial Officer | |
| 2020 | | |
| 175 | | |
| — | | |
| — | | |
| 175 | |
Employment
Agreements
Arthur
D. Sams
Our
Amended and Restated Executive Employment Agreement with Arthur D. Sams, dated as of July 8, 2016, provides for at-will employment of
Mr. Sams as our President and Chief Executive Officer, at an annual base salary of $200. On April 2, 2018, we increased Mr. Sams’
annual base salary to $275 effective as of April 1, 2018. Mr. Sams is eligible to receive an annual discretionary cash bonus to be
paid based upon performance criteria set by our Compensation Committee, as more fully described above, and is eligible to participate
in all of our employee benefit programs including our 2016 Plan.
Upon
termination by Polar without cause or resignation by Mr. Sams for good reason, Mr. Sams is entitled to receive (i) a lump sum cash payment
equal to 200% of his then-current base salary, (ii) a lump sum cash payment equal to 200% of the amount of average incentive bonus paid
to Mr. Sams during the two calendar years preceding the termination, and (iii) continued health insurance coverage for eighteen months.
If Mr. Sams is terminated without cause or resigns for good reason within three months before or twelve months after a change in control,
Mr. Sams is entitled to (a) a lump sum cash payment equal to 200% of his then-current base salary, (b) a lump sum cash payment equal
to 200% of the amount of average incentive bonus paid to Mr. Sams during the two calendar years preceding the termination, and (c) continued
health insurance coverage for eighteen months. If Mr. Sams becomes disabled, Mr. Sams is entitled to receive a lump sum cash payment
equal to 100% of his then-current base salary and continued health coverage for twelve months.
The
term “for good reason” is defined in the Amended and Restated Executive Employment Agreement as (i) the assignment to Mr.
Sams of any duties or responsibilities that result in the material diminution of Mr. Sams’ authority, duties or responsibility,
(ii) a material reduction by Polar in Mr. Sams’ annual base salary, except to the extent the base salaries of all other executive
officers of Polar are accordingly reduced, (iii) a relocation of Mr. Sams’ place of work, or Polar’s principal executive
offices if Mr. Sams’ principal office is at these offices, to a location that increases Mr. Sams’ daily one-way commute by
more than fifty miles, or (iv) any material breach by Polar of any material provision of the Amended and Restated Executive Employment
Agreement.
The
term “cause” is defined in the Amended and Restated Executive Employment Agreement as (i) Mr. Sams’ indictment or conviction
of any felony or of any crime involving dishonesty, (ii) Mr. Sams’ participation in any fraud or other act of willful misconduct
against Polar, (iii) Mr. Sams’ refusal to comply with any lawful directive of Polar, (iv) Mr. Sams’ material breach of his
fiduciary, statutory, contractual, or common law duties to Polar, or (v) conduct by Mr. Sams which, in the good faith and reasonable
determination of our board of directors, demonstrates gross unfitness to serve; provided, however, that in the event that any of the
foregoing events is reasonably capable of being cured, Polar shall, within twenty days after the discovery of the event, provide written
notice to Mr. Sams describing the nature of the event and Mr. Sams shall thereafter have ten business days to cure the event.
A
“change in control” of Polar is deemed to have occurred if, in a single transaction or series of related transactions (i)
any person (as the term is used in Section 13(d) and 14(d) of the Exchange Act), or persons acting as a group, other than a trustee or
fiduciary holding securities under an employee benefit program, is or becomes a “beneficial owner” (as defined in Rule 13-3
under the Exchange Act), directly or indirectly of securities of Polar representing a majority of the combined voting power of Polar,
(ii) there is a merger, consolidation or other business combination transaction of Polar with or into another corporation, entity or
person, other than a transaction in which the holders of at least a majority of the shares of voting capital stock of Polar outstanding
immediately prior to the transaction continue to hold (either by the shares remaining outstanding or by their being converted into shares
of voting capital stock of the surviving entity) a majority of the total voting power represented by the shares of voting capital stock
of Polar (or the surviving entity) outstanding immediately after the transaction, or (iii) all or substantially all of our assets are
sold.
Rajesh
Masina
Our
Executive Employment Agreement with Rajesh Masina, dated as of July 8, 2016, provided for at-will employment as our Vice President Operations
at an annual base salary is $120. On April 2, 2018, we appointed Mr. Masina as our Chief Operating Officer and increased his annual
base salary to $175 effective as of April 1, 2018. Mr. Masina was eligible to receive an annual discretionary cash bonus to be paid
based upon performance criteria set by our Compensation Committee, as more fully described above, and was eligible to participate in
all of our employee benefit programs including our 2016 Plan.
On
January 12, 2022, Rajesh Masina notified the Company of his resignation, effective January 21, 2022. Mr.
Masina’s resignation from the Company was not a result of any disagreement with the Company on any matter related to its operations,
policies or practices.
Luis
Zavala
Our
Executive Employment Agreement with Luis Zavala, dated as of July 8, 2016, provides for at-will employment as our Vice President Finance
at an annual base salary of $120. On April 2, 2018, we appointed Mr. Zavala as our Chief Financial Officer and increased his annual
base salary to $175 effective as of April 1, 2018. Mr. Zavala is eligible to receive an annual discretionary cash bonus to be paid
based upon performance criteria set by our Compensation Committee, as more fully described above, and is eligible to participate in all
of our employee benefit programs including our 2016 Plan. The general terms of Mr. Zavala’s Executive Employment Agreement are
identical to the terms of Mr. Masina’s Executive Employment Agreement.
2016
Omnibus Incentive Plan
On
July 8, 2016 our board of directors and stockholders adopted the 2016 Plan. The material terms of the 2016 Plan, as amended, are summarized
below.
Summary
of the Material Terms of the 2016 Plan
Purpose.
We established the 2016 Plan to attract, retain and motivate our employees, officers and directors, to promote the success of our business
by linking the personal interests of our employees, officers, consultants, advisors and directors to those of our stockholders and to
encourage stock ownership on the part of management. The 2016 Plan is intended to permit the grant of stock options (both incentive stock
options, or ISOs and non-qualified stock options, or NQSOs or, collectively, Options), stock appreciation rights, or SARS, restricted
stock awards, or Restricted Stock Awards, restricted stock units, or RSUs, incentive awards, or Incentive Awards, other stock-based awards,
or Stock Based Awards, dividend equivalents, or Dividend Equivalents, and cash awards, or Cash Awards.
Administration.
The 2016 Plan is administered by our Compensation Committee. Our Compensation Committee may act through subcommittees or, with respect
to awards granted to individuals who are not subject to the reporting and other provisions of Section 16 of the Exchange Act and who
are not members of our board of directors or the board of directors of our Affiliates (as defined by the 2016 Plan), delegate to one
or more officers all or part of its duties with respect to such awards. Our Compensation Committee may, at its discretion, accelerate
the time at which any award may be exercised, become transferable or nonforfeitable or become earned and settled including without limitation
(i) in the event of the participant’s death, disability, retirement or involuntary termination of employment or service (including
a voluntary termination of employment or service for good reason) or (ii) in connection with a Change in Control (as defined in the 2016
Plan).
Authorized
Shares. Under the 2016 Plan, we may issue a maximum aggregate of 1,754,385 shares of common stock, all of which may be issued pursuant
to Options, SARs, Restricted Stock Awards, RSUs, Incentive Awards, Stock-Based Awards or Dividend Equivalents. Each share issued in connection
with an award will reduce the number of shares available under the 2016 Plan by one, and each share covered under a SAR will reduce the
number of shares available under the 2016 Plan by one, even though the share is not actually issued upon settlement of the SAR. Shares
relating to awards that are terminated by expiration, forfeiture, cancellation or otherwise without issuance of shares of common stock,
settled in cash in lieu of shares, or exchanged prior to the issuance of shares for awards not involving shares, will again be available
for issuance under the 2016 Plan. Shares not issued as a result of net settlement of an award, tendered or withheld to pay the exercise
price, purchase price or withholding taxes of an award or shares purchased on the open market with the proceeds of the exercise price
of an award will not again be available for issuance under the 2016 Plan.
Award
Limits. In any calendar year, no participant may be granted awards that relate to more than 350,877 shares of our common stock. For
these purposes, an Option and its corresponding SAR will be counted as a single award. For any Cash Awards that are intended to constitute
annual incentive awards, the maximum amount payable to any one participant with respect to any 12-month period is $5,000. Award limits
that are expressed as a number of shares are subject to the adjustment provisions of the 2016 Plan as described below.
A
non-employee director may not be granted awards during any single calendar year that, taken together with any cash fees paid to such
non-employee director during such calendar year in respect of the non-employee director’s service as a member of the board during
such year, exceeds $500 in total value (calculating the value of any such awards based on the grant date fair value of such awards for
financial accounting purposes). Notwithstanding the foregoing, the board may make exceptions to the foregoing limit (up to twice such
limit) for a non-executive chair of the board or, in extraordinary circumstances, for other individual non-employee directors, as the
board may determine, provided that the non-employee director, receiving such awards may not participate in the decision to make such
awards.
Written
Agreements. All awards granted under the 2016 Plan will be governed by separate written agreements between the participants and us.
The written agreements will specify the terms of the particular awards.
Transferability.
Generally, an award is non-transferable except by will or the laws of descent and distribution, and during the lifetime of the participant
to whom the award is granted, the award may only be exercised by, or payable to, the participant. However, the Compensation Committee
may provide that awards, other than ISOs or a Corresponding SAR (as defined in the 2016 Plan) that is related to an ISO, may be transferred
by a participant to immediate family members or trust or other entities on behalf of the Participant and/or family members for charitable
donations. Any such transfer will be permitted only if (i) the participant does not receive any consideration for the transfer and (ii)
the Compensation Committee expressly approves the transfer. The holder of the transferred award will be bound by the same terms and conditions
that governed the award during the period that it was held by the participant, except that such transferee may only transfer the award
by will or the laws of descent and distribution.
Maximum
Award Period. No award shall be exercisable or become vested or payable more than ten years after the date of grant.
Compliance
With Applicable Law. No award shall be exercisable, vested or payable except in compliance with all applicable federal and state
laws and regulations (including, without limitation, tax and securities laws), any listing agreement with any stock exchange to which
we are a party, and the rules of all domestic stock exchanges on which our shares may be listed.
Payment.
The exercise or purchase price of an award, and any taxes required to be withheld with respect to an award, may be paid in cash or,
if the written agreement so provides, the Compensation Committee may allow a participant to pay all or part of the exercise or purchase
price, and any required withholding taxes, by tendering shares of common stock, through a broker-assisted cashless exercise, by means
of “net exercise” procedure, or any other specified medium of payment.
Stockholder
Rights. No participant shall have any rights as our stockholder as a result of issuance of an award until the award is settled by
the issuance of common stock (other than a Restricted Stock Award or RSUs for which certain stockholder rights may be granted).
Forfeiture
Provisions. Awards do not confer upon any individual any right to continue in our employ or service or in the employ or service of
our Affiliates. All rights to any award that a participant has will be immediately forfeited if the participant is discharged from employment
or service for “Cause” (as defined in the 2016 Plan).
Types
of awards
Options.
Both ISOs and NQSOs may be granted under the 2016 Plan. Our Compensation Committee will determine the eligible individuals to whom grants
of Options will be made, the number of shares subject to each option, the exercise price per share, the time or times at which the option
may be exercised, whether any performance or other conditions must be satisfied before a participant may exercise an option, the method
of payment by the participant, the method of delivery of shares to a participant, whether the Option is an ISO or a NQSO, and all other
terms and conditions of the award. However, the exercise price of an Option may not be less than the fair market value of a share of
common stock on the date the Option is granted. No participant may be granted ISOs that are first exercisable in any calendar year for
shares of common stock having an aggregate fair value (determined on the date of grant) that exceeds $100,000. With respect to an ISO
granted to a participant who is a Ten Percent Shareholder (as defined in the 2016 Plan), the exercise price per share may not be less
than 110% of the fair market value of the common stock on the date the Option is granted. At the Compensation Committee’s discretion,
an Option may be granted with or without a Corresponding SAR (as defined below).
SARs.
A SAR entitles the participant to receive, upon exercise, the excess of the fair market value on that date of each share of common stock
subject to the exercised portion of the SAR over the fair market value of each such share on the date of the grant of the SAR. A SAR
can be granted alone or in tandem with an Option. A SAR granted in tandem with an Option is called a Corresponding SAR and entitles the
participant to exercise the Option or the SAR, at which time the other tandem award expires with respect to the number of shares being
exercised. The Compensation Committee is authorized to determine the eligible individuals to whom grants of SARs will be made, the number
of shares of common stock covered by the grant, the time or times at which a SAR may be exercised and all other terms and conditions
of the SAR. However, no participant may be granted Corresponding SARs that are related to ISOs which are first exercisable in any calendar
year for shares of common stock having an aggregate fair market value (determined on the date of grant) that exceeds $100,000.
Restricted
Stock Awards and RSUs. A Restricted Stock Award is the grant or sale of shares of common stock, which may be subject to forfeiture
for a period of time or subject to certain conditions. A RSU entitles the participant to receive, upon vesting, shares of our common
stock. We will deliver to the participant one share of common stock for each RSU that becomes earned and payable. With regard to Restricted
Stock Awards, the Compensation Committee is authorized to determine the eligible individuals to whom grants will be made, the number
of shares subject to such grants, the purchase price, if any, to be paid for each share subject to the award of restricted stock, the
time or times at which the restrictions will terminate, and all other terms and conditions of the restricted stock. With regard to RSUs,
the Compensation Committee is authorized to determine the eligible individuals to whom grants will be made, the number of shares subject
to such grants and the vesting conditions entitling a participant to settlement of the RSUs.
Incentive
Awards. An Incentive Award entitles the participant to receive cash or common stock when certain conditions are met. The Compensation
Committee has the authority to determine the eligible individuals to whom grants will be made and all other terms and conditions of the
Incentive Award.
Stock-Based
Awards. Stock-Based Awards may be denominated or payable in, valued by reference to or otherwise based on shares of common stock,
including awards convertible or exchangeable into shares of common stock (or the cash value thereof) and common stock purchase rights
and awards valued by reference to the fair market value of the common stock. The Compensation Committee has the authority to determine
the eligible individuals to whom grants will be made and all other terms and conditions of Stock-Based Awards. However, the purchase
price for the common stock under any Stock-Based Award in the nature of a purchase right may not be less than the fair market value of
a share of common stock as of the date the award is granted. Cash awards, as an element of or supplement to any other award under the
2016 Plan, may also be granted.
Our
Compensation Committee is authorized under the 2016 Plan to grant shares of common stock as a bonus, or to grant shares of common stock
or other awards in lieu of any of our obligations or of our affiliates to pay cash or to deliver other property under the 2016 Plan or
under any other of our plans or compensatory arrangements or any of our affiliates.
Dividend
Equivalents. Our Compensation Committee may also grant Dividend Equivalents under the 2016 Plan. A Dividend Equivalent is an award
that entitles the participant to receive cash, shares of common stock, other awards or other property equal in value to all or a specified
portion of dividends paid with respect to shares of our common stock. The Compensation Committee is authorized to determine the eligible
individuals to whom grants will be made and all other terms and conditions of the Dividend Equivalents. However, no Dividend Equivalents
may be awarded with an Option, SAR or Stock-Based Award in the nature of purchase rights.
Cash
Awards. Cash Awards will also be authorized under the 2016 Plan. Cash Awards may be granted as an element of or a supplement to any
other award under the 2016 Plan or as a stand-alone Cash Award. The Compensation Committee will determine the terms and conditions of
any such Cash Awards.
Performance
Criteria. Our Compensation Committee has the discretion to establish objectively determinable performance conditions for when awards
will become vested, exercisable and payable. These performance conditions may be based on one or any combination of metrics related to
our financial, market or business performance. The form of the performance conditions also may be measured on a company, affiliate, division,
business unit or geographic basis, individually, alternatively or in any combination, subset or component thereof. Performance goals
may reflect absolute entity performance or a relative comparison of entity performance to the performance of a peer group of entities
or other external measure of the selected performance conditions. Profits, earnings and revenues used for any performance condition measurement
may exclude any extraordinary or nonrecurring items. The performance conditions may, but need not, be based upon an increase or positive
result under the aforementioned business criteria and could include, for example and not by way of limitation, maintaining the status
quo or limiting the economic losses (measured, in each case, by reference to the specific business criteria). An award that is intended
to become exercisable, vested or payable on the achievement of performance conditions means that the award will not become exercisable,
vested or payable solely on mere continued employment or service. However, such an award, in addition to performance conditions, may
be subject to continued employment or service by the participant. The performance conditions may include any or any combination of the
following: (a) revenue, (b) earnings before interest, taxes, depreciation and amortization, or EBITDA, (c) cash earnings (earnings before
amortization of intangibles), (d) operating income, (e) pre-or after-tax income, (f) earnings per share, (g) net cash flow, (h) net cash
flow per share, (i) net earnings, (j) return on equity, (k) return on total capital, (l) return on sales, (m) return on net assets employed,
(n) return on assets or net assets, (o) share price performance, (p) total stockholder return, (q) improvement in or attainment of expense
levels, (r) improvement in or attainment of working capital levels, (s) net sales, (t) revenue growth or product revenue growth, (u)
operating income (before or after taxes), (v) pre-or after-tax income (before or after allocation of corporate overhead and bonus), (w)
earnings per share; (x) return on equity, (y) appreciation in and/or maintenance of the price of the shares of common stock, (z) market
share, (aa) gross profits, (bb) comparisons with various stock market indices; (cc) reductions in cost, (dd) cash flow or cash flow per
share (before or after dividends), (ee) return on capital (including return on total capital or return on invested capital), (ff) cash
flow return on investments; (gg) improvement in or attainment of expense levels or working capital levels, (hh) stockholder equity and/or
(ii) other criteria selected by the Compensation Committee.
Our
Compensation Committee has the discretion to select one or more periods of time over which the attainment of one or more of the foregoing
performance conditions will be measured for the purpose of determining when an award will become vested, exercisable or payable. The
Compensation Committee has the authority to adjust goals and awards in the manner set forth in the 2016 Plan.
Change
in Control. In the event of a “Change in Control” (as defined in the 2016 Plan) and, with respect to awards that are
subject to Section 409A of the Internal Revenue Code of 1986, as amended, or the Code, and such awards, 409A Awards, only to the extent
permitted by Section 409A of the Code, our Compensation Committee in its discretion may, on a participant-by-participant basis (a) accelerate
the vesting of all unvested and unexercised Options, SARs or Stock-Based Awards in the nature of purchase rights and/or terminate such
awards, without any payment therefore, immediately prior to the date of any such transaction after giving the participant at least seven
days written notice of such actions; (b) fully vest and/or accelerate settlement of any awards; (c) terminate any outstanding Options,
SARs or Stock-Based Awards in the nature of purchase rights after giving the participant notice and a chance to exercise such awards
(to the extent then exercisable or exercisable upon the change in control); (d) cancel any portion of an outstanding award that remains
unexercised or is subject to restriction or forfeiture in exchange for a cash payment to the participant of the value of the award; or
(e) require that the award be assumed by the successor corporation or replaced with interests of an equal value in the successor corporation.
Amendment
and Termination. The 2016 Plan will expire 10 years after its effective date, unless terminated earlier by our board of directors.
Any award that is outstanding as of the date the 2016 Plan expires will continue in force according to the terms set out in the award
agreement. Our board of directors may terminate, amend or modify the 2016 Plan at any time. However, stockholder approval may be required
for certain types of amendments under applicable law or regulatory authority. Except as may be provided in an award agreement or the
2016 Plan, no amendment to the 2016 Plan may adversely affect the terms and conditions of any existing award in any material way without
the participant’s consent.
An
amendment will be contingent on approval of our stockholders, to the extent required by law, by the rules of any stock exchange on which
our securities are then traded or if the amendment would (i) increase the benefits accruing to participants under the 2016 Plan, including
without limitation, any amendment to the 2016 Plan or any agreement to permit a re-pricing or decrease in the exercise price of any outstanding
awards, (ii) increase the aggregate number of shares of common stock that may be issued under the 2016 Plan, or (iii) modify the requirements
as to eligibility for participation in the 2016 Plan.
Material
U.S. federal income tax consequences of awards under the 2016 Plan
The
following discussion summarizes the principal federal income tax consequences associated with awards under the 2016 Plan. The discussion
is based on laws, regulations, rulings and court decisions currently in effect, all of which are subject to change.
ISOs.
A participant will not recognize taxable income on the grant or exercise of an ISO (although the excess of the fair market value of the
common stock over the exercise price will be included for alternative minimum tax purposes). A participant will recognize taxable income
when he or she disposes of the shares of common stock acquired under the ISO. If the disposition occurs more than two years after the
grant of the ISO and more than one year after its exercise, the participant will recognize long-term capital gain (or loss) to the extent
the amount realized from the disposition exceeds (or is less than) the participant’s tax basis in the shares of common stock. A
participant’s tax basis in the common stock generally will be the amount the participant paid for the stock. If common stock acquired
under an ISO is disposed of before the expiration of the ISO holding period described above, the participant will recognize as ordinary
income in the year of the disposition the excess of the fair market value of the common stock on the date of exercise of the ISO over
the exercise price. Any additional gain will be treated as long-term or short-term capital gain, depending on the length of time the
participant held the shares. Special rules apply if a participant pays the exercise price by delivery of common stock. We will not be
entitled to a federal income tax deduction with respect to the grant or exercise of an ISO. However, in the event a participant disposes
of common stock acquired under an ISO before the expiration of the ISO holding period described above, we generally will be entitled
to a federal income tax deduction equal to the amount of ordinary income the participant recognizes.
NQSOs.
A participant will not recognize any taxable income on the grant of a NQSO. On the exercise of a NQSO, the participant will recognize
as ordinary income the excess of the fair market value of the common stock acquired over the exercise price. A participant’s tax
basis in the common stock is the amount paid plus any amounts included in income on exercise. Special rules apply if a participant pays
the exercise price by delivery of common stock. The exercise of a NQSO generally will entitle us to claim a federal income tax deduction
equal to the amount of ordinary income the participant recognizes.
SARs.
A participant will not recognize any taxable income at the time SARs are granted. The participant at the time of receipt will recognize
as ordinary income the amount of cash and the fair market value of the common stock that he or she receives. We generally will be entitled
to a federal income tax deduction equal to the amount of ordinary income the participant recognizes.
Restricted
Stock Awards and RSUs. With regard to Restricted Stock Awards, a participant will recognize ordinary income on account of a Restricted
Stock Award on the first day that the shares are either transferable or not subject to a substantial risk of forfeiture. The ordinary
income recognized will equal the excess of the fair market value of the common stock on such date over the price, if any, paid for the
stock. However, even if the shares under a Restricted Stock Award are both nontransferable and subject to a substantial risk of forfeiture,
the participant may make a special “83(b) election” to recognize income, and have his or her tax consequences determined,
as of the date the Restricted Stock Award is made. The participant’s tax basis in the shares received will equal the income recognized
plus the price, if any, paid for the Restricted Stock Award. We generally will be entitled to a federal income tax deduction equal to
the ordinary income the participant recognizes. With regard to RSUs, the participant will not recognize any taxable income at the time
RSUs are granted. When the terms and conditions to which the RSUs are subject have been satisfied and the RSUs are paid, the participant
will recognize as ordinary income the fair market value of the common stock he or she receives. We generally will be entitled to a federal
income tax deduction equal to the ordinary income the participant recognizes.
Incentive
Awards. A participant will not recognize any taxable income at the time an Incentive Award is granted. When the terms and conditions
to which an Incentive Award is subject have been satisfied and the award is paid, the participant will recognize as ordinary income the
amount of cash and the fair market value of the common stock he or she receives. We generally will be entitled to a federal income tax
deduction equal to the amount of ordinary income the participant recognizes.
Stock-Based
Awards. A participant will recognize ordinary income on receipt of cash or shares of common stock paid with respect to a Stock-Based
Award. We generally will be entitled to a federal tax deduction equal to the amount of ordinary income the participant recognizes.
Dividend
Equivalents. A participant will recognize as ordinary income the amount of cash and the fair market value of any common stock he
or she receives on payment of the Dividend Equivalents. To the extent the Dividend Equivalents are paid in the form of other awards,
the participant will recognize income as otherwise described herein.
Limitation
on Deductions. The deduction for a publicly-held corporation for otherwise deductible compensation to a “covered employee”
generally is limited to $1,000,000 per year. An individual is a covered employee if he or she is the chief executive officer or one of
the three highest compensated officers for the year (other than the chief executive officer or chief financial officer) or was a covered
employee for any preceding year beginning after December 31, 2016.
Other
Tax Rules. The 2016 Plan is designed to enable our Compensation Committee to structure awards that will not be subject to Section
409A of the Code, which imposes certain restrictions and requirements on deferred compensation. However, our Compensation Committee may
grant awards that are subject to Section 409A of the Code. In that case, the terms of such 409A Award will be (a) subject to the deferral
election requirements of Section 409A of the Code; and (b) may only be paid upon a separation from service, a set time, death, disability,
a change in control or an unforeseeable emergency, each within the meanings of Section 409A of the Code. Our Compensation Committee shall
not have the authority to accelerate or defer a 409A Award other than as permitted by Section 409A of the Code. Moreover, any payment
on a separation from service of a “Specified Employee” (as defined in the 2016 Plan) will not be made until six months following
the participant’s separation from service (or upon the participant’s death, if earlier) as required by Section 409A of the
Code.
Non-Employee
Director Compensation
Our
non-employee directors received a quarterly cash retainer of $7,500 during 2021. In addition, we reimburse all non-employee directors
for travel and other necessary business expenses incurred in the performance of director services and extend coverage to them under our
directors’ and officers’ indemnity insurance policies. During 2021, each of Messrs. Albrecht and Gross and Ms. Koster received
total compensation in the amount of $30,000.
Indemnification
of Directors and Officers
Section
145 of the Delaware General Corporation Law, or the DGCL, provides that a corporation may indemnify directors and officers as well as
other employees and individuals against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by such person in connection with any threatened, pending or completed actions, suits or proceedings in which
such person is made a party by reason of such person being or having been a director, officer, employee or agent to the corporation.
The DGCL provides that Section 145 is not exclusive of other rights to which those seeking indemnification may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or otherwise. Sections of our certificate of incorporation and our
bylaws provide for indemnification by us of our directors, officers, employees and agents to the fullest extent permitted by the DGCL.
Article
X of our certification of incorporation eliminates the liability of a director or stockholder for monetary damages for breach of fiduciary
duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under Delaware law. Under
Section 102(b)(7) of the DGCL, a director shall not be exempt from liability for monetary damages for any liabilities arising (i) from
any breach of the director’s duty of loyalty to the corporation or its stockholders, (ii) from acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL, or (iv) for any transaction
from which the director derived an improper personal benefit.
We
have entered into agreements to indemnify our directors and officers as determined by our board of directors. These agreements provide
for indemnification of related expenses including attorneys’ fees, judgments, fines and settlement amounts incurred by any of these
individuals in any action or proceeding. We believe that these indemnification agreements are necessary to attract and retain qualified
persons as directors and officers. We also maintain directors’ and officers’ liability insurance.
The
limitation of liability and indemnification provisions in our certificate of incorporation and our bylaws may discourage stockholders
from bringing a lawsuit against our directors for breach of their fiduciary duty. They may also reduce the likelihood of derivative litigation
against our directors and officers, even though an action, if successful, might benefit us and other stockholders. Furthermore, a stockholder’s
investment may be adversely affected to the extent that we pay the costs of settlement and damage awards against directors and officers
as required by these indemnification provisions.
Insofar
as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons
under the foregoing provisions of our certificate of incorporation or our bylaws, or otherwise, we have been informed that in the opinion
of the SEC, this indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The
following table sets forth information regarding beneficial ownership of our common stock as of March 31, 2022 by:
|
● |
each
person, or group of affiliated persons, known by us to beneficially own more than 5% of our shares of common stock; |
|
|
|
|
● |
each
of our directors; |
|
|
|
|
● |
each
of our named executive officers; and |
|
|
|
|
● |
all
of our directors and executive officers as a group. |
The
table is based on information provided to us by our directors, executive officers and principal stockholders. Beneficial ownership is
determined in accordance with the rules of the SEC, and generally means that a person has beneficial ownership of a security if he, she
or it possesses sole or shared voting or investment power of that security, including stock options and warrants that are exercisable
within 60 days of March 31, 2022. To our knowledge, except as indicated by footnote, and subject to community property laws where applicable,
the persons named in the table below have sole voting and investment power with respect to all shares of common stock shown as beneficially
owned by them. Shares of common stock underlying derivative securities, if any, that are currently exercisable or exercisable within
60 days after March 31, 2022 are deemed to be outstanding in calculating the percentage ownership of the applicable person or group but
are not deemed to be outstanding as to any other person or group. Percentage of beneficial ownership is based on 12,788,203 shares of
common stock outstanding as of the date of the table.
Unless
otherwise indicated, the address of each beneficial owner listed in the table below is c/o Polar Power, Inc., 249 E. Gardena Boulevard,
Gardena, California 90248.
Name and Address of Beneficial Owner (1) | |
Title of Class | | |
Amount and Nature of Beneficial Ownership | | |
Percent of Class | |
| |
| | |
| | |
| |
Arthur D. Sams (2) | |
| Common | | |
| 5,626,676 | | |
| 43.8 | % |
Luis Zavala (3) | |
| Common | | |
| 77,369 | | |
| * | |
Keith Albrecht (4) | |
| Common | | |
| 10,000 | | |
| * | |
Peter Gross (5) | |
| Common | | |
| 10,000 | | |
| * | |
Katherine Koster | |
| Common | | |
| — | | |
| — | |
All directors and executive officers as a group (5 persons)(6) | |
| Common | | |
| 5,724,045 | | |
| 44.4 | % |
|
(1) |
Messrs.
Sams Albrecht and Gross, and Ms. Koster are directors of Polar. Messrs. Sams and Zavala are named executive officers of Polar. |
|
|
|
|
(2) |
Includes
50,000 shares of common stock issuable upon exercise of options. |
|
|
|
|
(3) |
Includes
30,000 shares of common stock issuable upon exercise of options. |
|
(4) |
Includes
10,000 shares of common stock issuable upon exercise of options. |
|
|
|
|
(5) |
Amount
represents 10,000 shares of common stock issuable upon exercise of options. |
|
|
|
|
(6) |
Includes
130,000 shares issuable upon exercise of options. |
Equity
Compensation Plan Information
The
following table provides information about our common stock that may be issued upon the exercise of options, warrants and rights under
all our existing equity compensation plans as of December 31, 2021.
Plan Category | |
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants or Rights | | |
Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | | |
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans | |
Equity Compensation Plans Approved by Security Holders: | |
| | | |
| | | |
| | |
2016 Plan | |
| 140,000 | | |
$ | 5.22 | | |
| 1,624,385 | |
Item
13. Certain Relationships and Related Transactions, and Director Independence.
The
following is a summary of transactions since January 1, 2018 to which we have been a participant, in which:
|
● |
the
amount involved exceeded or will exceed $120 (in thousands); and |
|
|
|
|
● |
any of our directors (and director nominees), executive officers, or holders
of more than 5% of our voting securities, or immediate family member or affiliate of such persons, had or will have a direct or indirect
material interest, other than compensation and other arrangements that are described under “Executive Compensation” above,
or that were approved by our Compensation Committee. |
All
of the related person transactions described below have been approved by a majority of the independent and disinterested members of our
board of directors. We believe that each of the transactions described below were on terms no less favorable to us than terms we would
have obtained from unaffiliated third parties.
It
is our intention to ensure that all future transactions, if any, between us and related persons are approved by our audit committee or
a majority of the independent and disinterested members of our board of directors (except for compensation arrangements, which are approved
by our compensation committee), and are on terms no less favorable to us than those that we could obtain from unaffiliated third parties.
See “Policies and Procedures for Related Person Transactions” below.
Transactions
with Stockholders, Officers and Directors
On
March 1, 2014, we entered into a Subcontractor Installer Agreement with Smartgen Solutions, Inc., or Smartgen, a company engaged in business
of equipment rental and providing maintenance, repair and installation services to mobile telecommunications towers in California. Rajesh
Masina, our former Chief Operating Officer, owns 40% of the share capital of Smartgen and 30% is owned by his brother. On July 8, 2016,
our board of directors reviewed the terms and conditions of, and ratified, the Subcontractor Installer Agreement.
Under
the terms of the agreement, Smartgen has been appointed as a non-exclusive, authorized service provider for the installation, repair
and service of Polar products in Southern California. The agreement has a term of three years from the date of execution and automatically
renews for additional one-year periods if not terminated. All transactions involving this agreement have been monitored by our audit
committee.
During
2021 and 2020, Smartgen performed $88 and $129 in field services, respectively, the cost of which is included in cost of goods sold.
On
January 2, 2022, we provided written notice to Smartgen to terminate all agreements between the two companies. The termination was effective
January 31, 2022.
Employment
Agreements
We
have entered into amended employment agreement with each of Arthur D. Sams, our President, Chief Executive Officer and Secretary; Rajesh
Masina, our former Chief Operating Officer; and Luis Zavala, our Chief Financial Officer; providing for, without limitation, certain
payments upon termination and change in control. See “Executive Compensation–Employment Agreements” in this Annual
Report on Form 10-K for a further discussion of these agreements.
Indemnification
of Officers and Directors
Our
certificate of incorporation and our bylaws provide that we will indemnify our directors and officers with respect to certain liabilities,
expenses and other accounts imposed upon them because of having been a director or officer, except in the case of willful misconduct
or a knowing violation of criminal law. In addition, we have entered into indemnification agreements with each of our directors and executive
officers.
Policies
and Procedures for Related Person Transactions
Our
board of directors has adopted a written policy with respect to related person transactions. This policy governs the review, approval
or ratification of covered related person transactions. The Audit Committee of our board of directors manages this policy.
For
purposes of the policy, a “related person transaction” is a transaction, arrangement or relationship (or any series of similar
transactions, arrangements or relationships) in which we were, are or will be a participant, and the amount involved exceeds the applicable
dollar threshold set forth under Item 404 of Regulation S-K and in which any related person had, has or will have a direct or indirect
material interest. As defined in Item 404 of Regulation S-K, “related person” generally includes our directors (and director
nominees), executive officers, holders of more than 5% of our voting securities, and immediate family members or affiliates of such persons.
The
policy generally provides that we may enter into a related person transaction only if:
|
● |
the
Audit Committee pre-approves such transaction in accordance with the guidelines set forth in the policy, |
|
|
|
|
● |
the
transaction is on terms comparable to those that could be obtained in arm’s length dealings with an unrelated third party and
the Audit Committee (or the chairperson of the Audit Committee) approves or ratifies such transaction in accordance with the guidelines
set forth in the policy, |
|
|
|
|
● |
the
transaction is approved by the disinterested members of the board of directors, or |
|
|
|
|
● |
the
transaction involves compensation approved by the Compensation Committee of the board of directors. |
In
the event a related person transaction is not pre-approved by the Audit Committee and our management determines to recommend such related
person transaction to the Audit Committee, such transaction must be reviewed by the Audit Committee. After review, the Audit Committee
will approve or disapprove such transaction. If our Chief Executive Officer, in consultation with our Audit Committee, determines that
it is not practicable or desirable for us to wait until the next Audit Committee meeting, the chairperson of the Audit Committee will
possess delegated authority to act on behalf of the Audit Committee. The Audit Committee (or the chairperson of the Audit Committee)
may approve only those related person transactions that are in, or not inconsistent with, our best interests and the best interests of
our stockholders, as the Audit Committee (or the chairperson of the Audit Committee) determines in good faith. All approvals made by
chairperson of the Audit Committee will be ratified by the full Audit Committee at the next regularly scheduled meeting or within 120
days from approval by chairperson.
Our
Audit Committee has determined that the following transactions, even if the amount exceeds the applicable dollar threshold set forth
under Item 404 of Regulation S-K in the aggregate, will be deemed to be pre-approved by the Audit Committee:
|
● |
any
employment of certain named executive officers that would be publicly disclosed; |
|
|
|
|
● |
director
compensation that would be publicly disclosed; |
|
|
|
|
● |
transactions
with other companies where the related person’s only relationship is as a director or owner of less than ten percent of such
company (other than a general partnership), if the aggregate amount involved does not exceed the greater of $200 (in thousands)
or five percent of that company’s consolidated gross revenues |
|
|
|
|
● |
transactions
where all stockholders receive proportional benefits; |
|
|
|
|
● |
transactions
involving competitive bids; |
|
|
|
|
● |
transactions
with a related person involving the rendering of services at rates or charges fixed in conformity with law or governmental authority;
and |
|
|
|
|
● |
transactions
with a related person involving services as a bank depositary of funds, transfer agent, registrar, trustee under a trust indenture
or similar services. |
In
addition, the Audit Committee will review the policy at least annually and recommend amendments to the policy to the board of directors
from time to time.
The
policy provides that all related person transactions will be disclosed to the Audit Committee, and all material related person transactions
will be disclosed to the board of directors. Additionally, all related person transactions requiring public disclosure will be properly
disclosed, as applicable, on our various public filings.
The
Audit Committee will review all relevant information available to it about the related person transaction. The policy will provide that
the Audit Committee may approve or ratify the related person transaction only if the Audit Committee determines that, under all of the
circumstances, the transaction is in, or is not inconsistent with, our best interests and the best interests of our stockholders. The
policy will also provide that the Audit Committee may, in its sole discretion, impose such conditions as it deems appropriate on us or
the related person in connection with approval of the related person transaction.
Item
14. Principal Accounting Fees and Expenses.
The
following table presents fees for professional audit services rendered by Weinberg & Company, P.A. for 2021 and 2020 (in thousands).
| |
2021 | | |
2020 | |
Audit Fees | |
$ | 222 | | |
$ | 236 | |
Audit-Related Fees | |
| 2 | | |
| 12 | |
Tax Fees | |
| 57 | | |
| 50 | |
Total | |
$ | 281 | | |
$ | 298 | |
Audit
Fees. Consist of amounts billed for professional services rendered for the audit of our annual consolidated financial statements
included in this Annual Report on Form 10-K.
Audit-Related
Fees. Audit-Related Fees consist of fees billed for professional services that are reasonably related to the performance of the audit
or review of our consolidated financial statements but are not reported under “Audit Fees.”
Tax
Fees. Tax Fees consist of fees for professional services for tax compliance activities, including the preparation of federal and
state tax returns and related compliance matters.
All
Other Fees. Consists of amounts billed for services other than those noted above.
Our
Audit Committee considered all non-audit services provided by Weinberg & Company, P.A. and determined that the provision of such
services was compatible with maintaining such firm’s audit independence.
Audit
Committee Pre-Approval Policy
Our
Audit Committee is responsible for approving all audit, audit-related, tax and other services. The Audit Committee pre-approves all auditing
services and permitted non-audit services, including all fees and terms to be performed for us by our independent auditor at the beginning
of the fiscal year. Non-audit services are reviewed and pre-approved by project at the beginning of the fiscal year. Any additional non-audit
services contemplated by us after the beginning of the fiscal year are submitted to the Chairman of our Audit Committee for pre- approval
prior to engaging our independent auditor for such services. These interim pre-approvals are reviewed with the full Audit Committee at
its next meeting for ratification.
PART
IV
Item
15. Exhibits, Financial Statement Schedules.
(a)(1)
Financial Statements
Reference
is made to the financial statements listed on and attached following the Index to Financial Statements contained on page F-1 of this
report.
(a)(2)
Financial Statement Schedules
None.
(a)(3)
Exhibits
Reference
is made to the exhibits listed on the Index to Exhibits immediately preceding the signature page of this report.
Item
16. Form 10-K Summary.
None.
INDEX
TO FINANCIAL STATEMENTS
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Stockholders and the Board of Directors of Polar Power, Inc.
Gardena,
California
Opinion
on the Financial Statements
We
have audited the accompanying balance sheets of Polar Power, Inc. (the “Company”) as of December 31, 2021 and 2020, the related
statements of operations, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred
to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years
then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits
we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
Critical
Audit Matters
The
critical audit matters communicated below are matters arising from the current period audit of the consolidated financial
statements that were communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures
that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex
judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements,
taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the
critical audit matters or on the accounts or disclosures to which they relate.
Inventory
Valuation
As
described in Note 1 to the financial statements, the Company’s inventories are valued at the lower of cost or net realizable value,
with cost determined on first-in, first-out (“FIFO”) basis. Management considers historical usage, forecasted
demand in relation to inventory on hand, market conditions, and other factors when estimating net realizable value.
We identified management’s
estimation of the net realizable value of inventory as a critical audit matter, because of the significant judgments made by management
in estimating future demand and market conditions which are used to arrive at the net realizable value. This required a high degree of
auditor judgment and increased auditor effort in auditing such assumptions.
The
primary procedures we performed to address this critical audit matter included:
|
● |
We
obtained an understanding of management’s process for estimating net realizable value.
|
|
● |
We
assessed the reasonableness of management’s forecasted product demand and tested the
completeness and accuracy of the underlying data used in the analyses and whether they were
consistent with the historical data and evidence obtained in other areas of the audit.
|
|
● |
We
evaluated management’s product demand forecast for reasonableness considering historical
sales by product, comparing prior period estimates to actual results of the same period,
and considering trends within the industry that could impact the movement of the products
provided by the Company.
|
|
● |
We
developed an independent expectation of the net realizable value of inventory using historic
inventory activity and compared our independent expectation to the amount recorded in the
financial statements.
|
Assessment of the Company’s Ability to
Continue as a Going Concern
The accompanying financial statements have been
prepared assuming that the Company will continue as a going concern. As disclosed in Note 1 to the financial statements, the Company
recorded a net loss of $1.4 million, used cash in operations of $9.4 million for the year ended December 31, 2021 and presented an accumulated
deficit of $13.5 million. Management evaluated the Company’s liquidity within one year after the date of issuance of the consolidated
financial statements to determine if there is substantial doubt about the Company’s ability to continue as a going concern. In
the preparation of the liquidity assessment, management applied judgment to estimate the projected cash flows of the Company, including
the following: (i) projected cash outflows, (ii) projected cash inflows, and (iii) excess availability levels under the Company’s
existing line of credit financing. The cash flow projections were based on known or planned cash requirements for operating and financing
costs. Management believes, based on the Company’s forecast, that current working capital and capital expenditure financing is
sufficient to fund operations and satisfy the Company’s obligations as they come due within one year after the date of issuance
of the consolidated financial statements.
We
identified management’s evaluation of the Company’s ability to continue as a going concern and related disclosures
as a critical audit matter due to the significant judgments and assumptions used by management in preparing the Company’s forecasted
cash flows and the risk of bias in management’s judgments and assumptions in estimating these cash flows. Auditing these judgments
and assumptions required a high degree of auditor judgment and increased auditor effort required to address these matters.
The
primary procedures we performed to address this critical audit matter included:
| ● | We
obtained an understanding of management’s process for evaluating the Company’s
liquidity.
|
| ● | We
tested
the completeness and accuracy of the underlying data used by management in preparing the
forecasted cash flows by comparison to prior period forecasts to actual results. |
| ● | We
considered
positive and negative evidence impacting management’s forecasts, including market and
industry trends. |
| ● | We
compared management’s forecasts to the actual results of operations and excess availability
levels for the available period after year-end. |
| ● | We
evaluated
the adequacy of management’s disclosure in the financial statements regarding
the Company’s liquidity by comparing to other audit evidence obtained to determine
whether such information is consistent with the Company’s liquidity disclosure. |
We
have served as the Company’s auditor since 2016.
/s/
Weinberg & Company, P.A.
Los
Angeles, California
March
31, 2022
POLAR
POWER, INC.
BALANCE SHEETS
(in
thousands, except share and per share data)
The
accompanying notes are an integral part of these financial statements.
POLAR
POWER, INC.
STATEMENTS OF OPERATIONS
(in
thousands, except share and per share data)
The
accompanying notes are an integral part of these financial statements.
POLAR
POWER, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY
(in
thousands, except share data)
The
accompanying notes are an integral part of these financial statements.
POLAR
POWER, INC.
STATEMENTS OF CASH FLOW
(in
thousands)
The
accompanying notes are an integral part of these financial statements.
POLAR
POWER, INC.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2021 AND 2020
(In
thousands, except for share and per share data and where otherwise noted)
NOTE
1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
Company
Polar
Power, Inc. was incorporated in the State of Washington as Polar Products, Inc. and in 1991 reincorporated in the State of California
under the name Polar Power, Inc. In December 2016, Polar Power, Inc. reincorporated in the State of Delaware (the “Company”).
The Company designs, manufactures and sells direct current, or DC, power systems to supply reliable and low-cost energy to off-grid,
bad-grid and backup power, electric vehicle (EV) charging, and nano-grid applications. The Company’s products integrate DC generator,
proprietary electronic control systems, lithium batteries and solar photovoltaic (PV) technologies to provide low operating cost and
emissions for telecommunications, defense, automotive, nano-grid, EV charging and industrial markets.
Liquidity
The accompanying financial statements have been
prepared under the assumption that the Company will continue as a going concern. Such assumption contemplates the realization of assets
and satisfaction of liabilities in the normal course of business. For the year ended December 31, 2021, the Company recorded a net loss
of $1,414 and used cash in operations of $9,380. As of December 31, 2021, we had a cash balance of $5,101, with borrowing capacity of
$2,943, stockholders’ equity of $23,250 and a working capital of $21,760. Notwithstanding the net loss for 2021, management projects
adequate cash flow from operations and available line of credit in 2022 sufficient to ensure continuation of the Company as a going concern
for at least one year from the date the Company’s 2021 financial statements are issued.
Historically, we have financed our operations
through public and private sales of common stock, credit lines from financial institutions, and cash generated from operations to provide
the Company the liquidity and capital resources to fund its operating expenses and capital expenditure requirements. The Company expects
to continue investing in product development and sales and marketing activities and has taken action to improve our margins, and are
continuing to build a strong back log. The long-term continuation of the Company’s business plan is dependent upon the generation
of sufficient revenues from its products to offset expenses. In the event that the Company does not generate sufficient cash flows from
operations and is unable to obtain funding, the Company will be forced to delay, reduce, or eliminate some or all of its discretionary
spending, which could adversely affect the Company’s business prospects, ability to meet long-term liquidity needs or ability to
continue operations.
Impact
of COVID-19
The
Company continues to monitor the evolving COVID-19 pandemic and related guidance from international and domestic authorities, including
federal, state and local public health authorities and it may need to make changes to its business based on their recommendations. COVID-19
has had, and is likely to continue to have, a material and substantial adverse impact on the Company’s results of operations including,
among others, a decrease in the Company’s sales and delays in sourcing of raw materials from suppliers. The Company’s business
is directly dependent upon, and correlates closely with, the marketing levels and ongoing business activities of its existing customers
and suppliers. In the event of a continued widespread economic downturn caused by COVID-19, the Company could experience a further reduction
in current projects, longer sales and collection cycles, deferral or delay of purchase commitments for its DC power systems, a reduction
in its manufacturing functionality, higher than normal inventory levels, a reduction in the availability of qualified labor, and increased
price competition, all of which could substantially adversely affect its net revenues and its ability to remain a going concern.
The
extent of the impact of COVID-19 on its operational and financial performance will depend on certain developments, including the duration
and potential resurgence of the outbreak, the impact on its customers and sales cycles, the impact on its customer, employee or industry
events, and the effect on its vendors, all of which are uncertain and cannot be predicted. At this point, the Company is uncertain of
the full magnitude that the COVID-19 pandemic may have on our financial condition, liquidity and future results of operations.
Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period. Material estimates relate to the assumptions made in determining
reserves for uncollectible receivables, inventory net realizable value, impairment analysis of long-term assets, valuation allowance
on deferred tax assets, accruals for potential liabilities and warrant reserves, and assumptions made in valuing equity instruments
issued for services. Actual results may differ from those estimates.
Revenue
Recognition
The
Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with
Customers (“ASC 606”). The underlying principle of ASC 606 is to recognize revenue to depict the transfer of goods or services
to customers at the amount expected to be collected. ASC 606 creates a five-step model that requires entities to exercise judgment when
considering the terms of contract(s), which includes (1) identifying the contract(s) or agreement(s) with a customer, (2) identifying
the Company’s performance obligations in the contract or agreement, (3) determining the transaction price, (4) allocating the transaction
price to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied.
Substantially
all of the Company’s revenue is derived from product sales. Product revenue is recognized when performance obligations under the
terms of a contract are satisfied, which occurs for the Company upon shipment or delivery of products or services to its customers based
on written sales terms, which is also when control is transferred. Revenue is measured as the amount of consideration the Company expects
to receive in exchange for transferring the products or services to a customer. The Company determines whether delivery has occurred
based on when title transfers and the risks and rewards of ownership have transferred to the customer, which usually occurs when the
Company places the product with the customer’s carrier or delivers the product to a customer’s location. The Company regularly
reviews its customers’ financial positions to ensure that collectability is reasonably assured.
The
Company also recognizes revenues from engineering services, technical support, and sale of accessories that support the Company’s
direct current, or DC, power systems. Revenue is recognized when transfer of control to the customer has been made and the Company’s
performance obligation has been fulfilled. The Company’s revenue from engineering services, technical support services, and product
accessories are clearly defined in each transaction with its customers and have not been significant to date.
The
Company also recognizes revenues from the rental of equipment. The Company’s rental revenues have not been significant to date
and have accounted for less than one percent of total revenues for the years ended December 31, 2021 and 2020. The Company’s rental
contracts are fixed price contracts for fixed durations of time and include freight and delivery charges and are recognized on a straight-line
basis over the rental period.
Disaggregation
of Net Sales
The
following table shows the Company’s disaggregated net sales by product type (in thousands):
SCHEDULE OF DISAGGREGATED NET SALES
| |
2021 | | |
2020 | |
| |
Years Ended December 31, | |
| |
2021 | | |
2020 | |
DC power systems | |
$ | 16,291 | | |
$ | 8,659 | |
Engineering & Tech Support Services | |
| 390 | | |
| 226 | |
Accessories | |
| 215 | | |
| 146 | |
Total net sales | |
$ | 16,896 | | |
$ | 9,031 | |
The
following table shows the Company’s disaggregated net sales by customer type (in thousands):
| |
2021 | | |
2020 | |
| |
Years Ended December 31, | |
| |
2021 | | |
2020 | |
Telecom | |
$ | 14,953 | | |
$ | 8,640 | |
Government/Military | |
| 995 | | |
| 120 | |
Marine | |
| 76 | | |
| 5 | |
Other (backup DC power to various industries) | |
| 872 | | |
| 266 | |
Total net sales | |
$ | 16,896 | | |
$ | 9,031 | |
For
the years ended December 31, 2021 and 2020, international sales totaled $1,279 and $1,522, respectively.
Product
Warranties
The
Company provides limited warranties for parts and labor at no cost to its customers within a specified time period after the sale. The
Company’s standard warranty on new products is two years from the date of delivery to the customer. The Company offers a limited
extended warranty of up to five years on its certified DC power systems based on application and usage. The Company’s warranties
are of an assurance-type and come standard with all Company products to cover repair or replacement should the product not perform
as expected. Provisions for estimated expenses related to product warranties are made at the time products are sold. These estimates
are established using historical information about the nature, frequency and average cost of warranty claim settlements as well as product
manufacturing and recovery from suppliers. Management actively studies trends of warranty claims and takes action to improve product
quality and minimize warranty costs. The Company estimates the actual historical warranty claims coupled with an analysis of unfulfilled
claims to record a liability for specific warranty purposes, which are included in accrued liabilities and other current liabilities
in the accompanying balance sheets. As of December 31, 2021 and 2020, the Company had accrued a liability for warranty reserve of $600
and $600,
respectively, which are included in other accrued liabilities in the accompanying balance sheets. Management believes that the warranty
accrual is appropriate; however, actual claims incurred could differ from original estimates, requiring adjustments to the accrual.
The
following is a tabular reconciliation of the product warranty liability, excluding the deferred revenue related to the Company’s
warranty coverage (in thousands):
SCHEDULE OF RECONCILIATION OF THE PRODUCT WARRANTY LIABILITY
| |
| | |
| |
| |
Years End December 31, | |
| |
2021 | | |
2020 | |
Changes in estimates for warranties | |
| | | |
| | |
Balance at beginning of the period | |
$ | 600 | | |
$ | 375 | |
Payments | |
| (658 | ) | |
| (634 | ) |
Provision for warranties | |
| 658 | | |
| 859 | |
| |
| | | |
| | |
Balance at end of the period | |
$ | 600 | | |
$ | 600 | |
Shipping
Costs
Amounts
billed to a customer in a sales transaction related to shipping and handling are reported as revenue. Costs incurred by the Company for
shipping and handling are considered fulfillment costs and reported as cost of sales.
Cash
and cash equivalents
The
Company considers all highly liquid investments with an original maturity of 90 days or less when purchased to be cash equivalents. The
carrying amounts reported in the Balance Sheets for cash and cash equivalents are valued at cost, which approximates their fair value.
Accounts
Receivable
Trade
receivables are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts, as needed.
The Company uses the allowance method to account for uncollectible trade receivable balances. Under the allowance method, if needed,
an estimate of uncollectible customer balances is made based upon specific account balances that are considered uncollectible. Factors
used to establish an allowance include the credit quality and payment history of the customer. The Company did not deem it necessary
to provide an allowance for doubtful accounts as of December 31, 2021 and 2020.
Inventories
Inventories
are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out (“FIFO”) basis. The
Company records adjustments to its inventory based on an estimated forecast of the inventory demand, taking into consideration, among
others, inventory turnover, inventory quantities on hand, unfilled customer order quantities, forecasted demand, current prices, competitive
pricing, and trends and performance of similar products. If the estimated net realizable value is determined to be less than the recorded
cost of the inventory, the difference is recognized as a loss in the period in which it occurs. Once inventory has been written down,
it creates a new cost basis for inventory that may not be subsequently written up. For the year ended December 31, 2021, there were no
write-downs of inventory. For the year ended December 31, 2020, the Company recorded a write down of inventory of $3,400.
As
of December 31, 2021 and 2020, inventories consisted of the following (in thousands):
SCHEDULE
OF INVENTORIES NET
|
|
|
|
|
|
|
|
|
Years
Ended December 31, |
|
|
|
2021 |
|
|
2020 |
|
Raw
materials |
|
$ |
6,607 |
|
|
$ |
5,527 |
|
Finished
goods |
|
|
2,410 |
|
|
|
3,567 |
|
Inventories |
|
$ |
9,017 |
|
|
$ |
9,094 |
|
Property
and Equipment
Property
and equipment are recorded at cost less accumulated depreciation and amortization. Additions, improvements, and major renewals or replacements
that substantially extend the useful life of an asset are capitalized. Repairs and maintenance expenditures are expensed as incurred.
Depreciation and amortization of property and equipment is computed using the straight-line method over the estimated useful life. Estimated
useful lives of the principal classes of assets are as follows:
SCHEDULE
OF ESTIMATED USEFUL LIFE OF PROPERTY PLANT AND EQUIPMENT
| |
Estimated life |
Production tooling, jigs, fixtures | |
3-5 years |
Shop equipment and machinery | |
5 years |
Vehicles | |
3-5 years |
Leasehold improvements | |
Shorter of the lease term or estimated useful life |
Office equipment | |
5 years |
Software | |
5 years |
Management
regularly reviews property, equipment and other long-lived assets for possible impairment. This review occurs annually or more frequently
if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. Based upon management’s
annual assessment, there were no indicators of impairment of the Company’s property and equipment and other long-lived assets as
of December 31, 2021, or December 31, 2020.
Leases
The
Company accounts for its leases in accordance with the guidance of ASC 842, Leases. The Company determines whether a contract
is, or contains, a lease at inception. Right-of-use assets represent the Company’s right to use an underlying asset during the
lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use
assets and lease liabilities are recognized at lease commencement based upon the estimated present value of unpaid lease payments over
the lease term. The Company uses its incremental borrowing rate based on the information available at lease commencement in determining
the present value of unpaid lease payments.
Stock-Based
Compensation
The
Company periodically issues stock-based compensation to officers, directors, and consultants for services rendered. Such issuances vest
and expire according to terms established at the issuance date.
Stock-based
payments to employees, directors, and for acquiring goods and services from nonemployees, which include grants of employee stock options,
are recognized in the financial statements based on their grant date fair values in accordance with ASC 718, Compensation-Stock Compensation.
Stock option grants to employees, which are generally time vested, are measured at the grant date fair value and depending on the conditions
associated with the vesting of the award, compensation cost is recognized on a straight-line or graded basis over the vesting period.
Recognition of compensation expense for non-employees is in the same period and manner as if the Company had paid cash for the services.
The fair value of stock options granted is estimated using the Black-Scholes option-pricing model, which uses certain assumptions related
to risk-free interest rates, expected volatility, expected life, and future dividends. The assumptions used in the Black-Scholes option
pricing model could materially affect compensation expense recorded in future periods.
Income
Taxes
The
Company accounts for income taxes using the asset and liability method whereby deferred tax assets are recognized for deductible temporary
differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized
before the Company is able to realize their benefits, or that future deductibility is uncertain.
Tax
benefits from an uncertain tax position are recognized only if it more likely than not that the tax position will be sustained on examination
by the taxing authorities based on technical merits of the position. The tax benefits recognized in the financial statements from such
a position are measured based on the largest benefit that has greater than 50 percent likelihood of being realized upon ultimate resolution.
Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Research
and Development Costs
Research
and development costs are expensed as incurred and consist primarily of salaries and other expenses relating to the design, development,
and testing of the Company’s products. For the years ended December 31, 2021 and 2020, research and development expenditures totaled
$1,986 and $1,723, respectively.
Net
Loss Per Share
Basic
net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding
for the period. Diluted earnings per share is computed by dividing the net income applicable to common stockholders by the weighted average
number of shares of common stock outstanding plus the number of additional shares of common stock that would have been outstanding if
all dilutive potential shares of common stock had been issued using the treasury stock method. Potential shares of common stock are excluded
from the computation when their effect is antidilutive. The dilutive effect of potentially dilutive securities is reflected in diluted
net income per share if the exercise prices were lower than the average fair market value of shares of common stock during the reporting
period.
The
following potentially dilutive shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would
be anti-dilutive:
SCHEDULE OF DILUTED EARNINGS PER SHARE
| |
| | |
| |
| |
December 31, | |
| |
2021 | | |
2020 | |
Options | |
| 140,000 | | |
| 140,000 | |
Warrants | |
| 24,122 | | |
| 370,000 | |
Total | |
| 164,122 | | |
| 510,000 | |
Financial
Assets and Liabilities Measured at Fair Value
The
Company uses various inputs in determining the fair value of its financial assets and liabilities. Financial assets recorded at fair
value in the balance sheets are categorized by the level of objectivity associated with the inputs used to measure their fair value.
Authoritative
guidance provided by the Financial Accounting Standards Board (“FASB”) defines the following levels directly related to the
amount of subjectivity associated with the inputs to fair valuation of these financial assets:
|
Level
1 |
Quoted
prices in active markets for identical assets or liabilities. |
|
|
|
|
Level
2 |
Inputs,
other than the quoted prices in active markets, that is observable either directly or indirectly. |
|
|
|
|
Level
3 |
Unobservable
inputs based on the Company’s assumptions. |
The
carrying amounts of financial assets and liabilities, such as cash and cash equivalents, accounts receivable, accounts payable and accrued
expenses, approximate their fair values because of the short maturity of these instruments. The carrying values of notes and loans payable
approximate their fair values due to the fact that the interest rates on these obligations are based on prevailing market interest rates.
Segments
The
Company operates in one segment for the manufacture and distribution of its products. In accordance with the “Segment Reporting”
Topic of the ASC, the Company’s chief operating decision maker has been identified as the Chief Executive Officer and President,
who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing
guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information
quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which the
entity holds material assets and reports revenue. All material operating units qualify for aggregation under “Segment Reporting”
due to their similar customer base and similarities in: economic characteristics; nature of products and services; and procurement, manufacturing
and distribution processes. Since the Company operates in one segment, all financial information required by “Segment Reporting”
can be found in the accompanying financial statements.
Concentrations
Cash.
The Company maintains cash balances at four banks, with the majority held at one bank located in the U.S. At times, the amount on
deposit exceeds the federally insured limits. Management believes that the financial institutions that hold the Company’s cash
are financially sound and, accordingly, minimal credit risk exists.
Cash
denominated in Australian Dollar with a U.S. Dollar equivalent of $9 and $10 at December 31, 2021 and 2020, respectively, was held in
an account at a financial institution located in Australia. Cash denominated in Romanian Leu with a U.S. Dollar equivalent of $23 and
$28 at December 31, 2021 and 2020, respectively, was held in an account at a financial institution located in Romania.
Revenues.
For the years ended December 31, 2021, 67% of revenue was generated from the company’s largest customer, which is from the telecommunications
industry. In 2020, 52%, 15%, and 14% of revenue were generated from the Company’s three largest customers, which were all customers
from the telecommunications industry. In 2021 and 2020, sales to telecommunications customers accounted for 89% and 96% of total revenue,
respectively. In 2021 and 2020, sales to international customers accounted for 8% and 17% of total revenue, respectively.
Accounts
receivable. At December 31, 2021, the Company’s two largest receivable accounts represented 74% and 15% of the Company’s
total accounts receivable. At December 31, 2020, 87% of the Company’s accounts receivable was from one of the Company’s major
customer. There was no other customer that accounted for more than 10% of the Company’s accounts receivable as of the years ended
December 31, 2021 and 2020.
Accounts
payable. On December 31, 2021, the three largest accounts payable accounts to the Company’s vendors represented 16%, 9%, and
9%, respectively. On December 31, 2020, the three largest accounts payable accounts to the Company’s largest vendors represented
10%, 9%, and 8%, respectively.
Recent
Accounting Pronouncements
In
September 2016, the FASB issued ASU No. 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments (“ASC 326”).
The standard significantly changes how entities will measure credit losses for most financial assets, including accounts and notes receivables.
The standard will replace today’s “incurred loss” approach with an “expected loss” model, under which companies
will recognize allowances based on expected rather than incurred losses. Entities will apply the standard’s provisions as a cumulative-effect
adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The standard is
effective for interim and annual reporting periods beginning after December 15, 2022. The adoption of ASU 2016-13 is not expected to
have a material impact on the Company’s financial position, results of operations, and cash flows.
In
August 2020, the FASB issued ASU No. 2020-06 (“ASU 2020-06”) “Debt—Debt with Conversion and Other Options (Subtopic
470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40).” ASU 2020-06 reduces the number
of accounting models for convertible debt instruments by eliminating the cash conversion and beneficial conversion models. As a result,
a convertible debt instrument will be accounted for as a single liability measured at its amortized cost as long as no other features
require bifurcation and recognition as derivatives. By removing those separation models, the effective interest rate of convertible debt
instruments will be closer to the coupon interest rate. Further, the diluted net income per share calculation for convertible instruments
will require the Company to use the if-converted method. For contracts in an entity’s own equity, the type of contracts primarily
affected by this update are freestanding and embedded features that are accounted for as derivatives under the current guidance due to
a failure to meet the settlement conditions of the derivative scope exception. This update simplifies the related settlement assessment
by removing the requirements to (i) consider whether the contract would be settled in registered shares, (ii) consider whether collateral
is required to be posted, and (iii) assess shareholder rights. ASU 2020-06 is effective January 1, 2024, for the Company and the provisions
of this update can be adopted using either the modified retrospective method or a fully retrospective method. Early adoption is permitted,
but no earlier than January 1, 2021, including interim periods within that year. Effective January 1, 2021, the Company early adopted
ASU 2020-06 and that adoption did not have an impact on its financial statements and the related disclosures.
The
Company’s management does not believe that there are other recently issued but not yet effective authoritative guidance, if currently
adopted, would have a material impact on the Company’s financial statement presentation or disclosures.
NOTE
2 – PROPERTY AND EQUIPMENT
Property
and equipment consist of the following (in thousands):
Schedule of Property and Equipment
| |
December 31, 2021 | | |
December 31, 2020 | |
Shop equipment and machinery | |
$ | 3,350 | | |
$ | 3,286 | |
Production tooling, jigs, fixtures | |
| 71 | | |
| 71 | |
Vehicles | |
| 180 | | |
| 180 | |
Leasehold improvements | |
| 390 | | |
| 390 | |
Office equipment | |
| 181 | | |
| 177 | |
Software | |
| 106 | | |
| 103 | |
Total property and equipment, cost | |
| 4,278 | | |
| 4,207 | |
Less: accumulated depreciation and amortization | |
| (3,259 | ) | |
| (2,710 | ) |
Property and equipment, net | |
$ | 1,019 | | |
$ | 1,497 | |
Depreciation
and amortization expense on property and equipment for the years ended December 31, 2021 and 2020 was $549
and $622
respectively. During the years ended December
31, 2021 and 2020, $530 and
$595,
respectively, of depreciation expense was included in cost of sales for the years then ended.
NOTE
3 – NOTES PAYABLE
Notes
payable consist of the following (in thousands):
SCHEDULE OF NOTES PAYABLE
| |
December 31, 2021 | | |
December 31, 2020 | |
Total Notes Payable | |
$ | 510 | | |
$ | 777 | |
Less: Current Portion | |
| 242 | | |
| 267 | |
| |
| | | |
| | |
Notes Payable, Noncurrent portion | |
$ | 268 | | |
$ | 510 | |
The
Company has entered into several financing agreements for the purchase of equipment in prior years. The terms of these financing arrangements
are for a term of 2 years to 5 years, with interest rates ranging from 1.9% to 6.9% per annum, secured by the purchased equipment, and
mature between September 2023 and July 2024. The aggregate monthly payments of principal and interest of the outstanding notes payable
as of December 31, 2021 is approximately $22.
As
of December 31, 2020, the balance of notes payable was $777. During 2021, the Company paid down the notes payable by $267, and at December
31, 2021, the balance of notes payable was $510.
Annual
future principal payments under the outstanding note agreements as of December 31, 2021 are as follows (in thousands):
SCHEDULE OF ANNUAL FUTURE PRINCIPAL PAYMENTS
Years ending December 31: | |
| |
2022 | |
$ | 232 | |
2023 | |
| 196 | |
2024 | |
| 82 | |
Total | |
$ | 510 | |
NOTE
4 – LINE OF CREDIT
Credit
Facility
Effective
September 30, 2020, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Pinnacle Bank (“Pinnacle”).
During 2021, the Company did not take any advances from the revolving credit facility. At December 31, 2021, there was no balance outstanding
under the line of credit and the Company had availability under the line of credit in the amount of $2,943.
The
Loan Agreement provides for a revolving credit facility under which Pinnacle may make advances to the Company, subject to certain limitations
and adjustments, of up to (a) 85% of the aggregate net face amount of the Company’s accounts receivable and other contract rights
and receivables, plus (b) the lesser of (i) 35% of the lower of cost or wholesale market value of certain inventory of the Company or
(ii) $2,500. In no event shall the aggregate amount of the outstanding advances under the revolving credit facility be greater than $4,000.
Interest accrues on the daily balance at a rate of 1.25% above the prime rate, but in no event less than 3.75% per annum. Interest on
the portion of the daily balance consisting of advances against inventory accrues interest at a rate of 2.25% above the prime rate, but
in no event less than 4.75% per annum.
The
Loan Agreement’s initial term ends on September
30, 2022 and is renewed thereafter for additional
one-year term. In addition, Pinnacle may terminate the Loan Agreement at any time upon sixty days prior written notice and immediately
upon the occurrence of an event of default. Under the Loan Agreement, the Company granted Pinnacle a security interest in all presently
existing and thereafter acquired or arising assets of the Company. The Loan Agreement also contains a financial covenant requiring the
Company to attain an effective tangible net worth, as defined, which the Company attained as of December 31, 2021.
The
Loan Agreement obligates the Company to pay Pinnacle a yearly facility fee in an amount equal to 1.125% of the sum of the advance limit.
NOTE
5 – PPP LOAN PAYABLE
On
May 4, 2020, the Company entered into a loan (the “PPP Loan”) with Citibank, N.A. in an aggregate principal amount of $1,715,
pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (“CARES
Act”).
The
PPP Loan matures two years from the disbursement date and bears interest at a rate of 1% per annum. The Company applied ASC 470, Debt,
to account for the PPP Loan. The PPP loan and accrued interest were forgivable after December 31, 2020, as long as the borrower used
the loan proceeds for qualifying expenses, including payroll, benefits, rent and utilities, and maintains its payroll levels. Management
believes the entire loan amount has been used for qualifying expenses.
The
Company filed its application for a full loan forgiveness to Citibank in July 2021. On September 28, 2021, the Company received notice
from Citibank indicating that the SBA approved the forgiveness of the PPP loan payable in the amount of $1,715. Accordingly, for the
year ended December 31, 2021, the Company recognized the forgiveness of the PPP loan as “Gain on forgiveness of PPP loan payable”
in the accompanying statements of operations.
NOTE
6 – OPERATING LEASES
The
Company has two operating lease agreements for its warehouse and office spaces both with remaining lease terms at December 31, 2021,
of 1.4 years. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company accounts for the lease
and non-lease components of its leases as a single lease component. Rent expense is recognized on a straight-line basis over the lease
term. The Company also has another storage facility on a twelve-month lease term. Leases with an initial term of 12 months or less are
not recorded on the balance sheet.
Operating
lease right-of-use (“ROU”) assets and liabilities are recognized at the lease commencement date based on the present value
of lease payments over the lease term. ROU assets represent the Company’s right to use an underlying asset for the lease term and
lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Generally, the implicit rate
of interest in arrangements is not readily determinable and the Company utilizes its incremental borrowing rate in determining the present
value of lease payments. The Company’s incremental borrowing rate is a hypothetical collateralized borrowing rate based on its
understanding of what its credit rating would be. The operating lease ROU asset includes any lease payments made and excludes lease incentives.
The
components of rent expense and supplemental cash flow information related to leases for the period are as follows:
SCHEDULE
OF RENT EXPENSE AND SUPPLEMENTAL CASH FLOW INFORMATION
| |
Years Ended December 31, | |
| |
2021 | | |
2020 | |
Lease Cost (in thousands) | |
| | | |
| | |
Operating lease cost (of which $98 is included in general and administration and $601 is included in cost of sales in the Company’s statement of operations as of December 31, 2021, and $98 is included in general and administration and $601 is included in cost of sales in the Company’s statement of operations as of December 31, 2020) | |
$ | 699 | | |
$ | 699 | |
| |
| | | |
| | |
Other Information | |
| | | |
| | |
Weighted average remaining lease term – operating leases (in years) | |
| 1.4 | | |
| 2.4 | |
Average discount rate – operating leases | |
| 3.75 | % | |
| 3.75 | % |
The
supplemental balance sheet information related to leases for the period is as follows:
SCHEDULE
OF SUPPLEMENTAL BALANCE SHEET INFORMATION
| |
At December 31, 2021 | | |
At December 31, 2020 | |
Operating leases (in thousands) | |
| | | |
| | |
Long-term right-of-use assets, net of accumulated amortization of $990 and $1,265, respectively | |
$ | 914 | | |
$ | 1,563 | |
| |
| | | |
| | |
Current portion of operating lease liabilities | |
$ | 721 | | |
$ | 670 | |
Noncurrent portion of operating lease liabilities | |
| 268 | | |
| 990 | |
Total operating lease liabilities | |
$ | 989 | | |
$ | 1,660 | |
Maturities
of the Company’s lease liabilities are as follows:
SCHEDULE
OF MATURITIES OF LEASE LIABILITIES
Year
Ending (in thousands) | |
Operating Leases | |
2022 | |
$ | 747 | |
2023 | |
| 280 | |
Total lease payments | |
| 1,027 | |
Less: Imputed interest/present value discount | |
| (38 | ) |
Present value of lease liabilities | |
$ | 989 | |
Rent
expense for the twelve months ended December 31, 2021 and 2020 was $903 and $903, respectively (including short-term and other rentals).
NOTE
7 – STOCKHOLDERS’ EQUITY
Common
Stock
| ● | Underwritten
Public Offering of Common Stock |
On
February 10, 2021, and the Company issued and sold 750,000
shares of common stock in an underwritten public
offering. The Company received at the closing of the offering net proceeds of approximately $12,466
after deducting underwriting discounts and commissions and other offering expenses payable by the Company. The Company is
using the net proceeds from the Offering for general corporate purposes.
|
● |
Issuance of common
stock and warrants for cash in 2020 |
On July 2, 2020, the Company
entered into a securities purchase agreement with certain institutional investors for the sale in a private placement of 1,250,000 shares
of the Company’s common stock, at a purchase price of $2.25 per share. Additionally, each investor received a warrant exercisable
into 50% of the shares purchased by an investor (see Note 9). The closing of the private placement took place on July 7, 2020, and aggregate
net proceeds from the sale of the shares of common stock and warrants was approximately $2,812.
|
● |
Issuance
of common stock upon exercise of warrants |
During
the year ended December 31, 2021, warrants to purchase an aggregate of 225,878 shares of common stock were exercised, and the Company
received net proceeds of $707 upon such exercise. In addition, warrants exercisable into 120,000 shares of common stock were converted
under a cashless exercise option into 61,644 shares of the Company’s common stock.
During
the year ended December 31, 2020, warrants to purchase an aggregate of 375,000 shares of common stock were exercised, and the Company
received net proceeds of $1,174 upon such exercise.
Preferred
Stock
The
Company’s board of directors is authorized to issue up to 5,000,000 shares of preferred stock in one or more series and to fix
the rights, preferences, privileges, qualifications, limitations and restrictions thereof, including dividend rights and rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series
or the designation of such series, without any vote or action by the Company’s stockholders. Any preferred stock to be issued could
rank prior to the Company’s common stock with respect to dividend rights and rights on liquidation. The Company’s board of
directors, without stockholder approval, may issue preferred stock with voting and conversion rights which could adversely affect the
voting power of holders of common stock and discourage, delay or prevent a change in control of the Company.
Treasury
Stock
The
Company entered into a 10b-18 Stock Repurchase Agreement on November 6, 2019 authorizing ThinkEquity, a division of Fordham Financial
Management, Inc. to repurchase up to $500 of the Company’s common stock. During the year ended December 31, 2020, the Company purchased
of 17,477 shares and held them as treasury stock at cost of $40. On January 20, 2020, the Company terminated the Stock Repurchase Agreement.
NOTE
8 – STOCK OPTIONS
The
following table summarizes stock option activity:
SCHEDULE
OF STOCK OPTION ACTIVITY
| |
Number of Options | | |
Weighted Average Exercise Price | |
Outstanding, December 31, 2019 | |
| 140,000 | | |
$ | 5.22 | |
Granted | |
| — | | |
| — | |
Exercised | |
| — | | |
| — | |
Cancelled | |
| — | | |
| — | |
Outstanding, December 31, 2020 | |
| 140,000 | | |
$ | 5.22 | |
Granted | |
| — | | |
| — | |
Exercised | |
| — | | |
| — | |
Outstanding and exercisable, December 31, 2021 | |
| 140,000 | | |
$ | 5.22 | |
Effective
July 8, 2016 the Company’s board of directors approved the Polar Power 2016 Omnibus Incentive Plan (the “2016 Plan”),
authorizing the issuance of up to 1,754,385 shares of common stock as incentives to employees and consultants to the Company with awards
limited to a maximum of 350,877 shares to any one participant in any calendar year.
At
December 31, 2021 and 2020, the Company had total outstanding options of 140,000, which are fully vested, exercise prices ranging from
$4.84 to $5.09, and with 30,000 option shares set to expire in December 2027 and the remaining 110,000 option shares set to expire in
April 2028.
There
was no intrinsic value of the outstanding options at December 31, 2021.
NOTE
9 – STOCK WARRANTS
The
following table summarizes warrant activity:
SCHEDULE
OF WARRANTS OUTSTANDING
| |
Number of Warrants | | |
Weighted Average Exercise Price | |
Outstanding, December 31, 2019 | |
| 120,000 | | |
$ | 8.75 | |
Issued | |
| 625,000 | | |
| 3.13 | |
Exercised | |
| (375,000 | ) | |
| 3.13 | |
Outstanding, December 31, 2020 | |
| 370,000 | | |
$ | 8.75 | |
Issued | |
| — | | |
| — | |
Exercised | |
| (345,878 | ) | |
| 4.07 | |
Outstanding, December 31, 2021 | |
| 24,122 | | |
$ | 3.13 | |
Exercisable, December 31, 2021 | |
| 24,122 | | |
$ | 3.13 | |
On
July 7, 2020, the Company issued warrants exercisable into 625,000 shares of the Company’s common stock in conjunction with the
sales by the Company in a private placement of 1,250,000 shares of the Company’s common stock (see Note 7). The warrants have an
exercise price of $3.13 per share, are exercisable beginning on July 7, 2020 and have a term of five years. During the year ended December
31, 2020, warrants to purchase 375,000 shares of common stock were exercised, and the Company received net proceeds of $1,174 upon such
exercise.
During
year ended December 31, 2021, warrants to purchase 225,878 shares of common stock were exercised at $3.13 exercise price per share or
total net proceeds to the Company of $707 upon exercise. Also during 2021, warrants exercisable into 120,000 shares of the Company’s
common stock were exercised under a cashless exercise option into 61,644 shares of the Company’s common stock.
The
intrinsic value of the outstanding and exercisable warrants at December 31, 2021 was $11.
NOTE
10 – INCOME TAXES
The
benefit from income taxes for the years ended December 31, 2021 and 2020 consists of the following (in thousands):
SCHEDULE OF INCOME TAX
PROVISION (BENEFIT)
| |
| | |
| |
| |
Years Ended December 31, | |
| |
2021 | | |
2020 | |
Current Federal | |
| - | | |
| (2,139 | ) |
Current State | |
| - | | |
| - | |
Deferred Federal | |
| - | | |
| - | |
Deferred State | |
| - | | |
| - | |
Benefit from income taxes | |
| - | | |
| (2,139 | ) |
The
reconciliation of the effective income tax rate to the federal statutory rate is as follows:
SCHEDULE OF EFFECTIVE
INCOME TAX RATE TO THE FEDERAL STATUTORY RATE
| |
| | |
| |
| |
Years Ended December 31, | |
| |
2021 | | |
2020 | |
Federal income tax rate | |
| (21 | )% | |
| (21 | )% |
State tax, net of federal benefit | |
| (7 | )% | |
| (7 | )% |
Carryback net operating loss | |
| — | % | |
| — | % |
Change in valuation allowances | |
| 28 | % | |
| 12 | % |
Effective income tax rate | |
| - | % | |
| 16 | % |
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
statement purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and
liabilities at December 31, 2021 and 2020 are as follows (in thousands):
SCHEDULE
OF DEFERRED TAX ASSETS AND LIABILITIES
| |
December 31, 2021 | | |
December 31, 2020 | |
Deferred tax assets: | |
| | | |
| | |
Inventory valuation | |
$ | 1,373 | | |
$ | 1,379 | |
Accrued liabilities and other reserves | |
| 257 | | |
| 169 | |
Operating lease liability | |
| 277 | | |
| 465 | |
Net operating loss carryforwards | |
| 3,158 | | |
| 2,281 | |
Gross deferred tax assets | |
| 5,065 | | |
| 4,294 | |
Valuation allowance | |
| (4,701 | ) | |
| (3,515 | ) |
Total deferred tax assets | |
| 364 | | |
| 779 | |
Deferred tax liabilities: | |
| | | |
| | |
Operating lease right-of-use asset, net | |
| (128 | ) | |
| (436 | ) |
Depreciation | |
| (236 | ) | |
| (343 | ) |
Total deferred tax liabilities | |
| (364 | ) | |
| (779 | ) |
Net deferred tax asset (liability) | |
$ | — | | |
$ | — | |
On March 27, 2020, the Coronavirus
Aid, Relief, and Economic Security Act (“CARES Act”) was enacted and signed into law in response to the COVID-19 pandemic.
Under the CARES Act, net operating loss (“NOL”s) carryforwards arising in tax years beginning after December 31, 2017, and
before January 1, 2021 (e.g., NOLs incurred in 2018, 2019, or 2020 by a calendar-year taxpayer) may be carried back to each of the five
tax years preceding the tax year of such loss. Since the enactment of the Tax Cuts and Jobs Act of 2017 (TCJA), NOLs generally could
not be carried back but could be carried forward indefinitely. Further, the TCJA limited NOL absorption to 80% of taxable income. The
CARES Act temporarily removes the 80% limitation, reinstating it for tax years beginning after 2020.
Based on the passage of Cares
Act, the Company determined that the NOL carryback provision in the CARES Act would result in a cash benefit to us for the fiscal years
2017, 2018, and 2019. As a result, during the year ended December 31, 2020, an income tax benefit of $2,139 was recorded related to U.S.
Federal loss carryforwards that became eligible for carryback. At December 31, 2020, we recorded total income taxes receivable of $2,357,
of which $1,702 pertained to the benefit of carrying back the NOLs for 2018 and 2019 to the tax year ended September 30, 2016, and $655
pertained to the benefit of carrying back NOL for fiscal year 2020 to the short tax period ended December 31, 2016. During the year ended
December 31, 2021, the Company received $1,570 of the income taxes receivable, and the balance of $787 remained outstanding at December
31, 2021.
At
December 31, 2021, the Company had available Federal and state NOLs carryforwards to reduce future taxable
income of approximately $10.7
million and $12.9
million, respectively. The Federal NOL can
be carried forward indefinitely, but can only offset 80%
of taxable income in future years. The
state carryforward expires in 2039 through 2040.
Authoritative
guidance issued by the ASC Topic 740 – Income Taxes requires that a valuation allowance be established when it is more likely than
not that all or a portion of deferred tax assets will not be realized. The Company considers all evidence available when determining
whether deferred tax assets are more likely-than-not to be realized, including projected future taxable income, scheduled reversals of
deferred tax liabilities, prudent tax planning strategies, and recent financial operations. The evaluation of this evidence requires
significant judgement about the forecast of future taxable income is consistent with the plans and estimates we are using to manage the
underlying business. Based on their evaluation, the Company determined that their net deferred tax assets do not meet the requirements
to be realized, and as such, the Company has provided a full valuation allowance against them.
The
Company follows FASB guidelines that address the determination of whether tax benefits claimed or expected to be claimed on a tax return
should be recorded in the financial statements. Under this guidance, the Company may recognize the tax benefit from an uncertain tax
position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on
the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured
based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. This guidance
also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires
increased disclosures. At December 31, 2021 and 2020, the Company did not have a liability for unrecognized tax benefits, and no adjustment
was required at adoption.
The
Company files income tax returns in the U.S. federal jurisdiction and various states. The Company is subject to U.S. federal or state
income tax examinations by tax authorities for tax years after 2017.
The
Company’s policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of December 31, 2021
and 2020, the Company had no accrued interest or penalties related to uncertain tax positions. Additionally, tax years 2017 through 2021
remain open to examination by the major taxing jurisdictions to which the Company is subject.
NOTE
11 - EMPLOYEE RETENTION CREDITS
The
Consolidated Appropriations Act, passed in December 2020, expanded the employee retention credit (“ERC”) program through
December 2021. The credits cover 70% of qualified wages, plus the cost to continue providing health benefits to our employees, subject
to a $7 cap per employee per quarter. Due to revenue declines we have experienced, we qualified for approximately $2,000 of employee
retention credits (“ERC”) during the year ended December 31, 2021. The Company believes that there is reasonable assurance
that it has complied with the ERC eligibility requirements and has elected an accounting policy to present government assistance as a
reduction of the related expense. The ERC refund was recorded as an offset to certain payroll expenses in cost of sales of $1,300 and
operating expenses of $700 in the accompanying statement of operations for the year ended December 31, 2021. As of December 31, 2021,
the balance of $2,000 is presented as employee retention credit receivable in the accompanying balance sheet.
NOTE
12 – DISTRIBUTION AGREEMENT WITH A RELATED ENTITY
On
March 1, 2014, the Company entered into a subcontractor installer agreement with Smartgen Solutions, Inc. (“Smartgen”), a
related entity that is engaged in business of equipment rental and provider of maintenance, repair and installation services to mobile
telecommunications towers in California. Under the terms of the agreement, Smartgen has been appointed as a non-exclusive, authorized
service provider for the installation, repair and service of the Company’s products in Southern California. The agreement has a
term of three years from the date of execution and automatically renews for additional one-year periods if not terminated.
During
the years ended December 31, 2021 and 2020, Smartgen performed $88 and $129 in field services, respectively, the cost of which is included
in cost of goods sold.
On
January 2, 2022, we provided written notice to Smartgen to terminate all agreements between the two companies. The termination was effective
January 31, 2022.
NOTE
13 – COMMITMENTS AND CONTINGENCIES.
From
time to time, the Company may be involved in general commercial disputes arising in the ordinary course of our business. The Company
is not currently involved in legal proceedings that could reasonably be expected to have material adverse effect on its business, prospects,
financial condition or results of operations. In the opinion of management of the Company, adequate provision has been made in the Company’s
financial statements at December 31, 2021 with respect to such matters. See also Notes 6 and 10.
INDEX
TO EXHIBITS
10.9 |
|
Form of Representative’s Warrant |
|
10-K |
|
001-37960 |
|
10.9 |
|
3/10/2017 |
|
|
|
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|
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|
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10.10
|
|
Amendment No. 1 to Polar Power, Inc. 2016 Omnibus Incentive Plan |
|
10-K |
|
001-37960 |
|
10.10 |
|
4/1/2019 |
|
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10.11 |
|
Supplier Agreement between Polar Power, Inc. and Citibank, N.A. dated effective as of June 4, 2019 |
|
8-K |
|
001-37960 |
|
10.1 |
|
6/6/2019 |
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10.12 |
|
Paycheck Protection Program Loan Note by Polar Power, Inc. in favor of Citibank, N.A. dated May 4, 2020 |
|
8-K |
|
001-37960 |
|
10.1 |
|
5/8/2020 |
|
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10.13 |
|
Securities Purchase Agreement dated July 2, 2020 between Polar Power, Inc. and each purchaser identified on the signature pages thereto |
|
8-K |
|
001-37960 |
|
10.1 |
|
7/8/2020 |
|
|
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10.14 |
|
Registration Rights Agreement dated July 2, 2020 between Polar Power, Inc. and each purchaser identified on the signature pages thereto |
|
8-K |
|
001-37960 |
|
10.2 |
|
7/8/2020 |
|
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10.15 |
|
Loan and Security Agreement dated August 31, 2020 between Pinnacle Bank and Polar Power, Inc. |
|
8-K |
|
001-37960 |
|
10.1 |
|
10/9/2020 |
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10.16 |
|
First Modification to Loan and Security Agreement dated October 7, 2020 by and between Polar Power, Inc. and Pinnacle Bank |
|
8-K |
|
001-37960 |
|
10.2 |
|
10/9/2020 |
|
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14.1 |
|
Code of Ethics |
|
10-K |
|
001-37960 |
|
14.1 |
|
3/10/2017 |
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21.1 |
|
Subsidiaries of the Registrant |
|
10-K |
|
001-37960 |
|
21.1 |
|
3/10/2017 |
|
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|
23.1 |
|
Consent of Independent Registered Public Accounting Firm |
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X |
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31.1 |
|
Certification Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
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X |
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31.2 |
|
Certification Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
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X |
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32.1 |
|
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
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X |
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101.INS |
|
Inline
XBRL Instance Document |
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X |
|
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101.SCH |
|
Inline
XBRL Taxonomy Extension Schema |
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X |
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101.CAL |
|
Inline
XBRL Taxonomy Extension Calculation Linkbase |
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X |
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101.DEF
|
|
Inline
XBRL Taxonomy Extension Definition Linkbase |
|
|
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|
X |
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101.LAB |
|
Inline
XBRL Taxonomy Extension Label Linkbase |
|
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|
X |
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101.PRE |
|
Inline
XBRL Taxonomy Extension Presentation Linkbase |
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X |
|
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|
104 |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document) |
|
|
|
|
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|
|
(#) |
A
contract, compensatory plan or arrangement to which a director or executive officer is a party or in which one or more directors
or executive officers are eligible to participate. |
(*) |
Certain
of the agreements filed as exhibits contain representations and warranties made by the parties thereto. The assertions embodied in
such representations and warranties are not necessarily assertions of fact, but a mechanism for the parties to allocate risk. Accordingly,
investors should not rely on the representations and warranties as characterizations of the actual state of facts or for any other
purpose at the time they were made or otherwise. |
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on this 31st day of March 2022.
|
POLAR
POWER, INC. |
|
|
|
By: |
/s/
Arthur D. Sams |
|
|
Arthur
D. Sams, |
|
|
President,
Chief Executive Officer and Secretary |
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant
and in the capacities indicated on the dates indicated.
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/
Arthur D. Sams |
|
Chief
Executive Officer, President, Secretary |
|
March
31, 2022 |
Arthur
D. Sams |
|
and
Chairman of the Board of Directors
(principal executive officer) |
|
|
|
|
|
|
|
/s/
Luis Zavala |
|
Chief
Financial Officer |
|
March
31, 2022 |
Luis
Zavala |
|
(principal
financial and accounting officer) |
|
|
|
|
|
|
|
/s/
Keith Albrecht |
|
Director |
|
March
31, 2022 |
Keith
Albrecht |
|
|
|
|
|
|
|
|
|
/s/
Peter Gross |
|
Director |
|
March
31, 2022 |
Peter
Gross |
|
|
|
|
|
|
|
|
|
/s/
Katherine Koster |
|
Director |
|
March
31, 2022 |
Katherine
Koster |
|
|
|
|
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