UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2020
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 [X]
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 [X]
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 [X] 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 [X] 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 [X]
|
Smaller
Reporting Company [X]
|
|
Emerging
Growth Company [X]
|
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. [X]
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
[X]
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 $19,375,600.
The
number of shares outstanding of the Registrant’s common stock, $0.0001 par value, as of March 31, 2021 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, 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 direct current, or 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 and
residential and commercial power.
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). Within this market, we offer the following three configurations
of our DC power systems, with output power ranging from 5 kW to 30 kW:
|
●
|
DC
base power systems. Our basic system which is centered around a DC generator. Applications include both prime power and
backup power.
|
|
|
|
|
●
|
DC
hybrid power systems. Our basic DC power system with added energy storage via lithium-ion or other battery chemistries.
|
|
|
|
|
●
|
DC
Solar hybrid power systems. Our DC hybrid power system with added renewable energy (i.e., solar panels).
|
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
During 2020, as a result
of Covid-19, the telecommunications industry experienced a slowdown in construction activities due to disruptions in the global
supply chain of telecommunications related components, operational shutdowns and stay-at-home orders. 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 of existing orders. As a result of these factors, we experienced a 64% decline
in net revenues in 2020 as compared to 2019.
During 2020, in response
to the decline in revenues from our Tier-1 telecommunications customers, we diversified our sales efforts to develop power
systems configured inside containers designed for installation in remote off-grid applications (i.e., in applications not involving
a connection to an electrical power grid). During the fourth quarter of 2020, we began shipment of off-grid systems to
Tier-1 telecommunications providers. We believe these systems can provide significant fuel efficiency for both backup and
prime power applications in remote areas in the U.S. and globally. Although our initial orders for these systems were from
U.S.-based Tier-1 telecommunications customers, we believe the market opportunity for these remote systems may be significant
in emerging markets such as Africa and Asia where over 60% of the telecommunications towers are connected to a bad-grid
or are completely off-grid.
The slowdown in sales
from our Tier-1 telecommunications customers during the first half of 2020 also led us to further diversify our sales efforts
to increase sales to the U.S. military, international telecommunications customers and Tier-2 telecommunications customers in
the U.S. During the second half of 2020, we experienced measurable success in our diversification strategy. We anticipate
in 2021 our sales to new customers, combined with increased sales of new products introduced during 2020, will return
to pre-2020 historical sales levels.
The Covid-19 pandemic
has had a significant negative impact on our overall operations including revenues, productivity, gross margins and liquidity.
Management’s early focus on training, processes and procedures kept our infection rates to below 1% with no company-wide
COVID-19 spread. Due to the slowdown in sales to our Tier-1 telecommunications customers, our sales mix changed to smaller
quantity custom orders. Small custom orders with frequent line changeovers caused less process automation which,
in turn, led to higher labor costs and higher setup times. Since 2016, 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 this period of lower sales, we invested
in cross training our direct labor force across diverse processes and equipment which will make our workforce more agile and
productive in the future. In addition, during 2020, our sales force directed their efforts into additional markets
and regions to reduce customer and regional concentration.
During 2019, we developed
a lower emission solar hybrid power system which integrates solar energy storage with natural gas/LPG
(liquified-petroleum gas) powered generators that targets off-grid (i.e., areas where wireless towers are not connected to
an electrical grid) and bad-grid (i.e., areas where wireless towers are connected to an electrical grid that loses power more
than eight hours per day) DC power generation applications. Our new product is equipped with a 90,000-hour lifecycle engine
which provides longer life, lower emissions and operating costs. Certification of this product occurred in December
2019, when we received our certificate of conformity from the U.S. Environmental Protection Agency, or the EPA, for our small
spark-ignition Toyota engines. In the second half of 2020, we began shipments of our natural gas-powered DC power systems. Our
new product, equipped with our proprietary control systems, is designed for 24/7 prime power application providing
DC power outputs between 5 kW to 22 kW. We expect that the bad-grid, off-grid markets, which include telecommunications
towers, commercial and residential backup, electric vehicle charging, “Mini-Grid” and various others, will expand
the market for our natural gas/LPG product lines in both the U.S. and in international markets. We plan to develop new
configurations of DC power system, battery storage and solar to optimize the match between our solutions and various application
needs.
Markets
We
primarily operate within the telecommunications market and, to a lesser extent, in other markets, including military, electric
vehicle charging and residential and commercial power.
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 95% 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, Namibia, U.A.E.,
Australia 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 2020, we delivered over hundred natural gas-powered DC power systems
to a leading Japanese telecommunications tower operator while delivering production quantities to a Tier-1 telecommunications
tower operator in Papua New Guinea.
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:
|
●
|
enhanced
mobility, reliability and maintainability;
|
|
●
|
improved
fuel efficiency;
|
|
|
|
|
●
|
reduced
system size and weight;
|
|
|
|
|
●
|
reduced
infrared and acoustic signatures;
|
|
|
|
|
●
|
increased
survivability in rugged combat operations; and
|
|
|
|
|
●
|
reduced
total cost of ownership.
|
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-60 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.
During 2020, we were contacted
by a defense contractor to develop and deliver 50 kW high voltage power systems for auxiliary power use in military vehicles.
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.
Electric
Vehicle Charging
According
to Frost & Sullivan, a leading market consulting firm, the electric vehicle market in the U.S. will flourish over the next
five years. The firm anticipates that due to upcoming incentives for electric vehicles the number of electric vehicles in the
U.S. will grow from 1.4 million in 2020 to 7.0 million in 2025. This increase will require approximately 5.0 million additional
charging stations nationwide 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-powered charger for roadside assistance and emergency services for most major automotive
manufacturers. Our chargers were initially used by “AAA” for roadside assistance to rapid charge stranded out
of charge vehicles. In 2020, we improved this product by replacing the diesel engine with a heavy duty 90,000-hour lifetime
Toyota natural gas 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 Namibia,
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 30-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:
|
●
|
Proprietary
Technologies. Our decades of research and development has led to the development of DC power systems with output ranging
from 5 kW – 30 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 – 600 VDC to match the precise application needs (e.g.,
telecom equipment, electric vehicle charger, 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 safely charging a particular battery chemistry. AC power systems are indirectly connected to a commercially available
unknown battery charger that converts the AC output to DC voltage. The presence of inefficient or low-quality charger can
significantly lower charge efficiency of AC systems and may reduce battery life in some cases.
|
|
|
|
|
●
|
Engineering
Expertise. Over the past three 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 power systems, 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.
|
|
|
|
|
●
|
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.
|
|
|
|
|
●
|
Strong
Customer Base. Our customer base consists of large telecommunications companies,
military sub-contractors and industrial companies. Tier-1 telecommunications customers
have represented over 90% 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. 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
is 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.
In 2020, we diversified 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 Namibia, U.A.E., Australia, Poland and the Dominican
Republic. Our sales team directly markets to Tier-1 telecommunications companies in their
regions.
|
|
●
|
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 fixed-cost research, design and engineering
contracts, with an average of eight 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 30 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:
|
●
|
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.
|
|
|
|
|
●
|
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 2020, approximately 83% 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.
|
|
|
|
|
●
|
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. In 2019, we began the development of a lower emission LPG and natural gas DC power generator 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 2021, 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.
|
|
●
|
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.
In 2020, we began demonstrating our hybrid systems using natural gas fuel powered generators integrated with solar and battery
storage. We plan to conclude our testing in the first half of 2021, which we believe can then provide us the required credentials
to receive subsidies for our customers, thereby making us competitive in this marketplace.
|
Our
Technologies
In
1991, we began introducing DC power systems 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, 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.
In
1992, 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 and 32-pole designs (i.e., designs containing
12 or 36 magnetic poles) incorporating either 6 or 3 phases (i.e., containing 6 or 3 power circuits). 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
2002, 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.
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 2021, 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. We believe these
enhancements will increase our penetration into the storage market during 2021 and beyond.
In
2019, we developed a low-cost DC generator that runs on either natural gas or LPG. In December 2019, we received our certificate
of conformity from the EPA on our small spark-ignition Toyota engines which are used in our new LPG / natural gas generators.
These new generators provide power outputs between 5 kW to 15 kW and incorporate a 30,000- to 90,000-hour life engine with our
proprietary control system. We plan to market these stationary generators within the telecommunications, commercial and residential
markets primarily through third party distributors.
Products
and Services
We
broadly classify our power systems into three categories:
|
●
|
DC
base power systems. Our basic system which is centered around a DC generator. Applications include both prime power
and backup power.
|
|
|
|
|
●
|
DC
hybrid power systems. Our basic DC power system with added energy storage via lithium-ion or other battery chemistries.
|
|
|
|
|
●
|
DC
Solar hybrid power systems. Our DC hybrid power system with added renewable energy (i.e., solar panels).
|
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.
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:
|
●
|
all
aluminum, powder coated, enclosure with stainless hardware, which is lightweight and corrosion resistant;
|
|
|
|
|
●
|
105
C rated signal wire, tinned copper strands;
|
|
|
|
|
●
|
stainless
steel braided covering hoses for fuel and coolant lines;
|
|
|
|
|
●
|
Class
220 C magnet wire for alternator windings;
|
|
|
|
|
●
|
watertight
connectors in place of terminal strips and other non-sealed connectors; and
|
|
|
|
|
●
|
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 3,000-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, fuel costs of operating a generator 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 while the generator starts 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 to 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:
|
●
|
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.
|
|
|
|
|
●
|
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.
|
|
|
|
|
●
|
Shelter.
We provide an all-weather light-weight aluminum walk-in shelter that is easy to transport by truck or helicopter.
|
|
●
|
Lightning
protection. We provide the highest degree of lightning protection through the use of air-coil type inductors designed
by us.
|
|
|
|
|
●
|
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:
|
●
|
automated
and continuous remote monitoring with auto alerts and notifications that can be transmitted via email or text messaging;
|
|
|
|
|
●
|
maintenance
management, which provides ability to schedule preventative maintenance based on actual equipment usage; and
|
|
|
|
|
●
|
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 South Africa,
U.A.E., Poland and Dominican Republic and established sales and aftermarket service locations in Australia and Romania to locally
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 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.
The
COVID-19 pandemic has taken a toll on the global economy and has disrupted business operations globally. 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 the second half
of 2020 and early part of 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
market our products through various distribution channels that promote our products and brand and provide effective aftermarket
support and service. While most of our sales are achieved through our direct sales force, we also utilize independent service
providers and dealers to complement our global sales effort. The promotion of our natural gas powered Mini-Grid product, targeting
off-grid and bad grid rural areas, will be undertaken by mainly 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 Namibia, Australia and Romania 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 6 kW to 30 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 expenditures decreased by $553 to $1,723 during 2020, as compared to $2,276 in 2019. This decrease in
research and development expenditures is primarily attributable to the negative impact of COVID-19 on resources such as labor
and materials. We have implemented systems to monitor project status and utilize remote access and cloud-based systems to maintain
engineering efficiencies. Our research and development efforts during 2020 primarily focused on launching our new LPG / natural
gas line of generators and hybrid power systems for off-grid and unreliable grid cell sites, and supporting existing sales activity
related to our DC back-up power systems. During 2021, we expect research and development expenses to gradually increase as control
over COVID-19 improves and we continue investing into new products 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 2021 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
recent outbreak of COVID-19 has taken a toll on the global economy and has disrupted raw material supply chains all over the world.
During the first half of 2020, we experienced material shortages and delays while during the second half we experienced supplier
lead times returning to pre-COVID normal. We are actively sourcing the domestic supply chain for key components to ensure no future
delays. We anticipate modest price increases post pandemic, although we believe we can mitigate a portion of these anticipated
cost increases by passing through some cost increases to our customers while the other increases can be mitigated through increases
in efficiency.
Quality
Control
We
began concentrating on our quality control 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.
Employees
As
of March 31, 2021, we had 106 full time employees, which includes 96 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.
In
March 2020, in response to the COVID-19 outbreak, the governor of California issued a state-wide “shelter-in-place”
order and placed 79 employees on furlough status. We have implemented a Business
Continuity Plan designed to keep employees safe, follow regulatory guidelines, and continue essential business operations. In
September 2020, the majority of our employees that were on furlough status returned to work. We are actively monitoring the global
situation 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 2021 and perhaps beyond.
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 and ensuing governmental responses have materially negatively impacted, and could further materially adversely
affect, our business, financial condition, results of operations and cash flows.
The
COVID-19 pandemic has had a widespread and detrimental effect on the global economy as a result of the continued increase in the
number of cases, particularly in the United States, and actions 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. The COVID-19 pandemic and ensuing governmental
responses 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 severity 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. For instance, some areas of the United States are experiencing new surges in COVID-19 cases, which has,
in some cases, led to the closure of recently re-opened businesses and further postponed opening other businesses. 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 of raw materials from suppliers which,
in turn, has raised liquidity concerns. 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 widespread economic downturn
caused by COVID-19, we will likely experience a further 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 net revenues and our ability to remain a going concern.
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 2020 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 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 due to the daily evolution of the COVID-19 pandemic and the global responses to curb its
spread. 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, which include a global recession, and that, as a result
of such effects, we may continue to be adversely affected even after the COVID-19 pandemic has subsided.
We
continue to 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.
For
example, we built substantial inventory of our products in anticipation of customer demands in 2020. Due to a temporary slowdown
in construction of telecommunications towers in the U.S., we recorded lower than expected demand and sales of our products to
our U.S. telecommunications customers, which resulted in a $3,400 inventory write-down to reduce the remaining inventory of our
products to its estimated net realizable value of $9,094 as of December 31, 2020.
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. Although we have not
completed the preparation of our financial statements for the quarter ended March 31, 2021, we are in the process of undergoing
an evaluation of the net realizability of our assets, including the recoverability of our recorded inventory amounts. Upon the
completion of our analysis, there could be further adjustments to the carrying value of certain of our recorded assets, which
adjustments could be material.
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, 2020 and 2019, we incurred consolidated net losses
of approximately $10.8 million and $4.0 million, respectively. 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 three customers 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 three customers within the telecommunications
market, AT&T, T-Mobile and Verizon Wireless. The volume of sales to anyone of them may vary significantly from year to year.
Any factor adversely affecting sales of these power systems to these customers 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. For example, during the 2020, our U.S. Tier-1 telecommunications
customers postponed orders and shipments due to factors that we believe were related to both the shift in the allocation capital
budgets from backup power solutions to 5G programs and the impact of COVID-19, which resulted in a 64% decline in net revenues
from U.S. Tier-1 telecommunications customers during 2020 as compared to 2019.
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, our customers often require a significant technical review, tests and evaluations over long periods of time, 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 profit margins.
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
high concentration of our sales within the telecommunications market could result in a significant reduction in sales and negatively
affect our results of operations if demand for our DC power systems declines within this market.
We
expect to be predominately focused on the manufacturing, marketing and sales of DC power systems to telecommunications companies
for the foreseeable future. We may be unable to shift our business focus away from these activities. Accordingly, the emergence
of new competing DC power products or lower-cost alternative technologies may reduce the demand for our products. A downturn in
the demand for our DC power systems within the telecommunications market would likely materially and adversely affect our sales
and results of operations.
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:
|
●
|
effectively
identify and develop leading energy efficient technologies;
|
|
|
|
|
●
|
continue
to develop our technical expertise;
|
|
|
|
|
●
|
enhance
our current products and services with new, improved and competitive technology; and
|
|
|
|
|
●
|
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,
including our new LPG / natural gas line of generators and solar hybrid power systems, depends on a number of factors, including:
|
●
|
the
impact of the COVID-19 pandemic on the global markets;
|
|
|
|
|
●
|
the
changing requirements and preferences of the potential customers in our markets;
|
|
|
|
|
●
|
the
accurate prediction of market requirements, including regulatory issues;
|
|
|
|
|
●
|
the
timely completion and introduction of new products and services to avoid obsolescence;
|
|
|
|
|
●
|
the
quality, price and performance of new products and services;
|
|
|
|
|
●
|
the
availability, quality, price and performance of competing products and services;
|
|
●
|
our
customer service and support capabilities and responsiveness;
|
|
|
|
|
●
|
the
successful development of our relationships with existing and potential customers; and
|
|
|
|
|
●
|
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 66%, and 18% of our total engines sold as a component of our DC power systems during 2020, respectively, and represented
approximately 70%, 0% of our total engines sold as components of our DC power systems during 2019, 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. 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:
|
●
|
inflation
or changes in political and economic conditions;
|
|
|
|
|
●
|
unstable
regulatory environments;
|
|
|
|
|
●
|
changes
in import and export duties;
|
|
|
|
|
●
|
currency
rate fluctuations;
|
|
|
|
|
●
|
trade
restrictions;
|
|
|
|
|
●
|
labor
unrest;
|
|
|
|
|
●
|
logistical
and communications challenges; and
|
|
|
|
|
●
|
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 these facilities
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 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.
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. In 2020 and 2019, our sales to international customers accounted
for 17% and 1%, 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:
|
●
|
the
impact of COVID-19 on the global markets and the power generation market within the international telecommunications markets;
|
|
|
|
|
●
|
requirements
or preferences for domestic products or solutions, which could reduce demand for our products;
|
|
|
|
|
●
|
unexpected
changes in regulatory requirements;
|
|
|
|
|
●
|
imposition
of tariffs and other barriers and restrictions;
|
|
|
|
|
●
|
restrictions
on the import or export of critical technology;
|
|
●
|
management
communication and integration problems resulting from cultural and geographic dispersion;
|
|
|
|
|
●
|
the
burden of complying with a variety of laws and regulations in various countries;
|
|
|
|
|
●
|
difficulties
in enforcing contracts;
|
|
|
|
|
●
|
the
uncertainty of protection for intellectual property rights in some countries;
|
|
|
|
|
●
|
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;
|
|
|
|
|
●
|
tariffs
and trade barriers, export regulations and other regulatory and contractual limitations on our ability to sell products;
|
|
|
|
|
●
|
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;
|
|
|
|
|
●
|
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;
|
|
|
|
|
●
|
potentially
adverse tax consequences, including multiple and possibly overlapping tax structures;
|
|
|
|
|
●
|
general
economic and geopolitical conditions, including war and acts of terrorism;
|
|
|
|
|
●
|
lack
of the availability of qualified third-party financing; and
|
|
|
|
|
●
|
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:
|
●
|
stop
selling, incorporating or using our products and services that use the infringed intellectual property;
|
|
|
|
|
●
|
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
|
|
|
|
|
●
|
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 (loss) 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 amount 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:
|
●
|
competition
from existing technologies and products or new technologies and products that may emerge;
|
|
|
|
|
●
|
the
loss of significant customers, including AT&T, T-Mobile and Verizon Wireless;
|
|
|
|
|
●
|
actual
or anticipated variations in our quarterly operating results;
|
|
|
|
|
●
|
failure
to meet the estimates and projections of the investment community or that we may otherwise provide to the public;
|
|
|
|
|
●
|
our
cash position;
|
|
|
|
|
●
|
announcement
or expectation of additional financing efforts;
|
|
|
|
|
●
|
issuances
of debt or equity securities;
|
|
|
|
|
●
|
our
inability to successfully enter new markets or develop additional products;
|
|
|
|
|
●
|
actual
or anticipated fluctuations in our competitors’ operating results or changes in their respective growth rates;
|
|
|
|
|
●
|
sales
of our shares of common stock by us, or our stockholders in the future;
|
|
|
|
|
●
|
trading
volume of our shares of common stock on The Nasdaq Capital Market;
|
|
|
|
|
●
|
market
conditions in our industry;
|
|
|
|
|
●
|
overall
performance of the equity markets and general political and economic conditions;
|
|
|
|
|
●
|
introduction
of new products or services by us or our competitors;
|
|
|
|
|
●
|
additions
or departures of key management, scientific or other personnel;
|
|
●
|
publication
of research reports about us or our industry or positive or negative recommendations or withdrawal of research coverage by
securities or industry analysts;
|
|
|
|
|
●
|
changes
in the market valuation of similar companies;
|
|
|
|
|
●
|
disputes
or other developments related to intellectual property and other proprietary rights;
|
|
|
|
|
●
|
changes
in accounting practices;
|
|
|
|
|
●
|
significant
lawsuits, including stockholder litigation; and
|
|
|
|
|
●
|
other
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:
|
●
|
a
requirement that special meetings of stockholders be called only by the board of directors, the president or the chief executive
officer;
|
|
|
|
|
●
|
advance
notice requirements for stockholder proposals and nominations for election to our board of directors; and
|
|
|
|
|
●
|
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 acquirors 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 our Company. 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.
We
are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to emerging
growth companies will make our shares of common stock less attractive to investors.
We
are an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an emerging growth
company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies
that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section
404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation
in this report, our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory
vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be
an emerging growth company until December 31, 2021, although circumstances could cause us to lose that status earlier. We cannot
predict if investors will find our shares of common stock less attractive because we may rely on these exemptions. If some investors
find our shares of common stock less attractive as a result, there may be a less active trading market for our shares of common
stock and our share price may be more volatile.
Under
the JOBS Act, emerging growth companies also can delay adopting new or revised accounting standards until such time as those standards
apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting
standards and, therefore, are subject to the same new or revised accounting standards as other public companies that are not emerging
growth companies.
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 an “emerging growth company”
under the JOBS Act, 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. We could be an “emerging growth company” until
December 31, 2021. 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, 2020, 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, 2021, we had 12,788,203 shares of common stock outstanding held of record by approximately 13 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.
Purchases
of Equity Securities by the Issuer and Affiliated Purchasers
On
November 6, 2019, we entered into a Rule 10b-18 Stock Repurchase Agreement authorizing ThinkEquity to repurchase up to $500 of
our common stock. On January 20, 2020, we terminated the Stock Repurchase Agreement. As of December 31, 2020, we had purchased
17,477 shares common stock and held them as treasury stock at a cost of $40.
Period
|
|
Total number of shares (or units) purchased
|
|
|
Average price paid per share (or unit)
|
|
|
Total number of shares (or units) purchased as part of publicly announced plans or programs
|
|
|
Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs
|
|
November 14, 2019 to November 22, 2019
|
|
|
17,477
|
|
|
$
|
2.29
|
|
|
|
17,477
|
|
|
|
0
|
|
Total
|
|
|
17,477
|
|
|
$
|
2.29
|
|
|
|
17,477
|
|
|
|
0
|
|
Item
6. Selected Financial Data.
Not
applicable.
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
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). Within this market, we offer the following three configurations
of our DC power systems, with output power ranging from 5 kW to 30 kW:
|
●
|
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.
|
|
|
|
|
●
|
DC
hybrid power systems. These systems incorporate lithium-ion batteries (or other advanced battery chemistries) with
our proprietary battery management system, or BMS, into our standard DC power systems.
|
|
|
|
|
●
|
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 / natural gas and renewable formats, with diesel, natural gas and propane
gas being the predominate formats.
During
the years ended December 31, 2020 and 2019, 96% and 96%, respectively, of our total net sales were within the telecommunications
market. In 2020, 81% of our total net sales were derived primarily from three customers which are in the telecommunications industry
and each accounted for 52%, 15% and 14% of total net sales for 2020. In 2019, we had 91% of our total net sales derived from our
three largest customers which are in the telecommunications industry and each accounted for 68%, 17% and 6% of our total net sales
for 2019.
In
March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic, and, in the following weeks, many
U.S. states and foreign countries issued lockdown orders negatively impacting the operations of our manufacturing facilities and
customer demand for our products. Since then, the COVID-19 situation within the U.S. and foreign countries has rapidly escalated.
We have implemented new procedures to support the health and safety of our employees and we are following all guidelines issued
by the U.S. Centers for Disease Control and Prevention, as well as federal, state and regional public health authorities. Our
manufacturing facilities have remained opened with certain limitations and restrictions to comply COVID-19 safety guidelines and
provide a safe work environment for our employees.
COVID-19,
has had and is likely to continue to have, a material and substantial adverse impact on our results of operations including, among
others, a decrease in our sales, delays in sourcing of raw materials from suppliers which, in turn, has raised liquidity concerns.
In addition, our inventory write-off increased during 2020 due to current uncertainties regarding specific product shipments.
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 widespread economic downturn caused by COVID-19, we will likely
experience a further 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 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 our net
revenues and our ability to remain a going concern.
During
December 2020, the Food and Drug Administration authorized the release of vaccines to help control COVID-19. Although there are
many unknown factors of its success to control COVID-19 and the timeline of making the vaccine available to a great majority of
people around the world, we believe these are significant events aimed to control COVID-19 that may lead to improvements to the
global economy and to our business.
The
extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the
duration and spread of the outbreak, the impact on our customers and our sales cycles, the impact on our customer, employee or
industry events, and the effect on our vendors, all of which are uncertain and cannot be predicted. At this point, we are uncertain
of the full magnitude that the pandemic may have on our financial condition, liquidity and future results of operations.
Critical
Accounting Policies
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
(“GAAP”) requires management to make certain estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. On an ongoing basis, management reviews
its estimates and if deemed appropriate, those estimates are adjusted. Significant estimates include those related to assumptions
used in determining reserves for uncollectible receivables, assumptions used in valuing inventories at net realizable value, impairment
analysis of long term assets, estimates of useful lives of property and equipment, assumptions used in valuing stock-based compensation,
the valuation allowance for deferred tax assets, accruals for product warranties, accruals for potential liabilities, and assumptions
used in the determination of the Company’s liquidity. Actual results may differ from those estimates.
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
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 deliver the product to a customer’s location.
The Company regularly reviews its customers’ financial positions to ensure that collectability is reasonably assured.
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. The Company’s warranties
are of an assurance-type and come standard with all Company 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. The Company estimates the actual historical
warranty claims coupled with an analysis of unfulfilled claims to record a liability for specific warranty purposes.
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 subsequently written up.
Stock-Based
Compensation
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, 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. 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.
Effects
of Inflation
The
impact of inflation and changing prices has not been significant on the financial condition or results of operations of our company.
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.
Jumpstart
Our Business Startups Act of 2012
On
April 5, 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can
take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or
revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting
standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves
of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on
which adoption of such standards is required for other public companies.
We
are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements provided by the
JOBS Act. Subject to certain conditions set forth in the JOBS Act, if as an “emerging growth company” we choose to
rely on such exemptions, we may not be required to, among other things, (i) provide an auditor’s attestation report on our
system of internal controls over financial reporting pursuant to Section 404, (ii) provide all of the compensation disclosure
that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act,
(iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit
firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial
statements (auditor discussion and analysis), and (iv) disclose certain executive compensation-related items such as the correlation
between executive compensation and performance and comparisons of the Chief Executive Officer’s compensation to median employee
compensation. These exemptions will apply until we no longer meet the requirements of being an “emerging growth company.”
We will remain an “emerging growth company” until the earliest of (i) the last day of the fiscal year in which we
have total annual gross revenues of $1 billion or more; (ii) December 31, 2021 (the last day of our fiscal year following the
fifth anniversary of the date of the completion of our initial public offering); (iii) the date on which we have issued more than
$1.07 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated
filer under the rules of the SEC.
Financial
Performance Summary – Year Ended December 31, 2020
Our
net sales for the year ended December 31, 2020, were $9,031, as compared to $24,801 for the year ended December 31, 2019. We reported
a net loss of $10,871 for 2020, as compared to net loss of $4,045 for 2019. We believe this decline in revenues is primarily due
to our Tier-1 telecommunications customers shifting their investments to the deployment of their new 5G networks rather than making
investments in back-up power generators. We also believe that COVID-19 has had a negative impact on our customers’ ability
to deploy new systems due to precautionary measures focused at slowing down the spread of COVID-19 within their employee base.
The focus on the deployment of new 5G networks has had a direct negative impact on our ability to increase sales of our products
to our Tier-1 telecommunications customers.
During
2020, our international sales increased to $1,522, as compared to $230 during 2019. The increase was due primarily to shipments
of our new LPG DC power systems during the second half of 2020.
Our
sales backlog as of December 31, 2020, was $4,239, with 65% of that amount being attributable to U.S. telecommunications customers,
21% to telecommunications customers outside the U.S., 2% to military customers, and 12% to other 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. During the fourth quarter of 2020, we believe the major Tier-1 wireless providers reached a point in the implementation
of their 5G programs where they are starting to increase orders on backup power solutions. In December 2020, our backlog increased
by $2.0 million primarily from sales orders from our largest Tier-1 telecommunications customer.
With
the release of COVID-19 vaccines in December 2020, we remain hopeful that the global economy will gradually return to normality
allowing us to expand our sales and marketing initiatives. We are also working on expanding our research and development capacity
to enhance our sales support and new product development programs. We are focused on diversifying our customer base within the
telecom market while seeking new opportunities in other markets.
We
anticipate that our future sales will improve as the U.S. economy recovers from the impact of the COVID-19 pandemic, our U.S.
telecommunications customers return to their backup power programs, and we succeed in diversifying our customer base. However,
the full impact of the COVID-19 pandemic on our financial and operating performance will depend significantly on the duration
and severity of the outbreak, the actions taken to contain or mitigate its 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
section “Risk Factors” in this Annual Report 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, 2020 and 2019
|
|
Year Ended December 31,
|
|
|
Dollar
Variance
|
|
|
Percentage
Variance
|
|
|
Results as a
Percentage
of Net Revenues for
the
Year Ended
December 31,
|
|
|
|
|
|
|
Favorable
|
|
|
Favorable
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
(Unfavorable)
|
|
|
(Unfavorable)
|
|
|
2020
|
|
|
2019
|
|
Net sales
|
|
$
|
9,031
|
|
|
$
|
24,801
|
|
|
$
|
(15,770
|
)
|
|
|
(64
|
)%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
14,654
|
|
|
|
19,882
|
|
|
|
5,228
|
|
|
|
26
|
%
|
|
|
162.2
|
%
|
|
|
80.2
|
%
|
Gross profit (loss)
|
|
|
(5,623
|
)
|
|
|
4,919
|
|
|
|
(10,542
|
)
|
|
|
(214
|
)%
|
|
|
(62.2
|
)%
|
|
|
19.8
|
%
|
Sales and marketing expenses
|
|
|
1,556
|
|
|
|
2,621
|
|
|
|
1,065
|
|
|
|
41
|
%
|
|
|
17.2
|
%
|
|
|
10.6
|
%
|
Research and development expenses
|
|
|
1,723
|
|
|
|
2,276
|
|
|
|
553
|
|
|
|
24
|
%
|
|
|
19.1
|
%
|
|
|
9.2
|
%
|
General and administrative expenses
|
|
|
4,062
|
|
|
|
4,004
|
|
|
|
(58
|
)
|
|
|
(1
|
)%
|
|
|
45.0
|
%
|
|
|
16.1
|
%
|
Total operating expenses
|
|
|
7,341
|
|
|
|
8,901
|
|
|
|
1,560
|
|
|
|
18
|
%
|
|
|
81.3
|
%
|
|
|
35.9
|
%
|
Loss from operations
|
|
|
(12,964
|
)
|
|
|
(3,982
|
)
|
|
|
(8,982
|
)
|
|
|
226
|
%
|
|
|
(143.5
|
)%
|
|
|
(16.1
|
)%
|
Interest and finance costs
|
|
|
(60
|
)
|
|
|
(103
|
)
|
|
|
43
|
|
|
|
42
|
%
|
|
|
(0.7
|
)%
|
|
|
(0.4
|
)%
|
Other income (expense), net
|
|
|
14
|
|
|
|
40
|
|
|
|
(26
|
)
|
|
|
(65
|
)%
|
|
|
0.2
|
%
|
|
|
0.2
|
%
|
Loss before income taxes
|
|
|
(13,010
|
)
|
|
|
(4,045
|
)
|
|
|
(8,965
|
)
|
|
|
222
|
%
|
|
|
(144.1
|
)%
|
|
|
(16.3
|
)%
|
Income tax benefit
|
|
|
(2,139
|
)
|
|
|
—
|
|
|
|
2,139
|
|
|
|
—
|
%
|
|
|
(23.7
|
)%
|
|
|
0.0
|
%
|
Net loss
|
|
$
|
(10,871
|
)
|
|
$
|
(4,045
|
)
|
|
$
|
(6,826
|
)
|
|
|
169
|
%
|
|
|
(120.4
|
)%
|
|
|
(16.3
|
)%
|
Net
Sales. Net sales decreased by $15,770, or 64%, to $9,031 for the year ended December 31, 2020, as compared to $24,801 for
the year ended December 31, 2019. The decrease was primarily due to a decrease in sales of our DC power systems to U.S. Tier-1
telecommunications customers. U.S. telecommunications customers accounted for 83% of our total net sales during 2020, as compared
to 95% of total net sales in 2019.
Our
revenue from telecommunications customers, U.S. and international, accounted for 96% of total net sales during 2020 and also during
2019. Our three largest customers are in the telecommunications industry and each customer accounted for 52%, 15%, and 14% of
total net sales for 2020, as compared to our three largest customers in 2019, also customers in the telecommunications industry,
each accounting for 68%, 17%, and 6% of total net sales. Our revenues as a percentage of total net sales for the year to international
customers increased from 1% during 2019 to 17% during 2020.
We
believe the decline in revenues during 2020 is a result of a combination of factors including, among others, a temporary shift
by our U.S. Tier-1 telecommunications customers in budget allocation towards acquiring wireless communication spectrum and the
deployment of their 5G networks rather than purchasing back-up power generators. We also believe that COVID-19 has had, and continues
to have, a negative impact on our customers’ ability to deploy new back-up power systems due to precautionary measures aimed
at slowing down the spread of COVID-19.
During
the fourth quarter of 2020, we began to see an increase in sales orders for our DC power systems from our U.S. telecommunications
customers compared to the fourth quarter of 2019. We believe telecommunications customers have made substantial progress in launching
their 5G networks during 2020. Their 5G programs have many elements that will be deployed and enhanced at different times over
the upcoming years and we believe our DC back-up power systems are an ideal fit to their infrastructure buildout and provide needed
backup power support to enhance network reliability. In addition, the Food and Drug Administration authorized the release of vaccines
to help control COVID-19 in December 2020. Although there are many unknown factors of its success to control COVID-19 and the
timeline of making the vaccine available to a great majority of people around the world, we believe these are positive signs that
may lead to improved revenue numbers for Polar Power in upcoming quarters and beyond.
Cost
of Sales. Cost of sales decreased by $5,228, or 26%, to $14,654 during 2020, compared to $19,882 during 2019. Cost of sales
as a percentage of net sales increased from 80.2% in 2019 to 162.2% in 2020 as a result of an increase in factory overhead absorption
and an inventory reserve of $3,400 during 2020. The increase in factory overhead absorption during 2020 is primarily attributed
to underutilization of manufacturing facilities and staff resulting primarily from COVID-19 related factors mentioned in previous
sections of this report.
Gross
Profit (Loss). We experienced a gross loss of $5,623 during 2020, as compared to a gross profit of $4,919 during 2019, which
represents a decrease in gross profit of $10,542 or 214%. Gross profit as a percentage of net sales decreased to (62.2)% in 2020,
as compared to 19.8% in 2019. The decrease in gross profit as a percentage of net sales during 2020 was primarily due a combination
of sales discounts offered for large volume orders from Tier-1 telecommunications customers, an increase in factory overhead absorption,
and an increase to inventory write-off of $3,400 recorded in cost of sales during 2020.
Sales
and Marketing Expenses. Sales and marketing expenses decreased $1,065 to $1,556 during 2020, as compared to $2,621 during
2019. The decrease was attributable to a decrease in marketing and promotions of our DC power systems in the U.S. and international
markets due to travel restrictions and other measures aimed to reducing the spread of COVID-19. As part of our ongoing strategy
to expand our customer base, we plan to increase our sales and marketing expenditures as travel restrictions are lifted and tradeshow
and similar events become available.
Research
and Development Expenses. During 2020, research and development expenses decreased by $553 to $1,723, as compared to $2,276
during 2019. The decrease was primarily because of COVID-19 and its implications to safety measures and availability of personnel.
Our research and development efforts during 2020 primarily focused on launching our new LPG / natural gas line of generators and
hybrid power systems for off-grid and unreliable grid cell sites, and supporting existing sales activity related to our DC back-up
power systems. During 2021, we expect research and development expenses to gradually increase as control over COVID-19 improves
and we continue investing into new products as part of our strategy to diversify our product lines.
General
and Administrative Expenses. Our general and administrative expenses increased by $58, to $4,062 during 2020, as compared
to $4,004 during 2019. The increase was primarily due to an increase of approximately $500 in legal, audit, and broker fees services
related to an equity raise that took place in July 2020 and consulting services for additional disclosures required as a result
of COVID-19.
Interest
and Finance Costs. During 2020, our interest expense was $60, as compared to $103 during 2019, an increase of $43. Our interest
expense during 2020 included approximately $12 in fees in connection with selling $2.6 million of receivables to Citibank under
our Supplier Agreement, $41 in interest paid for financing of production equipment, $4 in interest paid under our line of credit
with Pinnacle Bank, and $3 in interest paid for financing of insurance policies.
Other
Income (Expense), Net. During 2020, our interest income was $14, as compared to $40 during 2019, a decrease of $26. Our other
income included a $10 Economic Injury Disaster Grant.
Income Tax
Benefit. In 2020, we recognized a benefit from income taxes of $2,139 attributable to refundable federal and state income
taxes. During 2019, we did not recognize any benefit from income taxes as carry back claims of income taxes were applied.
Net
Loss. As a result of the factors identified above, we generated a net loss of $10,871 for 2020, as compared to net loss of
$4,045 for 2019, an increase loss of $6,826. A significant portion of the increase in net loss can be attributed to the results
of a decrease our of DC back-up power systems to US telecommunications customers, and an increase in factory overhead absorption,
and $3,400 increase inventory reserve reported in our cost of sales during 2020.
Liquidity
and Capital Resources
Sources
of Liquidity
During the year ended
December 31, 2020, we funded our operations primarily from cash on hand and sales of receivables under our Supplier Agreement
with Citibank. These funds were also used to increase inventory to support research and development projects and the launch of
our new line of LPG / natural gas generators. As of December 31, 2020, we had working capital of $10,123, as compared to working
capital of $16,433 at December 31, 2019. This $6,310 decrease in working capital is primarily attributable to a $1,194
decrease in cash and cash equivalents resulting from net cash of $6,548 used in operating activities, net cash used in investing
activities of $19 from the acquisition of new property and equipment, and net cash from financing activities of $5,372
which included proceeds of $1,715 from a Paycheck Protection Program (“PPP”) Loan, proceeds of $2,812
from the issuance of common stock and warrants in our July 2020 private placement and proceeds of $1,174 from the exercise of
certain of these warrants.
On
December 31, 2020 and December 31, 2019, our net trade receivables totaled $1,190 and $934, respectively. On December 31, 2020,
$1,041 (87%) and $53 (5%) represented the two largest open customer account balances, while $652 (70%) and $183 (20%) represented
the two largest open customer account balances on December 31, 2019.
Our
available capital resources on December 31, 2020 consisted primarily of $1,646 in cash and cash equivalents, as compared to $2,840
as of December 31, 2019. We expect our future capital resources will consist primarily of cash on hand, cash generated by operations,
if any, and future debt or equity financings, if any. In light of the COVID-19 crisis, the U.S. Department of the Treasury enacted
the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, to provide emergency assistance and health care response
for individuals, families, and businesses affected by the COVID-19 pandemic. On May 4, 2020, we entered into a loan agreement
with Citibank, N.A. in the amount of $1,715 through the PPP which we expect will be forgiven in whole or in part. On July 2, 2020,
we received net proceeds of $2,812 from a private placement of securities and during the last four months of 2020, received proceeds
of $1,174 from warrants exercised. We believe these programs, together with our credit facility with Pinnacle Bank, or Pinnacle,
described below, will supplement our current and future available capital resources.
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 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.
During
2020, we advanced $2,500 from the revolving credit facility, which we also paid off during the year. As such, the balance outstanding
under the Loan Agreement at December 31, 2020 was $0. As of December 31, 2020, we had availability under the Loan Agreement of
$1,070.
Supplier
Agreement
Effective
June 4, 2019, we executed a Supplier Agreement with Citibank, N.A. Under the terms of the Supplier Agreement, we could from time
to time offer to sell to Citibank certain of our accounts receivable relating to invoiced sales made to AT&T. Once AT&T
approved the invoice, AT&T would send payment instructions to Citibank. The sale price was equal to the face amount of the
receivable less the applicable discount charge calculated by multiplying the face amount of the receivable by (i) the annual discount
rate (which is equal to the 90-day London Inter-bank Offered Rate plus 1.00%) and (ii) the discount acceptance period (which is
equal the number of days in the payment terms less the number of days necessary to approve the invoice) divided by 360. On October
8, 2020, we terminated the Supplier Agreement with Citibank, N.A. During the year ended December 31, 2020, a total of $2,621 of
accounts receivables had been sold to Citibank by us, and we incurred fees of approximately $12 during the twelve-month period
then ended.
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 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, with the first nine months of interest deferred. Principal and interest are payable monthly
commencing nine months after the disbursement date and may be prepaid by us at any time prior to maturity with no prepayment penalties.
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 PPP Loan is subject to forgiveness to the extent proceeds are used for payroll costs, including payments required
to continue group health care benefits, and certain rent, utility, and mortgage interest expenses (collectively, “Qualifying
Expenses”), pursuant to the terms and limitations of the PPP. We intend to use a significant majority of the PPP Loan amount
for Qualifying Expenses and expect the full amount of the PPP Loan to be forgiven. However, no assurance can be given that we
will obtain forgiveness of the PPP Loan in whole or in part.
Future
Capital Requirements
On
February 7, 2021, we entered into an underwriting agreement with ThinkEquity, a division of Fordham Financial Management, Inc.,
pursuant to which we agreed to sell an aggregate of 750,000 shares of our common stock in a firm commitment underwritten public
offering at a price per share to the public of $18.00. The public offering closed on February 10, 2021. We received net proceeds
of approximately $12.5 million and we plan to use the net proceeds for general corporate purposes.
We
believe that the current funds on hand will be sufficient to fund our operating expenses and capital expenditure requirements
for at least the next twelve months. We continue to review operations in order to identify additional strategies designed to generate
cash flow, improve our financial position, and enable the timely discharge of our obligations.
Cash
Flow
The
following table sets forth the significant sources and uses of cash for the periods set forth below:
|
|
Year Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Net Cash Provided By (Used In):
|
|
|
|
|
|
|
|
|
Operating Activities
|
|
$
|
(6,548
|
)
|
|
$
|
(2,167
|
)
|
Investing Activities
|
|
$
|
(19
|
)
|
|
$
|
(338
|
)
|
Financing Activities
|
|
$
|
5,373
|
|
|
$
|
(295
|
)
|
Net decrease in cash
|
|
$
|
(1,194
|
)
|
|
$
|
(2,800
|
)
|
Operating
Activities
Net
cash used in operating activities for 2020 was $6,548, as compared to $2,167 for the same period in 2019. This increase in net
cash used in 2020 was primarily due to a net loss of $10,871, a write-down of $3,400 for excess and obsolete inventory, an increase
in income tax benefit of $2,139, coupled with a decrease of $907 in prepaid assets resulting from engines imported from Japan
which had been prepaid in 2019.
Investing
Activities
Net
cash used in investing activities for 2020 totaled $19, as compared to $338 for 2019, a decrease of $319. 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 $5,373 for 2020, as compared to $295 used in financing activities during 2019, an
increase of $5,668. This increase was primarily due to borrowing $1,715 in May 2020 from Citibank, N.A. pursuant to the PPP under
the CARES Act., receiving an aggregate net proceeds of $2,812 from a private placement of common stock and warrants and proceeds
of $1,174 from the exercise of certain of these warrants during the last four months of 2020.
Backlog
As
of December 31, 2020, we had a backlog of $4.2 million. 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, 2020 was comprised of the following
elements: 65% in purchases of DC power systems, parts and services by telecommunications customers in the U.S., 21% in purchases
from telecommunications customers outside the U.S., 2% by military contractors; and 12% from other markets. We believe the majority
of our backlog will be shipped within the next six 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, 2020, 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, 2020, 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, 2020, 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, 2020 that have materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting.
Item
9B. Other Information
None.
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
|
|
69
|
|
Chairman
of the Board, President, Chief Executive Officer and Secretary
|
Rajesh
Masina
|
|
38
|
|
Chief
Operating Officer
|
Luis
Zavala
|
|
51
|
|
Chief
Financial Officer
|
|
|
|
|
|
Non-Employee
Directors
|
|
|
|
|
Keith
Albrecht
|
|
70
|
|
Director
|
Peter
Gross
|
|
71
|
|
Director
|
Katherine
Koster
|
|
58
|
|
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 of directors considered his diverse and global experience in engineering and manufacturing combined
with a successful entrepreneurial career as a key attribute in his selection. The board of directors believes that through his
experience in product development and international operations over the past two decades he can provide our company with particular
insight into global opportunities and new markets for our current and planned future product lines.
Rajesh
Masina has served as our Chief Operating Officer since April 2018 and previously served as our Vice President Operations from
August 2009 to April 2018. Prior to joining us, Mr. Masina served as a supply chain consultant to International Game Technology,
a large gaming equipment company in Reno, Nevada, from December 2008 to June 2009. Mr. Masina worked as the Assistant Manager
for Applied Photonics Worldwide Inc., an engineering services company, from January 2006 to January 2008. From July 2001 to May
2003, Mr. Masina worked as the Business Development Manager in his family business, which provided consulting services to a regional
telecommunications provider in India with respect to the acquisition of telecommunications sites. We believe Mr. Masina has a
unique combination of technical and business knowledge that is vital to our growth strategy. Mr. Masina’s key strengths
include business analytics, supply chain management, make vs. buy decision making, production scheduling, client relations, and
strategic planning. Mr. Masina is a minority investor in a startup equipment rental company, Smartgen Solutions, Inc., serving
the Southern California telecommunications equipment market. Smartgen Solutions, Inc. provides installation and maintenance service
for various telecommunications tower companies and also is an authorized service dealer for Polar products. Mr. Masina has a Master’s
in Electrical Engineering from the University of Nevada Reno and an MBA from the University of Nevada Reno’s Supply Chain
Program.
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.
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.
Peter
Gross has served as a member of our board of directors since December 2018 and serves as a member of our Audit Committee,
Compensation Committee and Nominating and Corporate Governance Committee. Since 2012, Mr. Gross has served as the Vice President
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 of directors considered his significant engineering experience in the power systems industry, especially for data center
and telecommunications applications. Our board of directors 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 of directors since December 2019 and serves as a member of our Audit Committee
and Nominating and Corporate Governance Committee. Since 2008, Ms. Koster has served as Managing Director – Public Finance
at Piper Sandler Companies where she assists municipalities in accessing the capital markets to fund critical infrastructure.
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. Our board of directors believes that Ms. Koster’s investment banking experience with
Piper Sander Companies 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
board of directors. Our certificate of incorporation and bylaws also provide that any vacancy on our board of directors, including
a vacancy resulting from an expansion of our board of directors, 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.
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 Exchange Act; and compensation committee members also satisfy an additional independence test for compensation committee
members under the Nasdaq Listing Rules.
Our
board of directors has evaluated the independence of its members based upon the rules of the Nasdaq Stock Market and the SEC.
Applying these standards, our board of directors 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. As such, a majority of our board of directors is comprised
of “independent directors” as defined under the Nasdaq Listing Rules.
Board
Committees
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:
|
●
|
overseeing
accounting and financial reporting process;
|
|
●
|
selecting,
retaining and replacing independent auditors and evaluating their qualifications, independence and performance;
|
|
●
|
reviewing
and approving scope of the annual audit and audit fees;
|
|
●
|
discussing
with management and independent auditors the results of annual audit and review of quarterly financial statements;
|
|
●
|
reviewing
adequacy and effectiveness of internal control policies and procedures;
|
|
●
|
approving
retention of independent auditors to perform any proposed permissible non-audit services;
|
|
●
|
overseeing
internal audit functions and annually reviewing audit committee charter and committee performance;
|
|
●
|
preparing
the audit committee report that the SEC requires in our annual proxy statement; and
|
|
●
|
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 of directors 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:
|
●
|
developing
and maintaining an executive compensation policy and monitor the results of that policy;
|
|
●
|
recommending
to our board of directors for approval compensation and benefit plans;
|
|
●
|
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;
|
|
●
|
determining
and approving the annual compensation for other executive officers;
|
|
●
|
retaining
or obtaining the advice of a compensation consultant, outside legal counsel or other advisor;
|
|
●
|
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;
|
|
●
|
reviewing
and making recommendations to our board of directors regarding the compensation of non-employee directors; and
|
|
●
|
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:
|
●
|
considering
and reviewing periodically the desired composition of our board of directors;
|
|
●
|
establishing
any qualifications and standards for individual directors;
|
|
●
|
identifying,
evaluating and nominating candidates for election to our board of directors;
|
|
●
|
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;
|
|
|
|
|
●
|
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;
|
|
●
|
considering
other corporate governance and related matters as requested by our board of directors; and
|
|
●
|
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 the board of directors 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 of directors or our Compensation Committee. None of the members of our Compensation Committee is or has been an officer
or employee of Polar.
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
2020, 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:
|
●
|
attract,
retain, motivate and reward our executive officers who are responsible for our success;
|
|
●
|
align
and strengthen the mutual interests of our executive officers, our company and our stockholders;
|
|
●
|
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
|
|
●
|
provide
total compensation to each executive officer that is internally equitable, competitive and influenced by company and individual
performance.
|
During
2020, 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 2020, 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 2020.
Compensation
Philosophy
Our
compensation philosophy and objectives are as follows:
|
●
|
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;
|
|
●
|
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
|
|
●
|
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:
|
●
|
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.
|
|
●
|
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.
|
|
●
|
Long
vesting periods. Our equity awards to our executive officers generally vest in annual installments over a three-year period.
|
|
●
|
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.
|
|
●
|
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.
|
|
●
|
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.
|
|
●
|
Change
in control. All executive officers’ unvested equity grants accelerate upon any change in control of Polar Power.
|
|
●
|
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.
|
|
●
|
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
2020, our executive officers’ compensation program included three major elements:
|
●
|
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 2020, the Compensation Committee kept the same
base salary structure as in 2019. 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 2020, 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 2020 the total revenues were $36 million and none of the additional
elements qualified, then the executive officer would not be eligible for a performance award of 25% of base salary as outlined
in the table below.
Company Performance Element
|
|
Minimum
Level
|
|
|
Target
Level
|
|
|
Maximum
Level
|
|
Revenue
|
|
|
20
|
%
|
|
|
25
|
%
|
|
|
30
|
%
|
Gross Margin
|
|
|
5
|
%
|
|
|
10
|
%
|
|
|
15
|
%
|
EBITDA
|
|
|
5
|
%
|
|
|
10
|
%
|
|
|
15
|
%
|
Customer Concentration
|
|
|
8
|
%
|
|
|
15
|
%
|
|
|
23
|
%
|
International Sales
|
|
|
7
|
%
|
|
|
12
|
%
|
|
|
17
|
%
|
Total
|
|
|
50
|
%
|
|
|
75
|
%
|
|
|
100
|
%
|
Company Performance Element
|
|
Minimum
Level
|
|
|
Target
Level
|
|
|
Maximum
Level
|
|
|
2020
Actual
|
|
Revenue ($ million)
|
|
$
|
30
|
|
|
$
|
36
|
|
|
$
|
42
|
|
|
$
|
9.0
|
|
Gross Margin (% of revenue)
|
|
|
31
|
%
|
|
|
32
|
%
|
|
|
33
|
%
|
|
|
(58.6
|
)%
|
EBITDA (% of revenue)
|
|
|
5
|
%
|
|
|
7
|
%
|
|
|
9
|
%
|
|
|
(132.5
|
)%
|
Customer Concentration (% of total sales)
|
|
|
55
|
%
|
|
|
45
|
%
|
|
|
35
|
%
|
|
|
52
|
%
|
International Sales (% of total sales)
|
|
|
15
|
%
|
|
|
20
|
%
|
|
|
25
|
%
|
|
|
1
|
%
|
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”:
|
●
|
Arthur
D. Sams, our President, Chief Executive Officer, Secretary and Chairman of the Board;
|
|
●
|
Rajesh
Masina, our Chief Operating Officer; and
|
|
●
|
Luis
Zavala, our Chief Financial Officer.
|
Name
and Principal
Position
|
|
Year
|
|
|
Salary
($)
|
|
|
Option
Awards
($)
|
|
|
Bonus
($)
|
|
|
Total
($)
|
|
Arthur D. Sams, President,
|
|
2020
|
|
|
|
275,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
275,000
|
|
Chief Executive Officer and Secretary
|
|
2019
|
|
|
|
275,000
|
|
|
|
—
|
|
|
|
28,188
|
|
|
|
303,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rajesh Masina,
|
|
2020
|
|
|
|
175,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
175,000
|
|
Chief Operating Officer
|
|
2019
|
|
|
|
175,000
|
|
|
|
—
|
|
|
|
17,938
|
|
|
|
192,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Luis Zavala,
|
|
2020
|
|
|
|
175,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
175,000
|
|
Chief Financial Officer
|
|
2019
|
|
|
|
175,000
|
|
|
|
—
|
|
|
|
17,938
|
|
|
|
192,938
|
|
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 $200,000. On April 2, 2018, we increased
Mr. Sams’ annual base salary to $275,000 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, provides for at-will employment as our Vice President
Operations at an annual base salary is $120,000. On April 2, 2018, we appointed Mr. Masina as our Chief Operating Officer and
increased his annual base salary to $175,000 effective as of April 1, 2018. Mr. Masina 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, resignation by Mr. Masina for good reason or upon Mr. Masina’s disability, Mr. Masina
is entitled to receive (i) a lump sum cash payment equal to 50% of his then-current base salary, and (ii) continued health insurance
coverage for six months. If Mr. Masina is terminated without cause or resigns for good reason within three months before or twelve
months after a change in control, Mr. Masina is entitled to (a) a lump sum cash payment equal to 50% of his then-current base
salary, and (b) continued health insurance coverage for six months.
The
terms “for good reason,” “cause” and “change in control in Mr. Masina’s Executive Employment
Agreement are identical to the definitions contained in Mr. Sams’ Amended and Restated Executive Employment Agreement.
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 $120,000. On April 2, 2018, we appointed Mr. Zavala as our Chief Financial Officer and increased
his annual base salary to $175,000 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 2020. 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 2020, 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, 2021 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 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, 2021. 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, 2021 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
|
%
|
Rajesh Masina (3)
|
|
Common
|
|
|
135,264
|
|
|
|
1.1
|
%
|
Luis Zavala (4)
|
|
Common
|
|
|
77,369
|
|
|
|
|
*
|
Keith Albrecht (5)
|
|
Common
|
|
|
33,334
|
|
|
|
|
*
|
Peter Gross (6)
|
|
Common
|
|
|
10,000
|
|
|
|
|
*
|
Katherine Koster
|
|
Common
|
|
|
—
|
|
|
|
|
*
|
All directors and executive officers as a group (6 persons)(7)
|
|
Common
|
|
|
5,882,643
|
|
|
|
45.5
|
%
|
|
(1)
|
Messrs.
Sams Albrecht and Gross, and Ms. Koster are directors of Polar. Messrs. Sams, Masina 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. Mr. Masina owns 40% of the share capital of Smartgen Solutions,
Inc. Mr. Masina disclaims beneficial ownership over the shares of common stock of Polar held by Smartgen Solutions, Inc. Jayamadhuri
Penumarthi, the President and Secretary of Smartgen Solutions, Inc., has voting and investment power over such shares of common
stock. The address of Smartgen Solutions, Inc. is: 10324 Chestnut Ridge Rd., Austin, TX. 78726.
|
|
(4)
|
Includes
30,000 shares of common stock issuable upon exercise of options.
|
|
(5)
|
Includes
10,000 shares of common stock issuable upon exercise of options.
|
|
(6)
|
Amount
represents 10,000 shares of common stock issuable upon exercise of options.
|
|
(7)
|
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, 2020.
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 $120,000; 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 Vice President of Operations, 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. Once we have completed this offering and established
an audit committee, all transactions involving this agreement will be monitored by our audit committee.
During
2020 and 2019, Smartgen performed $129 and $289 in field services, respectively, the cost of which is included in cost of goods
sold.
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 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 $200,000
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 2020 and 2019.
|
|
2020
|
|
|
2019
|
|
Audit Fees
|
|
$
|
236
|
|
|
$
|
171
|
|
Audit-Related Fees
|
|
|
12
|
|
|
|
4
|
|
Tax Fees
|
|
|
50
|
|
|
|
40
|
|
Total
|
|
$
|
298
|
|
|
$
|
215
|
|
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, 2020 and 2019,
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, 2020 and 2019, 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.
We
have served as the Company’s auditor since 2016.
/s/
Weinberg & Company, P.A.
Los
Angeles, California
March
31, 2021
POLAR
POWER, INC.
BALANCE SHEETS
(in
thousands, except share and per share data)
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,646
|
|
|
$
|
2,840
|
|
Accounts receivable
|
|
|
1,190
|
|
|
|
934
|
|
Inventories
|
|
|
9,094
|
|
|
|
13,912
|
|
Prepaid expenses
|
|
|
358
|
|
|
|
1,265
|
|
Income taxes receivable
|
|
|
2,357
|
|
|
|
231
|
|
Total current assets
|
|
|
14,645
|
|
|
|
19,182
|
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Operating lease right-of-use assets, net
|
|
|
1,563
|
|
|
|
2,187
|
|
Property and equipment, net
|
|
|
1,497
|
|
|
|
2,100
|
|
Deposits
|
|
|
94
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
17,799
|
|
|
$
|
23,563
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
311
|
|
|
$
|
575
|
|
Customer deposits
|
|
|
703
|
|
|
|
197
|
|
Accrued liabilities and other current liabilities
|
|
|
1,142
|
|
|
|
1,031
|
|
Current portion of operating lease liabilities
|
|
|
670
|
|
|
|
618
|
|
Current portion of notes payable
|
|
|
267
|
|
|
|
328
|
|
Current
portion of loan payable
|
|
|
1,429
|
|
|
|
|
|
Total current liabilities
|
|
|
4,522
|
|
|
|
2,749
|
|
|
|
|
|
|
|
|
|
|
Notes payable, net of current portion
|
|
|
510
|
|
|
|
778
|
|
Operating lease liabilities, net of current portion
|
|
|
990
|
|
|
|
1,660
|
|
Loan payable, net of current
portion
|
|
|
286
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
6,308
|
|
|
|
5,187
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value, 5,000,000 shares authorized,
no shares issued and outstanding
|
|
|
—
|
|
|
|
—
|
|
Common stock, $0.0001 par value, 50,000,000 shares authorized, 11,768,158
shares issued and 11,750,681 shares outstanding on December 31, 2020 and 10,143,158 shares issued and 10,125,681 shares outstanding
on December 31, 2019
|
|
|
1
|
|
|
|
1
|
|
Additional paid-in capital
|
|
|
23,643
|
|
|
|
19,657
|
|
Accumulated deficit
|
|
|
(12,113
|
)
|
|
|
(1,242
|
)
|
Treasury Stock, at cost (17,477
shares)
|
|
|
(40
|
)
|
|
|
(40
|
)
|
Total stockholders’ equity
|
|
|
11,491
|
|
|
|
18,376
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’
equity
|
|
$
|
17,799
|
|
|
$
|
23,563
|
|
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)
|
|
Years Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
9,031
|
|
|
$
|
24,801
|
|
Cost of Sales (includes inventory
write-downs of $3,400 and $270, respectively)
|
|
|
14,654
|
|
|
|
19,882
|
|
Gross profit (loss)
|
|
|
(5,623
|
)
|
|
|
4,919
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
1,556
|
|
|
|
2,621
|
|
Research and development
|
|
|
1,723
|
|
|
|
2,276
|
|
General and administrative
|
|
|
4,062
|
|
|
|
4,004
|
|
Total operating expenses
|
|
|
7,341
|
|
|
|
8,901
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(12,964
|
)
|
|
|
(3,982
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
Interest expense and finance costs
|
|
|
(60
|
)
|
|
|
(103
|
)
|
Other income
|
|
|
14
|
|
|
|
40
|
|
Total other income (expenses)
|
|
|
(46
|
)
|
|
|
(63
|
)
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(13,010
|
)
|
|
|
(4,045
|
)
|
|
|
|
|
|
|
|
|
|
Benefit from income taxes
|
|
|
(2,139
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(10,871
|
)
|
|
$
|
(4,045
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted
|
|
$
|
(1.01
|
)
|
|
$
|
(0.40
|
)
|
Weighted average shares outstanding, basic and diluted
|
|
|
10,816,938
|
|
|
|
10,125,681
|
|
The
accompanying notes are an integral part of these financial statements.
POLAR
POWER, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY
(in
thousands, except share data)
|
|
Common Stock,
|
|
|
Additional paid-in
|
|
|
Retained Earnings (Accumulated
|
|
|
Treasury
|
|
|
Total Stockholders’
|
|
|
|
Number
|
|
|
Amount
|
|
|
capital
|
|
|
Deficit)
|
|
|
Stock
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2018
|
|
|
10,143,158
|
|
|
$
|
1
|
|
|
$
|
19,578
|
|
|
$
|
2,803
|
|
|
$
|
—
|
|
|
$
|
22,382
|
|
Fair value of vested stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
79
|
|
|
|
—
|
|
|
|
—
|
|
|
|
79
|
|
Treasury Stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(40
|
)
|
|
|
(40
|
)
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,045
|
)
|
|
|
|
|
|
|
(4,045
|
)
|
Balances, December 31, 2019
|
|
|
10,143,158
|
|
|
|
1
|
|
|
|
19,657
|
|
|
|
(1,242
|
)
|
|
|
(40
|
)
|
|
|
18,376
|
|
Common stock and warrants issued for cash
|
|
|
1,250,000
|
|
|
|
—
|
|
|
|
2,812
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,812
|
|
Common stock issued upon exercise of warrants
|
|
|
375,000
|
|
|
|
—
|
|
|
|
1,174
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,174
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10,871
|
)
|
|
|
—
|
|
|
|
(10,871
|
)
|
Balances, December 31, 2020
|
|
|
11,768,158
|
|
|
$
|
1
|
|
|
$
|
23,643
|
|
|
$
|
(12,113
|
)
|
|
$
|
(40
|
)
|
|
$
|
11,491
|
|
The
accompanying notes are an integral part of these financial statements.
POLAR
POWER, INC.
STATEMENTS OF CASH FLOWS
(in
thousands)
|
|
Years Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(10,871
|
)
|
|
$
|
(4,045
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Fair value of vested stock options
|
|
|
—
|
|
|
|
79
|
|
Depreciation and amortization
|
|
|
622
|
|
|
|
628
|
|
Amortization of operating lease right-of-use assets
|
|
|
624
|
|
|
|
661
|
|
Inventory write-down
|
|
|
3,400
|
|
|
|
270
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(256
|
)
|
|
|
6,793
|
|
Inventories
|
|
|
1,418
|
|
|
|
(5,710
|
)
|
Prepaid expenses
|
|
|
907
|
|
|
|
(910
|
)
|
Income taxes receivable
|
|
|
(2,126
|
)
|
|
|
484
|
|
Accounts payable
|
|
|
(264
|
)
|
|
|
(492
|
)
|
Customer deposits
|
|
|
506
|
|
|
|
118
|
|
Accrued expenses and other current liabilities
|
|
|
110
|
|
|
|
527
|
|
Decrease in lease liabilities
|
|
|
(618
|
)
|
|
|
(570
|
)
|
Net cash used in operating activities
|
|
|
(6,548
|
)
|
|
|
(2,167
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
|
(19
|
)
|
|
|
(338
|
)
|
Net cash used in investing activities
|
|
|
(19
|
)
|
|
|
(338
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock and warrants
|
|
|
2,812
|
|
|
|
—
|
|
Proceeds from exercise of warrants
|
|
|
1,174
|
|
|
|
—
|
|
Proceeds from loan payable
|
|
|
1,715
|
|
|
|
—
|
|
Repayment of notes payable
|
|
|
(328
|
)
|
|
|
(255
|
)
|
Proceeds from advances from credit facility
|
|
|
2,500
|
|
|
|
—
|
|
Repayment of advances from credit facility
|
|
|
(2,500
|
)
|
|
|
—
|
|
Purchase of treasury stock
|
|
|
—
|
|
|
|
(40
|
)
|
Net cash provided by (used in) financing
activities
|
|
|
5,373
|
|
|
|
(295
|
)
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
|
(1,194
|
)
|
|
|
(2,800
|
)
|
Cash and cash equivalents, beginning
of period
|
|
|
2,840
|
|
|
|
5,640
|
|
Cash and cash
equivalents, end of period
|
|
$
|
1,646
|
|
|
$
|
2,840
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
52
|
|
|
$
|
52
|
|
Taxes Paid
|
|
$
|
—
|
|
|
$
|
—
|
|
Supplemental non-cash investing and
financing activities:
|
|
|
|
|
|
|
|
|
Property and equipment acquired
under notes payable
|
|
$
|
—
|
|
|
$
|
153
|
|
Recording of lease right-of-use
assets and lease liabilities
|
|
$
|
—
|
|
|
$
|
2,847
|
|
Reclassification of prepaid expenses
to property and equipment
|
|
$
|
—
|
|
|
$
|
114
|
|
The
accompanying notes are an integral part of these financial statements.
POLAR
POWER, INC.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2020 AND 2019
(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 1979 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 applications. The Company’s products integrate DC generator and proprietary
automated controls, lithium batteries and solar systems to provide low operating cost and lower emissions alternative power needs
in telecommunications, defense, automotive and industrial markets.
Liquidity
The
Company’s financial statements have been prepared on the going concern basis, which contemplates the realization of assets
and the settlement of liabilities and commitments in the normal course of business. For the year ended December 31, 2020, the
Company incurred a net loss of $10,871 and used cash in operating activities of $6,547. At December 31, 2020, the Company had
cash on hand of $1,646 and working capital of $10,123. Subsequent to December 31, 2020, the Company sold an aggregate of 750,000
shares of its common stock for net proceeds of approximately $12,500 in an offering completed in January 2021. In addition, in
January 2021, the Company issued an aggregate of 225,878 shares of common stock upon the exercise of warrants and received cash
proceeds of $707. Notwithstanding the net loss for 2020, management believes that its current cash balance, plus net proceeds
from issuance of common stock and exercise of warrants in January 2021, is sufficient to fund operations for at least one year
from the date the Company’s 2020 financial statements are issued.
The
Company expects to continue to incur net losses and negative operating cash flows in the near-term. The Company may seek to raise
additional debt and/or equity capital to fund future operations. No assurance can be given that any future financing will be available
or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional
financing, it may contain undue restrictions on its operations, in the case of debt financing or cause substantial dilution for
its stockholders, in case or equity financing. Management continues to review operations in order to identify additional strategies
designed to generate cash flow, improve the Company’s financial position, and enable the timely discharge of the Company’s
obligations. If management is unable to identify sources of additional cash flow in the short term, it may be required to further
reduce or limit operations.
COVID-19
The
Company is subject to risks and uncertainties of the COVID-19 pandemic that could adversely impact its business, including its
sales, raw materials supply chain, liquidity and access to capital markets and business development activities. The Company has
implemented additional health and safety precautions and protocols in response to the pandemic and government guidelines. During
2020, sales to the Company’s U.S. telecommunications customers, which represented 95% of the Company’s net sales for
2020, decreased 63% from 2019 as its customers postponed shipments and orders to prioritize expansion of 5G and cell site edge
computing networks and as a result of the effects of COVID-19 pandemic on the business of the Company’s customers. As a
result of the Company’s declining revenues during the COVID-19 pandemic, management implemented cost reduction programs
to reduce overhead and lower operating expenses, while still keeping the business operational and ready to expand when needed.
During 2020, the Company’s supply chain was not placed in jeopardy due to the COVID-19 outbreak.
The
extent of the impact of the COVID-19 pandemic has had and will continue to have on the Company’s business is highly uncertain
and difficult to predict and quantify. The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s
business, results of operations and financial condition, will depend on future developments that are highly uncertain, including
as a result of new information that may emerge concerning COVID-19 and the actions taken to contain or treat it, as well as the
economic impact on local, regional, national and international markets.
Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
(“GAAP”) requires management to make certain estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. On an ongoing basis, management reviews
its estimates and if deemed appropriate, those estimates are adjusted. Significant estimates include those related to assumptions
used in determining reserves for uncollectible receivables, assumptions used in valuing inventories at net realizable value, impairment
analysis of long term assets, estimates of useful lives of property and equipment, assumptions used in valuing stock-based compensation,
the valuation allowance for deferred tax assets, accruals for product warranties, accruals for potential liabilities, and assumptions
used in the determination of the Company’s liquidity. 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 our 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. Under ASC 606, 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.
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 deliver 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 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, 2020 and 2019. 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:
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
DC power systems
|
|
$
|
8,659
|
|
|
$
|
24,177
|
|
Engineering & Tech Support Services
|
|
|
226
|
|
|
|
281
|
|
Accessories
|
|
|
146
|
|
|
|
343
|
|
Total net sales
|
|
$
|
9,031
|
|
|
$
|
24,801
|
|
The
following table shows the Company’s disaggregated net sales by customer type:
|
|
Years
Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Telecom
|
|
$
|
8,640
|
|
|
$
|
23,753
|
|
Government/Military
|
|
|
120
|
|
|
|
589
|
|
Marine
|
|
|
5
|
|
|
|
83
|
|
Other
(backup DC power to various industries)
|
|
|
266
|
|
|
|
376
|
|
Total
net sales
|
|
$
|
9,031
|
|
|
$
|
24,801
|
|
For the years ended December
31, 2020 and 2019, international sales totaled $1,522 and $230, respectively. For the year ended December 31, 2020, over
88% of our international sales were made to one customer in Japan. There were no sales made to this customer during 2019.
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. The Company’s warranties are
of an assurance-type and come standard with all Company 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. The Company estimates the actual historical warranty claims coupled with
an analysis of unfulfilled claims to record a liability for specific warranty purposes. As of December 31, 2020 and 2019, the
Company had accrued a liability for warranty reserve of $600 and $375, 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:
|
|
Years End December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Changes in estimates for warranties
|
|
|
|
|
|
|
Balance at beginning of the period
|
|
$
|
375
|
|
|
$
|
175
|
|
Payments
|
|
|
(634
|
)
|
|
|
(530
|
)
|
Provision for warranties
|
|
|
859
|
|
|
|
730
|
|
|
|
|
|
|
|
|
|
|
Balance at end of the period
|
|
$
|
600
|
|
|
$
|
375
|
|
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, 2020 and 2019.
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 subsequently written up. At December 31,
2020, as a result of the deterioration of the forecasted marketability of certain of the Company’s inventory, management
determined that the inventory’s revenue-generating ability was diminished, and the net realizable value of this inventory
had fallen below its historical carrying cost. Accordingly, for the year ended December 31, 2020, the Company recorded a write
down of inventory of $3,400, which is included in cost of goods sold. At December 31, 2020, the balance of inventory reflects
its new cost basis after the write down. For the year ended December 31, 2019, the Company recorded a write down of inventory
of $270, which is included in cost of goods sold. At December 31, 2020 and 2019, inventory has been reduced by cumulative write-downs
totaling $4,000 and $600, respectively.
As
of December 31, 2020 and 2019, inventories consisted of the following:
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Raw materials
|
|
$
|
5,527
|
|
|
$
|
8,051
|
|
Finished goods
|
|
|
3,567
|
|
|
|
5,861
|
|
Inventories
|
|
$
|
9,094
|
|
|
$
|
13,912
|
|
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:
|
|
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, 2020 or December 31, 2019.
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 The Company adopted ASC 842 on January 1, 2019. There was
no cumulative-effect adjustment to accumulated deficit.
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, 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. 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, 2020 and 2019, research and development expenditures
totaled $1,723 and $2,276, respectively.
Net
Loss Per Share
Basic
loss per share is computed by dividing net loss by the weighted average number of common shares 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
common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential
common shares had been issued using the treasury stock method. Dilutive potential common shares include shares from unexercised
warrants and options. Potential common share equivalents have been excluded where their inclusion would be anti-dilutive. The
Company’s basic and diluted net loss per share is the same for all periods presented because all shares issuable upon exercise
of warrants and options are anti-dilutive.
The
following potentially dilutive shares were excluded from the shares used to calculate diluted earnings per share as their inclusion
would be anti-dilutive:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Options
|
|
|
140,000
|
|
|
|
140,000
|
|
Warrants
|
|
|
370,000
|
|
|
|
120,000
|
|
Total
|
|
|
510,000
|
|
|
|
260,000
|
|
Financial
Assets and Liabilities Measured at Fair Value
Accounting
standards require certain assets and liabilities be reported at fair value in the financial statements and provide a framework
for establishing that fair value. Fair value is defined as the price that would be received upon sale of an asset or paid to transfer
a liability in an orderly transaction between market participants at the measurement date. When determining fair value, the Company
considers the principal or most advantageous market in which it transacts, and considers assumptions that market participants
would use when pricing the asset or liability. The framework for determining fair value is based on a hierarchy that prioritizes
the inputs and valuation techniques used to measure fair value:
|
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 and accounts payable,
approximate their fair values because of the short-term nature of these instruments. The carrying values of notes 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 $10 and $16 at December 31, 2020 and 2019, 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 $28 and $4 at December 31, 2020 and 2019, respectively, was held in an account at a financial institution located in Romania.
Revenues.
For the years ended December 31, 2020, 52%, 15%, and 14% of revenue were generated from the company’s three largest customers,
which were customers from the telecommunications industry. In 2019, 68%, 17%, and 6% of revenue were generated from the Company’s
three largest customers, all are customers from the telecommunications industry. In 2020 and 2019, sales to telecommunications
customers accounted for 96% and 96% of total revenue, respectively. In 2020 and 2019, sales to international customers accounted
for 17% and 1%, of total revenue, respectively.
Accounts
receivable. At December 31, 2020, 87% of the Company’s accounts receivable was from one of the Company’s major
customer. At December 31, 2019, 70% and 20% represented the two largest accounts receivable balances from the Company’s
customers. There was no other customer that accounted for more than 10% of the Company’s accounts receivable as of the years
ended December 31, 2020 and 2019.
Accounts
payable. On December 31, 2020, the three largest accounts payable accounts to the Company’s vendors represented 10%,
9%, and 8%, respectively. On December 31, 2019, the three largest accounts payable accounts to the Company’s largest vendors
represented 11%, 10%, and 10%, respectively.
Recent
Accounting Pronouncements
In
June 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. As a smaller reporting company, ASU 2016-13 will be effective for the Company beginning
January 1, 2023, with early adoption permitted. 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.
The
Company’s management does not believe that any 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:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Shop equipment and machinery
|
|
$
|
3,286
|
|
|
$
|
3,264
|
|
Production tooling, jigs, fixtures
|
|
|
71
|
|
|
|
71
|
|
Vehicles
|
|
|
180
|
|
|
|
188
|
|
Leasehold improvements
|
|
|
390
|
|
|
|
390
|
|
Office equipment
|
|
|
177
|
|
|
|
172
|
|
Software
|
|
|
103
|
|
|
|
103
|
|
Total property and equipment, cost
|
|
|
4,207
|
|
|
|
4,188
|
|
Less: accumulated depreciation and amortization
|
|
|
(2,710
|
)
|
|
|
(2,088
|
)
|
Property and equipment, net
|
|
$
|
1,497
|
|
|
$
|
2,100
|
|
Depreciation
and amortization expense on property and equipment for the years ended December 31, 2020 and 2019 was $622 and $628 respectively.
During the years ended December 31, 2020 and 2019, $595 and $586, 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:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Total Notes Payable
|
|
$
|
777
|
|
|
$
|
1,106
|
|
Less: Current Portion
|
|
|
267
|
|
|
|
328
|
|
|
|
|
|
|
|
|
|
|
Notes Payable, Noncurrent portion
|
|
$
|
510
|
|
|
$
|
778
|
|
The
Company has entered into several financing agreements for the purchase of equipment. 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.
The aggregate monthly payments of principal and interest of the outstanding notes payable as of December 31, 2020 is approximately
$20 and are due through 2024.
As
of December 31, 2019, the balance of notes payable was $1,106. During 2020, the Company paid down the notes payable by $328, and
at December 31, 2020, the balance of notes payable was $777.
Annual
future principal payments under the outstanding note agreements as of December 31, 2020 are as follows:
Years ending December 31:
|
|
|
|
2021
|
|
|
267
|
|
2022
|
|
|
232
|
|
2023
|
|
|
196
|
|
2024
|
|
|
82
|
|
Total
|
|
$
|
777
|
|
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 2020, we advanced $2,500 from the revolving credit facility, which we also paid off during the
year. As of December 31, 2020, there was no balance outstanding under the line of credit at December 31, 2020, and the Company
had availability under the line of credit in the amount of $1,070. The Loan Agreement’s initial term ends on September 30,
2022, and is renewed thereafter for additional one-year terms. Either party may terminate the Loan Agreement on the last day of
the initial term or subsequent renewal term by giving the other party at least sixty days prior written notice. 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.
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 (the “Standard
Interest Rate”), but in no event shall 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
(the “Inventory Interest Rate”), but in no event shall the Inventory Interest Rate be less than 4.75% per annum. The
Loan Agreement also contains a financial covenant requiring the Company to attain an effective tangible net worth, defined as
its total assets, excluding all intangible assets, less its total liabilities plus loans to the Company from our officers, stockholders
or employees that have been subordinated to the Company’s obligations to Pinnacle, greater than $6,000 as determined by
Pinnacle as of the end of each fiscal quarter.
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 plus the original principal balance of any term loans and advances other than under the revolving credit facility. Under
the Loan Agreement, the Company also agreed to grant Pinnacle a security interest in all presently existing and thereafter acquired
or arising assets of the Company. The Loan Agreement also contains customary representations, warranties and covenants, and other
terms and conditions.
Supplier
Agreement
Effective
June 4, 2019, the Company executed a Supplier Agreement with Citibank, N.A. (“Citibank”). On October 8, 2020, the
Company terminated the Supplier Agreement with Citibank.
Under
the terms of the Supplier Agreement, the Company from time to time offered to sell to Citibank certain of the Company’s
accounts receivable relating to invoiced sales made to AT&T. Once AT&T approved the invoice, AT&T sent payment instructions
to Citibank. During the years ended December 31, 2020 and 2019, total of $2,621 and $13,229 of accounts receivables, respectively,
was sold to Citibank by the Company, and the Company incurred fees of approximately $12 and $52, respectively.
The
sale price was equal to the face amount of the receivable less the applicable discount charge calculated by multiplying the face
amount of the receivable by (i) the annual discount rate (which is equal to the 90-day London Inter-bank Offered Rate plus 1.00%)
and (ii) the discount acceptance period (which is equal the number of days in the payment terms less the number of days necessary
to approve the invoice) divided by 360.
NOTE
5 – LOAN PAYABLE
On
May 4, 2020, the Company entered into a loan with Citibank, N.A. in an aggregate principal amount of $1,715 (the “PPP Loan”),
pursuant to the Paycheck Protection Program (the “PPP”) under 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, with the first nine months of interest deferred. Principal and interest are payable monthly
commencing nine months after the disbursement date and may be prepaid by the Company at any time prior to maturity with no prepayment
penalties. The Company 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 PPP Loan is subject to forgiveness to the extent proceeds are used for payroll costs, including payments required
to continue group health care benefits, and certain rent, utility, and mortgage interest expenses (collectively, “Qualifying
Expenses”), pursuant to the terms and limitations of the PPP. The Company intends to use a significant majority of the PPP
Loan amount for Qualifying Expenses and expects the full amount of the PPP Loan to be forgiven. However, no assurance can be given
that the Company will obtain forgiveness of the PPP Loan in whole or in part.
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,
2020, of 2.4 years. 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. 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.
Operating
lease right-of-use (“ROU”) assets and liabilities are recognized at commencement date based on the present value of
lease payments over the lease term. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities
represent our 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:
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Lease Cost
|
|
|
|
|
|
|
|
|
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, 2020, and $102 is included in general and administration and $597 is included in cost of sales in the Company’s
statement of operations as of December 31, 2019)
|
|
$
|
699
|
|
|
$
|
699
|
|
|
|
|
|
|
|
|
|
|
Other Information
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term – operating
leases (in years)
|
|
|
2.4
|
|
|
|
3.4
|
|
Average discount rate – operating leases
|
|
|
3.75
|
%
|
|
|
3.75
|
%
|
The
supplemental balance sheet information related to leases for the period is as follows:
|
|
At December 31,
2020
|
|
|
At December 31,
2019
|
|
Operating leases
|
|
|
|
|
|
|
|
|
Long-term right-of-use assets, net of accumulated amortization
of $1,265 and $154, respectively
|
|
$
|
1,563
|
|
|
$
|
2,187
|
|
|
|
|
|
|
|
|
|
|
Current portion of operating lease liabilities
|
|
$
|
670
|
|
|
$
|
618
|
|
Noncurrent portion of operating lease liabilities
|
|
|
990
|
|
|
|
1,660
|
|
Total operating lease liabilities
|
|
$
|
1,660
|
|
|
$
|
2,278
|
|
Maturities
of the Company’s lease liabilities are as follows:
Year Ending
|
|
Operating Leases
|
|
2021
|
|
|
721
|
|
2022
|
|
|
747
|
|
2023
|
|
|
272
|
|
Total lease payments
|
|
|
1,740
|
|
Less: Imputed interest/present value discount
|
|
|
(80
|
)
|
Present value of lease liabilities
|
|
$
|
1,660
|
|
Rent
expense for the twelve months ended December 31, 2020 and 2019 was $903 and $865, respectively (including short-term and other
rentals).
NOTE
7 – STOCKHOLDERS’ EQUITY
Common
Stock
|
●
|
Issuance
of common stock and warrants for cash
|
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, 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, 2019, 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:
|
|
Number of
Options
|
|
|
Weighted Average
Exercise
Price
|
|
Outstanding, December 31, 2018
|
|
|
360,000
|
|
|
$
|
4.84
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Cancelled
|
|
|
(220,000
|
)
|
|
|
5.26
|
|
Outstanding, December 31, 2019
|
|
|
140,000
|
|
|
$
|
5.22
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Outstanding and exercisable, December 31, 2020
|
|
|
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, 2020 and 2019, 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. On October 1, 2019, the Company’s
three executive officers agreed to terminate their rights to 220,000 stock option shares that had not vested as of April 1, 2019.
During
the year ended December 31, 2019, the Company recorded stock-based compensation costs of $79 related to the vesting of these options.
There was no unamortized cost compensation remaining as of December 31, 2019 As such, no further stock compensation expense was
recorded during the year ended December 31, 2020.
There
was no intrinsic value of the outstanding options at December 31, 2020.
NOTE
9 – STOCK WARRANTS
The
following table summarizes warrant activity:
|
|
Number of
Warrants
|
|
|
Weighted Average
Exercise
Price
|
|
Outstanding, December 31, 2018
|
|
|
120,000
|
|
|
$
|
8.75
|
|
Issued
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Outstanding, December 31, 2019
|
|
|
120,000
|
|
|
$
|
8.75
|
|
Issued
|
|
|
625,000
|
|
|
|
3.13
|
|
Exercised
|
|
|
(375,000
|
)
|
|
|
3.13
|
|
Outstanding, December 31, 2020
|
|
|
370,000
|
|
|
$
|
4.95
|
|
Exercisable, December 31, 2020
|
|
|
370,000
|
|
|
$
|
4.95
|
|
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.
There
was no intrinsic value of the outstanding and exercisable warrants at December 31, 2020.
NOTE
10 – INCOME TAXES
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, NOLs 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 have
recorded an income tax receivable of $1,702 for the benefit of carrying back the NOLs for 2018 to 2019 to the tax year ended September
30, 2016. We are forecasting an NOL for fiscal year 2020 and expect to carry it back to the short tax period ended December 31,
2016. As a result, we have also included the 2020 provisional amounts of $655 in income tax receivable at December 31, 2020.
The
benefit from income taxes for the years ended December 31, 2020 and 2019 consists of the following:
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
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:
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Federal income tax rate
|
|
|
(21
|
)%
|
|
|
(21
|
)
|
State tax, net of federal benefit
|
|
|
(7
|
)%
|
|
|
(7
|
)%
|
Carryback net operating loss
|
|
|
—
|
%
|
|
|
21
|
%
|
Change in valuation allowances
|
|
|
12
|
%
|
|
|
7
|
%
|
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, 2020 and 2019 are as follows:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Inventory reserves
|
|
$
|
1,379
|
|
|
$
|
396
|
|
Accrued liabilities and other reserves
|
|
|
169
|
|
|
|
208
|
|
Operating lease liability
|
|
|
465
|
|
|
|
635
|
|
Net operating loss carryforwards
|
|
|
2,281
|
|
|
|
734
|
|
Gross deferred tax assets
|
|
|
4,294
|
|
|
|
1,973
|
|
Valuation allowance
|
|
|
(3,515
|
)
|
|
|
(1,266
|
)
|
Total deferred tax assets
|
|
|
779
|
|
|
|
707
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Operating lease right-of-use asset, net
|
|
|
(436
|
)
|
|
|
(610
|
)
|
Depreciation
|
|
|
(343
|
)
|
|
|
(97
|
)
|
Total deferred tax liabilities
|
|
|
(779
|
)
|
|
|
(707
|
)
|
Net deferred tax asset (liability)
|
|
$
|
—
|
|
|
$
|
—
|
|
At
December 31, 2020, the Company had available Federal and state net operating loss carryforwards (“NOL”s) to reduce
future taxable income of approximately $7,200,000 and $10,900,000, 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, 2020 and 2019, 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 2016.
The
Company’s policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of December 31,
2020 and 2019, the Company had no accrued interest or penalties related to uncertain tax positions. Additionally, tax years 2016
through 2020 remain open to examination by the major taxing jurisdictions to which the Company is subject.
NOTE
11 – 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, 2020 and 2019, Smartgen performed $129 and $289 in field services, respectively, the cost of which
is included in cost of goods sold.
NOTE
12 – COMMITMENTS AND CONTINGINCIES.
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, 2020 with respect to such matters. See also Notes 6 and 10.
NOTE
13 – SUBSEQUENT EVENTS.
Issuance
of common stock upon exercise of warrants
In
January 2021, warrants to purchase 225,878 shares of common stock were exercised, and the Company received net proceeds of $707
upon such exercise. Also, in January 2021, warrants to purchase 120,000 shares of common stock were exercised under a cashless
transaction resulting in the issuance of 61,644 shares of the Company’s common stock.
Underwritten
Offering of Common Stock
On
February 7, 2021, the Company entered into an underwriting agreement with ThinkEquity, a division of Fordham Financial Management,
Inc., pursuant to which the Company agreed to sell to ThinkEquity an aggregate of 750,000 shares of the Company’s common
stock, $0.0001 par value per share (the “Shares”), in a firm commitment underwritten public offering. All of the Shares
were sold by the Company to the Underwriter on February 10, 2021, and the Company received at the closing of the offering net
proceeds of approximately $12.5 million from the sale of the Shares after deducting underwriting discounts and commissions and
other offering expenses payable by the Company. The Company expects to use the net proceeds from the Offering for general corporate
purposes.
INDEX
TO EXHIBITS
10.9
|
|
Form of Representative’s Warrant
|
|
10-K
|
|
001-37960
|
|
10.9
|
|
3/10/17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.10
|
|
Amendment No. 1 to Polar Power, Inc. 2016 Omnibus Incentive Plan
|
|
10-K
|
|
001-37960
|
|
10.10
|
|
4/1/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.1
|
|
Code of Ethics
|
|
10-K
|
|
001-37960
|
|
14.1
|
|
3/10/17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21.1
|
|
Subsidiaries of the Registrant
|
|
10-K
|
|
001-37960
|
|
21.1
|
|
3/10/17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23.1
|
|
Consent of Independent Registered Public Accounting Firm
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101.INS
|
|
Inline
XBRL Instance Document
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101.SCH
|
|
Inline
XBRL Taxonomy Extension Schema
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101.CAL
|
|
Inline
XBRL Taxonomy Extension Calculation Linkbase
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101.DEF
|
|
Inline
XBRL Taxonomy Extension Definition Linkbase
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101.LAB
|
|
Inline
XBRL Taxonomy Extension Label Linkbase
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101.PRE
|
|
Inline
XBRL Taxonomy Extension Presentation Linkbase
|
|
|
|
|
|
|
|
|
|
X
|
(#)
|
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 2021.
|
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, 2021
|
Arthur
D. Sams
|
|
and
Chairman of the Board of Directors
(principal executive officer)
|
|
|
|
|
|
|
|
/s/
Luis Zavala
|
|
Chief
Financial Officer
|
|
March
31, 2021
|
Luis
Zavala
|
|
(principal
financial and accounting officer)
|
|
|
|
|
|
|
|
/s/
Keith Albrecht
|
|
Director
|
|
March
31, 2021
|
Keith
Albrecht
|
|
|
|
|
|
|
|
|
|
/s/
Peter Gross
|
|
Director
|
|
March
31, 2021
|
Peter
Gross
|
|
|
|
|
|
|
|
|
|
/s/
Katherine Koster
|
|
Director
|
|
March
31, 2021
|
Katherine
Koster
|
|
|
|
|
Polar Power (NASDAQ:POLA)
Historical Stock Chart
From Mar 2024 to Apr 2024
Polar Power (NASDAQ:POLA)
Historical Stock Chart
From Apr 2023 to Apr 2024