Inventories

Disaggregation of Net Sales

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

SCHEDULE OF DISAGGREGATED NET SALES

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

The following tables shows the Company’s net sales by the respective geographical regions of our customers:

For the three-months ended June 30, 2023 and 2022, international sales totaled $1,641 and $74 respectively. For the six-months ended June 30, 2023 and 2022, international sales totaled $2,766 and $112 respectively.

Inventories consist

As of raw materialsJune 30, 2023 and finished goods andDecember 31, 2022, inventories consisted of the following:

SCHEDULE OF INVENTORIES NET

Inventories are stated at the lower of cost or market. Cost isnet realizable value, with cost determined principally on a first-in-first-out average costfirst-in, first-out (“FIFO”) basis. Inventory quantities on hand are reviewed regularlyFor the six-months ended June 30, 2023 and 2022, there were no write-downs for obsolete inventory are recorded based on an estimated forecast of the inventory item demand in the near future. As of September 30, 2017 and December 31, 2016, the Company has established inventory reserves of $250,000 for obsolete and slow-moving inventory. As of September 30, 2017 and December 31, 2016, the components of inventories were as follows:

Product Warranties

The Company provides limited warranties for parts and labor at no cost to its customers within a specified time period after the sale. The warranty terms are typically from one to five years. Provisions for estimated expenses related to product warranties are made atAs of June 30, 2023 and December 31, 2022, the time products are sold. These estimates are established using historical information about the nature, frequency and average cost of warranty claim settlements as well as product manufacturing and recovery from suppliers. Management actively studies trends of warranty claims and takes action to improve product quality and minimize warranty costs. The Company estimates the actual historical warranty claims coupled with an analysis of unfulfilled claims to recordhad accrued a liability for specific warranty purposes. The Company’s product warranty obligationsreserve of $600 and $600, respectively, which are included in accrued expenses and other current liabilities in the balance sheets. As of September 30, 2017 and December 31, 2016, the Company’s product warranty liability had a balance of $175,000. Management believes that the warranty accrual is appropriate; however actual claims incurred could differ from original estimates, requiring adjustments to the accrual. The product warranty accrual is included in accrued and other current 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:

SCHEDULE OF RECONCILIATION OF THE PRODUCT WARRANT LIABILITY

Income TaxesStock-Based Compensation

The Company accountsperiodically issues stock-based compensation to officers, directors, and consultants for income taxes usingservices rendered. Such issuances vest and expire according to terms established at the assetissuance date.

Stock-based payments to employees, directors, and liability method whereby deferred tax assetsfor acquiring goods and services from nonemployees, which include grants of employee stock options, are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized before the Company is able to realize their benefits, or that future deductibility is uncertain.

Tax benefits from an uncertain tax position are recognized only if it more likely than not that the tax position will be sustained on examination by the taxing authorities based on technical merits of the position. The tax benefits recognized in the financial statements from such a positionbased 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 basedat the grant date fair value and depending on the largest benefit that has greater than 50% likelihoodconditions associated with the vesting of being realized upon ultimate resolution. Deferred taxthe 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:

The carrying amounts of certain financial assets and liabilities, are adjusted forsuch as cash and cash equivalents, accounts receivable and accounts payable, approximate their fair values because of the effectsshort maturity of changes in tax lawsthese instruments. The carrying values of the line of credit and notes payable approximate their fair values since the interest rates on the date of enactment.these obligations are based on prevailing market interest rates.

Concentrations

Concentrations

Cash.Cash. The Company maintains cash balances at two banks.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 isare financially sound and, accordingly, minimal credit risk exists.

Cash denominated in Australian Dollars with a U.S. Dollar equivalent of $6 and $8 at June 30, 2023 and December 31, 2022, 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 $18 and $23 at June 30, 2023 and December 31, 2022, respectively, was held in an account at a financial institution located in Romania.

Net SalesRevenues. . For the three months ended SeptemberJune 30, 2017 and 2016, 74% and 91%, respectively,2023, 49% of net salesrevenues were generated from the Company’s largest customer, a Tier-1 telecommunications wireless carrier in the U.S, and 26% of revenue was generated from the Company’s second largest customer, a telecommunications customer Verizon Wireless.outside the U.S. For the ninethree months ended SeptemberJune 30, 2017 and 2016, 82% and 89%, respectively,2022, 88% of net salesrevenues were generated from Verizon Wireless.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 June 30, 2023 and June 30, 2022, sales to telecommunications customers accounted for 97% and 99% of total revenues, respectively. For the three months ended June 30, 2023 and June 30, 2022, sales to international customers accounted for 29% and 2%, of total revenue, respectively.

Accounts receivable. On SeptemberFor the six months ended June 30, 2017, accounts receivable related2023, sales to the Company’s largest customer, a Tier-1 telecommunications wireless carrier in the U.S., accounted for 49% of total revenues, and 26% of revenue was generated from the Company’s second largest customer, a telecommunications customer outside the U.S. For the same period in 2022, sales to the Company’s largest customer, a Tier-1 telecommunications wireless carrier in the U.S., accounted for 89%. There was no other revenue from customers in excess of 10% of revenues in either period. For the six months ended June 30, 2023 and June 30, 2022, sales to telecommunications customers accounted for 96% and 99% of total revenues, respectively. For the six months ended June 30, 2023 and June 30, 2022, sales to international customers accounted for 28% and 1%, of total revenue, respectively.

Accounts receivable. At June 30, 2023, the three largest accounts receivable from the Company’s customers represented 75%73%, 12% and 10%, of the Company’s receivables. Ontotal accounts receivable. At December 31, 2016, 94%2022, 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 were from one customer, Verizon Wireless.as of June 30, 2023 or December 31, 2022.

Accounts payable. On SeptemberAt June 30, 2017,2023, accounts payable to the Company’s largest vendor represented 7% while the other twothree largest vendors represented 6%19%, 11% and 5% each.5%, of the Company’s accounts payable. On December 31, 2016,2022, the three largest accounts payable accounts to the Company’s largest vendor represented 29%, while the other two largest vendors represented 9% each.51%, 3%, and 3%, respectively.

Purchases. The Company has established relationships with third party engine suppliers and other key suppliers from whichNet Loss Per Share

Basic net loss per share is computed by dividing net loss by the Company sources components for its power systems. The Company is substantially dependent on its two key engine suppliers, Yanmar Engines Company and Kubota Corporation. Purchases from Yanmar and Kubota, represented 19% and 23%weighted average number of the Company’s total cost of salescommon shares outstanding for the three months ended September 30, 2017 and 2016, respectively; and represented 19% and 20%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 Company’s total costnumber of sales foradditional common shares that would have been outstanding if all dilutive potential common shares had been issued using the nine months ended September 30, 2017 and 2016, respectively.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

Recent Accounting Pronouncements

In May 2014,September 2016, the FASB issued Accounting Standards Update (ASU)ASU No. 2014-09,Revenue from Contracts2016-13, 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 Customers. ASU 2014-09 is a comprehensive revenue recognition standard thatan “expected loss” model, under which companies will supersede nearly all existing revenue recognition guidance under current GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenueallowances based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costsexpected rather than incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein.losses. Entities will be able to transition toapply the standard either retrospectively orstandard’s provisions as a cumulative-effect adjustment to retained earnings as of the datebeginning of adoption.the first reporting period in which the guidance is effective. The Company is in the process of evaluating the impact of ASU 2014-09 on the Company’s financial statements and disclosures.

In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02,Leases. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02standard is effective for allthe Company for interim and annual reporting periods beginning after December 15, 2018. Early2022. Effective January 1, 2023, the Company adopted ASU 2016-13 and that adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the expected impact that the standard could have on its financial statements and related disclosures.

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the SEC did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.position, results of operations, and cash flows.

NOTE 2 – RESTRICTED CASH

As of September 30, 2017,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 cash balance of $14,779,028 included restricted cash of $1,000,423. The restricted cash serves as a collateral to the line of credit (see Note 5) opened with a bank in March 2017.financial statement presentation or disclosures.

NOTE 32 – PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

SCHEDULE OF PROPERTY AND EQUIPMENT

Depreciation and amortization expense on property and equipment for the three months ended SeptemberJune 30, 20172023 and September 30, 20162022 was $65,678$110 and $57,430,$129, respectively. During the three months ended SeptemberJune 30, 20172023 and September 30, 2016, $58,0572022, $125 and $49,979,$125, respectively, of the depreciation expense was included in the balance of cost of sales.

Depreciation and amortization expense on property and equipment for the ninesix months ended SeptemberJune 30, 20172023 and September 30, 20162022 was $185,758$226 and $154,010,$264, respectively. During the ninesix months ended SeptemberJune 30, 20172023 and September 30, 2016, $162,7292022, $220 and $135,000,$255, respectively, of the depreciation expense was included in the balance of cost of sales.

NOTE 3 – NOTES PAYABLE, RELATED PARTY

In May 2023, the Company issued a note payable to its Chief Executive Officer for $160,000. The note is unsecured, due April 25, 2024, and bears interest at 1% per annum.

NOTE 4 – NOTES PAYABLE

Notes payable consist of the following:

SCHEDULE OF NOTES PAYABLE

TheIn 2018 and 2019, the Company has entered into severalfive financing agreements for the purchase of equipment. The terms of these financing arrangements are for a term of 2 years to 5 years, with interest rates ranging from 1.9%3.4% to 6.9%5.0% per annum, and secured by the purchased equipment. AggregateThe aggregate monthly payments of principal and interest of the outstanding notes payable as of June 30, 2023 is approximately $10,000$20 and are due through 2019.December 2023.

NOTE 5 – LINE OF CREDIT

On March 21, 2017,Credit Facility

Effective September 30, 2020, the Company entered into a CreditLoan and Security Agreement (as amended from time to time, the “Loan Agreement”) with Pinnacle Bank (“Pinnacle”). At June 30, 2023, the outstanding balance under the line of credit was $4,927and related documents with Citibank, N.A.the Company had availability under the line of credit of $71. The Loan Agreement initially expired on September 30, 2022, and on November 3, 2022, the Loan Agreement was amended to expire on September 30, 2024.

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.

Borrowings based on receivables bears an interest on the daily balance at a rate of 1.25% above the prime rate, but in no event less than 3.75% per annum (9.50% at June 30, 2023 and 8.75% at December 31, 2022). 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 (10.5% at June 30, 2023 and 9.75% at December 31, 2022).

On April 13, 2023, the Company entered into a Third Modification to the Loan Agreement under which the Company and Pinnacle agreed to add a new section which provides for anPinnacle to lend the Company up to $146 collateralized by certain equipment. At June 30, 2023, the outstanding balance under this section of the Loan Agreement was $136 and is included in the total outstanding balance of $4,927.

On May 25, 2023, the Company entered into a Fourth Modification to the Loan Agreement under which the parties (a) agreed to amend the amount of available advances under the Loan Agreement such that the aggregate amount of up to $1,000,000. Thethe outstanding advances under the revolving credit facility will expire at such timemay not be greater than $6 million, and (b) raised the parties mutually agreeconcentration percentage applicable to certain Tier-1 telecommunication customers from 50% to 75% in the definition of eligible accounts.

Pinnacle may terminate the credit facilityLoan 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 at the electionarising assets of the lender. Interest accrues onCompany. The Loan Agreement also contains a financial covenant requiring the principal amountCompany to attain an effective tangible net worth, as defined, which the Company attained as of revolving loans outstanding underJune 30, 2023.

The Loan Agreement obligates the creditCompany to pay Pinnacle a yearly facility at a rate equal to the greater of (i) the prime rate of interest as published by Citibank, or (ii) the one-month London Interbank Offered Rate plus 2%. Amounts outstanding from time to time under the credit facility are due and payable monthlyfee in an amount equal to the greater of 2%1.125% of the outstanding principal balance or $100, plus accrued interest. Upon the terminationsum of the credit facility, any amounts owed underadvance limit.

NOTE 6 – STOCK OPTIONS

The following table summarizes stock options:

SCHEDULE OF STOCK OPTION ACTIVITY

Effective July 8, 2016, the credit facility will be payable byCompany’s board of directors approved the Company in 48 equal consecutive monthly installmentsPolar Power 2016 Omnibus Incentive Plan (the “2016 Plan”), authorizing the issuance of principal, together with accrued monthly interestup to 1,754,385 shares of common stock as incentives to employees and any other charges beginning the first calendar month after the date of cancellation. The credit facility is also subjectconsultants to an annual finance charge of $2,500, which amount has been waived for the first year. The credit facility is secured by a Certificate of Deposit (restricted cash) account opened by the Company with Citibank in the amountawards limited to a maximum of $1,000,000.

The Company’s credit facility contains negative covenants prohibiting it from (i) creating or permitting350,877 shares to exist any liens, security interests or other encumbrances on the Company’s assets, (ii) engagingone participant in any business activities substantially different than those in which the Company is presently engaged, (iii) ceasing operations, liquidating, merging, transferring, acquiring or consolidating with any other entity, changing its name, dissolving or transferring or selling collateral out of the ordinary course of business, or (iv) paying dividends on the Company’s capital stock (other than dividends payable in stock).calendar year.

As of SeptemberAt June 30, 2017,2023, and December 31, 2022, the Company had not borrowed any funds undertotal outstanding options exercisable into 140,000 shares of the credit facilityCompany’s common stock. The options are fully vested, with exercise prices ranging from $4.84 to $5.60. 30,000 options expire in December 2027 and thusthe remaining 110,000 options expire in April 2028.

The outstanding options had availability of $1,000,000.no intrinsic value at June 30, 2023.

NOTE 67 – SHAREHOLDERS’ EQUITYSTOCK WARRANTS

Warrants

At SeptemberJune 30, 2017,2023, warrant shares outstanding were as follows:

SCHEDULE OF WARRANTS OUTSTANDING

AllAt June 30, 2023, and December 31, 2022, the Company had outstanding warrants outstanding are 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 have a remaining contractual life of 4.25 years. expire in July 2025.

There was no intrinsic value of the outstanding and exercisable warrants at SeptemberJune 30, 2017.2023.

NOTE 7– DISTRIBUTION AGREEMENT WITH A RELATED ENTITY8 – OPERATING LEASES

OnThe Company has two operating lease agreements for its warehouse and office facilities. An amendment dated January 31, 2023, to one of its operating leases that expired on February 28, 2023, extends that lease term for three years commencing March 1, 2014,2023 through February 28, 2026. Lease payments total $2,596, with monthly lease payments ranging from $58 beginning in March 2023, to $74 beginning in March 2024, to $84 from March 2025 to February 2026. The lease amendment was considered a new lease agreement and as a result, the Company entered intorecognized an operating lease right-of-use asset and related operating lease liability of $2,392.

The Company’s second operating lease expires in August 2023. In May 2023, the Company signed an amendment to the second lease extending the term to August 2026. Lease payments will total $1,304, with monthly lease payments ranging from $31 beginning in September 2023, to $37 beginning in September 2024, to $41 from September 2025 to August 2026. The lease amendment to the Company’s second operating lease is also considered a subcontractor installernew lease agreement with Smartgen Solutions, Inc. (“Smartgen”),and as a result, the Company will recognize an operating lease right-of-use asset and related entity that is engaged in businessoperating lease liability of equipment rental and provider of maintenance, repair and installation services to mobile telecommunications towers in California. Under the termsapproximately $1,184 upon commencement of the agreement, Smartgen has been appointed as a non-exclusive, authorized service providernew term.

The components of rent expense and supplemental cash flow information related to leases for the installation, repair and serviceperiod are as follows:

SCHEDULE OF RENT EXPENSE AND SUPPLEMENTAL CASH FLOW INFORMATION

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

SCHEDULE OF SUPPLEMENTAL BALANCE SHEET INFORMATION

Maturities of the Company’s products in Southern California. The agreement has a term of three years fromlease liabilities are as follows (in thousands):

SCHEDULE OF MATURITIES OF LEASE LIABILITIES

Rent expense for the date of execution and automatically renews for additional one year periods if not terminated.

During the threesix months ended SeptemberJune 30, 20172023 and 2016, Smartgen performed $31,0052022 was $649 and $30,654$476, respectively.

NOTE 9 - EMPLOYEE RETENTION CREDITS

The Consolidated Appropriations Act, passed in field services, respectively. Smartgen performed $127,887 and $61,756 in field services forDecember 2021, expanded the nine months ended September 30, 2017 and 2016, respectively.

Smartgen had no purchases fromemployee 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. Due to revenue declines the Company experienced, it qualified for approximately $2,000 of ERC during the three monthsyear ended SeptemberDecember 31, 2021. The Company believes that it has complied with the ERC eligibility requirements, and as of December 31, 2022 and June 30, 2017. Smartgen had $1,1362023, the balance of $2,000 is presented as ERC receivable in purchases of goods, parts and services from the Company during the nine months ended September 30, 2017. Smartgen made no purchases from the Company during the nine months ended September 30, 2016.accompanying balance sheets.

NOTE 8 – INCOME TAXES

The provision for income taxes consists of the following for the nine months ended September 30, 2017 and September 30, 2016:

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities at September 30, 2017 and at December 31, 2016 are as follows:

Effective January 1, 2007, the Company adopted FASB guidelines that address the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under this guidance, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. This guidance also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. At the date of adoption, and as of September 30, 2017 and December 31, 2016, the Company did not have a liability for unrecognized tax benefits, and no adjustment was required at adoption.

The Company files income tax returns in the U.S. federal jurisdiction and various states. The Company is subject to U.S. federal or state income tax examinations by tax authorities for tax years after 2010.

The Company’s policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of September 30, 2017 and December 31, 2016, the Company has no accrued interest or penalties related to uncertain tax positions. Additionally, tax years 2010 through 2016 remain open to examination by the major taxing jurisdictions to which the Company is subject.

The Company has refundable income taxes of $1,257,585 as of September 30, 2017. This was a result of estimated tax payments for the first quarter of 2017. The refundable income taxes will be used to offset any taxable net income in the annual tax return.

NOTE 9 – COMMITMENT AND CONTINGENCIES

Legal Proceedings

From time to time, the Company may be involved in general commercial disputes arising in the ordinary course of its business. The Company is not currently involved in legal proceedings that could reasonably be expected to have material adverse effect on its business, prospects, financial condition or results of operations.

Sales Backlog

As of September 30, 2017, the Company had a backlog of $1,546,777. The amount of backlog represents revenue that the Company anticipates recognizing in the future, as evidenced by purchase orders and other purchase commitments received from customers, but on which work has not yet been initiated or with respect to which work is currently in progress. Product delivery to fulfill a customer’s purchase order depends on the customer’s requested ship date, which may require the Company to hold on to finished goods for weeks or months. A customer could have delays in preparing the site where its product will be installed, causing the Company to delay product delivery. Finished product tied to a purchase order, but which has not been delivered to the customer is counted as part of the Company’s backlog.

The Company’s backlog consists of 62% in purchases of its DC power systems by telecommunications customers, of which 45% is from the Company’s single largest telecommunications customer and 17% from one of two Tier 1 telecommunications companies that granted the Company approved supplier status during the first quarter of 2017. In addition, the Company’s backlog includes 28% in purchases from military contractors, and 10% from other markets. The Company believes the majority of its backlog will be shipped within the next nine months. However, there can be no assurance that the Company will be successful in fulfilling such orders and commitments in a timely manner or that the Company will ultimately recognize as revenue the amounts reflected in its backlog. 

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.

OverviewReferences 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 direct current, or DC power generators, renewable energy and cooling systems for applications primarily in the telecommunications market and, to a lesser extent, in other markets, including military, electric vehicle, charging, cogeneration, distributed powermarine and uninterruptable power supply. industrial. We are continuously diversifying our customer base and are selling our products into non-telecommunication markets and applications at an increasing rate. The changes in customer diversity are reported in the financial section.

Within the telecommunications market,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). Within this market,

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 three configurations of our DC power systems, with output power ranging from 5 kW to 2050 kW:

Sales of our DC generators to the telecommunications market continues to be the largest contributor to our net sales representing 97% and 96% of total net sales for the three and six months ended June 30, 2023, as compared to 99% for each of the three- and six-month periods in 2022. Our DC generators are primarily used as backup power for cellular sites. Our hybrid and DC solar hybrid power systems offer prime power for sites that have bad-grid or are off-grid. Our systems are available in diesel, natural gas, liquidLPG / propane gas, gasoline and biofuelrenewable fuel formats, with diesel, natural gas and liquid propane gas being the predominant formats,formats.

We experienced a significant increase in sales of our DC generators to telecommunications customers in international markets during the three and six months ended June 30, 2023, as compared to the same periods in 2022. Sales to telecommunications customers in international markets represented 29% and 28% for the three and six months ends June 30, 2023, as compared to 2% and 1% of our total net sales for the same periods in 2022. We have several telecommunications customers in the south pacific region purchasing our DC generators to develop the telecommunications infrastructure in this region. During the second quarter of 2022, we received purchase orders from our largest telecommunications customer in the South Pacific Islands totaling $6.2 million for our DC power generators for off-grid applications to supply rural areas with broadband services. As of June 30, 2023, we shipped all but two generators of the $6.2 million order.

We believe the implementation and ongoing development of 5G networks along with programs to develop the telecommunications infrastructure in rural and underdeveloped countries will continue to fuel our growth in the telecommunications market over the next five to ten years.

We continue to work on diversifying our customer base and are capableselling 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. Our EPA certification of being remotely monitored1KS 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.

In May 2023, we announced plans to expand our mobile offerings by upgrading our global network management tool usingmobile CHAdeMO EV chargers to the universal combined charging system standard to reach the mobile EV charging market. We are taking orders for our proprietary software technology, allowing usnew line of EV charges and expect to have them available before the end of the first quarter of 2024. Mobile EV chargers are used for emergency roadside service providing a fast-charging solution for EVs that have run out of charge before reaching a stationary charging facility.

Solar combined with the Toyota 1KS and 4Y engines along with our customersalternators 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 collectmarket 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 data in comfort and updatefuel economy. Also, there are increasing restrictions on the use of diesel and gasoline engines in many lakes and waterways making way for our products remotely.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.

We believe 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.

Following a 2.5-year delay, we launched the Toyota 1KS series, reaching a key milestone in the Company’s evolution. We just started shipments of the Toyota based generators and expect production volumes will continue to build as production learning curves lead to efficiencies.

We believe the Toyota prime power engines, when configured into generators, will provide strong opportunities for growth and diversification in line with the Company’s long-term plan. This engine platform is expected to easily facilitate the shift from diesel to natural gas and LPG (liquid petroleum gas, aka propane or butane). LPG and natural gas fuel reduce carbon emissions between 16% to 27% and combined with increased fuel efficiency of DC generators and solar technologies emissions become very minimal. The Toyota 1KS prime power engines have much lower maintenance requirements when compared to diesel engines and the current LPG and natural gas backup generators from the major brands. The Toyota 1KS engine will be focused on applications in telecommunications, microgrids, EV charging, and CHP (combined heat and power).

The delay in the launch was caused by several factors, including a challenging hiring market for specialized engineers, and problems with combustion control and lubricating oil temperature regulation (note that the Toyota engine itself presented no problems), which have been resolved, field-tested, and implemented into engineering and production. Lastly, disruptions attributable to long lead times for components and availability also negatively impacted the development schedule.

Despite the delay, we did not stop our marketing efforts and are now transitioning from sales contacts to sales, which includes the production of sales literature and field demonstrations. The launch was planned for 2 years back, and in anticipation the Company has purchased a large number of engines, requiring significant working capital, but is well positioned to meet anticipated demand. This inventory is expected to convert back to cash as product sales accelerate. As a hedge against the world supply chain problems, the Company has maintained large inventory levels on critical items.

We install, sell

Impact of COVID-19 and serviceInflation

COVID-19. The COVID-19 pandemic has negatively impacted business and industries all over the world since March 2020. The pandemic has had a significant negative impact on our products withinoverall operations including revenues, productivity, gross margins and liquidity. The pandemic has resulted in labor shortages, disruptions in the chain of supply, and higher material costs. During the three and six months ended June 30, 2023, supply chain constraints that affected timely delivery of raw materials required to complete our identified markets throughDC power systems negatively affected our direct salesmanufacturing productivity levels. Labor shortages resulted in excess overtime for the existing labor force and a networkreduction in engineering projects. We believe that Covid-19 will be an ongoing challenge for years to come and to adapt will require us to further globalize our vendors, engineering, and customers.

Inflation. The continuing impact of independentthe COVID-19 pandemic, higher inflation, the actions by the Federal Reserve to address inflation, most notably sustained increases in interest rates, and rising energy prices create uncertainty about the future economic environment which will continue to evolve and, we believe, has impacted the Company’s business in 2022 and may continue to impact its business in 2023. The implications of higher government deficits and debt, tighter monetary policy, and potentially higher long-term interest rates may drive a higher cost of capital for the business and an increase in the Company’s operating expenses.

Recent Business Events

In September 2022, we renewed our master service providersagreement with our largest customer, a U.S. Tier1 telecommunications customer. The agreement included price adjustments to our products which we believe will help offset the effects of inflation and dealers.improve our margins. For the three and six months ended June 30, 2023, 49% of our total net sales in each period were derived from our largest customer and 51% of our total backlog as of June 30, 2023 are purchase orders from our largest customer.

Our sales backlog as of June 30, 2023 was $5,936, of which our telecommunications customers in the U.S. accounted for 66%, telecommunications customers outside the U.S. accounted for 23%, customers in military markets accounted for 6%, customers in the marine markets accounted for 2%, and customers in other markets accounted for 3%.

We 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. Our 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 weto meeting the telecommunications need for larger and more compact generators our larger models have established strategic relationships with local service partners in international marketshigh interest from micro-grids, peak power shaving, and EV charging.

We believe that Covid-19 will be an ongoing challenge for years to jointly promote, distributecome and serviceto adapt will require us to further globalize our products.vendors, engineering, and customers.

Critical Accounting Policies and Estimates

OurThe preparation of the Company’s financial statements have been prepared in accordanceconformity with generally accepted accounting principles generally accepted in the United States of America. The preparation of these financial statements(“GAAP”) requires usmanagement 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 that may have a significant impact on the portrayal of our financial conditioncan be subjective and complex, and therefore, actual results of operations. We base ourcould differ materially from those estimates under different assumptions or conditions. Management bases its estimates on historical experience and on various other 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 offor 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 materially from thesethose estimates.

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

Warranty Costs. We provide limited warranties for parts and labor at no cost to our customers within a specified time period after the sale. The warranty terms are typically from one to five years. Provisions for estimated expenses related to product warranties are made at the time products are sold. These estimates are established using historical information about the nature, frequency and average cost of warranty claim settlements as well as product manufacturing and recovery from suppliers. Management actively studies trends of warranty claims and takes action to improve product quality and minimize warranty costs. We estimate the actual historical warranty claims coupled with an analysis of unfulfilled claims to record a liability for specific warranty purposes. Our product warranty obligations arestatements included in other accrued liabilities inour Annual Report on Form 10-K for the balance sheets. We accrued a liability for warranty reserve of $175,000 on each offiscal year ended December 31, 2016 and September 30, 2017. Management believes2022, that the warranty accrual is appropriate; however actual claims incurred could differ from original estimates, requiring adjustments to the accrual. The product warranty accrual is allocated to current liabilities in the balance sheets.

Inventory. We write downimpacted our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value-based upon assumptions about future demand, future pricing and market conditions. If actual future demand, future pricing or market conditions are less favorable than those projected by management, additional inventory write-downs may be required and the differences could be material. Once established, write-downs are considered permanent adjustments to the cost basis of the obsolete or unmarketable inventories.

Income Taxes.Our estimate of income taxes payable, deferred income taxes and the effective tax rate is based on an analysis of many factors including interpretations of federal and state income tax laws, the difference between tax and financial reporting bases of assets and liabilities, estimates of amounts currently due or owed in various jurisdictions, and current accounting standards. We review and update our estimates on a quarterly basis as facts and circumstances change and actual results are known. We recognize income taxes for the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets are recognized for the future tax consequences of transactions that have been recognized in ourcondensed financial statements or tax returns. A valuation allowance is provided when it is more likely than not that some portion or the entire deferred tax asset will not be realized.and related notes included herein.

Effects of Inflation

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

Impact of New Accounting Pronouncements

See “Note 1 – Organization and Summary of Significant Accounting Policies – Recent Accounting Pronouncements” of the Notes to our condensed financial statementsstatements.

Financial Performance Summary and Outlook

Our net sales for the three months ended June 30, 2023 were $5,587, which represents a 31% increase in net sales as compared to $4,274 for the three months ended June 30, 2022. Our net sales for the six months ended June 30, 2023 were $9,777, which represents a 22% increase in net sales as compared to $7,983 for the same period in 2022.