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 September 30, 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 November 14, 2022 was 12,949,550.

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	24

ITEM 4. Controls and Procedures	24

PART II – OTHER INFORMATION	25

ITEM 1. Legal Proceedings	25

ITEM 1A. Risk Factors	25

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	41

ITEM 3. Defaults Upon Senior Securities	41

ITEM 4. Mine Safety Disclosure	41

ITEM 5. Other Information	41

ITEM 6. Exhibits	41

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)


	September 30, 2022			December 31, 2021
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	363		$	5,101
Accounts receivable		1,216			4,243
Inventories		15,625			9,017
Prepaid expenses		4,328			4,006
Employee retention credit receivable		2,000			2,000
Income taxes receivable		787			787
Total current assets		24,319			25,154

Other assets:
Operating lease right-of-use assets, net		411			914
Property and equipment, net		657			1,019
Deposits		93			93

Total assets	$	25,480		$	27,180

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	425		$	328
Customer deposits		3,569			897
Accrued liabilities and other current liabilities		1,179			1,206
Current portion of operating lease liabilities		453			721
Current portion of notes payable		248			242
Total current liabilities		5,874			3,394

Notes payable, net of current portion		81			268
Operating lease liabilities, net of current portion		-			268

Total liabilities		5,955			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, 12,967,027 shares issued and 12,949,550 shares outstanding on September 30, 2022, and 12,805,680 shares issued and 12,788,203 shares outstanding on December 31, 2021.		1			1
Additional paid-in capital		37,331			36,816
Accumulated deficit		(17,767	)		(13,527	)
Treasury Stock, at cost (17,477 shares)		(40	)		(40	)
Total stockholders’ equity		19,525			23,250

Total liabilities and stockholders’ equity	$	25,480		$	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)

	2022			2021			2022			2021
	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Net Sales	$	1,707		$	4,136		$	9,690		$	12,273
Cost of Sales		1,954			3,170			7,971			10,398
Gross profit (loss)		(247	)		966			1,719			1,875

Operating Expenses
Sales and marketing		328			372			1,134			1,119
Research and development		319			533			1,145			1,485
General and administrative		1,482			823			3,648			2,796
Total operating expenses		2,129			1,728			5,927			5,400

Loss from operations		(2,376	)		(762	)		(4,208	)		(3,525	)

Other income (expenses)
Interest expense and finance costs		(12	)		(14	)		(39	)		(46	)
Gain on forgiveness of PPP loan payable		—			1,715			—			1,715
Other income (expense), net		7			3			7			29
Total other income (expenses), net		(5	)		1,704			(32	)		1,698

Net income (loss)	$	(2,381	)	$	942		$	(4,240	)	$	(1,827	)

Net income (loss) per share – basic	$	(0.19	)	$	0.07		$	(0.33	)	$	(0.14	)
Net income (loss) per share – diluted	$	(0.19	)	$	0.07		$	(0.33	)	$	(0.14	)
Weighted average shares outstanding, basic		12,848,466			12,788,203			12,967,027			12,697,683
Weighted average shares outstanding, diluted		12,848,466			12,807,361			12,967,027			12,697,683

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 September 30, 2022

	Number		Amount		capital		Deficit)			Stock			Equity
	Common Stock				Additional paid-in		(Accumulated			Treasury			Total Stockholders’
	Number		Amount		capital		Deficit)			Stock			Equity
Balance, June 30, 2022 (unaudited)		12,805,680	$	1	$	36,816	$	(15,386	)	$	(40	)	$	21,391
Stock-based compensation		161,347				515		—			—			515
Net loss		—		—		—		(2,381	)		—			(2,381	)
Balance, September 30, 2022 (unaudited)		12,967,027	$	1	$	37,331	$	(17,767	)		(40	)	$	19,525

Nine months ended September 30, 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
Stock-based compensation		161,347				515		—			—			515
Net loss		—		—		—		(4,240	)		—			(4,240	)
Balance, September 30, 2022 (unaudited)		12,967,027	$	1	$	37,331	$	(17,767	)	$	(40	)	$	19,525

Three months Ended September 30, 2021

	Common Stock				Additional paid-in		(Accumulated			Treasury			Total Stockholders’
	Number		Amount		capital		Deficit)			Stock			Equity
Balance, June 30, 2021 (unaudited)		12,805,680	$	1	$	36,816	$	(14,882	)	$	(40	)	$	21,895
Net income		—		—		—		942			—			942
Balance, September 30, 2021 (unaudited)		12,805,680	$	1	$	36,816	$	(13,940	)		(40	)	$	22,837

Nine months ended September 30, 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
Beginning balance		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		—		—		—		(1,827	)		—			(1,827	)
Net income (loss)		—		—		—		(1,827	)		—			(1,827	)
Balance, September 30, 2021 (unaudited)		12,805,680	$	1	$	36,816	$	(13,940	)	$	(40	)	$	22,837
Ending balance		12,805,680	$	1	$	36,816	$	(13,940	)	$	(40	)	$	22,837

See Accompanying Notes to the Condensed Financial Statements

POLAR POWER, INC.

UNAUDITED CONDENSED STATEMENTS OF CASH FLOW

(in thousands)

	2022			2021
	Nine Months Ended September 30,
	2022			2021
Cash flows from operating activities:
Net loss	$	(4,240	)	$	(1,827	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		387			420
Gain from forgiveness of PPP loan payable		—			(1,715	)
Stock-based compensation to officers, employees and consultants		515
Changes in operating assets and liabilities
Accounts receivable		3,027			(2,330	)
Inventories		(6,608	)		496
Prepaid expenses		(322	)		(3,758	)
Income tax receivable		—			1,570
Operating lease right-of-use asset		503			484
Accounts payable		97			(102	)
Customer deposits		2,672			260
Accrued expenses and other current liabilities		(27	)		110
Operating lease liability		(536	)		(498	)
Net cash used in operating activities		(4,532	)		(6,890	)

Cash flows from investing activities:
Acquisition of property and equipment		(25	)		(14	)
Net cash used in investing activities		(25	)		(14	)

Cash flows from financing activities:
Proceeds from sale of common stock, net of offering costs		—			12,466
Proceeds from exercise of warrants		—			707
Repayment of notes payable		(181	)		(209	)
Net cash used in financing activities		(181	)		12,964

Increase (decrease) in cash and cash equivalents		(4,738	)		6,060
Cash and cash equivalents, beginning of period		5,101			1,646
Cash and cash equivalents, end of period	$	363		$	7,706

See Accompanying Notes to the Condensed Financial Statements

POLAR POWER, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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.

Liquidity

The accompanying financial statements have been prepared under the assumption that the Company will continue as a going concern. Such assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. For the nine months ended September 30, 2022, the Company recorded a net loss of $4,240 and used cash in operations of $4,532. As of September 30, 2022, we had a cash balance of $363, with borrowing capacity of $2,920, stockholders’ equity of $19,525 and a working capital of $18,445. Notwithstanding the net loss for the nine-month period ended September 30, 2022, management projects adequate cash flow from operations and available line of credit through September 30, 2023, sufficient to ensure continuation of the Company as a going concern for at least one year from the date the Company’s September 30, 2022 financial statements are issued.

Historically, we have financed our operations through public and private sales of common stock, credit lines from financial institutions, and cash generated from operations to provide the Company the liquidity and capital resources to fund its operating expenses and capital expenditure requirements. The Company expects to continue investing in product development and sales and marketing activities and has taken action to improve our margins, and are continuing to build a strong back log. The long-term continuation of the Company’s business plan is dependent upon the generation of sufficient revenues from its products to offset expenses. In the event that the Company does not generate sufficient cash flows from operations and is unable to obtain funding, the Company will be forced to delay, reduce, or eliminate some or all of its discretionary spending, which could adversely affect the Company’s business prospects, ability to meet long-term liquidity needs or ability to continue operations.

Impact of COVID-19

The Company continues to monitor the COVID-19 pandemic and related guidance from international and domestic authorities, including federal, state and local public health authorities. 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, an increase in employee absenteeism, a decrease in available and qualified employment candidates, 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 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 potential resurgence of the outbreak, the impact on its customers and sales cycles, the impact on its customer, employee or industry events, the impact on inflation and the effect on the supply chain, all of which are uncertain and cannot be predicted.

Effects of Inflation

The impact of inflation and changing prices on our raw materials and components during the three and nine months ended September 30, 2022 has reduced profits due to previous order commitments with fixed price contracts. Rapid changes in the global economy may cause additional significant spikes in inflation which may have an impact in our financial condition during 2022 and beyond. Because some of our contracts are at a fixed price, we face the risk that cost overruns or inflation may exceed, erode or eliminate our expected profit margin, or cause us to record a loss on certain projects or make us less competitive in certain markets. We are taking actions to manage the potential impacts of these matters and we will continue to assess the actual and expected impacts and the need for further action.

Basis of Presentation of Unaudited Financial Information

The unaudited condensed financial statements of the Company for the three and nine months ended September 30, 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 condensed balance sheet information as of December 31, 2021, was derived from the audited financial statements included in the Company’s financial statements as of that date included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 31, 2022. These financial statements should be read in conjunction with that Annual 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 warranty 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. The Company also generates revenues from engineering, tech support, and rental services. Product or service 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 and nine-month periods ended September 30, 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

		1		2
	Three months ended September 30,
	2022 (Unaudited)		2021 (Unaudited)
DC power systems	$	1,659	$	4,023
Engineering & Tech Support Services		28		52
Accessories		20		61
Total net sales	$	1,707	$	4,136

		1		2
	Nine months ended September 30,
	2022 (Unaudited)		2021 (Unaudited)
DC power systems	$	9,474	$	11,884
Engineering & Tech Support Services		105		222
Accessories		111		167
Total net sales	$	9,690	$	12,273

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

		1		2
	Three months ended September 30,
	2022 (Unaudited)		2021 (Unaudited)
Telecom	$	1,538	$	3,524
Government/Military		2		373
Marine		140		30
Other (backup DC power to various industries)		27		209
Total net sales	$	1,707	$	4,136

		1		2
	Nine months ended September 30,
	2022 (Unaudited)		2021 (Unaudited)
Telecommunications	$	9,435	$	11,017
Government/Military		31		538
Marine		157		44
Other (backup DC power to various industries)		67		674
Total net sales	$	9,690	$	12,273

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 September 30, 2022 and December 31, 2021, inventory has been reduced by cumulative write-downs totaling $3,133 and $3,500, respectively. If the Company’s estimates regarding net realizable value are inaccurate, including its estimates regarding its inventory, or changes in customer demand for the Company’s products in an unforeseen manner, the Company may experience additional write-downs of its inventory in the short-term.

As of September 30, 2022 and December 31, 2021, inventories consisted of the following:

SCHEDULE OF INVENTORIES NET

	September 30, 2022 (unaudited)		December 31, 2021

Raw materials	$	11,516	$	6,607
Finished goods		4,109		2,410
Total Inventories	$	15,625	$	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 September 30, 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	September 30, 2022 (unaudited)			December 31, 2021
Balance at beginning of the period	$	600		$	600
Payments		(406	)		(658	)
Provision for warranties		406			658
Balance at end of the period	$	600		$	600

Stock-Based Compensation

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

Stock-based payments to officers, directors, employees and consultants for acquiring goods and services from nonemployees, which include grants of employee stock options, are recognized in the financial statements based on their grant date fair values in accordance with ASC 718, Compensation-Stock Compensation. Stock option grants to officers, directors, employees and consultants, which are generally time vested, are measured at the grant date fair value and depending on the conditions associated with the vesting of the award, compensation cost is recognized on a straight-line or graded basis over the vesting period. Recognition of compensation expense for non-employees is in the same period and manner as if 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 $10 and $9 at September 30, 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 $19 and $23 at September 30, 2022 and December 31, 2021, respectively, was held in an account at a financial institution located in Romania.

Revenues. For the three months ended September 30, 2022, 87% 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 September 30, 2021, 70% of revenues were generated from the Company’s largest customer, a Tier-1 telecommunications wireless carrier 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 September 30, 2022 and September 30, 2021, sales to telecommunications customers accounted for 90% and 92% of total revenues, respectively. For the three months ended September 30, 2022 and September 30, 2021, sales to international customers accounted for 7% and 12%, of total revenue, respectively.

For the nine months ended September 30, 2022, sales to the Company’s largest customer, a Tier-1 telecommunications wireless carrier in the U.S., accounted for 88% of total revenues. For the same period in 2021, sales to the Company’s largest customer, a Tier-1 telecommunications wireless carriers in the U.S., accounted for 67%. There was no other revenue from customers in excess of 10% of revenues in either period. For the nine months ended September 30, 2022 and September 30, 2021, sales to telecommunications customers accounted for 97% and 90% of total revenues, respectively. For the nine months ended September 30, 2022 and September 30, 2021, sales to international customers accounted for 2% and 10%, of total revenue, respectively.

Accounts receivable. At September 30, 2022, 96% 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 September 30, 2022 or December 31, 2021.

Accounts payable. At September 30, 2022, accounts payable to the Company’s three largest vendors represented 32%, 26% and 10%, 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

	September 30, 2022 (Unaudited)		September 30, 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 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

	September 30, 2022 (Unaudited)			December 31, 2021
Production tooling, jigs, fixtures	$	71		$	71
Shop equipment and machinery		3,371			3,350
Vehicles		181			180
Leasehold improvements		390			390
Office equipment		185			181
Software		106			106
Total property and equipment, cost		4,304			4,278
Less: accumulated depreciation and amortization		(3,647	)		(3,259	)
Property and equipment, net	$	657		$	1,019

Depreciation and amortization expense on property and equipment for the three months ended September 30, 2022 and 2021 was $124 and $134, respectively. During the three months ended September 30, 2022 and 2021, $119 and $129, respectively, of the depreciation expense was included in the balance of cost of sales.

Depreciation and amortization expense on property and equipment for the nine months ended September 30, 2022 and 2021 was $387 and $420, respectively. During the nine months ended September 30, 2022 and 2021, $374 and $402, 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

	September 30, 2022		December 31,
	(Unaudited)		2021
Total Notes Payable for purchase of Equipment	$	329	$	510
Less Current Portion		248		242
Notes Payable, long term	$	81	$	268

The Company has entered into several financing agreements for the purchase of equipment in prior years. The terms of these financing arrangements are from 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 September 30, 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”). The Loan Agreement was amended by the First Modification to Loan and Security Agreement (the “First Modification”) on October 7, 2020. During 2022, the Company did not draw any advances from the revolving credit facility. At September 30, 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 $2,920.

The Loan Agreement, as amended, 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.

After being amended by the First Modification, the Loan Agreement’s initial term ended on September 30, 2022. On November 3, 2022, the Company executed the Second Modification to Loan and Security Agreement with Pinnacle for a two-year term with an expiration date of September 30, 2024. Pinnacle may terminate the Loan Agreement, as amended, at any time upon sixty days prior written notice and immediately upon the occurrence of an event of default. Under the Loan Agreement, as amended, the Company granted Pinnacle a security interest in all presently existing and thereafter acquired or arising assets of the Company. The Loan Agreement, as amended, also contains a financial covenant requiring the Company to attain an effective tangible net worth, as defined, which the Company attained as of September 30, 2022.

The Loan Agreement, as amended, 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 – COMMON STOCK

In August 2022, the Company issued an aggregate of 161,347 shares of common stock to its officers, employees and consultants as part of the Company’s Employee Retention Program and the Company’s 2016 Omnibus Incentive Plan. The shares of common stock had an aggregate grant date fair value of $515 based on the closing price of the Company’s common stock on the grant date of the awards.

During the three and nine-month periods ended September 30, 2022 and September 30, 2021, the Company had stock-based compensation expense of $515 and nil, respectively.

NOTE 6 – STOCK OPTIONS

The following table summarizes stock options:

SCHEDULE OF STOCK OPTION ACTIVITY

	Number of		Weighted Average
	Options		Exercise Price
Outstanding, December 31, 2021		140,000	$	5.22
Granted		—		—
Exercised/Forfeited/Expired		—		—
Outstanding, September 30, 2022 (unaudited)		140,000	$	5.22
Exercisable, September 30, 2022 (unaudited)		140,000	$	5.22

At September 30, 2022 and December 31, 2021, the Company had total outstanding options exercisable into 140,000 shares of the Company’s common stock. These options are fully vested, with exercise prices ranging from $4.84 to $5.60. Options exercisable into 30,000 shares expire in December 2027 and the remaining options exercisable into 110,000 shares expire in April 2028.

The outstanding options had no intrinsic value at September 30, 2022.

NOTE 7 – STOCK WARRANTS

The following table summarizes warrants:

SCHEDULE OF WARRANTS OUTSTANDING

	Number of Warrants		Weighted Average Exercise Price
Outstanding December 31, 2021		24,122	$	3.13
Issued		—		—
Exercised/Forfeited/Expired		—		—
Outstanding, September 30, 2022 (unaudited)		24,122	$	3.13
Exercisable, September 30, 2022 (unaudited)		24,122	$	3.13

At September 30, 2022 and December 31, 2021, the Company had outstanding warrants exercisable into 24,122 shares of the Company’s common stock. The warrants were 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 outstanding and exercisable warrants had no intrinsic value at September 30, 2022.

NOTE 8 – 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 September 30, 2022 and 2021, Smartgen performed nil and $15 in field services, respectively. Smartgen performed nil and $66 in field services for the nine months ended September 30, 2022 and 2021, respectively. The agreement with Smartgen was terminated effective January 31, 2022.

NOTE 9 – OPERATING LEASES

The Company has two operating lease agreements for its warehouse and office spaces both with a weighted average remaining lease terms at September 30, 2022 of approximately one year.

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

	Nine Months Ended September 30, 2022			Nine Months Ended September 30, 2021
Operating lease cost (of which $147 is included in general and administration and $902 is included in cost of sales in the Company’s statement of operations for the nine months ended September 30, 2022, and for the same period in 2021, respectively)	$	525		$	525
Lease Cost
Operating lease cost (of which $147 is included in general and administration and $902 is included in cost of sales in the Company’s statement of operations for the nine months ended September 30, 2022, and for the same period in 2021, respectively)	$	525		$	525

Other Information
Weighted average remaining lease term – operating leases (in years)		0.7			1.7
Average discount rate – operating leases		3.75	%		3.75	%

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

	At September 30, 2022		At September 30, 2021
Operating leases
Long-term right-of-use assets, net of accumulated amortization of $2,406 and $1,749, respectively	$	411	$	1,079

Short-term operating lease liabilities	$	453	$	708
Long-term operating lease liabilities		—		454
Total operating lease liabilities	$	453	$	1,162

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

Year Ending	Operating Leases
2022 (remaining 3 months)		189
2023		280
Total lease payments		469
Less: Imputed interest/present value discount		(16	)
Present value of lease liabilities	$	453

Rent expense for the nine months ended September 30, 2022 and 2021 was $726 and $678, respectively.

NOTE 10 - EMPLOYEE RETENTION CREDITS

The Consolidated Appropriations Act, passed in December 2020, expanded the employee retention credit (“ERC”) program through December 2021. The credits cover 70% of qualified wages, plus the cost to continue providing health benefits to our employees, subject to a $7 cap per employee per quarter. During the year ended December 31, 2021, the Company qualified for approximately $2,000 of ERC. As of September 30, 2022 and December 31, 2021, the balance of $2,000 is presented as employee retention credit receivable in the accompanying condensed balance sheets.

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.

References to the “Company,” “Polar,” “our,” “us” or “we” refer to Polar Power, Inc. 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, marine and industrial. We are continuously diversifying our customer base and are selling our products into non-telecommunication markets and applications at an increasing rate.

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

We believe it’s more efficient to build power systems around the DC generator because it’s simpler to integrate with battery storage and solar photovoltaics which also operate on DC. Many applications in communications, water pumping, lighting, vehicle and vessel propulsion, security systems operate on DC power only. Many micro-grids and energy storage are DC based and use inverters to convert the DC to AC.

Serving these various markets, we offer the following configurations of our DC power systems, with output power ranging from 5 kW to 50 kW:

	●	Base power systems. These stationary systems integrate a DC generator and automated controls with remote monitoring, which are typically contained within an environmentally regulated enclosure.

	●	Hybrid power systems. These systems incorporate lithium-ion batteries (or other advanced battery chemistries) with our proprietary battery management system into our standard DC power systems.

	●	DC solar hybrid power systems. These stationary systems incorporate photovoltaic and other sources of renewable energy into our DC hybrid power systems.

	●	*Mobile power systems.* These are very light weight and compact power systems used for EV charging, robotics, communications, security.

Our DC power systems are available in diesel, natural gas, LPG / propane and renewable fuel formats, with diesel, natural gas and propane gas being the predominant formats.

During the three months ended September 30, 2022 and 2021, 90% and 92%, respectively, of our total net sales were within the telecommunications market. For the three months ended September 30, 2022, 87% of our total net sales were derived from our largest telecommunications customer. For the same period in 2021, 70% of our total net sales were derived from our largest telecommunications customer. There was no other revenue from customers in excess of 10% of total net sales in either period.

During the nine months ended September 30, 2022 and 2021, 97% and 90%, respectively, of our total net sales were within the telecommunications market. For the nine months ended September 30, 2022, 88% of our total net sales were derived from our largest telecommunications customer. For the same period in 2021, 67% of our total net sales were derived from our largest telecommunications customer. There was no other revenue from customers in excess of 10% of total net sales in either period.

Overseas sales to telecommunications customers are showing growth after long marketing investments. During the second quarter of 2022, we received purchase orders from a telecommunications customer in the South Pacific Islands in the amount of $6,279 for our DC power generators for off-grid applications to supply rural areas with broadband services. This order is part of a growing program to develop the telecommunications infrastructure in this region. We expect to complete shipments by the end of 2022.

We continue to work on diversifying our customer base and are selling into non-telecommunication markets and applications at an increasing rate and are focused on new markets for our DC power platform. As part of this diversification effort, we have been expanding the power range of our portfolio and in March 2022, we received EPA certification on our 4Y Toyota engine project aimed at expanding the power range to 35 kW on natural gas and LPG. Our EPA certification of 1KS and 4Y Toyota engines brings to the market clean fuel (non-diesel) engines with very low maintenance and lower operating costs. In many regions throughout the world, the cost of propane and LPG is much lower than the cost of diesel fuel so there is an economic incentive to lower carbon emissions.

The Toyota 1KS and 4Y engines were designed for 24/7 operation for heating, air-conditioning, and CHP applications in Japan. During the 1970s and 1980s Japan faced a problem with their electric grid supporting the rapid increase in HVAC usage. So instead of the electric grid providing the energy for the HVAC needs, these loads were moved over to the natural gas grid. To meet this application requirement, Toyota engines had to have long life (60,000+ hours) with very low maintenance. With the global increasing need for EV charging and HVAC, we see the need to shift some of this increasing energy demand to natural gas and propane/LPG. According to the US EIA, natural gas, coal, coke, fuel oil, provides 60.8% of the energy used by electric utilities in the US. Using natural gas and propane/LPG fuels for HVAC and EV charging shifts energy usage away from coal, coke, and fuel oil; thereby reducing emissions. Generating power locally reduces energy transmission losses, further reducing emissions.

Solar combined with the Toyota 1KS and 4Y engines along with our alternators and controls will offer clean and renewable energy for applications including HVAC, refrigeration, EV charging, peak power shaving, off grid power, and backing up the grid for home and business. We are actively pursuing these applications which we believe form the foundation for micro-grids.

We also continue to market our DC generators for the military, advanced mobility and marine markets as part of our ongoing customer diversification strategy. 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 tend to cover the cost of product development. Marine sales interest have increased significantly both domestically and overseas due to the increased performance in comfort and fuel economy. Also, there are increasing restrictions on the use of diesel and gasoline engines in many lakes and waterways making way for our natural gas and propane operated generators. Using natural gas and propane for home and office charging for electric vehicle and forklifts is still a market under development. Same is true for diesel mobile chargers for emergency roadside assistance.

The geopolitical uncertainty is driving nations and business to secure or harden their energy needs driving a more rapid pace toward energy efficiency and solar energy.

Impact of COVID-19

The COVID-19 pandemic has negatively impacted business and industries all over the world since March 2020. The pandemic continues to have a significant negative impact on our overall operations including revenues, productivity, gross margins and liquidity.

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 caused significant disruptions in the supply chain including increasing cost and expenses of materials and services. Our business is directly dependent upon, and correlates closely with, the marketing levels and ongoing business activities of our existing customers and suppliers. In the event of a continued widespread economic downturn caused by COVID-19, we will likely experience a further reduction in current projects, longer sales and collection cycles, deferral or delay of purchase commitments for our DC power systems, a reduction in our manufacturing functionality, higher than normal inventory levels, a reduction in the availability of qualified labor, and increased price competition, all of which could substantially adversely affect our net revenues and our ability to remain a going concern.

The impacts of COVID-19 on our business, sources of revenues and the general economy, are currently not fully known. 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 fiscal year 2022 and perhaps beyond.

Market Trends and Uncertainties

The global economy, including the financial and credit markets, has recently experienced extreme volatility and disruptions, including increases in inflation rates, rising interest rates, severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, and uncertainty about economic stability. We anticipate these factors to continue for the remainder of fiscal 2022 potentially resulting in a negative impact on our overall operations including revenues, productivity, gross margins and liquidity.

We believe recent special military actions of the Russian Federation and its invasion of Ukraine have added considerable to our shipping costs due to diesel fuel costs. However, we believe the resulting geopolitical uncertainty should increase our military contracts.

We cannot reasonably estimate the financial impact of increased inflation or supply chain disruptions on our financial condition, results of operations or cash flows in the future.

Effects of Inflation

The impact of inflation and changing prices during the three and nine months ended September 30, 2022 has not been significant on the financial condition or results of operations of our company. Rapid changes in the global economy may cause significant spikes in inflation which may have an impact in our financial condition during 2022 and beyond. Because some of our contracts are at a fixed price, we face the risk that cost overruns or inflation may exceed, erode or eliminate our expected profit margin, or cause us to record a loss on certain projects. We are taking actions to manage the potential impacts of these matters and we will continue to assess the actual and expected impacts and the need for further action.

Recent Business Events

In September 2022, we renewed our master service agreement with our largest customer. The agreement included price adjustments to our products which we believe will help offset the effects of inflation and improve our margins. For the three and nine months ended September 30, 2022, 87% and 88%, respectively, of our total net sales were derived from our largest customer.

Our total backlog on September 30, 2022 was $13,614, of which our largest customer represents 38%. Our backlog also includes a $6.2 million order for our DC power generators to a customer in the South Pacific Islands. The order was received during the second quarter of 2022 and is expected to ship by the end of 2022.

Supply change constraints augmented by the COVID-19 pandemic and Russia’s invasion of Ukraine extended delays in receiving parts and components to complete our DC generators during the second and third quarter of 2022. We experienced extended lead times and delays securing items such as diesel engines and small electronic components used in our products.

We also continue to work on diversifying our customer base and are selling into non-telecommunication markets and applications at an increasing rate. In March 2022, we received EPA certification on our 4Y Toyota engine project aimed at expanding the power range to 35 kW on natural gas and LPG. Polar’s EPA certification of 1KS and 4Y Toyota engines brings to the market (non-diesel) engines with very low maintenance and high fuel efficiency. In addition to meeting the telecommunications need for larger and more compact generators our larger models have high interest from micro-grids, peak power shaving, and EV charging.

Our solar hybrid power systems, which integrate solar energy storage with natural gas/LPG (propane) powered generators, are ideal for off-grid (i.e., areas where wireless towers are not connected to an electrical grid) and bad-grid (i.e., areas where wireless towers are connected to an electrical grid that loses power more than eight hours) applications.

Our growing backlog and shipments have demonstrated that our customers are viable and moving forward with orders. The headwind to a more rapid sales growth is a labor and supply chain issue. We anticipate that our component suppliers will normalize their backlogs sometime during the 4^th quarter in 2023. In the meantime, our strategy will be to maintain large inventories of engines and electronic components to offset disruptions.

Critical Accounting Policies and Estimates

The preparation of the Company’s financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Some of those judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates under different assumptions or conditions. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Management regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates are adjusted accordingly. Actual results could differ from those estimates. Significant estimates include those related to assumptions used in 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. There were no changes to our critical accounting policies described in the financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, that impacted our condensed financial statements and related notes included herein.

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.

Financial Performance Summary and Outlook

Our net sales for the three months ended September 30, 2022 were $1,707, which represents a 59% decrease in net sales as compared to $4,136 for the three months ended September 30, 2021. We expect a significant rebound in the fourth quarter 2022 as critical components of raw materials are expected to arrive during the quarter. Our net sales for the nine months ended September 30, 2022 were $9,690, which represents a 21% decrease in net sales as compared to $12,273 for the same period in 2021.

Supply chain constraints affected timely delivery of raw materials required to complete our DC power systems. We anticipate a significant improvement in sourcing these materials during the fourth quarter of 2022 and expedite product deliveries to our customers before the end of this year.

Our sales backlog as of September 30, 2022 is $13,614. Our backlog includes orders of $5,198 from our U.S. telecommunications customers primarily to develop their 5G infrastructure and use our DC generators as primary backup power. Our international telecommunications customer in the South Pacific Islands added $6,279 to our backlog. These units will be used for off-grid applications to supply rural areas with broadband services as part of a growing program to develop the telecommunications infrastructure in this region.

Our immediate focus is to fulfill delayed orders to customers. We also anticipate that our sales will increase as we overcome supply chain and labor issues. We will continue to take proactive steps to manage our operations and mitigate the financial impacts of higher costs and supply chain issues; however, some of the factors are not within our control, and the duration and severity of supply chain issues in unknown and unpredictable.

See “Risk Factors” commencing on page 24 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 September 30, 2022 Compared to the Three Months Ended September 30, 2021

	Three Months Ended September 30,						Dollar Variance			Percentage Variance			Results as a Percentage of Net Sales for the Period Ended September 30,
	2022 (unaudited)			2021 (unaudited)			Favorable (Unfavorable)			Favorable (Unfavorable)			2022			2021
Net sales	$	1,707		$	4,136		$	(2,429	)		(59	)%		100.0	%		100.0	%
Cost of sales		1,954			3,170			1,216			38	%		114.5	%		76.6	%
Gross profit (loss)		(247	)		966			(1,213	)		126	%		(14.5	)%		23.4	%
Sales and marketing expenses		328			372			44			12	%		19.2	%		9.0	%
Research and development expenses		319			533			214			40	%		18.7	%		12.9	%
General and Administrative expenses		1,482			823			(659	)		(80	)%		86.8	%		19.9	%
Total operating expenses		2,129			1,728			(401	)		(23	)%		124.7	%		41.8	%
Loss from operations		(2,376	)		(762	)		(1,614	)		(212	)%		(139.2	)%		(18.4	)%
Interest and finance costs		(12	)		(14	)		2			14	%		(0.7	)%		(0.4	)%
Gain from PPP loan forgiveness		—			1,715			(1,715	)		(100	)%		0.0	%		41.4	%
Other income (expense), net		7			3			4			(133	)%		0.4	%		0.1	%
Net loss	$	(2,381	)	$	942		$	(3,323	)		353	%		(139.5	)%		(22.8	)%

Net Sales. Net sales decreased $2,429, or 59%, to $1,707 for the three months ended September 30, 2022, as compared to $4,136 for the same period in 2021. The decrease in sales was primarily due to supply chain constraints which postponed product shipment to the fourth quarter of 2022. Sales to our largest telecommunication customer in the U.S. accounted for 87% of our total net sales during the three months ended September 30, 2022. For the same period in 2021, 70% of our total net sales were generated from our largest telecommunications customer. There was no other revenue from customers in excess of 10% of total net sales in either period.

Net sales to telecommunications customers in the U.S. accounted for 90% of our total net sales for the three months ended September 30, 2022, as compared to 92% for the same period in 2021. Our international sales represented 2% of our net sales for the three months ended September 30, 2022, as compared to 7% in international sales in the same period in 2021.

Cost of Sales. Cost of sales during the three months ended September 30, 2022 decreased by $1,216 or 38%, to $1,954, as compared to $3,170 during the same period in 2021. Cost of sales as a percentage of net sales during the three months ended September 30, 2022 increased to 114.5% as compared to 76.6% in the same period in 2021. The increase in cost of sales as a percentage of net sales was a result of a decrease in factory overhead absorption due to under-utilization of the production capacity as a result of delays caused by current supply chain constraints. We believe we will achieve significant reductions in the cost of sales as a percentage of net sales in future quarterly periods as supply chain constraints decrease and production increases to normal levels.

Gross Profit (Loss). We had a gross loss of $247 for the three months ended September 30, 2022, which is a decrease of $1,213, or 126%, as compared to gross profit of $966 during the same period in 2021. The increase in gross loss for the three months ended September 30, 2022 was primarily a result of a reduction in labor efficiencies in manufacturing caused by delays in production as a result of current supply chain constraints. Our gross loss as a percentage of net sales was (14.5)% for the quarter ended September 30, 2022, as compared to a gross profit as a percentage of net sales of 23.4% in the same period in 2021.

Sales and Marketing Expenses. During the three months ended September 30, 2022, sales and marketing expenses decreased by $44, or 12%, to $328, as compared to $372 during the same period in 2021. The decrease was attributable to a decrease in tradeshow expense due to a decrease in sales support staff. We expect to hire three to five additional sales support staff in the upcoming quarters.

Research and Development Expenses. During the three months ended September 30, 2022, research and development expenses decreased by $214 or 40%, to $319, as compared to $533 during the same period in 2021. The decrease was primarily due to a decrease in R&D support staff during the three months ended September 30, 2022 as compared to the same period in 2021. Our research and development efforts during the third quarter of 2022 primarily focused on product design and customization for our international customers. We plan to recruit additional engineers during the upcoming quarters to support our customer diversification efforts.

General and Administrative Expenses. General and administrative expenses increased by $659, or 80%, to $1,482 during the three months ended September 30, 2022, as compared to $823 during same period in 2021. The increase in general and administrative expenses during the three months ended September 30, 2022 was primarily due to $515 in stock-based compensation to officers, employees and consultants.

Interest and Finance Costs. Interest expense for the three months ended September 30, 2022 was $12, as compared to $14 during the same period in 2021. Our interest expense for the current period is primarily from interest expense paid on equipment financing and the minimum interest expense on our line of credit.

Net Profit (Loss). As a result of the factors identified above, we reported net loss of $2,381, or $(0.19) per basic and diluted share, for the three months ended September 30, 2022, as compared to net income of 942, or $0.07 per basic and diluted share, for the same period in 2021.

Nine Months Ended September 30, 2022 Compared to the Nine Months Ended September 30, 2021

Nine Months Ended

September 30,

Dollar

Variance

Percentage

Variance

Results as a

Percentage

of Net Sales for

the Period Ended

September 30,

2022

(unaudited)

2021

SEC Form 10-Q filed by Polar Power Inc.