UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021

☐ 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)

(310) 830-9153

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.05 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

	Large Accelerated Filer ☐		Accelerated Filer ☐
	Non-Accelerated Filer ☒		Smaller Reporting Company ☒
			Emerging Growth Company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, par value $0.0001 per share		POLA		The NASDAQ Stock Market, LLC

The number of shares outstanding of the Registrant’s common stock, $0.0001 par value, as of August 16, 2021 was 12,788,203.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION	1

ITEM 1. Condensed Financial Statements	1

ITEM 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations	15

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk	25

ITEM 4. Controls and Procedures	25

PART II – OTHER INFORMATION	27

ITEM 1. Legal Proceedings	27

ITEM 1A. Risk Factors	27

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	43

ITEM 3. Defaults Upon Senior Securities	43

ITEM 4. Mine Safety Disclosure	43

ITEM 5. Other Information	43

ITEM 6. Exhibits	43

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including without limitation the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors,” contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases you can identify these statements by forward-looking words such as “believe,” “may,” “will,” “might,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “should,” “would,” “project,” “plan,” “outlook,” “target,” “expect,” or similar expressions, or the negative or plural of these words or expressions.

Such forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking statements. These statements appear throughout this Quarterly Report on Form 10-Q and are statements regarding our intent, belief, or current expectations, primarily based on our current assumptions, expectations and projections about future events and trends that may affect our business, financial conditions, operating results, cash flows or prospects, as well as related industry developments. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us and described in Part II, Item 1A, entitled “Risk Factors,” and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 of this Quarterly Report on Form 10-Q. We undertake no obligation to update any forward-looking statements for any reason, or to conform these statements to actual results or to changes in our expectations.

PART I – FINANCIAL INFORMATION

ITEM 1. Condensed Financial Statements

POLAR POWER, INC.

CONDENSED BALANCE SHEETS

(in thousands, except share and per share data)

	June 30, 2021			December 31, 2020
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	8,538		$	1,646
Accounts receivable		4,880			1,190
Inventories, net		8,217			9,094
Prepaid expenses		3,238			358
Income tax receivable		787			2,357
Total current assets		25,660			14,645

Other assets:
Operating lease right-of-use assets, net		1,242			1,563
Property and equipment, net		1,210			1,497
Deposits		94			94
Total assets	$	28,206		$	17,799

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	372		$	311
Customer deposits		968			703
Accrued expenses and other current liabilities		1,299			1,142
Current portion of operating lease liabilities		695			670
Current portion of notes payable		237			267
Current portion of PPP loan payable		1,715			1,429
Total current liabilities		5,286			4,522

Notes payable, net of current portion		390			510
Operating lease liabilities, net of current portion		635			990
PPP loan payable, net of current portion		—			286

Total liabilities		6,311			6,308

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, 12,805,680 shares issued and 12,788,203 shares outstanding on June 30, 2021 and 11,768,158 shares issued and 11,750,681 shares outstanding on December 31, 2020		1			1
Additional paid-in capital		36,816			23,643
Accumulated deficit		(14,882	)		(12,113	)
Treasury Stock, at cost (17,477 shares)		(40	)		(40	)
Total stockholders’ equity		21,895			11,491

Total liabilities and stockholders’ equity	$	28,206		$	17,799

See Accompanying Notes to the Condensed Financial Statements

POLAR POWER, INC.

UNAUDITED CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

	2021			2020			2021			2020
	Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020
Net Sales	$	4,847		$	1,126		$	8,137		$	3,987
Cost of Sales		3,880			1,837			7,228			4,858
Gross profit (loss)		967			(711	)		909			(871	)

Operating Expenses
Sales and marketing		379			312			747			851
Research and development		463			368			952			820
General and administrative		990			904			1,973			2,074
Total operating expenses		1,832			1,584			3,672			3,745

Loss from operations		(865	)		(2,295	)		(2,763	)		(4,616	)

Other income (expenses)
Interest expense and finance costs		(15	)		(14	)		(31	)		(35	)
Other income (expense), net		14			11			25			13
Total other income (expenses), net		(1	)		(3	)		(6	)		(22	)

Loss before income taxes		(866	)		(2,298	)		(2,769	)		(4,638	)

Income tax benefit		—			—			—
Current		—			—			—			(1,484	)
Deferred		—			—			—			(655	)
Total income tax benefit		—			—			—			(2,139	)

Net loss	$	(866	)	$	(2,298	)	$	(2,769	)	$	(2,499	)

Net loss per share – basic and diluted	$	(0.07	)	$	(0.23	)	$	(0.22	)	$	(0.25	)
Weighted average shares outstanding, basic and diluted		12,788,203			10,125,681			12,651,672			10,125,681

See Accompanying Notes to the Condensed Financial Statements

POLAR POWER, INC.

UNAUDITED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)

Three months ended June 30, 2021

	Number		Amount		capital		Deficit)			Stock			Equity
	Common Stock				Additional paid-in		(Accumulated			Treasury			Total Stockholders’
	Number		Amount		capital		Deficit)			Stock			Equity
Balance, March 31, 2021 (unaudited)		12,805,680	$	1	$	36,816	$	(14,016	)	$	(40	)	$	22,761
Issuance of common stock for cash, net of offering costs
Issuance of common stock for cash, net of offering costs, shares
Common stock issued upon exercise of warrants
Common stock issued upon exercise of warrants, shares
Net loss		—		—		—		(866	)		—			(866	)
Balance, June 30, 2021 (unaudited)		12,805,680	$	1	$	36,816	$	(14,882	)		(40	)	$	21,895

Six months ended June 30, 2021

	Common Stock				Additional paid-in		(Accumulated			Treasury			Total Stockholders’
	Number		Amount		capital		Deficit)			Stock			Equity
Balance, December 31, 2020 (unaudited)		11,768,158	$	1	$	23,643	$	(12,113	)	$	(40	)	$	11,491
Issuance of common stock for cash, net of offering costs		750,000		—		12,466		—			—			12,466
Common stock issued upon exercise of warrants		287,522		—		707		—			—			707
Net loss		—		—		—		(2,769	)		—			(2,769	)
Balance, June 30, 2021 (unaudited)		12,805,680	$	1	$	36,816	$	(14,882	)	$	(40	)	$	21,895

Three months ended June 30, 2020

	Common Stock				Additional paid-in		(Accumulated			Treasury			Total Stockholders’
	Number		Amount		capital		Deficit)			Stock			Equity
Balance, March 31, 2020		10,143,158	$	1	$	19,657	$	(1,443	)	$	(40	)	$	18,175
Net loss		—		—		—		(2,298	)		—			(2,298	)
Balance, June 30, 2020 (unaudited)		10,143,158	$	1	$	19,657	$	(3,741	)	$	(40	)	$	15,877

Six months ended June 30, 2020

	Common Stock				Additional paid-in		(Accumulated			Treasury			Total Stockholders’
	Number		Amount		capital		Deficit)			Stock			Equity
Balance, December 31, 2019		10,143,158	$	1	$	19,657	$	(1,242	)	$	(40	)	$	18,376
Net loss		—		—		—		(2,499	)		—			(2,499	)
Balance, June 30, 2020 (unaudited)		10,143,158	$	1	$	19,657	$	(3,741	)	$	(40	)	$	15,877

See Accompanying Notes to the Condensed Financial Statements

POLAR POWER, INC.

UNAUDITED CONDENSED STATEMENTS OF CASH FLOW

(in thousands)

	2021			2020
	Six Months Ended June 30,
	2021			2020
Cash flows from operating activities:
Net loss	$	(2,769	)	$	(2,499	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		287			314
Amortization of operating lease right-of-use asset		321			309
Deferred tax assets		—			(655	)
Changes in operating assets and liabilities:
Accounts receivable		(3,690	)		168
Inventories		877			29
Prepaid expenses		(2,880	)		247
Deposits		—			1
Income tax receivable		1,570			(1,484	)
Accounts payable		61			9
Customer deposits		265			395
Accrued expenses and other current liabilities		157			(204	)
Decrease in lease liability		(330	)		(302	)
Net cash used in operating activities		(6,131	)		(3,672	)

Cash flows from investing activities:
Proceeds from sales of property and equipment, including insurance proceeds		—			8
Net cash provided by investing activities		—			8

Cash flows from financing activities:
Proceeds from sale of common stock for cash		12,466			—
Proceeds from exercise of warrants		707			—
Proceeds from PPP Loan		—			1,715
Repayment of notes payable		(150	)		(164	)
Net cash provided by financing activities		13,023			1,551

Increase (decrease) in cash and cash equivalents		6,892			(2,113	)
Cash and cash equivalents, beginning of period		1,646			2,840
Cash and cash equivalents, end of period	$	8,538		$	727

See Accompanying Notes to the Condensed Financial Statements

POLAR POWER, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020

(In thousands, except for share and per share data and where otherwise noted)

(UNAUDITED)

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

Polar Power, Inc. was incorporated in the State of Washington as Polar Products, Inc. and in 1991 reincorporated in the State of California under the name Polar Power, Inc. In December 2016, Polar Power, Inc. reincorporated in the State of Delaware (the “Company”). The Company designs, manufactures and sells direct current, or DC, power systems to supply reliable and low-cost energy to off-grid, bad-grid and backup power 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.

Impact of COVID-19

The Company continues to monitor the evolving COVID-19 pandemic and related guidance from international and domestic authorities, including federal, state and local public health authorities and it may need to make changes to its business based on their recommendations. COVID-19 has had, and is likely to continue to have, a material and substantial adverse impact on the Company’s results of operations including, among others, a decrease in the Company’s sales and delays in sourcing of raw materials from suppliers. The Company’s business is directly dependent upon, and correlates closely with, the marketing levels and ongoing business activities of its existing customers and suppliers. In the event of a continued widespread economic downturn caused by COVID-19, the Company will likely experience a further reduction in current projects, longer sales and collection cycles, deferral or delay of purchase commitments for its DC power systems, a reduction in its manufacturing functionality, higher than normal inventory levels, a reduction in the availability of qualified labor, and increased price competition, all of which could substantially adversely affect its net revenues and its ability to remain a going concern.

The extent of the impact of COVID-19 on its operational and financial performance will depend on certain developments, including the duration and potential resurgence of the outbreak, the impact on its customers and sales cycles, the impact on its customer, employee or industry events, and the effect on its vendors, all of which are uncertain and cannot be predicted. At this point, the Company is uncertain of the full magnitude that the COVID-19 pandemic may have on our financial condition, liquidity and future results of operations.

Basis of Presentation of Unaudited Financial Information

The unaudited condensed financial statements of the Company for the three and six months ended June 30, 2021 and 2020 have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Regulation S-K for scaled disclosures for smaller reporting companies. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. However, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for the fair presentation of the Company’s financial position and results of operations. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full fiscal year. The balance sheet information as of December 31, 2020 was derived from the audited financial statements included in the Company’s financial statements as of and for the years ended December 31, 2020 and 2019 contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission, or the SEC, on March 31, 2021. These financial statements should be read in conjunction with that report.

Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Material estimates relate to the assumptions made in determining reserves for uncollectible receivables, inventory reserves and returns, impairment analysis of long-term assets, valuation allowance on deferred tax assets, income tax accruals, accruals for potential liabilities and warrant reserves and assumptions made in valuing equity instruments issued for services. Actual results may differ from those estimates.

Revenue Recognition

The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”). The underlying principle of ASC 606 is to recognize revenue to depict the transfer of goods or services to customers at the amount expected to be collected. ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contract(s), which includes (1) identifying the contract(s) or agreement(s) with a customer, (2) identifying the Company’s performance obligations in the contract or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied.

Substantially all of the Company’s revenue is derived from product sales. Product revenue is recognized when performance obligations under the terms of a contract are satisfied, which occurs for the Company upon shipment or delivery of products or services to its customers based on written sales terms, which is also when control is transferred. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring the products or services to a customer. The Company determines whether delivery has occurred based on when title transfers and the risks and rewards of ownership have transferred to the customer, which usually occurs when the Company places the product with the customer’s carrier or delivers the product to a customer’s location. The Company regularly reviews its customers’ financial positions to ensure that collectability is reasonably assured.

The Company also recognizes revenues from engineering services, technical support, and sale of accessories that support the Company’s direct current, or DC, power systems. Revenue is recognized when transfer of control to the customer has been made and the Company’s performance obligation has been fulfilled. The Company’s revenue from engineering services, technical support services, and product accessories are clearly defined in each transaction with its customers and have not been significant to date.

The Company also recognizes revenues from the rental of equipment. The Company’s rental revenues have not been significant to date and have accounted for less than one percent of total revenues for the three and six month periods ended June 30, 2021 and 2020. The Company’s rental contracts are fixed price contracts for fixed durations of time and include freight and delivery charges and are recognized on a straight-line basis over the rental period.

Disaggregation of Net Sales

The following table shows the Company’s disaggregated net sales by product type:

SCHEDULE OF DISAGGREGATED NET SALES

	Three months ended June 30,
	2021 (Unaudited)		2020 (Unaudited)
DC power systems	$	4,635	$	1,074
Engineering & Tech Support Services		142		34
Accessories		70		18
Total net sales	$	4,847	$	1,126

	Six months ended June 30,
	2021 (Unaudited)		2020 (Unaudited)
DC power systems	$	7,860	$	3,819
Engineering & Tech Support Services		170		110
Accessories		107		58
Total net sales	$	8,137	$	3,987

The following table shows the Company’s disaggregated net sales by customer type:

	Three months ended June 30,
	2021 (Unaudited)		2020 (Unaudited)
Telecommunications	$	4,440	$	1,096
Government/Military		134		4
Marine		14		2
Other (backup DC power to various industries)		259		24
Total net sales	$	4,847	$	1,126

	Six months ended June 30,
	2021 (Unaudited)		2020 (Unaudited)
Telecommunications	$	7,492	$	3,834
Government/Military		165		8
Marine		14		3
Other (backup DC power to various industries)		466		142
Total net sales	$	8,137	$	3,987

Inventories

Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out (“FIFO”) basis. The Company records adjustments to its inventory based on an estimated forecast of the inventory demand, taking into consideration, among others, inventory turnover, inventory quantities on hand, unfilled customer order quantities, forecasted demand, current prices, competitive pricing, and trends and performance of similar products. If the estimated net realizable value is determined to be less than the recorded cost of the inventory, the difference is recognized as a loss in the period in which it occurs. Once inventory has been written down, it creates a new cost basis for inventory that may not be subsequently written up. As of June 30, 2021 and December 31, 2020, inventory has been reduced by cumulative write-downs totaling $3,745 and $4,000, respectively.

As of June 30, 2021 and December 31, 2020, inventories consisted of the following:

SCHEDULE OF COMPONENTS OF INVENTORIES

	June 30, 2021 (unaudited)		December 31, 2020

Raw materials	$	5,116	$	5,527
Finished goods		3,101		3,567
Total Inventories, net	$	8,217	$	9,094

Product Warranties

The Company provides limited warranties for parts and labor at no cost to its customers within a specified time period after the sale. The Company’s standard warranty on new products is two years from the date of delivery to the customer. The Company offers a limited extended warranty of up to five years on its certified DC power systems based on application and usage. The Company’s warranties are of an assurance-type and come standard with all Company products to cover repair or replacement should product not perform as expected. Provisions for estimated expenses related to product warranties are made at the time products are sold. These estimates are established using historical information about the nature, frequency and average cost of warranty claim settlements as well as product manufacturing and recovery from suppliers. Management actively studies trends of warranty claims and takes action to improve product quality and minimize warranty costs. The Company estimates the actual historical warranty claims coupled with an analysis of unfulfilled claims to record a liability for specific warranty purposes, which are included in accrued expenses and other current 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:

Changes in estimates for warranties	June 30, 2021 (unaudited)			December 31, 2020
Balance at beginning of the period	$	600		$	375
Payments		(244	)		(634	)
Provision for warranties		244			859
Balance at end of the period	$	600		$	600

Stock-Based Compensation

The Company periodically issues stock-based compensation to officers, directors, and consultants for services rendered. Such issuances vest and expire according to terms established at the issuance date.

Stock-based payments to employees, directors, and for acquiring goods and services from nonemployees, which include grants of employee stock options, are recognized in the financial statements based on their grant date fair values in accordance with ASC 718, Compensation-Stock Compensation. Stock option grants to employees, which are generally time vested, are measured at the grant date fair value and depending on the conditions associated with the vesting of the award, compensation cost is recognized on a straight-line or graded basis over the vesting period. Recognition of compensation expense for non-employees is in the same period and manner as if the Company had paid cash for the services. The fair value of stock options granted is estimated using the Black-Scholes option-pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life, and future dividends. The assumptions used in the Black-Scholes option pricing model could materially affect compensation expense recorded in future periods.

Financial Assets and Liabilities Measured at Fair Value

The Company uses various inputs in determining the fair value of its financial assets and liabilities. Financial assets recorded at fair value in the balance sheets are categorized by the level of objectivity associated with the inputs used to measure their fair value.

Authoritative guidance provided by the Financial Accounting Standards Board (“FASB”) defines the following levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these financial assets:

	Level 1	Quoted prices in active markets for identical assets or liabilities.

	Level 2	Inputs, other than the quoted prices in active markets, that is observable either directly or indirectly.

	Level 3	Unobservable inputs based on the Company’s assumptions.

The carrying amounts of financial assets and liabilities, such as cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, approximate their fair values because of the short maturity of these instruments. The carrying values of notes and loans payable approximate their fair values due to the fact that the interest rates on these obligations are based on prevailing market interest rates.

Segments

The Company operates in one segment for the manufacture and distribution of its products. In accordance with the “Segment Reporting” Topic of the ASC, the Company’s chief operating decision maker has been identified as the Chief Executive Officer and President, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets and reports revenue. All material operating units qualify for aggregation under “Segment Reporting” due to their similar customer base and similarities in: economic characteristics; nature of products and services; and procurement, manufacturing and distribution processes. Since the Company operates in one segment, all financial information required by “Segment Reporting” can be found in the accompanying financial statements.

Concentrations

Cash. The Company maintains cash balances at four banks, with the majority held at one bank located in the U.S. At times, the amount on deposit exceeds the federally insured limits. Management believes that the financial institutions that hold the Company’s cash are financially sound and, accordingly, minimal credit risk exists.

Cash denominated in Australian Dollars with a U.S. Dollar equivalent of $9 and $10 at June 30, 2021 and December 31, 2020, respectively, was held in an account at a financial institution located in Australia. Cash denominated in Romanian Leu with a U.S. Dollar equivalent of $26 and $28 at June 30, 2021 and December 31, 2020, respectively, was held in an account at a financial institution located in Romania.

Revenues. For the three months ended June 30, 2021, 77% of revenues were generated from the Company’s largest customer, a Tier-1 telecommunications wireless carrier in the U.S. For the same period in 2020, 60%, and 16% of revenues were generated from the Company’s two largest customers, both of which are telecommunications wireless carriers in the U.S. There was no other revenue from customers in excess of 10% of revenues in either period. For the three months ended June 30, 2021 and June 30, 2020, sales to telecommunications customers accounted for 92% and 97% of total revenues, respectively. For the three months ended June 30, 2021 and June 30, 2020, sales to international customers accounted for 2% and 7%, of total revenue, respectively.

For the six months ended June 30, 2021, sales to the Company’s largest customer, a Tier-1 telecommunications wireless carrier in the U.S., accounted for 70% of total revenues. For the same period in 2020, sales to the Company’s two largest customers, both of which are Tier-1 telecommunications wireless carriers in the U.S., accounted for 67% and 14% of total revenues, respectively. There was no other revenue from customers in excess of 10% of revenues in either period. For the six months ended June 30, 2021 and June 30, 2020, sales to telecommunications customers accounted for 92% and 96% of total revenues, respectively. For the six months ended June 30, 2021 and June 30, 2020, sales to international customers accounted for 12% and 7%, of total revenue, respectively.

Accounts receivable. At June 30, 2021, 77% of the Company’s accounts receivable were from the Company’s largest customer, and 11% were from one of the Company’s international telecommunications customers. At December 31, 2020, 87% of the Company’s accounts receivable were from the Company’s largest customer. There was no other customer that accounted for more than 10% of the Company’s accounts receivable as of June 30, 2021 or December 31, 2020.

Accounts payable. At June 30, 2021, accounts payable to the Company’s largest vendors represented 13%, 8% and 5%, respectively, of the Company’s accounts payable. At December 31, 2020, the three largest accounts payable accounts to the Company’s vendors represented 10%, 9%, and 8%, respectively, of the Company’s accounts payable.

Net Income (Loss) Per Share

Basic net income (loss) per share is computed by dividing net income (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. Potential common shares are excluded from the computation when their effect is antidilutive. The dilutive effect of potentially dilutive securities is reflected in diluted net income per share if the exercise prices were lower than the average fair market value of common shares during the reporting period.

The following potentially dilutive shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would be anti-dilutive:

SCHEDULE OF DILUTED EARNINGS PER SHARE

	June 30, 2021 (Unaudited)		June 30, 2020 (Unaudited)
Options		140,000		140,000
Warrants		24,122		115,000
Total		164,122		255,000

Recent Accounting Pronouncements

In September 2016, the FASB issued ASU No. 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments (“ASC 326”). The standard significantly changes how entities will measure credit losses for most financial assets, including accounts and notes receivables. The standard will replace today’s “incurred loss” approach with an “expected loss” model, under which companies will recognize allowances based on expected rather than incurred losses. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The standard is effective for interim and annual reporting periods beginning after December 15, 2022. The adoption of ASU 2016-13 is not expected to have a material impact on the Company’s financial position, results of operations, and cash flows.

In August 2020, the FASB issued ASU No. 2020-06 (“ASU 2020-06”) “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40).” ASU 2020-06 reduces the number of accounting models for convertible debt instruments by eliminating the cash conversion and beneficial conversion models. As a result, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost as long as no other features require bifurcation and recognition as derivatives. By removing those separation models, the effective interest rate of convertible debt instruments will be closer to the coupon interest rate. Further, the diluted net income per share calculation for convertible instruments will require the Company to use the if-converted method. For contracts in an entity’s own equity, the type of contracts primarily affected by this update are freestanding and embedded features that are accounted for as derivatives under the current guidance due to a failure to meet the settlement conditions of the derivative scope exception. This update simplifies the related settlement assessment by removing the requirements to (i) consider whether the contract would be settled in registered shares, (ii) consider whether collateral is required to be posted, and (iii) assess shareholder rights. ASU 2020-06 is effective January 1, 2024, for the Company and the provisions of this update can be adopted using either the modified retrospective method or a fully retrospective method. Early adoption is permitted, but no earlier than January 1, 2021, including interim periods within that year. Effective January 1, 2021, the Company early adopted ASU 2020-06 and that adoption did not have an impact on its financial statements and the related disclosures.

The Company’s management does not believe that there are other recently issued but not yet effective authoritative guidance, if currently adopted, would have a material impact on the Company’s financial statement presentation or disclosures.

NOTE 2 – PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

SCHEDULE OF PROPERTY AND EQUIPMENT

	June 30, 2021 (Unaudited)			December 31, 2020
Production tooling, jigs, fixtures	$	71		$	71
Shop equipment and machinery		3,286			3,286
Vehicles		180			180
Leasehold improvements		390			390
Office equipment		177			177
Software		103			103
Total property and equipment, cost		4,207			4,207
Less: accumulated depreciation and amortization		(2,997	)		(2,710	)
Property and equipment, net	$	1,210		$	1,497

Depreciation and amortization expense on property and equipment for the three months ended June 30, 2021 and 2020 was $136 and $157, respectively. During the three months ended June 30, 2021 and 2020, $129 and $149, respectively, of the depreciation expense was included in the balance of cost of sales.

Depreciation and amortization expense on property and equipment for the six months ended June 30, 2021 and 2020 was $287 and $314, respectively. During the six months ended June 30, 2021 and 2020, $273 and $302, respectively, of the depreciation expense was included in the balance of cost of sales.

NOTE 3 – NOTES PAYABLE

Notes payable consist of the following:

SCHEDULE OF NOTES PAYABLE

	2021		2020
	June 30, 2021
	(Unaudited)		December 31, 2020
Total Equipment Notes Payable	$	627	$	777
Less Current Portion		237		267
Notes Payable, long term	$	390	$	510

The Company has entered into several financing agreements for the purchase of equipment in prior years. The terms of these financing arrangements are for a term of 2 years to 5 years, with interest rates ranging from 1.9% to 6.9% per annum, secured by the purchased equipment, and mature between June 2023 and December 2023. The aggregate monthly payments of principal and interest of the outstanding notes payable as of June 30, 2021 is approximately $28.

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 the six months ended June 30, 2021, the Company did not take any advances from the revolving credit facility and had no balance outstanding under the line of credit at June 30, 2021. At June 30, 2021, the Company had availability under the line of credit in the amount of $2,481. The Loan Agreement’s initial term ends on September 30, 2022, and is renewed thereafter for additional one-year terms. In addition, Pinnacle may terminate the Loan Agreement at any time upon sixty days prior written notice and immediately upon the occurrence of an event of default. Under the Loan Agreement, the Company granted Pinnacle a security interest in all presently existing and thereafter acquired or arising assets of the Company. The Loan Agreement also contains a financial covenant requiring the Company to attain an effective tangible net worth, as defined.

The Loan Agreement provides for a revolving credit facility under which Pinnacle may make advances to the Company, subject to certain limitations and adjustments, of up to (a) 85% of the aggregate net face amount of the Company’s accounts receivable and other contract rights and receivables, plus (b) the lesser of (i) 35% of the lower of cost or wholesale market value of certain inventory of the Company or (ii) $2,500. In no event shall the aggregate amount of the outstanding advances under the revolving credit facility be greater than $4,000. Interest accrues on the daily balance at a rate of 1.25% above the prime rate, but in no event less than 3.75% per annum. Interest on the portion of the daily balance consisting of advances against inventory accrues interest at a rate of 2.25% above the prime rate, but in no event less than 4.75% per annum.

The Loan Agreement obligates the Company to pay Pinnacle a yearly facility fee in an amount equal to 1.125% of the sum of the advance limit.

NOTE 5- PPP LOAN PAYABLE

On May 4, 2020, the Company entered into a loan (the “PPP Loan”) with Citibank, N.A. in an aggregate principal amount of $1,715, pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).

The PPP Loan 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. Interest accrues during the time between the disbursement of the loan and SBA remittance of the forgiveness amount. The Company is 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 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 Company filed its application for a full loan forgiveness to Citibank on July 30, 2021 and the application is currently under the bank’s review. 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 believes it used 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 – STOCKHOLDERS’ EQUITY

Underwritten Public Offering of Common Stock

On February 10, 2021, and the Company issued and sold 750,000 shares of common stock in an underwritten public offering. The Company received at the closing of the offering net proceeds of approximately $12.5 million 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.

Issuance of common stock upon exercise of warrants

During the six months ended June 30, 2021, warrants to purchase an aggregate of 225,878 shares of common stock were exercised, and the Company received net proceeds of $707 upon such exercise. In addition, warrants exercisable into 120,000 shares of common stock were converted under a cashless exercise option into 61,644 shares of the Company’s common stock.

NOTE 7 – STOCK OPTIONS

The following table summarizes stock option activity:

SCHEDULE OF STOCK OPTION ACTIVITY

	Number of		Weighted Average Exercise
	Options		Price
Outstanding, December 31, 2020		140,000	$	5.22
Granted		—		—
Exercised		—		—
Outstanding, June 30, 2021 (unaudited)		140,000	$	5.22
Exercisable, June 30, 2021 (unaudited)		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 in any calendar year.

At June 30, 2021, the Company had total outstanding options of 140,000, which are fully vested, with exercise prices ranging from $4.84 to $5.60 per share. Option exercisable into 30,000 shares expire in December 2027 and the remaining options exercisable into 110,000 shares expire in April 2028.

The intrinsic value of the outstanding options at June 30, 2021 was approximately $581.

NOTE 8 – STOCK WARRANTS

At June 30, 2021, warrant shares outstanding were as follows:

SCHEDULE OF WARRANTS OUTSTANDING

	Number of Warrants			Weighted Average Exercise Price
Outstanding December 31, 2020		370,000		$	8.75
Issued		—			—
Exercised		(345,878	)		(4.07	)
Outstanding, June 30, 2021 (unaudited)		24,122		$	3.13
Exercisable, June 30, 2021 (unaudited)		24,122		$	3.13

At December 31, 2020, the Company had outstanding warrants exercisable into 370,000 shares of the Company’s common stock, of which 250,000 warrants were issued in connection with a July 2020 private placement of the Company’s common stock, and the remaining 120,000 warrants were issued to underwriters in a December 2016 offering.

During the six months ended June 30, 2021, warrants to purchase 225,878 shares of common stock were exercised at $3.13 exercise price per share or total net proceeds to the Company of $707 upon exercise. Also during the six months ended June 30, 2021, warrants exercisable into 120,000 shares of the Company’s common stock were exercised under a cashless exercise option into 61,644 shares of the Company’s common stock.

The intrinsic value of the outstanding and exercisable warrants at June 30, 2021 was $151.

NOTE 9 – 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 an initial term of three years from the date of execution and automatically renews for additional one-year periods if not terminated.

During the three months ended June 30, 2021 and 2020, Smartgen performed $22 and nil in field services, respectively. Smartgen performed $51 and $31 in field services for the six months ended June 30, 2021 and 2020, respectively.

Smartgen had no purchases from the Company during the three months and the six months ended June 30, 2021 and 2020, respectively.

NOTE 10 – OPERATING LEASES

The Company has two operating lease agreements for its warehouse and office spaces both with remaining lease terms at June 30, 2021, of 1.9 years. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company accounts for the lease and non-lease components of its leases as a single lease component. Rent expense is recognized on a straight-line basis over the lease term. The Company also has another storage facility on a twelve-month lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet.

Operating lease right-of-use (“ROU”) assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Generally, the implicit rate of interest in arrangements is not readily determinable and the Company utilizes its incremental borrowing rate in determining the present value of lease payments. The Company’s incremental borrowing rate is a hypothetical collateralized borrowing rate based on its understanding of what its credit rating would be. The operating lease ROU asset includes any lease payments made and excludes lease incentives.

The components of rent expense and supplemental cash flow information related to leases for the period are as follows:

	Six Months Ended June 30, 2021			Six Months Ended June 30, 2020
Lease Cost
Operating lease cost (of which $49 is included in general and administration and $301 is included in cost of sales in the Company’s statement of operations for the six months ended June 30, 2021, and for the same period in 2020, respectively)	$	350		$	350

Other Information
Weighted average remaining lease term – operating leases (in years)		1.9			2.9
Average discount rate – operating leases		3.75	%		3.75	%

The supplemental balance sheet information related to leases for the period is as follows:

	2021		2020
	At June 30, 2021		At December 31, 2020
Operating leases
Long-term right-of-use assets, net of amortization of $1,586 and $1,265, respectively	$	1,242	$	1,563

Short-term operating lease liabilities	$	695	$	670
Long-term operating lease liabilities		635		990
Total operating lease liabilities	$	1,330	$	1,660

Maturities of the Company’s lease liabilities are as follows (in thousands):

	2021
Year Ending	Operating Leases
2021 (remaining 6 months)		363
2022		747
2023		280
Total lease payments		1,390
Less: Imputed interest/present value discount		(60	)
Present value of lease liabilities	$	1,330

Rent expense for the six months ended June 30, 2021 and 2020 was $452 and $418, respectively.

ITEM 2. Management’s 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 Quarterly Report on Form 10-Q. 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 report. 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.

All dollar amounts are presented in thousands, except share and per-share data and where otherwise noted.

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 and technology into non-telecommunication markets and applications at an increasing rate. The goal is not to have any one customer or market exceed more than 15% of our total net sales volume thereby providing a solid foundation for growth and stability.

Within the telecommunications market, our DC power systems provide reliable and low-cost DC power to service applications that do not have access to the utility grid (i.e., prime power applications) or have critical power needs and cannot be without power in the event of utility grid failure (i.e., back-up power applications).

During the three months ended June 30, 2021 and 2020, 92% and 97%, respectively, of our total net sales were within the telecommunications market. For the three months ended June 30, 2021, 77% of our total net sales was derived from our largest customer, which is a Tier-1 telecommunications customer in the U.S. For the same period in 2020, our two largest customers represented 60% and 16% of our total net sales, respectively, both being telecommunications customers in the U.S. with one being a Tier-1 telecommunications customer. There was no other revenue from customers in excess of 10% of revenues in either period. During those periods, the majority of our sales were of our DC base powers systems. For the three months ended June 30, 2021 and June 30, 2020, sales to international customers accounted for 2% and 7%, of total revenue, respectively.

During the six months ended June 30, 2021 and 2020, 92% and 96%, respectively, of our total net sales were within the telecommunications market. In the six months ended June 30, 2021, 70% of our total net sales was derived from our largest customer, which is a Tier-1 telecommunications customer in the U.S. In 2020, our two largest customers represented 67% and 14% of our total net sales, respectively, both being Tier-1 telecommunications customers in the U.S. There was no other revenue from customers in excess of 10% of revenues in either period. During those periods, the majority of our sales were of our DC base powers systems. For the six months ended June 30, 2021 and June 30, 2020, sales to international customers accounted for 12% and 7%, of total revenue, respectively.

Military sales are growing and adding to our customer diversification. Backlog orders from military customers represented 12% of our backlog for the period ended June 30, 2021. The military’s increasing use of robotics, drones, and computerization in the field is driving the demand for battery charging with DC generators. Military sales are advantageous because of their long-term contracts and they provide funding to cover the cost of product development.

Advance Mobility applications require power to charge batteries and appliances within a vehicle. Our DC power systems are smaller in size, lighter in weight, and operate with greater efficiency than AC power systems, making our product ideal for these applications. Our advance mobility sales for this year to date is $4,185, which includes product shipped and orders that have been received from customers and included in our backlog. Towards the end of June 2021, we received a $3.0 million dollar order for DC power systems to be used in advanced mobility applications in commercial vehicles. At June 30, 2021, 47% of our backlog of $6,670 represented products being used in advanced mobility applications in commercial vehicles.

We developed our DC power system for mobile electric vehicle charging. These systems can operate off diesel, propane, or natural gas and are ideal for mobile electric vehicles charging and range extenders. Our DC mobile electric vehicle charging systems provide direct charging to an electric vehicles’ 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 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. We have sold a limited number of our DC power systems for these applications for field trails.

We expect that opportunities in the bad-grid (i.e., areas where wireless towers are connected to an electrical grid that loses power more than eight hours), and off-grid (i.e., areas where wireless towers are not connected to an electrical grid) market 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 market, 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 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 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.

Our current bottleneck to expand our sales into these markets and applications is having limited presale engineering support. We are currently in the process of remedying this deficiency.

Impact of COVID-19

We continue to monitor the rapidly evolving COVID-19 pandemic and related guidance from international and domestic authorities, including federal, state and local public health authorities and may need to make changes to our business based on their recommendations. 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, and delays in sourcing of raw materials from suppliers. Our business is directly dependent upon, and correlates closely with, the marketing levels and ongoing business activities of our existing customers and suppliers. In the event of a continued 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.

The impacts of COVID-19 on our business, sources of revenues and the general economy, are currently not fully known. We are conducting business as usual with some modifications to employee work locations, and cancellation of certain marketing events, among other modifications. As a result of our declining revenues during the COVID-19 pandemic in 2020, our management team implemented a cost reduction program to reduce overhead. We lowered operation expenses, while still keeping the business operational and ready to expand when needed. We will continue to actively monitor the situation and may take further actions that may alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, partners, suppliers and stockholders. It is not clear what the potential effects any such alterations or modifications may have on our business, including the effects on our customers and prospects, although we do anticipate it to negatively impact our financial results during the remainder of 2021 and perhaps beyond.

During December 2020, a limited supply of the COVID-19 vaccine was released to the general public. Since then, over 150.9 million people in the U.S. have been vaccinated and showing positive results aimed to control the pandemic. During the second quarter of 2021, many restrictions previously imposed to control the pandemic were eased around the world and especially in the U.S. In July 2021, the COVID-19 delta variant fueled a COVID-19 surge around the world leading to many restrictions being put back in place and threatening the U.S. economic recovery. We remain hopeful that we will continue to operate our business as in the first six months of 2021 as most of our employees, customers, and suppliers have received the COVID-19 vaccine and we continue to maintain COVID-19 precautionary measures. Control over COVID-19 will improve our ability to travel for purpose of training our sales staff and customers, commissioning of generators, and promoting the rollout of our new products to enhance our efforts for customer diversification. We expect to see significant improvements to labor and manufacturing efficiencies if our sales backlog continues to grow and delays in the supply chain improve. In addition, we believe our investments during the last two years in our facilities, our state-of-the-art manufacturing equipment, and training of our staff place us in good position to achieve significant improvements in our financial position as opportunities arise and the negative impact of COVID-19 is reduced.

Recent Business Events

During the first six months of 2021, we experienced an increase in demand of our DC power systems primarily by our Tier-1 telecommunications customers in the U.S. Our net sales for the six months ended June 30, 2021, increased 104% as compared to our net sales during the same period in 2020. Our net sales during the second quarter of 2021 increased 47% as compared to the first quarter of 2021. We also experienced a 20% increase in our backlog as of June 30, 2021 to $6,670, as compared to backlog of $5,563 on March 31, 2021. This increase in backlog was primarily due to a $3.0 million order for our DC power systems for advanced mobility applications. We also believe this increase in demand is due to the normalization in business activities due to decrease in COVID-19 related shutdowns and restrictions. This has generated additional sales from our existing customers in telecommunications, military and marine markets. The focus on vehicle electrification, EV charging infrastructure and hybrid vehicles for reduced emissions in all types of vehicles in the government and commercial markets augurs well for our technology. The space and weight restrictions of most vehicle programs does not allow traditional power systems like AC generators to work thereby creating a unique advantage for our DC power solutions.

The implementation of 5G networks by Tier-1 telecommunication customers has resulted in an approximately 200% increase in energy use at cell sites. In addition, use of 5G technology in IoT, video streaming, and data analytics applications requires cell sites to be operational 100% of the time which, in turn, increases the demand for reliable power backup systems. During the first half of 2021, we invested in the development of backup power systems with increased power utilizing larger engines and improved emission control systems. We believe increased power usage of 5G networks enhances market opportunities for our higher efficiency DC power systems as compared to traditional AC power systems. We believe being an approved supplier for the three largest Tier-1 telecommunication providers in the U.S. provides us with additional growth opportunities during the current rapid 5G expansion in the largest urban centers in the U.S.

In 2020, we introduced our new DC generator line equipped with our proprietary control systems designed for 24/7 prime power applications providing power outputs between 5 kW to 15 kW. Presently we are in the process of introducing a 20 to 30 kW generator based on a larger Toyota engine and the same Bosch engine ECU (engine control unit). These systems offer significantly lower greenhouse gas emissions while also lowering maintenance and fuel costs. Our solar hybrid power systems, which integrate solar energy storage with natural gas/LPG powered generators, are ideal for off-grid and bad-grid applications.

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 during 2020, our sales force directed their efforts into niche markets and regions to expand our customer base beyond Tier-1 telecommunications customers. During 2021, we have experienced increased sales to new customers from diverse market segments which we believe will result in additional production orders during the remainder of 2021 and beyond.

In order to effectively manage our liquidity during this period of uncertainty caused by the COVID-19 pandemic, 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.

Critical Accounting Policies

We believe that the following critical accounting policies, among others, affect our more significant judgment and estimates used in the preparation of our financial statements:

Revenue Recognition. We recognize revenue in accordance with Financial Accounting Standards Board Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”). ASC 606 requires entities to recognize revenue through the application of a five-step model, which includes: identification of the contract; identification of the performance obligations; determination of the transaction price; allocation of the transaction price to the performance obligations; and recognition of revenue as the entity satisfies the performance obligations.

Substantially all of our revenue is derived from product sales. Product revenue is recognized when performance obligations under the terms of a contract are satisfied, which occurs for us upon shipment or delivery of products or services to our customers based on written sales terms, which is also when control is transferred. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring the products or services to a customer. We determine whether delivery has occurred based on when title transfers and the risks and rewards of ownership have transferred to the customer, which usually occurs when we place the product with the customer’s carrier or deliver the product to a customer’s location. We regularly review our customers’ financial positions to ensure that collectability is reasonably assured.

Warranty Costs. We provide limited warranties for parts and labor at no cost to our customers within a specified time period after the sale. Our standard warranty on new products is two years from the date of delivery to the customer. We offer a limited extended warranty of up to five years on our certified DC power systems based on application and usage. Our warranties are of an assurance-type and come standard with all of our products to cover repair or replacement should product not perform as expected. Provisions for estimated expenses related to product warranties are made at the time products are sold. These estimates are established using historical information about the nature, frequency and average cost of warranty claim settlements as well as product manufacturing and recovery from suppliers. Management actively studies trends of warranty claims and takes action to improve product quality and minimize warranty costs. We estimate the actual historical warranty claims coupled with an analysis of unfulfilled claims to record a liability for specific warranty purposes.

Inventory. Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out (“FIFO”) basis. We record adjustments to our inventory based on an estimated forecast of the inventory demand, taking into consideration, among others, inventory turnover, inventory quantities on hand, unfilled customer order quantities, forecasted demand, current prices, competitive pricing, and trends and performance of similar products. If the estimated net realizable value is determined to be less than the recorded cost of the inventory, the difference is recognized as a loss in the period in which it occurs. Once inventory has been written down, it creates a new cost basis for inventory that may not subsequently written up.

Stock-Based Compensation. We periodically issue stock-based compensation to officers, directors, and consultants for services rendered. Such issuances vest and expire according to terms established at the issuance date. Stock-based payments to employees, directors, and for acquiring goods and services from nonemployees, which include grants of employee stock options, are recognized in the financial statements based on their grant date fair values in accordance with ASC 718, Compensation-Stock Compensation. Stock option grants to employees, which are generally time vested, are measured at the grant date fair value and depending on the conditions associated with the vesting of the award, compensation cost is recognized on a straight-line or graded basis over the vesting period. Recognition of compensation expense for non-employees is in the same period and manner as if we had paid cash for the services. The fair value of stock options granted is estimated using the Black-Scholes option-pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life, and future dividends. The assumptions used in the Black-Scholes option pricing model could materially affect compensation expense recorded in future periods.

Effects of Inflation

The impact of inflation and changing prices has not been significant on the financial condition or results of operations of our company.

Impact of New Accounting Pronouncements

See “Note 1 – Organization and Summary of Significant Accounting Policies – Recent Accounting Pronouncements” of the Notes to our condensed financial statements commencing on page 5 of this Quarterly Report on Form 10-Q.

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; (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 and Outlook

Our net sales for the three months ended June 30, 2021 were $4,847, which represents a 330% increase in net sales as compared to $1,126 for the three months ended June 30, 2020. Our net sales for the six months ended June 30, 2021 were $8,137, which represents a 104% increase in net sales as compared to $3,987 for the same period in 2020. The increase in net sales also represents an increase of 47% from our previous quarter ended March 31, 2021 of $3,290. We see improvements in all market segments across the U.S. as the economy normalizes after the COVID-19 related shutdowns and restrictions. We anticipate that the expansion of 5G networks in the U.S. markets, requiring new installs and/or upgrades of backup power systems at cell sites, will help to drive an increase in our revenues over the next five years.

Our sales backlog as of June 30, 2021 was $6,670, with 37% of that amount being attributable to U.S. Tier-1 telecommunications customers, 47% to advanced mobility applications in commercial vehicles, 12% to advanced mobility applications in military vehicles, and 4% to other customers.

For the remainder of 2021, we plan to expand our customer base within the advanced mobility and military markets. We also anticipate that our sales will increase as the global economy recovers from the impact of the COVID-19 pandemic. However, the full impact 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 “Risk Factors” commencing on page 27 of this Quarterly Report on Form 10-Q 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.

Three Months Ended June 30, 2021 Compared to the Three Months Ended June 30, 2020

	Three Months Ended June 30,						Dollar Variance			Percentage Variance			Results as a Percentage of Net Sales for the Period Ended June 30,
	2021 (unaudited)			2020 (unaudited)			Favorable (Unfavorable)			Favorable (Unfavorable)			2021			2020
Net sales	$	4,847		$	1,126		$	3,721			330	%		100.0	%		100.0	%
Cost of sales		3,880			1,837			(2,043	)		(111	)%		80.1	%		163.1	%
Gross profit (loss)		967			(711	)		1,678			236	%		19.9	%		(63.1	)%
Sales and marketing expenses		379			312			(67	)		(21	)%		7.8	%		27.7	%
Research and development expenses		463			368			(95	)		(26	)%		9.6	%		32.7	%
General and administrative expenses		990			904			(86	)		(10	)%		20.4	%		80.3	%
Total operating expenses		1,832			1,584			(248	)		(16	)%		37.8	%		140.7	%
Loss from operations		(865	)		(2,295	)		1,430	)		62	%		(17.9	)%		(203.8	)%
Interest and finance costs		(15	)		(14	)		(1	)		(7	)%		(0.3	)%		(1.2	)%
Other income (expense), net		14			11			3			27	%		0.3	%		1.0	%
Loss before income taxes		(866	)		(2,298	)		1,432			62	%		(17.9	)%		(204.1	)%
Net loss	$	(866	)	$	(2,298	)	$	1,432			62	%		(17.9	)%		(204.1	)%

Net Sales. Net sales increased $3,721, or 330%, to $4,847 for the three months ended June 30, 2021, as compared to $1,126 for the same period in 2020. The increase in net sales was primarily due to an increase in sales of our DC power systems to Tier-1 telecommunications customers in the U.S. to support their 5G infrastructure buildout. We also believe the release of the COVID-19 vaccines in December 2020 had a positive effect in increasing sales during 2021. Sales to our largest customer accounted for 77% of our total net sales during the three months ended June 30, 2021. For the same period in 2020, 60%, and 16% of revenues were generated from our two largest telecommunications customers. There were no other customers with revenue in excess of 10% of our total net sales in either period.

For the three months ended June 30, 2021 and June 30, 2020, sales to international customers accounted for 2% and 7%, of total revenue, respectively.

Cost of Sales. Cost of sales during the three months ended June 30, 2021 increased by $2,043, or 111%, to $3,880, as compared to $1,837 during the same period in 2020. Cost of sales as a percentage of net sales during the three months ended June 30, 2021, decreased to 80.1% as compared to 163.1% in the same period in 2020. The decrease in cost of sales as a percentage of net sales is a result of improved manufacturing overhead absorption and improvements in labor efficiencies resulting from a higher manufacturing volume. We believe our manufacturing facilities are under-utilized in large part due to the significant investments we made in manufacturing equipment and facilities during the previous two years to increase our production capacity. These initiatives have resulted in an increase in overhead costs related to our lower production volumes. We believe as sales volumes increase, overhead costs will be reduced for each unit sold thereby improving our overall gross margins.

Gross Profit (Loss). We had a gross profit of $967 for the three months ended June 30, 2021, which is an increase in gross profit of $1,678, or 236%, as compared to gross loss of $711 during the same period in 2020. Our gross profit as a percentage of net sales was 19.9% for the quarter ended June 30, 2021, as compared to a (63.1)% in the same period in 2020. The increase in gross profit margin was attributable to an increase in factory overhead absorption resulting from higher sales and resulting in improved utilization of our production facilities.

Sales and Marketing Expenses. During the three months ended June 30, 2021, sales and marketing expenses increased by $67, or 21%, to $379, as compared to $312 during the same period in 2020. The increase was attributable to a slight increase in travel and marketing expenditures as compared to the complete shutdown of travel and business activities during the same period in 2020 as a result of the COVID-19 pandemic. 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 return to normal.

Research and Development Expenses. During the three months ended June 30, 2021, research and development expenses increased by $95, or 26%, to $463, as compared to $368 during the same period in 2020. During the same period in 2021, we increased our research and development efforts to support customization projects related to DC powers systems for non-telecommunications customers. In addition, we focused our efforts on the development of our new 20 to 30 kW generator based on a larger Toyota engine.

General and Administrative Expenses. General and administrative expenses increased by $86, or 10%, to $990 during the three months ended June 30, 2021, as compared to $904 during same period in 2020. The slight increase was primarily due to a 10% increase in general and administrative wages resulting from an increase in labor force in 2021 when compared to the same period in 2020 when many of our employees were on furlough status due to the pandemic. We anticipate our general and administrative costs to remain flat for the remainder of 2021.

Interest and Finance Costs. Interest expense for the three months ended June 30, 2021 was $15, as compared to $14 during the same period in 2020, an increase of $1. We had a $1 increase in interest expense attributable to the minimum finance charges of $2.5 on our credit facility with Pinnacle Bank.

Income Tax. We had no income tax expense for the three months ended June 30, 2021, and for the same period in 2020.

Net Loss. As a result of the factors identified above, we reported net loss of $866, or $(0.07) per basic and diluted share, for the three months ended June 30, 2021, as compared to net loss of $2,298, or $(0.23) per basic and diluted share, for the same period in 2020.

Six Months Ended June 30, 2021 Compared to the Six Months Ended June 30, 2020

	Six Months Ended June 30,						Dollar Variance			Percentage Variance			Results as a Percentage of Net Sales for the Period Ended June 30,
	2021 (unaudited)			2020 (unaudited)			Favorable (Unfavorable)			Favorable (Unfavorable)			2021			2020
Net sales	$	8,137		$	3,987		$	4,150			104	%		100.0	%		100.0	%
Cost of sales		7,228			4,858			(2,370	)		(49	)%		88.8	%		121.8	%
Gross profit (loss)		909			(871	)		1,780			204	%		11.2	%		(21.8	)%
Sales and marketing expenses		747			851			104			12	%		9.2	%		21.3	%
Research and development expenses		952			820			(132	)		(16	)%		11.7	%		20.6	%
General and Administrative expenses		1,973			2,074			101			5	%		24.2	%		52.0	%
Total operating expenses		3,672			3,745			73			2	%		45.1	%		93.9	%
Loss from operations		(2,763	)		(4,616	)		1,853			40	%		(34.0	)%		(115.8	)%
Interest and finance costs		(31	)		(35	)		4			11	%		(0.4	)%		(0.9	)%
Other income (expense), net		25			13			12			92	%		0.3	%		0.3	%
Loss before income taxes		(2,769	)		(4,638	)		1,869			40	%		(34.0	)%		(116.3	)%
Income tax benefit		—			(2,139	)		(2,139	)		(100	)%		0.0	%		(53.6	)%
Net loss	$	(2,769	)	$	(2,499	)	$	(270	)		(11	)%		(34.0	)%		(62.7	)%

Net Sales. Net sales increased $4,150, or 104%, to $8,137 for the six months ended June 30, 2021, as compared to $3,987 for the same period in 2020. The increase in net sales was primarily due to an increase in sales of our DC power systems to Tier-1 telecommunications customers in the U.S. to support their 5G infrastructure buildout. We also believe the normalization of business activity with fewer shutdowns and restrictions has had a positive effect in increasing sales during 2021. Sales to our largest customer accounted for 70% of our total net sales during the six months ended June 30, 2021. Sales to our two largest customers for the six months ended June 30, 2020, accounted for 67% and 14% of total net sales. There were no other customer with revenue in excess of 10% of our total net sales in either period.

For the six months ended June 30, 2021 and June 30, 2020, sales to international customers accounted for 12% and 7%, of total revenue, respectively.

Cost of Sales. Cost of sales during the six months ended June 30, 2021 increased by $2,370, or 49%, to $7,228, as compared to $4,858 during the same period in 2020. Cost of sales as a percentage of net sales during the six months ended June 30, 2021 decreased to 88.8%, as compared to 121.8% in the same period in 2020 as a result of improvements in overhead absorption and labor efficiencies resulting from a higher volume in sales.

Gross Profit (Loss). Gross profit during the six months ended June 30, 2021 increased by $1,780, or 204%, to gross profit of $909, as compared to gross loss of $871 during the same period in 2020. Our gross profit as a percentage of net sales was 11.2% for the six months ended June 30, 2021, as compared to (21.8)% loss in the same period in 2020. The increase in gross profit margin was attributable to an increase in factory overhead absorption resulting from higher sales resulting in improved utilization of our production facilities during the six months ended June 30, 2021.

Sales and Marketing Expenses. During the six months ended June 30, 2021, sales and marketing expenses decreased by $104, or 12%, to $747, as compared to $851 during the same period in 2020. COVID-19 created travel restrictions and closure or postponement of tradeshow and promotional events worldwide limiting our sales teams to telework. We expect sales and marketing expenses to gradually increase for the remainder of this year as travel restrictions are lifted and tradeshow and promotional events reopen.

Research and Development Expenses. During the six months ended June 30, 2021, research and development expenses increased by $132, or 16%, to $952, as compared to $820 during the same period in 2020. The increase in research and development expense in 2021 was a result of increased research and development efforts to support customization projects related to DC powers systems for non-telecommunications customers and the development of our new 20 to 30 kW generator based on a larger Toyota engine.

General and Administrative Expenses. General and administrative expenses decreased by $101, or 5%, to $1,973 during the six months ended June 30, 2021, as compared to $3,745 during same period in 2020. The decrease in general and administrative expenses was as a result of a decrease in legal and consulting fees in 2021 when compared to 2020.

SEC Form 10-Q filed by Polar Power, Inc.