Polar Power, Inc. 10-K

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, 2023, we had 12,949,550 shares of common stock outstanding held of record by approximately 21 stockholders. These holders of record include depositories that hold shares of stock for brokerage firms which, in turn, hold shares of stock for numerous beneficial owners. Recent Sales of Unregistered Securities None. Item 6. [RESERVED]. Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” and elsewhere in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results to be expected for any future period, and results for any interim period are not necessarily indicative of the results to be expected for the full year. 34 Overview We design, manufacture, and sell DC power generators, renewable energy and cooling systems for applications primarily in the telecommunications market and, to a lesser extent, in other markets, including military, electric vehicle charging, marine and industrial. We are continuously diversifying our customer base. We are selling our products into non-telecommunication markets and applications at an increasing rate. Within the various markets we service, our DC power systems provide reliable and low-cost DC power to service applications that do not have access to the utility grid (i.e., prime power applications) or have critical power needs and cannot be without power in the event of utility grid failure (i.e., back-up power applications). During the years ended December 31, 2022 and 2021, 96% and 89%, respectively, of our total net sales were within the telecommunications market. In 2022, our two largest customers represented 66% and 23% of our total net sales, respectively, one being a Tier-1 telecommunications customer in the U.S. and one being a telecommunications customer outside the U.S. In 2021, we had 67% of our total net sales derived from our largest customer, which is a Tier-1 telecommunications customer in the U.S There was no other revenue from customers in excess of 10% of total net sales in either period. During those periods, the majority of our sales were of our DC base powers systems. During 2022 and 2021, sales to international customers accounted for 25% and 8% of total revenue, respectively. Sales to military customers during 2022 and 2021 accounted for 1% and 6% of total revenues, respectively. During 2022 and 2021, sales to other markets accounted for 3% and 5% of total revenue, respectively. Advance Mobility applications require power to charge batteries and appliances within a vehicle. Our DC power systems are smaller in size, lighter in weight, and operate with greater efficiency than AC power systems, making our product ideal for these applications. We have supplied our DC generators to many automotive manufactures in support of their remote field testing of electric vehicles. We are presently in development of natural gas CHP home chargers as a solution to many homes that are not able to support fast charging using the electric grid. We believe we can compete with the electric utility rates for home and office charging by using natural gas and making use of surplus heat from the generator in certain bad grid and remote area applications. Our DC mobile EV charging systems can operate with diesel or propane and are ideal for emergency road service to rapid charge EV’s stranded without a charge. Our DC mobile EV charging systems offer convenience, faster charging, and lower cost than towing an EV on a flatbed to a charging station. We have shipped DC mobile EV charging systems used to extend range for specialty vehicles used in applications requiring low emissions. Our DC mobile EV charging systems provide direct charging to an electric vehicle’s battery. We also developed DC power systems for medium to large solar PV applications to provide energy service for irrigation, refrigerated storage of meat and produce, and micro grid. By combining the energy of solar PV and propane or natural gas, our DC power systems can provide constant energy 24 hours a day without using expensive energy storage. Propane or natural gas fueled DC power systems are connected in parallel with the solar array (also a DC energy source) greatly simplifying the means of combining multiple energy sources. This process is more efficient and lowers both the CAPEX and OPEX of the Solar systems by eliminating battery storage and / or connection to the grid. Currently, the most popular technologies used in these applications are either grid power, diesel only, or a combination of grid and solar with a large battery bank. Our proposed technology is more environmentally friendly and lowers the cost of food processing. Currently, we have sold a limited number of our DC power systems that are undergoing field trials. We expect that opportunities in the bad-grid (i.e., areas where wireless towers are connected to an electrical grid that loses power for more than eight hours), and off-grid (i.e., areas where wireless towers are not connected to an electrical grid) applications, which include telecommunications towers, commercial and residential backup power, electric vehicle charging, “mini-grid” and various other power applications, will help to expand the market for our natural gas/LPG (propane) product lines domestically and internationally. We plan to develop new configurations of DC power system, battery storage and solar products to optimize the match between our solutions and various application needs. Serving these various markets, we offer the following three configurations of our DC power systems, with output power ranging from 5 kW to 50 kW: ● DC base power systems . These stationary systems integrate a DC generator and automated controls with remote monitoring, which are typically contained within an environmentally regulated enclosure. ● DC hybrid power systems . These systems incorporate lithium-ion batteries (or other advanced battery chemistries) with our proprietary battery management system into our standard DC power systems. ● DC solar hybrid power systems . These stationary systems incorporate photovoltaic and other sources of renewable energy into our DC hybrid power system. ● Mobile power systems . These stationary systems incorporate photovoltaic and other sources of renewable energy into our DC hybrid power system. Our DC power systems are available in diesel, natural gas, LPG / propane and renewable formats, with diesel, natural gas and propane gas being the predominate formats. 35 Critical Accounting Policies We believe that the following critical accounting policies, among others, affect our more significant judgment and estimates used in the preparation of our financial statements: Revenue Recognition. We recognize revenue in accordance with Financial Accounting Standards Board Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”). ASC 606 requires entities to recognize revenue through the application of a five-step model, which includes: identification of the contract; identification of the performance obligations; determination of the transaction price; allocation of the transaction price to the performance obligations; and recognition of revenue as the entity satisfies the performance obligations. Substantially all of our revenue is derived from product sales. Product revenue is recognized when performance obligations under the terms of a contract are satisfied, which occurs for us upon shipment or delivery of products or services to our customers based on written sales terms, which is also when control is transferred. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring the products or services to a customer. We determine whether delivery has occurred based on when title transfers and the risks and rewards of ownership have transferred to the customer, which usually occurs when we place the product with the customer’s carrier or deliver the product to a customer’s location. We regularly review our customers’ financial positions to ensure that collectability is reasonably assured. We also recognize revenue from the rental of equipment. Our 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, 2022 and 2021. Warranty Costs . We provide limited warranties for parts and labor at no cost to our customers within a specified time period after the sale. Our standard warranty on new products is two years from the date of delivery to the customer. We offer a limited extended warranty of up to five years on our certified DC power systems based on application and usage. Our warranties are of an assurance-type and come standard with all of our products to cover repair or replacement should product not perform as expected. Provisions for estimated expenses related to product warranties are made at the time products are sold. These estimates are established using historical information about the nature, frequency and average cost of warranty claim settlements as well as product manufacturing and recovery from suppliers. Management actively studies trends of warranty claims and takes action to improve product quality and minimize warranty costs. We estimate the actual historical warranty claims coupled with an analysis of unfulfilled claims to record a liability for specific warranty purposes. Inventory . Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out (“FIFO”) basis. We record adjustments to our inventory based on an estimated forecast of the inventory demand, taking into consideration, among others, inventory turnover, inventory quantities on hand, unfilled customer order quantities, forecasted demand, current prices, competitive pricing, and trends and performance of similar products. If the estimated net realizable value is determined to be less than the recorded cost of the inventory, the difference is recognized as a loss in the period in which it occurs. Once inventory has been written down, it creates a new cost basis for inventory that may not subsequently written up. 36 Stock-Based Compensation. We periodically issue stock-based compensation to officers, directors, employees, and consultants for services rendered. Such issuances vest and expire according to terms established at the issuance date. Stock-based payments to officers, directors, employees, and for acquiring goods and services from nonemployees, which include grants of employee stock options, are recognized in the financial statements based on their grant date fair values in accordance with ASC 718, Compensation-Stock Compensation . Stock option grants to officers, directors, employees, and consultants, which are generally time vested, are measured at the grant date fair value and depending on the conditions associated with the vesting of the award, compensation cost is recognized on a straight-line or graded basis over the vesting period. Recognition of compensation expense for non-employees is in the same period and manner as if we had paid cash for the services. The fair value of stock options granted is estimated using the Black-Scholes option-pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life, and future dividends. The assumptions used in the Black-Scholes option pricing model could materially affect compensation expense recorded in future periods. Effects of Inflation The impact of inflation and changing prices during 2022 has not been significant on the financial condition or results of operations of our company. Rapid changes in the global economy may cause significant spikes in inflation which may have an impact in our financial condition during 2023 and beyond. Because some of our contracts are at a fixed price, we face the risk that cost overruns or inflation may exceed, erode or eliminate our expected profit margin, or cause us to record a loss on certain projects. We are taking actions to manage the potential impacts of these matters and we will continue to assess the actual and expected impacts and the need for further action. 37 Impact of Recent Accounting Pronouncements See “Note 1 – Organization and Summary of Significant Accounting Policies – Recent Accounting Pronouncements” of the Notes to Financial Statements commencing on page F-7 of this Annual Report on Form 10-K for management’s discussion as to the impact of recent accounting pronouncements. Financial Performance Summary – Year Ended December 31, 2022 Our net sales for the year ended December 31, 2022, were $16,056, as compared to $16,896 for the year ended December 31, 2021. We reported a net loss of $5,584 for 2022, as compared to net loss of $1,414 for 2021. Our revenues during these periods are primarily due to our telecommunications customers increasing their investments in back-up power generators primarily to support expansion of their network infrastructure. Labor shortages caused by COVID-19 and supply chain constraints that affected timely delivery of raw materials required to complete our DC power systems resulted in approximately $3,500 of expected shipments to be postponed from 2022 to the first half of 2023. During 2022, our international sales increased 211% to $3,983, as compared to $1,279 during 2021. The increase in international sales is primarily due to a new telecommunications customer in the South Pacific Islands. Our sales backlog as of December 31, 2022, was $12,001, with 47% of that amount being attributable to our largest U.S. telecommunications customer, 16% represented purchases from other telecommunications customers in the U.S., 32 % represented purchases from telecommunications customers outside the U.S., 1 % represented purchase from customers in the marine industry, 1% represented purchases from customers in the military markets, and 3% represented purchases from customer in other markets. We plan to continue to expand our customer base in all market segments. We also anticipate that our sales will increase as we overcome supply chain and labor issues. We plan to continue to take proactive steps to manage our operations and mitigate the financial impacts of higher costs and supply chain issues. However, the full impact on our financial and operating performance of the COVID-19 pandemic along with geopolitical factors and increasing inflation concerns will depend significantly on the duration and severity of these factors, the actions taken to mitigate their impact, disruption to our supply chain, and the pace with which our clients return to more normalized purchasing behavior, among others factors beyond our knowledge or control. See “Risk Factors” commencing on page 16 of this Annual Report on Form 10-K for additional considerations. 38 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, 2022 and 2021 (in thousands) Year Ended December 31, Dollar Variance Percentage Variance Results as a Percentage of Net Revenues for the Year Ended December 31, Favorable Favorable 2022 2021 (Unfavorable) (Unfavorable) 2022 2021 Net sales $ 16,056 $ 16,896 $ (840 ) (5 )% 100.0 % 100.0 % Cost of sales 13,931 13,451 (480 ) (4 )% 86.8 % 79.6 % Gross profit 2,125 3,445 (1,320 ) (38 )% 13.2 % 20.4 % Sales and marketing expenses 1,471 1,488 17 1 % 9.2 % 8.8 % Research and development expenses 1,460 1,986 526 26 % 9.1 % 11.8 % General and administrative expenses 4,727 3,069 (1,658 ) (54 )% 29.4 % 18.2 % Total operating expenses 7,658 6,543 (1,115 ) (17 )% 47.7 % 38.7 % Loss from operations (5,533 ) (3,098 ) (2,435 ) (79 )% (34.5 )% (18.3 )% Interest and finance costs (58 ) (60 ) 2 3 % (0.4 )% (0.4 )% Gain from PPP loan forgiveness — 1,715 (1,715 ) — % — % — % Other income (expense), net 7 29 (22 ) (76 )% 0.0 % 0.2 % Loss before income taxes (5,584 ) (1,414 ) (4,170 ) (295 )% (34.8 )% (8.4 )% Income tax — — — — % — — % Net loss $ (5,584 ) $ (1,414 ) $ (4,170 ) (295 )% (34.8 )% (8.4 )% 39 Net Sales. Net sales decreased by $840, or 5%, to $16,056 for the year ended December 31, 2022, as compared to $16,896 for the year ended December 31, 2021. During 2022 we experienced labor shortages caused by COVID-19 and delays in receiving key components as a result of supply chain constraints. Our revenue from telecommunications customers, accounted for 96% of total net sales during 2022 and 89% of total net sales during 2021. Our largest customers during 2022 represented 66% and 23% of our total net sales, respectively, one being a U.S. Tier-1 telecommunications customer and one being a telecommunications customer outside the U.S. In 2021, our largest customer, a Tier-1 telecommunications customer in the U.S., represented 67% of our total net sales. There was no other revenue from customers in excess of 10% of total net sales in either period. During 2022 and 2021, sales to international customers accounted for 25% and 8% of total revenue, respectively. Sales to military customers during 2022 and 2021 accounted for 1% and 6% of total revenues, respectively. Sales to other markets during 2022 and 2021 accounted for 3% and 5% of total revenue, respectively. Most of our sales were of our DC base powers systems during the two years. Cost of Sales . Cost of sales increased by $480, or 4%, to $13,931 during 2022, compared to $13,451 during 2021. Cost of sales as a percentage of net sales increased from 79.6% in 2021 to 86.8% in 2022 as a result of a decrease in factory overhead absorption due to under-utilization of the production capacity as a result of labor shortages and supply chain constraints. We believe we will achieve significant reductions in the cost of sales as a percentage of net sales as supply chain constraints decrease and production increases to normal levels. Our cost of sales for 2021 includes a $1,300 credit to salaries and benefits expense related to the Employee Retention Credit (“ERC”), a refundable tax credit recorded in accounts receivable. The ERC assisted business owners and their employees by providing an incentive to keep workers on the payroll and eligible businesses received a tax credit for a percentage of each eligible employee’s wage. Gross Profit . We recognized a gross profit of $2,125 during 2022, as compared to a gross profit of $3,445 during 2021, which represents a decrease in gross profit of $1,320 or 38%. Gross profit as a percentage of net sales decreased to 13.2% in 2022, as compared to 20.4% in 2021. The decrease in gross profit during 2022 was primarily attributable to a decrease in factory overhead absorption resulting from lower sales primarily during the third quarter of 2022. Sales and Marketing Expenses. Sales and marketing expenses decreased $17 to $1,471 during 2022, as compared to $1,488 during 2021. The decrease was attributable to a slight decrease in sales support staff during 2022 as compared the same period in 2021. We plan to increase our sales force and increase our marketing and tradeshow activities in 2023 to support our diversification strategy and expand our customer base in all market segments. 40 Research and Development Expenses. During 2022, research and development expenses decreased by $526 to $1,460, as compared to $1,986 during 2021. The decrease in 2022 is attributed to a decrease in engineering staff during 2022 as compared to 2021. Our research and development efforts during 2022 focused on developing our new 27 kW D.C. power system, our new 4Y Toyota engine control system, and on product design and customization for our international customers. We plan to recruit additional engineers during 2023 to support new product developments and our customer diversification efforts. General and Administrative Expenses . Our general and administrative expenses increased by $1,658 to $4,727 during 2022, as compared to $3,069 during 2021. The increase was primarily due to $515 in stock-based compensation to officers, employees and consultants, an increase of $168 in legal and consulting fees, and smaller increases to insurance, rent, and utilities. Our general and administrative expenses for 2021 include a $700 credit to salaries and benefits expense related to the ERC, a refundable tax credit recorded in accounts receivable. The ERC assisted business owners and their employees by providing an incentive to keep workers on the payroll and eligible businesses received a tax credit for a percentage of each eligible employee’s wage. Interest and Finance Costs. Our interest expense was $58 in 2022, as compared to $60 in 2021. In 2022, our equipment financing expense decreased by $11, bank fees related to our line of credit with Pinnacle Bank increased by $9. Gain from PPP Loan Forgiveness . In September 2021, we recognized a non-cash gain of $1,715 within Other income (expense) on the consolidated statement of operations on the forgiveness of our PPP loan. Other Income (Expense), Net. During 2022, other income was $7, as compared to $29 during 2021, an decrease of $22. The decrease was primarily attributable to refunds of general liability insurance paid during 2021. Net Loss. As a result of the factors identified above, we generated a net loss of $5,584, or ($0.43) per basic and diluted share, for 2022, as compared to net loss of $1,414, or ($0.11) per basic and diluted share, for 2021, an increase loss of $4,170. The increase in net loss is primarily attributed to a decrease in net sales of $840 due to labor shortages and supply chain constraints during 2022, an increase in operating expenses of $1,115, coupled with the gain from forgiveness of the PPP loan in 2021. Liquidity and Capital Resources Sources of Liquidity During the year ended December 31, 2022, we funded our operations primarily from cash on hand. These funds were also used to increase our engineering and production staff and inventory to support higher production. As of December 31, 2022, we had working capital of $17,367, as compared to working capital of $21,760 at December 31, 2021. This $4,393 decrease in working capital is primarily attributable to a $4,890 decrease in cash and cash equivalents resulting from net cash of $6,507 used in operating activities, net cash used in investing activities of $25 for the acquisition of new property and equipment, and net cash from financing activities of $1,642 which includes net proceeds of $1,884 from our credit facility and $242 in repayments of equipment financing. On December 31, 2022, and December 31, 2021, our net trade receivables totaled $2,230 and $4,243, respectively. On December 31, 2022, $2,006 (90%) represented the largest open customer account balance, while $3,131 (74%) and $624 (15%) represented the two largest open customer account balances on December 31, 2021. At December 31, 2021, we recognized $2,000 related to the ERC for salaries and benefits expenses incurred during 2021 resulting in a refundable tax credit. The ERC assist business owners and their employees by providing an incentive to keep workers on the payroll and eligible businesses received a tax credit for a percentage of each eligible employee’s wage. As of December 31, 2022, the ERC is still being processed by the IRS. Our available capital resources on December 31, 2022, consisted primarily of $211 in cash and cash equivalents, as compared to $5,101 as of December 31, 2021. We expect our future capital resources will consist primarily of cash on hand, cash generated by operations, drawdowns on our credit facility with Pinnacle Bank, funds from the ERC, and future debt or equity financings, if any. 41 Credit Facility Effective September 30, 2020, we entered into a Loan and Security Agreement, or Loan Agreement, with Pinnacle. The Loan Agreement was amended by the First Modification to Loan and Security Agreement on October 7, 2020. The Loan Agreement’s initial term ended on September 30, 2022. On November 3, 2022, we executed the Second Modification to Loan and Security Agreement with Pinnacle for a two-year term with an expiration date of September 30, 2024. The Loan Agreement, as amended, provides for a revolving credit facility under which Pinnacle may, in its sole discretion upon our request, make advances to us in an amount, subject to certain limitations and adjustments, of up to (a) 85% of the aggregate net face amount of our accounts receivable and other contract rights and receivables, plus (b) the lesser of (i) 35% of the lower of cost or wholesale market value of certain of our inventory or (ii) $2,500. In no event will the aggregate amount of the outstanding advances under the revolving credit facility be greater than $4,000. Interest accrues on the daily balance at a rate of 1.25% above the prime rate, or the Standard Interest Rate, but in no event will the Standard Interest Rate be less than 3.75% per annum. Interest on the portion of the daily balance consisting of advances against inventory accrues interest at a rate of 2.25% above the prime rate per annum, or the Inventory Interest Rate, but in no event will the Inventory Interest Rate be less than 4.75% per annum. The Loan Agreement also contains a financial covenant requiring us to attain an effective tangible net worth, defined as our total assets, excluding all intangible assets, less our total liabilities plus loans to us from our officers, stockholders or employees that have been subordinated to our obligations to Pinnacle, greater than $6,000 as determined by Pinnacle as of the end of each fiscal quarter. We have an outstanding balance of $1,884 under the Loan Agreement at December 31, 2022. As of December 31, 2022, we had availability under the Loan Agreement of $1,137 and we believe that we are in compliance with the terms and conditions of the Loan Agreement. Paycheck Protection Program Loan On May 4, 2020, we entered into a loan with Citibank, N.A. in an aggregate principal amount of $1,715, or the PPP Loan, pursuant to the Paycheck Protection Program, or the PPP, under the Coronavirus Aid, Relief and Economic Security Act, or the CARES Act. The PPP Loan is evidenced by a promissory note dated May 4, 2020. The PPP Loan matures two years from the disbursement date and bears interest at a rate of 1% per annum. We filed our application for a full loan forgiveness to Citibank on July 30, 2021 and the application is under the bank’s review. Interest accrues during the time between the disbursement of the PPP Loan and SBA remittance of the forgiveness amount. We are responsible for paying the accrued interest on any amount of the loan that is not forgiven. Principal and interest are payable monthly commencing on loan amounts not forgiven and may be prepaid by us at any time prior to maturity with no prepayment penalties. We applied ASC 470, Debt , to account for the PPP Loan. Under the terms of the CARES Act, recipients of PPP loans can apply for and be granted forgiveness for all or a portion of loans granted under the PPP. The Company filed its application for a full loan forgiveness to Citibank in July 2021. On September 28, 2021, the Company received noticed from Citibank indicating that the SBA rendered final decision approving loan forgiveness in the amount of $1,715. As a result, we recognized a non-cash gain of $1,715 within Other income (expense) on the statement of operations. 42 Cash Flow The following table sets forth the significant sources and uses of cash for the periods set forth below (in thousands): Year Ended December 31, 2022 2021 Net Cash Provided By (Used In): Operating Activities $ (6,507 ) $ (9,380 ) Investing Activities $ (25 ) $ (71 ) Financing Activities $ 1,642 $ 12,906 Net increase (decrease) in cash $ (4,890 ) $ 3,455 Operating Activities Net cash used in operating activities for 2022 was $6,507, as compared to $9,380 for the same period in 2021. This increase in net cash used in 2022 was primarily due to a net loss of $5,584, a decrease in accounts receivable of $2,013, a decrease in prepaid expenses of $1,377, an increase in inventories of $6,443, and an increase in customer deposits of $1,229. At December 31, 2021, we recognized $2.0 million related to the ERC for salaries and benefits expenses incurred during 2021 resulting in a refundable tax credit. Of this amount, cost of sales was reduced by $1.3 million as a result of the ERC, and general & administrative expenses was reduced by $0.7 million as a result of the ERC. The ERC assist business owners and their employees by providing an incentive to keep workers on the payroll and eligible businesses received a tax credit for a percentage of each eligible employee’s wage. Investing Activities Net cash used in investing activities for 2022 totaled $25, as compared to $71 for 2021, an increase of $46. The net cash used in investing activities in 2022 was attributable to in new manufacturing equipment. Financing Activities Net cash provided by financing activities totaled $1,642 for 2022, as compared to $12,906 provided by financing activities during 2021, a decrease of $11,264. This decrease was primarily due to the issuance and sale of 750,000 shares of our common stock in a firm commitment underwritten public offering on February 10, 2021. We received net proceeds of approximately $12,466 from the sale of the shares after deducting underwriting discounts and commissions and other offering expenses payable by us. During 2022, we received $1,884 in proceeds from advances from our credit facility at Pinnacle Bank and repaid $242 on our equipment financing notes payable.. 43 Backlog As of December 31, 2022, we had a backlog of $12,001. 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, 2022, was comprised of the following elements: 63% in purchases of DC power systems by telecommunications customers in the U.S., 32% in purchases by telecommunications customers outside the U.S., 1% in purchases by customers in the marine industry, 1% in purchases in military markets, and 3% in purchases by customers in other markets. Due to overall shortage of commodities worldwide caused by COVID, our largest customers have placed orders with delivery dates up to nine months in the future. We believe this provides us better control on operational efficiencies and inventory management. We believe the majority of our backlog will be shipped within the next twelve months. However, there can be no assurance that we will be successful in fulfilling such orders and commitments in a timely manner or that we will ultimately recognize as revenue the amounts reflected in our backlog. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Not applicable. Item 8. Financial Statements and Supplementary Data. Reference is made to the financial statements, which begin at page F-1 of this Annual Report on Form 10-K. Item 9. Changes in and Disagreements with Accountants on Accounting and Finance Disclosure. None.