The Company

Polar Power, Inc. was incorporated in the State of Washington as Polar Products, Inc. and in 1991 reincorporated in the State of California under the name Polar Power, Inc. In December 2016, Polar Power, Inc. reincorporated in the State of Delaware (the “Company”). The Company designs, manufactures and sells direct current, or DC, power systems to supply reliable and low-cost energy to off-grid, bad-grid and backup power applications. The Company’s products integrate DC generator and proprietary automated controls, lithium batteries and solar systems to provide low operating cost and lower emissions alternative power needs in telecommunications, defense, automotive and industrial markets.

Impact of COVID-19

The Company continues to monitor the rapidly evolving situation and 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, delays in sourcing of raw materials from suppliers which, in turn, has raised liquidity concerns. In addition, the Company’s inventory reserve increased during the first nine months of 2020 due to current uncertainties regarding specific product shipments. The Company’s business is directly dependent upon, and correlates closely with, the marketing levels and ongoing business activities of its existing customers and suppliers. In the event of a continued widespread economic downturn caused by COVID-19, the Company will likely experience a further reduction in current projects, longer sales and collection cycles, deferral or delay of purchase commitments for our 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.

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

During November 2020, two leaders in the pharmaceutical industry released news of achieving over 90% effectiveness on their COVID-19 vaccines. We remain hopeful that this is the beginning of taking control over the COVID-19 pandemic and seeing economic conditions gradually improve in 2021. Control over COVID-19 will improve our ability to travel for purpose of training our sales staff and customers, commissioning of generators, and promoting the rollout of our new products to enhance our efforts for customer diversification. We expect to see significant improvements to labor and manufacturing efficiencies and a reduction in delays in the supply chain. In addition, we believe our investments during the last two years in facilities, state-of-the-art manufacturing equipment, and training of our staff place us in good position to achieve significant improvements in our financial position as opportunities arise and the negative impact of COVID-19 is reduced.

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.

Inventories

Inventories consist of raw materials and finished goods and are stated at the lower of cost or net realizable value. If the estimated net realizable value is determined to be less than the recorded cost of the inventory, a provision is made to reduce the carrying amount of the inventory item to the lower net realizable value determination. Determination of the net realizable value may be complex, and therefore, requires management to make assumptions and to apply a high degree of judgment. In order for management to make the appropriate determination of net realizable value, the following items are commonly considered: inventory turnover statistics, inventory quantities on hand in our facilities and customer inventories, unfilled customer order quantities, forecasted consumer demand, current prices, competitive pricing, seasonality factors, consumer trends and performance of similar products or accessories. Subsequent changes in facts or circumstances do not result in the reversal of previously recorded write-downs. As of December 31, 2019, the Company established inventory reserves of $600 for obsolete and slow-moving inventory. During the three and nine months ended September 30, 2020, due to lower than expected demand and sales of our products, we increased our inventory reserve by $2,400 to reduce the remaining inventory of our products to its estimated net realizable value of $11,380 as of September 30, 2020. If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required. As of September 30, 2020 and December 31, 2019, the components of inventories were as follows:

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:

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.

Concentrations

Cash. The Company maintains cash balances at three 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 $17 at September 30, 2020 and December 31, 2019, respectively, was held in an account at a financial institution located in Australia. Cash denominated in Romanian Leu with a U.S. Dollar equivalent of $29 and $4 at September 30, 2020 and December 31, 2019, respectively, was held in an account at a financial institution located in Romania.

Revenues. For the three months ended September 30, 2020, 41% and 27% of revenues were generated from the Company’s two largest customers, one being a Tier-1 telecommunications wireless carrier. For the same period in 2019, 84% and 7.5% of revenues were generated from the Company’s two largest customers, both being Tier-1 telecommunications wireless carriers. For the three months ended September 30, 2020 and September 30, 2019, sales to telecommunications customers accounted for 99% and 97% of total revenues, respectively.

For the nine months Ended September 30, 2020, sales to the Company’s two largest customers accounted for 57% and 13% of total revenues, one being a Tier-1 telecommunications wireless carrier. For the same period in 2019, the Company’s two largest customers accounted for 84% and 24% of total revenues, both beingTier-1 telecommunications wireless carriers. For the nine months ended September 30, 2020 and September 30, 2019, sales to telecommunications customers accounted for 96% and 96% of total revenues, respectively.

Accounts receivable. At September 30, 2020, 58% and 29% of the Company’s accounts receivable were from the Company’s two largest customers. At December 31, 2019, 70% and 20% of the Company’s accounts receivable were from the Company’s two largest customers.

Accounts payable. At September 30, 2020, accounts payable to the Company’s largest vendor represented 14% while the other two largest vendors represented 11% and 10%, respectively. At December 31, 2019, accounts payable to the Company’s largest vendor represented 11% while the other two largest vendors represented 10% each.

Recent Accounting Pronouncements

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

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.