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 March 31, 2022

☐ 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 May 16, 2022 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	23

ITEM 4. Controls and Procedures	23

PART II – OTHER INFORMATION	24

ITEM 1. Legal Proceedings	24

ITEM 1A. Risk Factors	24

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	40

ITEM 3. Defaults Upon Senior Securities	40

ITEM 4. Mine Safety Disclosure	40

ITEM 5. Other Information	40

ITEM 6. Exhibits	40

FORWARD LOOKING AND CAUTIONARY STATEMENTS

All statements included or incorporated by reference in this Quarterly Report on Form 10-Q, other than statements or characterizations of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Examples of forward-looking statements include, but are not limited to, statements concerning projected net sales, costs and expenses and gross margins; our accounting estimates, assumptions and judgments; the demand for our products; the effect and consequences of the novel coronavirus, or COVID-19, pandemic on matters including U.S., local and foreign economies, wars and international conflicts including the current military actions involving the Russian Federation and Ukraine, our business operations, the ability of financing and the health and productivity of our employees; the competitive nature of and anticipated growth in our industry; production capacity and goals; our ability to consummate acquisitions and integrate their operations successfully; and our prospective needs for additional capital. These forward-looking statements are based on our current expectations, estimates, approximations and projections about our industry and business, management’s beliefs, and certain assumptions made by us, all of which are subject to change. Forward-looking statements can often be identified by words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,” “ongoing,” similar expressions and variations or negatives of these words. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, some of which are listed under “Risk Factors” in Part II, Item 1A, 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. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to revise or update publicly any forward-looking statement for any reason, except as otherwise required by law.

FINANCIAL PRESENTATION

All dollar amounts in this Quarterly Report on Form 10-Q are presented in thousands, except share and per share data and where otherwise noted.

PART I – FINANCIAL INFORMATION

ITEM 1. Condensed Financial Statements

POLAR POWER, INC.

CONDENSED BALANCE SHEETS

(in thousands, except share and per share data)

	March 31, 2022			December 31, 2021
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	4,186		$	5,101
Accounts receivable		3,616			4,243
Inventories		10,485			9,017
Prepaid expenses		3,264			4,006
Employee retention credit receivable		2,000			2,000
Income taxes receivable		787			787
Total current assets		24,338			25,154

Other assets:
Operating lease right-of-use assets, net		748			914
Property and equipment, net		893			1,019
Deposits		93			93

Total assets	$	26,072		$	27,180

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	544		$	328
Customer deposits		923			897
Accrued liabilities and other current liabilities		1,211			1,206
Current portion of operating lease liabilities		691			721
Current portion of notes payable		245			242
Total current liabilities		3,614			3,394

Notes payable, net of current portion		205			268
Operating lease liabilities, net of current portion		123			268

Total liabilities		3,942			3,930

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 March 31, 2022, and December 31, 2021.		1			1
Additional paid-in capital		36,816			36,816
Accumulated deficit		(14,647	)		(13,527	)
Treasury Stock, at cost (17,477 shares)		(40	)		(40	)
Total stockholders’ equity		22,130			23,250

Total liabilities and stockholders’ equity	$	26,072		$	27,180

See Accompanying Notes to the Condensed Financial Statements

POLAR POWER, INC.

UNAUDITED CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)


	Three Months Ended March 31,
	2022			2021
Net Sales	$	3,709		$	3,290
Cost of Sales		2,804			3,348
Gross profit (loss)		905			(58	)

Operating Expenses
Sales and marketing		405			368
Research and development		476			490
General and administrative		1,131			982
Total operating expenses		2,012			1,840

Loss from operations		(1,107	)		(1,898	)

Other income (expenses)
Interest expense and finance costs		(13	)		(16	)
Other income (expense), net		—			11
Total other income (expenses), net		(13	)		(5	)

Net loss	$	(1,120	)	$	(1,903	)

Net loss per share – basic and diluted	$	(0.10	)	$	(0.15	)
Weighted average shares outstanding, basic and diluted		12,788,203			12,513,625

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 March 31, 2022


	Common Stock				Additional paid-in		(Accumulated			Treasury			Total Stockholders’
	Number		Amount		capital		Deficit)			Stock			Equity
Balance, December 31, 2021		12,805,680	$	1	$	36,816	$	(13,527	)	$	(40	)	$	23,250
Net loss		—		—		—		(1,120	)		—			(1,120	)
Balance, March 31, 2022 (unaudited)		12,805,680	$	1	$	36,816	$	(14,647	)	$	(40	)	$	22,130

Three months Ended March 31, 2021

	Common Stock				Additional paid-in		(Accumulated			Treasury			Total Stockholders’
	Number		Amount		capital		Deficit)			Stock			Equity
Balance, December 31, 2020		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 shares issued upon exercise of warrants		287,522		—		707		—			—			707
Net loss		—		—		—		(1,903	)		—			(1,903	)
Balance, March 31, 2021 (unaudited)		12,805,680	$	1	$	36,816	$	(14,016	)		(40	)	$	22,761

See Accompanying Notes to the Condensed Financial Statements

POLAR POWER, INC.

UNAUDITED CONDENSED STATEMENTS OF CASH FLOW

(in thousands)


	Three Months Ended March 31,
	2022			2021
Cash flows from operating activities:
Net loss	$	(1,120	)	$	(1,903	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		135			151
Amortization of operating lease right-of-use asset		166			160
Changes in operating assets and liabilities
Accounts receivable		626			(1,521	)
Inventories		(1,468	)		540
Prepaid expenses		742			(416	)
Accounts payable		216			113
Customer deposits		26			(333	)
Accrued expenses and other current liabilities		5			(10	)
Decrease in lease liability		(175	)		(162	)
Net cash used in operating activities		(847	)		(3,381	)

Cash flows from investing activities:
Acquisition of property and equipment		(8	)		—
Net cash used in investing activities		(8	)		—

Cash flows from financing activities:
Proceeds from sale of common stock, net of offering cost		—			12,466
Proceeds from exercise of warrants		—			707
Repayment of notes payable		(60	)		(80	)
Net cash provided by (used in) financing activities		(60	)		13,093

Increase (decrease) in cash and cash equivalents		(915	)		9,712
Cash and cash equivalents, beginning of period		5,101			1,646
Cash and cash equivalents, end of period	$	4,186		$	11,358

See Accompanying Notes to the Condensed Financial Statements

POLAR POWER, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021

(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, electric vehicle (EV) charging, and nano-grid applications. The Company’s products integrate DC generator, proprietary electronic control systems, lithium batteries and solar photovoltaic (PV) technologies to provide low operating cost and emissions for telecommunications, defense, automotive, nano-grid, EV charging and industrial markets.

Impact of COVID-19

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

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

Basis of Presentation of Unaudited Financial Information

The unaudited condensed financial statements of the Company for the three months ended March 31, 2022 and 2021 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, 2021 was derived from the audited financial statements included in the Company’s financial statements as of and for the years ended December 31, 2021 and 2020 contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission, or the SEC, on March 31, 2022. 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”).

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 regularly reviews its customers’ financial positions to ensure that collectability is reasonably assured.

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-month periods ended March 31, 2022 and 2021

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 March 31,
	2022 (Unaudited)		2021 (Unaudited)
DC power systems	$	3,617	$	3,155
Engineering & Tech Support Services		44		28
Accessories		48		107
Total net sales	$	3,709	$	3,290

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

	Three months ended March 31,
	2022 (Unaudited)		2021 (Unaudited)
Telecom	$	3,670	$	3,053
Government/Military		17		31
Marine		14		—
Other (backup DC power to various industries)		8		206
Total net sales	$	3,709	$	3,290

Inventories

Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out (“FIFO”) basis. As of March 31, 2021 and December 31, 2021, inventory has been reduced by cumulative write-downs totaling $3,400 and $3,500, respectively. As of March 31, 2022 and December 31, 2021, inventories consisted of the following:

SCHEDULE OF INVENTORIES NET

	March 31, 2022 (unaudited)		December 31, 2021

Raw materials	$	7,591	$	6,607
Finished goods		2,894		2,410
Total Inventories	$	10,485	$	9,017

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. As of March 31, 2022 and December 31, 2021, the Company had accrued a liability for warranty reserve of $600 and $600, respectively, which are included in other accrued liabilities in the accompanying condensed balance sheets. 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	March 31, 2022 (unaudited)			December 31, 2021
Balance at beginning of the period	$	600		$	600
Payments		(153	)		(658	)
Provision for warranties		153			658
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 investments and measures these assets on a recurring basis. 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 and accounts payable, approximate their fair values because of the short maturity of these instruments. The carrying values of the line of credit, notes payable approximate their fair values due to the fact that the interest rates on these obligations are based on prevailing market interest rates.

Segments

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

Concentrations

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

Cash denominated in Australian Dollars with a U.S. Dollar equivalent of $11 and $9 at March 31, 2022 and December 31, 2021, 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 $24 and $23 at March 31, 2022 and December 31, 2021, respectively, was held in an account at a financial institution located in Romania.

Revenues. For the three months ended March 31, 2022, 90% of revenues were generated from the Company’s largest customer (a Tier-1 telecommunications wireless carrier in the U.S.). For the three months ended March 31, 2021, 59% (from a Tier-1 telecommunications wireless carrier in the U.S.), 15%, and 11% of revenues were generated from the Company’s three largest customers. There was no other revenue from customers in excess of 10% of revenues in either period. For the three months ended March 31, 2022 and March 31, 2021, sales to telecommunications customers accounted for 99% and 93% of total revenues, respectively. For the three months ended March 31, 2022 and March 31, 2021, sales to international customers accounted for 1% and 26%, of total revenue, respectively.

Accounts receivable. At March 31, 2022, 93% of the Company’s accounts receivable were from the Company’s largest customer. At December 31, 2021, the Company’s two largest receivable accounts represented 74% and 15% of the Company’s total accounts receivable. There was no other customer that accounted for more than 10% of the Company’s accounts receivable as of March 31, 2022 or December 31, 2021.

Accounts payable. At March 31, 2022, accounts payable to the Company’s three largest vendors represented 32%, 12% and 7%, respectively, of the Company’s accounts payable. On December 31, 2021, the three largest accounts payable accounts to the Company’s vendors represented 16%, 9%, and 9%.

Net Loss Per Share

Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing the net income applicable to common stockholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued using the treasury stock method. 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

	March 31, 2022 (Unaudited)		March 31, 2021 (Unaudited)
Options		140,000		140,000
Warrants		24,122		24,122
Total		164,122		164,122

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. ASU 2016-13 is effective for the Company beginning January 1, 2023, and early adoption is permitted. The adoption of ASU 2016-13 is not expected to have a material impact on the Company’s financial position, results of operations, and cash flows.

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.

In May 2021, the FASB issued ASU 2021-04 “Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation— Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815- 40) Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options” (“ASU 2021-04”). ASU 2021-04 provides guidance as to how an issuer should account for a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option (i.e., a warrant) that remains classified after modification or exchange as an exchange of the original instrument for a new instrument. An issuer should measure the effect of a modification or exchange as the difference between the fair value of the modified or exchanged warrant and the fair value of that warrant immediately before modification or exchange and then apply a recognition model that comprises four categories of transactions and the corresponding accounting treatment for each category (equity issuance, debt origination, debt modification, and modifications unrelated to equity issuance and debt origination or modification). ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the guidance provided in ASU 2021-04 prospectively to modifications or exchanges occurring on or after the effective date. The Company adopted ASU 2021-04 effective January 1, 2022. The adoption of ASU 2021-04 did not have any impact on the Company’s consolidated financial statement presentation or 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

	March 31, 2022 (Unaudited)			December 31, 2021
Production tooling, jigs, fixtures	$	71		$	71
Shop equipment and machinery		3,358			3,350
Vehicles		181			180
Leasehold improvements		390			390
Office equipment		181			181
Software		106			106
Total property and equipment, cost		4,287			4,278
Less: accumulated depreciation and amortization		(3,394	)		(3,259	)
Property and equipment, net	$	893		$	1,019

Depreciation and amortization expense on property and equipment for the three months ended March 31, 2022 and 2021 was $135 and $151, respectively. During the three months ended March 31, 2022 and 2021, $130 and $144, 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

	March 31, 2022		December 31,
	(Unaudited)		2021
Total Equipment Notes Payable	$	450	$	510
Less Current Portion		245		242
Notes Payable, long term	$	205	$	268

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. The aggregate monthly payments of principal and interest of the outstanding notes payable as of March 31, 2022 is approximately $22 and are due through 2024.

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 2022, the Company did not take any advances from the revolving credit facility. At March 31, 2022, there was no balance outstanding under the line of credit and the Company had availability under the line of credit in the amount of $3,127.

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

The loan agreement’s initial term ends on September 30, 2022 and is renewed thereafter for additional one-year term. In addition, Pinnacle may terminate the Loan Agreement at any time upon sixty days prior written notice and immediately upon the occurrence of an event of default. Under the loan agreement, the Company granted Pinnacle a security interest in all presently existing and thereafter acquired or arising assets of the Company. The Loan Agreement also contains a financial covenant requiring the Company to attain an effective tangible net worth, as defined, which the Company attained as of March 31, 2022.

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 – STOCK OPTIONS

The following table summarizes stock option activity:

SCHEDULE OF STOCK OPTION ACTIVITY

	Number of		Weighted Average
	Options		Exercise Price
Outstanding, December 31, 2021		140,000	$	5.22
Granted		—		—
Exercised		—		—
Outstanding, March 31, 2022 (unaudited)		140,000	$	5.22
Exercisable, March 31, 2022 (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 to any one participant in any calendar year.

At December 31, 2021, the Company had total outstanding options of 140,000, which were carried forward to March 31, 2022. These options are fully vested, exercise prices ranging from $4.84 to $5.60, and with 30,000 option shares set to expire in December 2027 and the remaining 110,000 option shares set to expire in April 2028.

The outstanding options had no intrinsic value at March 31, 2022.

NOTE 6 – STOCK WARRANTS

At March 31, 2022, warrant shares outstanding were as follows:

SCHEDULE OF WARRANTS OUTSTANDING

	Number of Warrants		Weighted Average Exercise Price
Outstanding December 31, 2021		24,122	$	3.13
Issued		—		—
Exercised		—		—
Outstanding, March 31, 2022 (unaudited)		24,122	$	3.13
Exercisable, March 31, 2022 (unaudited)		24,122	$	3.13

At December 31, 2021, the Company had outstanding warrants exercisable into 24,122 shares of the Company’s common stock, which were carried forward to March 31, 2022. The warrants had been issued in connection with a July 2020 private placement of shares of the Company’s common stock. The warrants have an exercise price of $3.13 per share and expire in July 2025.

The intrinsic value of the outstanding and exercisable warrants at March 31, 2022 was $2.

NOTE 7 – 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. During the three months ended March 31, 2022 and 2021, Smartgen performed nil and $29 in field services, respectively. On January 2, 2022, we provided written notice to Smartgen to terminate all agreements between the two companies. The termination was effective January 31, 2022.

NOTE 8 – OPERATING LEASES

The Company has two operating lease agreements for its warehouse and office spaces both with remaining lease terms at March 31, 2022 of 1.2 years.

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

Three Months
Ended

March 31, 2022

SEC Form 10-Q filed by Polar Power Inc.