Polar Power, Inc. 10-K

Item 1. Business 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 and residential and commercial power. Within the telecommunications market, our DC power systems provide reliable and low-cost DC power to service applications that do not have access to the utility grid (i.e., prime power applications) or have critical power needs and cannot be without power in the event of utility grid failure (i.e., back-up power applications). Within this market, we offer the following three configurations of our DC power systems, with output power ranging from 5 kW to 30 kW: ● DC base power systems . Our basic system which is centered around a DC generator. Applications include both prime power and backup power. ● DC hybrid power systems . Our basic DC power system with added energy storage via lithium-ion or other battery chemistries. ● DC Solar hybrid power systems . Our DC hybrid power system with added renewable energy (i.e., solar panels). 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. We were incorporated in 1979 in the State of Washington as Polar Products, Inc., and in 1991 we reincorporated in the State of California under the name Polar Power, Inc. In December 2016, Polar Power, Inc. reincorporated in the State of Delaware. Our internet website address is https://polarpower.com/. Recent Business Events During 2020, as a result of Covid-19, the telecommunications industry experienced a slowdown in construction activities due to disruptions in the global supply chain of telecommunications related components, operational shutdowns and stay-at-home orders. These disruptions negatively affected our U.S. Tier-1 telecommunications customers which, in turn, resulted in a significant reduction in our new equipment orders and slow-down in shipments of existing orders. As a result of these factors, we experienced a 64% decline in net revenues in 2020 as compared to 2019. During 2020, in response to the decline in revenues from our Tier-1 telecommunications customers, we diversified our sales efforts to develop power systems configured inside containers designed for installation in remote off-grid applications (i.e., in applications not involving a connection to an electrical power grid). During the fourth quarter of 2020, we began shipment of off-grid systems to Tier-1 telecommunications providers. We believe these systems can provide significant fuel efficiency for both backup and prime power applications in remote areas in the U.S. and globally. Although our initial orders for these systems were from U.S.-based Tier-1 telecommunications customers, we believe the market opportunity for these remote systems may be significant in emerging markets such as Africa and Asia where over 60% of the telecommunications towers are connected to a bad-grid or are completely off-grid. The slowdown in sales from our Tier-1 telecommunications customers during the first half of 2020 also led us to further diversify our sales efforts to increase sales to the U.S. military, international telecommunications customers and Tier-2 telecommunications customers in the U.S. During the second half of 2020, we experienced measurable success in our diversification strategy. We anticipate in 2021 our sales to new customers, combined with increased sales of new products introduced during 2020, will return to pre-2020 historical sales levels. 1 The Covid-19 pandemic has had a significant negative impact on our overall operations including revenues, productivity, gross margins and liquidity. Management’s early focus on training, processes and procedures kept our infection rates to below 1% with no company-wide COVID-19 spread. Due to the slowdown in sales to our Tier-1 telecommunications customers, our sales mix changed to smaller quantity custom orders. Small custom orders with frequent line changeovers caused less process automation which, in turn, led to higher labor costs and higher setup times. Since 2016, we experienced high double-digit sales growth which resulted in us making strategic investments to increase our production capacity to $50 million annual revenue through an increase in plant space and the addition of automation equipment. The unanticipated drop in sales during 2020 caused a disproportionate distribution of fixed and semi-fixed overhead costs across much lower revenues. During this period of lower sales, we invested in cross training our direct labor force across diverse processes and equipment which will make our workforce more agile and productive in the future. In addition, during 2020, our sales force directed their efforts into additional markets and regions to reduce customer and regional concentration. During 2019, we developed a lower emission solar hybrid power system which integrates solar energy storage with natural gas/LPG (liquified-petroleum gas) powered generators that targets 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 per day) DC power generation applications. Our new product is equipped with a 90,000-hour lifecycle engine which provides longer life, lower emissions and operating costs. Certification of this product occurred in December 2019, when we received our certificate of conformity from the U.S. Environmental Protection Agency, or the EPA, for our small spark-ignition Toyota engines. In the second half of 2020, we began shipments of our natural gas-powered DC power systems. Our new product, equipped with our proprietary control systems, is designed for 24/7 prime power application providing DC power outputs between 5 kW to 22 kW. We expect that the bad-grid, off-grid markets, which include telecommunications towers, commercial and residential backup, electric vehicle charging, “Mini-Grid” and various others, will expand the market for our natural gas/LPG product lines in both the U.S. and in international markets. We plan to develop new configurations of DC power system, battery storage and solar to optimize the match between our solutions and various application needs. Markets We primarily operate within the telecommunications market and, to a lesser extent, in other markets, including military, electric vehicle charging and residential and commercial power. Telecommunications We provide power generation equipment for the telecommunications markets. Our equipment provides backup power to grid connected mobile tower sites during power outages resulting from severe weather like hurricanes, wildfires and floods. Most telecommunications towers are equipped with battery backup for short term power outages. Our DC power generators are installed to address longer-term disruptions in power. We also deliver products that provide prime power for off-grid telecommunications tower sites installed in remote and rural areas where reliability of the power grid is suspect. Since 2012, the telecommunications market is our largest market segment and has contributed over 95% of our annual revenues. Since 2012, we developed products and configurations that target telecommunications applications with key features like high fuel efficiency, light weight and compact design when compared to our competitors’ products. These features allow our telecommunications customers to install equipment requiring a smaller footprint on building roof tops and compact commercial sites while also requiring less fuel storage due to the fuel efficiency of our products. In the past five years, we have gained approval and certifications from four top Tier-1 telecommunications operators in the U.S. market. With over 90% of the world’s telecommunication towers located in non-U.S. territories, we decided to establish international sales offices in Poland, Romania, Australia, Namibia, U.A.E., Australia and South Africa to provide long term growth. In 2017, we began investments into international markets and have recorded a steady increase in sales every year since. In 2020, we delivered over hundred natural gas-powered DC power systems to a leading Japanese telecommunications tower operator while delivering production quantities to a Tier-1 telecommunications tower operator in Papua New Guinea. 2 In the U.S. market, over 95% of the telecommunications towers are connected to a power grid, thereby only requiring backup power generation in equipment in case of an emergency loss of power, while in the emerging markets of Africa and Asia, a significant percentage of telecommunications towers are not connected to the grid thereby requiring fuel-efficient prime power equipment to provide power by charging the batteries. Most prime power sites also require integration with solar and storage batteries to utilize renewable energy during the day while generators and batteries provide power during nights and/or on cloudy days. In the U.S., telecommunications companies have focused their efforts on adding generators to provide backup power at existing sites, while in the international market telecommunications companies are in expansion phase of adding new sites to the infrastructure to provide coverage in rural and remote areas. During 2019, the telecommunications infrastructure in the U.S. and other developed nations was known to have sufficient capacity to satisfy the needs of average smart phone users. However, the advent of 5G technology has resulted in a digital revolution within both the commercial and consumer sectors leading to an exponential increase in data usage. We believe that the need for backup power equipment in the telecommunications services industry which consists of digital infrastructure (e.g., fiber, telecommunications towers, active networks and data centers), operators (e.g., mobile and fixed broadband, data centers and cloud computing) and applications (e.g., broadband connections, telephones, video streaming and e-commerce), holds promising growth opportunities as 5G use expands in the near and long term. The next generation of wireless network capabilities offer potential revolutionary applications far beyond smart phones and mobile devices. The 5G mobile network is intended to converge connectivity, intelligent edge and Internet of Things (IoT) technologies which is expected to result in an increase in telecommunications tower sites in both the U.S. and abroad. In the near term, 5G will deliver broadband-like services such as high-definition streaming video to a cell phone. Businesses will benefit from using 5G for data monitoring and cloud-native 5G networks to compute and store data locally. All of these applications dramatically scale up data usage which requires an increase in infrastructure and an increase in power and backup generators. The pervasiveness of 5G, including reliance by users on, among other things, local weather, traffic conditions, self-driving vehicles, wearable health monitoring devices that automatically informs doctors, stores automatically ordering items sold on virtual carts, farmers automated irrigation system with tracking sensors, will require robust backup equipment at telecommunications sites. We believe higher data usage will require higher reliability backup systems that are fuel efficient and are located in proximity to the point of use. In urban environments, roof-top space, weight of the equipment and the amount of fuel storage are critical factors in the selection of backup equipment. As one of the leading providers of DC power generation equipment, we have demonstrated these benefits to telecommunications providers for decades and we are therefore encouraged with the prospect of infrastructure expansion in this space that requires fuel efficient and lower emission power generation equipment. Military Since 1979, we have been developing and marketing products to the U.S. military and large defense contractors in the U.S. and international markets. The need for low voltage DC power generation systems are vital for military operations and commonly used to charge storage batteries, provide backup emergency power, or provide startup power for aircrafts or weapon systems. During the past decade, digitization of the military accelerated exponentially to support modern information, communication, and weapon systems. The need to process information rapidly has led to digitization of command, control, communications, computers and intelligence across both combat support and service support. This expansion in data transfer and storage has led to an increase in energy needs, which requires efficient power generation equipment that can charge batteries or directly power these systems. A digitized battlefield includes sensors, information processing, data distribution, electronic countermeasures, all requiring with few exceptions, 28 volts DC or 48 volts energy at point of use. Our DC generators designed for military applications provide: ● enhanced mobility, reliability and maintainability; 3 ● improved fuel efficiency; ● reduced system size and weight; ● reduced infrared and acoustic signatures; ● increased survivability in rugged combat operations; and ● reduced total cost of ownership. In 2016, the military began the Advanced Medium Mobile Power Sources, or AMMPS, a U.S. Department of Defense program to develop and deliver 5 kW-60 kW output ranging generators in either a skid, trailer mounted, or microgrid configurations to replace legacy standalone AC generators. The new generation of mobile power generators combined with solar and wind power can function as sustainable sources of DC and AC power in remote areas. The new generation of AMMPS power systems are required to provide 21% higher fuel efficiency, lower noise, weight, 90% reliability and be capable of performing in extreme environments. During 2020, we directly and jointly partnered with defense contractors, provided DC hybrid power systems, with integrated controls providing higher fuel efficiency than legacy AC generators currently in use. Improvements in sensors, navigation and communication technologies have led to increased integration of situational awareness systems that allow all combat assets to communicate and coordinate both defensive and offensive efforts during combat. In earlier combat vehicle designs, these surveillance systems were powered by the main auxiliary vehicle battery, which required the vehicle’s main engine to continue operating to power auxiliary battery systems. A decade ago, we began delivering compact 3 kW – 15 kW DC auxiliary batteries to power these communication and reconnaissance systems thereby improving fuel efficiency of the combat and vehicles when deployed. During the decade we have delivered several configurations of these auxiliary power units to the military, which vary in function from battery charging to supplying power to weapon systems. During 2020, we were contacted by a defense contractor to develop and deliver 50 kW high voltage power systems for auxiliary power use in military vehicles. We are currently in the process of development of next-generation higher output power DC power system. After conclusion of the testing of this higher power DC power system, we plan to introduce a configuration of this product to the residential and commercial microgrid market in emerging markets. We believe 50 kW standalone DC power system, powered by natural gas or LPG would be ideal for rural communities in emerging markets such as Africa and Asia. The capacity of 50 kW is sufficiently large enough to power a small rural hospital, dairy farm and a cluster of houses in a small village. The ease of connecting our DC power system with solar, battery packs or any other source of energy like wind can introduce a sustainable cost-effective solution in emerging markets. Electric Vehicle Charging According to Frost & Sullivan, a leading market consulting firm, the electric vehicle market in the U.S. will flourish over the next five years. The firm anticipates that due to upcoming incentives for electric vehicles the number of electric vehicles in the U.S. will grow from 1.4 million in 2020 to 7.0 million in 2025. This increase will require approximately 5.0 million additional charging stations nationwide to support the cumulative growth of electric vehicles. A 2018 article by McKinsey & Company entitled “ The potential impact of electric vehicles on global energy systems ” stated that although a modest increase in electric vehicle sales of 5% will not lead to a shortage in electricity since most new capacity can be delivered by renewables like solar, wind, and gas powered generation. This modest increase in sales may have a significant impact on peak loads, especially in concentration points of electric vehicle charging and during the evening peak times when most electric vehicle users connect their vehicles for charging. The report claims unmanaged peak load increases due to electric vehicle charging will require increases in costly sub-station upgrades. We believe that the more cost effective option will be investing into battery storage at the utility level to manage the peak loads or flexible electricity costs for electric vehicle charging in an effort to discourage peak load charging. 4 Regardless of how the peak charging issue is resolved, most homes have not been designed to allow for fast charging of electric vehicles. In order to address this issue, in 2020 we completed the design of our natural gas-powered electric vehicle charger and backup generator. Our electric vehicle chargers, being independent of the grid, are designed to automatically fast charge connected electric vehicles at home on a daily basis while providing backup power during power outages. In addition, the heat generated while charging is captured and delivered to heat the home, heat water for laundry, or heat the pool. Our electric vehicle charger was initially designed in 2009 as a diesel-powered charger for roadside assistance and emergency services for most major automotive manufacturers. Our chargers were initially used by “AAA” for roadside assistance to rapid charge stranded out of charge vehicles. In 2020, we improved this product by replacing the diesel engine with a heavy duty 90,000-hour lifetime Toyota natural gas engine. This product targets residential customers that own or are expected to own electric vehicles during the next five years. With the anticipated stress on utility grids due to an increase in the number of electric vehicles that require charging, combined with the fact that most homes are unable to provide fast charging, we believe that an independent natural gas-powered electric vehicle charger would be ideal and cost effective. Currently, many electric vehicle owners exceed the base power usage at home resulting in peak hour usage penalties which diminishes anticipated cost savings of using electric vehicles. Our residential natural gas-powered EV charger eliminates these costs while also providing backup power in case of emergencies. The benefits of fast charging with a natural gas generator, as opposed to using the electric grid, includes avoids peak rate charges, a reduced carbon footprint and the opportunity to provide heating and air conditioning, through combined heat and power or CHP systems that utilize waste heat from the generator/charger which we believe is a compelling market opportunity for our new product. Residential and Commercial Power – Mini-Grid Increased use of electricity worldwide is directly related to humanity’s improvement in the quality of life. Increased global urbanization has resulted in many governments investing in power plants and providing infrastructure to satisfy the growing demand for electricity. Similar needs of the rural populations have been largely ignored worldwide due to the isolation, low density and population spread over vast areas resulting in an increased cost of infrastructure. Even in rural areas where the infrastructure was built to deliver electricity, frequent blackout and infrastructure failures are commonplace and often not repaired for long periods. According to recent World Bank data, 13% of the world’s population, approximately 950 million, still lack electricity compared to 25% in 1994. While 47% of the world’s population still lives in rural areas, about 25% of those living in rural areas lack electricity. Globally, 954 million people live without electricity of which 547 million are located in Sub-Saharan Africa, 254 million are located in South Asia, 71 million are located in East Asia, and 82 million in other areas. During the past decade, developments in renewable energy and battery storage have provided an alternate method to resolve this energy inequity between rural and urban populations worldwide. However, due to weather and costs of such systems and technologies are still at an early stage of mass adoption. We envision a hybrid system with natural gas or LPG integrated with a solar and battery system to generate power during peaks and valleys of demand that we believe would be more cost effective and reliable than the current systems in place. These “Mini-Grid” hybrid systems would generate between 5kW – 25kW of power on 24/7 basis and provide electricity for a small housing unit, commercial facility or a school building. Our Mini-Grid system uses natural gas or LPG as primary fuel source, the same fuel as cooking fuel in rural and remote regions worldwide. For decades, many governments have been allocating resources to eliminate solid fuels like wood, solid waste as cooking fuels from rural and remote communities. Significant progress has been made by providing economic subsidies for use of natural gas or LPG as cooking fuel to reduce pollution. In 2017, we established sales offices near the emerging growth countries of Namibia, Australia and U.A.E. setup to develop strategic alliances with distributors to promote our residential solutions to communities living in bad-grid and off-grid areas. 5 Our Competitive Strengths We have over a 30-year history and have developed a reputation as a proven supplier of reliable and advanced proprietary technology products to customers within the telecommunications, military, commercial, industrial and marine markets. We have invested significant capital and engineering expertise to develop power generation systems that are environmentally friendly and fuel-efficient. We further believe our success will be based on the following key competitive strengths: ● Proprietary Technologies. Our decades of research and development has led to the development of DC power systems with output ranging from 5 kW – 30 kW. Our DC power systems integrates our proprietary DC alternator with electronic controls to monitor and control the power being outputted to the equipment, which is then coupled to an engine assembly and cooling systems. Our DC power system output voltage can be configured between 12 V – 600 VDC to match the precise application needs (e.g., telecom equipment, electric vehicle charger, etc.). Over the past decades we have developed proprietary charge algorithms for most commercially available batteries and match charge algorithms to battery model or chemistry prior to initiating a charge cycle. Unlike AC power systems, our DC power systems are directly connected to the battery source and therefore optimized for safely charging a particular battery chemistry. AC power systems are indirectly connected to a commercially available unknown battery charger that converts the AC output to DC voltage. The presence of inefficient or low-quality charger can significantly lower charge efficiency of AC systems and may reduce battery life in some cases. ● Engineering Expertise. Over the past three decades we have strategically constructed a product portfolio that focuses on improving energy efficiency by developing DC power output-based equipment where all major components and technologies are developed in-house, and proprietary manufacturing processes created in-house to ensure product reliability and long life. Our leading competitors approached the need for DC equipment in the telecom, military, and industrial markets by modifying legacy AC generators with conversion equipment resulting in significantly lower efficiency when compared to DC power systems. Being one of the first companies to develop DC power systems, we developed proprietary components ranging from alternators, control systems and charging algorithms for various battery chemistries. We have focused on providing the lowest cost of ownership with demonstrated long life of our equipment during the past thirty years. Lowest cost of ownership is complemented with the best fuel economy, best in class weather resistance provided by aluminum enclosures and customized algorithms matching battery chemistries and operational profiles. ● Manufacturing Competitiveness. We believe that our vertical integration approach to manufacturing lowers our production costs and improves our overall operational efficiency. In addition, vertically integrated manufacturing of our proprietary technologies such as DC alternators, charge controls and battery management systems, provides us with a greater control and protection over our intellectual property. We believe our modular approach to manufacturing provides us with the lowest manufacturing costs for our proprietary technologies while giving us the ability to deliver customized solutions to our Tier-1 wireless telecommunications customers. ● Strong Customer Base. Our customer base consists of large telecommunications companies, military sub-contractors and industrial companies. Tier-1 telecommunications customers have represented over 90% of our aggregated sales for the past five years. Initial demand of our products by telecommunications customers was primarily based on the need to provide backup power during electricity outages. While our competitors provided and continue to provide legacy AC generators with DC conversion devices, we elected to invest significant time and capital in the research and development of products with a lowest cost of ownership. Certification of our products by Tier-1 telecommunications customers is time intensive and takes upwards of three years of field trials to receive final product acceptance. This thorough approach to vendor selection reduces the number of vendors selected by our telecommunications customers and has dramatically reduced the number of competitors in the U.S. markets. Currently, a significant percentage of our U.S. sales are to national Tier-1 telecommunications providers with multiple facilities. In 2020, we diversified our sales efforts to include Tier-2 telecommunications customers, off-grid remote area products and residential charging. In the international markets, our customers are regional Tier-1 telecommunications providers. We have established sales offices in emerging markets like Namibia, U.A.E., Australia, Poland and the Dominican Republic. Our sales team directly markets to Tier-1 telecommunications companies in their regions. 6 ● Experienced Management Team. Our Chief Executive Officer and key engineers combined have over 100 years of engineering and production experience in the design and manufacturing of power systems. Our engineers have equipment design experience, as well as hands-on skills to build prototypes. A key factor demonstrating our management’s abilities and our engineering aptitude can be found in our successful track record over the last 25 years of executing fixed-cost research, design and engineering contracts, with an average of eight projects per year. Business Strategy For the past three decades we have been promoting the use of DC power systems where DC power is the primary power in use. The telecommunications tower application is the largest user of DC power, in both grid and off-grid connected sites. Furthermore, we believe that the growth in wireless telecommunications infrastructure in the U.S. and international markets has led to a rapid rise in the need for DC backup power systems. With over 30 years of experience and reputation within the DC power systems market, we are working to increase awareness, availability and affordability of more efficient DC-based products as a backup power and charging sources within the telecommunications industry. Because of the increased power outages during emergencies and natural disasters, existing and new wireless installations need to be upgraded to provide reliable operations during times of emergency. The primary elements of our business strategy include: ● Further develop U.S. mobile telecommunications market. We continue to invest capital into our sales and marketing efforts to demonstrate our DC power systems to the top Tier-1 wireless telecommunications providers and more than 500 small wireless and cable operators in the U.S. Our goal is to further diversify our customer base. We believe the rapid transition towards 5G will result in an increase in demand for back-up power generators and that our new LPG / natural gas DC power systems will allow us to better compete on an economic basis with our competitors that provide AC power systems. ● Expand global sales to bad-grid or off-grid markets. The increase in telecommunications subscriber base in rural and remote areas in emerging countries has increased the deployment of telecommunications sites in off-grid and bad-grid areas. During 2020, approximately 83% of our DC power systems sales were to U.S. telecommunications customers, which we believe represents only 4.7% of the total global telecommunications market. We believe that the lack of a stable electric infrastructure in rural regions of many developing nations provides significant opportunity for our products in both off-grid and bad-grid location. During 2020, we demonstrated our products to several prospects in need of off-grid and/or bad-grid solutions which resulted in several initial orders. ● Further develop our new LPG and natural gas DC power systems. With the increased growth in off-grid and bad-grid telecommunications sites, emissions generated by telecommunications towers is beginning to be a major contributor of pollution and greenhouse gases. In 2019, we began the development of a lower emission LPG and natural gas DC power generator for use in rural off-grid and bad-grid sites. We initiated this development by partnering with world’s largest natural gas engine manufacturer, Toyota Engines, located in Japan. Subsequently, we integrated engine control systems utilizing control technology from Bosch, located in Germany, and concluded by receiving certification from the EPA in December 2019 to sell our new product in all 50 states in the U.S. Upon certification, we began marketing this low emission natural gas solution to telecommunications customers worldwide and in the midst of the COVID-19 pandemic we secured several orders for natural gas configured backup and prime power applications. During 2020, we began shipments of our DC natural gas generators to several domestic and international Tier-1 telecommunications customers. In 2021, we plan to expand our sales and service network for our natural gas generators, targeting residential and telecommunications customers in the U.S. while also targeting Tier-1 telecommunications customers in emerging nations with solar hybrid natural gas generators for off-grid markets. 7 ● Expand renewable solar energy product offerings . Developing regions like Africa, South East Asia and Latin America lack an electric utility infrastructure to support the installation of grid connected telecommunications towers in remote areas. Due to these challenges, telecommunications companies are installing hybrid power generation systems that consist of solar panels, batteries and fossil fuel powered generators. Installing fuel inefficient generators combined with solar and batteries without any integration is proving to be cost prohibitive. Several local government programs to subsidize the adoption of solar and battery storage along with generators in off-grid telecommunications towers have failed due to lack of quality components and integration. In 2020, we began demonstrating our hybrid systems using natural gas fuel powered generators integrated with solar and battery storage. We plan to conclude our testing in the first half of 2021, which we believe can then provide us the required credentials to receive subsidies for our customers, thereby making us competitive in this marketplace. Our Technologies In 1991, we began introducing DC power systems to provide backup and prime power for off-grid and bad-grid applications. Our initial products were predominantly designed for military applications and used as auxiliary power for vehicles, tanks and radar sites. In the late 1990s, we introduced our DC power systems for commercial applications like mobile telecommunications towers, solar refrigerators and oil field applications. In 1992, we developed our own proprietary DC alternator to improve system efficiency, reduce costs and lower weight. Our design replaced a conventional 4-pole, three-phase designs with a light weight, low cost 12-pole and 32-pole designs (i.e., designs containing 12 or 36 magnetic poles) incorporating either 6 or 3 phases (i.e., containing 6 or 3 power circuits). Another unique aspect of the design of our DC alternators is the elimination of bearings, internal wiring connections, and an exciter (i.e., a device which supplies the magnetizing current to generate working flux) to provide a longer life cycle than conventional motor designs in the marketplace. In 2002, we introduced our 6200 PMHH alternator, which combines the attributes of homopolar alternator technology with a permanent magnet. When mounted on an engine and operated at either a fixed or variable speed, the model 6200 PMHH generates a precise amount of regulated voltage and current. The DC output can then be used to power electronics or charge batteries. In 2006, we introduced our next generation 8000 Series alternators designed for higher power and voltage applications, which features our proprietary 32-pole permanent magnet alternator technology. The 8000 Series offers high efficiency at a lower cost while integrating our proprietary digital control system, Supra Controller™, that manages and optimizes alternator output. Our Supra Controller™ networks all components via CAN bus communications and software and has the ability to control, analyze, monitor, record and communicate all key system parameters to ensure efficiency, safety and reliability of the overall system. The ability to remotely monitor and calibrate each system parameter, receive system alarms and auto-reset the system when a fault is corrected are the key differentiating factors of our DC power systems. In telecommunications tower backup applications, backup generators are used to provide power during grid outages or to charge batteries to provide longer run times during emergencies. Due to battery costs and availability issues, many telecommunications providers are known to use various types of chemistries or capacities as storage sources. During the past decade, we have successfully integrated various battery chemistry charge algorithms into our Supra Controller™ software. In 2011, we added charge algorithms for various lithium battery chemistries and integrated our proprietary battery management system, or BMS, with our Supra Controller™ software. In 2013, we further expanded the integration of storage and renewable energy such as solar and wind into our Supra Controller™ software resulting in the shipment of twenty off-grid telecommunications tower power systems to Australia. 8 In 2017 and 2018, we demonstrated our DC hybrid power systems to telecommunications providers in South East Asia and Africa. We believe that the integration of renewable energy and storage batteries are ideal for off-grid remote locations in rural areas worldwide. During 2021, we plan to continue our research and development efforts to further enhance these integrations for remote telecommunications towers in South East Asia and Africa. In 2018, we developed our next generation BMS that enhances our current technology to more accurately measure, monitor, control and integrate battery performance data with our Supra Controller™. In addition, we enhanced the user interface to allow us the ability to update or develop new charging algorithms in the field which can be remotely programmed or uploaded. We believe these enhancements will increase our penetration into the storage market during 2021 and beyond. In 2019, we developed a low-cost DC generator that runs on either natural gas or LPG. In December 2019, we received our certificate of conformity from the EPA on our small spark-ignition Toyota engines which are used in our new LPG / natural gas generators. These new generators provide power outputs between 5 kW to 15 kW and incorporate a 30,000- to 90,000-hour life engine with our proprietary control system. We plan to market these stationary generators within the telecommunications, commercial and residential markets primarily through third party distributors. Products and Services We broadly classify our power systems into three categories: ● DC base power systems . Our basic system which is centered around a DC generator. Applications include both prime power and backup power. ● DC hybrid power systems . Our basic DC power system with added energy storage via lithium-ion or other battery chemistries. ● DC Solar hybrid power systems . Our DC hybrid power system with added renewable energy (i.e., solar panels). 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. DC Base Power Systems Our DC base power systems are designed for use in prime power and backup power applications. All of our DC power systems are designed to last 20 years or more in backup applications and meet all UL2200 standards. To maximize operational life, we incorporate (over and above our competition) the following: ● all aluminum, powder coated, enclosure with stainless hardware, which is lightweight and corrosion resistant; ● 105 C rated signal wire, tinned copper strands; ● stainless steel braided covering hoses for fuel and coolant lines; ● Class 220 C magnet wire for alternator windings; ● watertight connectors in place of terminal strips and other non-sealed connectors; and ● our proprietary Supra Controller™ modules that are environmentally sealed. We believe that the number one reliability issue with a generator set is the failure to start. To improve the reliability of our generators, we remove the engine’s starting battery and replace it with a super capacitor. The super capacitor has a 15- to 20-year service life, greater cold cranking amps and withstands greater temperature extremes than conventional starting batteries. 9 To reduce maintenance and help ensure that there is always adequate oil, we increase the engine’s oil capacity to provide for a 3,000-hour (natural gas / propane) or 1,500-hour (diesel) maintenance interval. Standard oil intervals for typical generators range from 200 to 500 hours. DC Hybrid Power Systems In most off-grid or bad-grid outdoor applications where DC loads are required, such as telecommunications towers in rural or remote areas, fuel costs of operating a generator can account for more than 60% of the total operating costs. In most backup applications, such as telecommunications and uninterruptable power supply systems, lead acid batteries are used for providing transitional power while the generator starts up. In most of our prime power applications (including telecommunications) the goal is to reduce maintenance and fuel costs. Our Supra Controller™ automatically cycles the generator off when the loads are small and cycles it on again when the load increases or the battery charge is depleted. This cycling reduces engine maintenance and saves significant quantities of fuel. Additional fuel savings are realized by using lithium-ion batteries in place of lead acid batteries. Lead acid batteries, when compared with lithium-ion batteries, have high internal resistance, are inherently inefficient during charging or discharging in cyclic load applications and therefore require longer to charge, resulting in higher fuel costs. In 2011, we completed the design and testing of a hybrid power system, where our DC power system was integrated with lithium-ion batteries to provide a longer life and higher fuel efficiency to cyclic DC power applications such as telecommunications towers. In 2019, we implemented our next generation BMS for our lithium battery storage system. This next generation BMS enhances battery charging accuracy, integrates with engine controls and provides additional protection for the lithium batteries. Our DC hybrid power systems can monitor the charge/discharge cycle of various battery chemistries, including lithium-ion and lead acid batteries. Our Supra Controller™ system incorporates a CAN bus communications capability that provides communication and control between the battery and the DC hybrid power system. Each cell in the battery pack is individually monitored for voltage and temperature, ensuring the safety and longevity of the battery bank. These power systems include enclosures, a lithium-ion battery pack, our proprietary BMS and our proprietary Supra Controller™ system that controls engine output, battery charging algorithms, cooling system and power control circuits that optimize DC load outputs. DC Solar Hybrid Power Systems Our DC solar hybrid power system combines our DC hybrid power system with solar photovoltaic modules and a custom engineered multi power point tracking charge controller. In most off-grid or bad-grid outdoor applications, such as telecommunications towers in rural or suburban areas, the fuel costs of operating a generator can account for more than half of the total operating costs. We believe that incorporating renewable energy sources, such as solar, with our DC hybrid power systems is ideal solution for numerous off-grid and bad-grid applications worldwide. Our DC solar hybrid power systems incorporate the following features: ● Hybrid power panel . We produce distribution panel assemblies that make use of punched and plated buss bars to make the heavy current connections between appliances. The industry standard is using labor intensive hand crimped wires and lugs which are accomplished in the field. ● Photovoltaic Arrays . Our telecommunications customers request photovoltaic array structures to withstand winds of 150 mph and 200 mph exceeding the industry standard of 120 mph. ● Shelter . We provide an all-weather light-weight aluminum walk-in shelter that is easy to transport by truck or helicopter. 10 ● Lightning protection . We provide the highest degree of lightning protection through the use of air-coil type inductors designed by us. ● Air-Conditioning . We provide DC air-conditioning if required in very hot weather environments. We also provide cooling systems using ambient air. During 2019, we developed an environmentally friendly solar hybrid power system based on a combination of solar with LPG and propane power sources which we believe lowers both capital expenditures and operating expenditures. These new generators have been specifically designed to run in residential applications and will provide power outputs between 5 kW to 22 kW and which incorporate a 30,000- to 90,000-hour life engine with our proprietary control system. Our natural gas generators when integrated with battery storage and solar are ideal microgrids for off-grid and bad grid residential and commercial applications. Service and Support Global Network Management Tools We offer global network management services through our telematics tool, which consists of our Supra Controller™ technology integrated with monitoring software. This hardware is integrated into each DC power system and collects critical data from the equipment and transmits this data back to the customer and our service department. This capability allows us and our customers to monitor system performance remotely and to remotely update the equipment with new revision software in the field. Our telematics capabilities and services include: ● automated and continuous remote monitoring with auto alerts and notifications that can be transmitted via email or text messaging; ● maintenance management, which provides ability to schedule preventative maintenance based on actual equipment usage; and ● real-time, bi-directional communication capability for remote upgrades, testing and troubleshooting. Our telematics tools also provide information to our customers on specific equipment utilization that provides the abilities to determine the functional status of the equipment and proactively schedule maintenance. We believe these tools assist in reducing equipment downtime, thereby reducing the overall cost of ownership. In addition, we plan to use these tools to monitor and provide accurate billing for our rental equipment deployed at customer facilities. Aftermarket and Service Parts We offer extensive aftermarket and service parts programs. We maintain an extensive inventory of aftermarket parts and sell parts directly to customers or through our qualified network of service providers. In addition, we require our regional service providers to maintain sufficient quantities of aftermarket parts in their inventory to ensure minimum downtime upon product failure. We maintain accurate records of bill of materials for each serial number shipped and service our products well beyond their recommended lives. In the marketplace, our products are known for their long life and durability. Product and Warranty Support We utilize a nationwide network of dealers and service providers to perform installation and warranty services for our customers. Through our dealers we offer product commissioning as an added service to all our customers and require the purchase of such services as a condition for acceptance of any warranty claims in the future. We offer installation of the equipment, preliminary testing, integration of equipment with other assets located at the site and introductory maintenance and safety training. We offer various levels of fee-based services to support our products in the field. In addition, we have trained product and application engineers that deliver high quality, responsive lifetime technical support to all our customers worldwide. 11 We further support our customers by using qualified regional independent service providers to perform warranty and aftermarket service and repair on our products. Our regional service providers are factory trained and certified prior to being authorized to repair or service our equipment. We generally reimburse regional service providers for the warranty services they perform on our systems. Sales and Marketing Our sales strategy focuses on using our direct sales force to market our DC backup power products to telecommunications providers in the U.S. We use local regional sales managers in the U.S. market to demonstrate our products to Tier-1 telecommunications providers. Our products are purchased by regional centers operated by our telecommunications customers, thereby expanding our overall market into regions we may not have covered previously. We have established a sales and service infrastructure in international markets. We established regional sales offices in South Africa, U.A.E., Poland and Dominican Republic and established sales and aftermarket service locations in Australia and Romania to locally manage the South East Asia and EMEA regions, respectively. Due to a general lack of a reliable power grid, many emerging markets continue to expand their telecommunications infrastructures at a high rate. We believe that this lack of a reliable power grid, together with our knowledge of integrating renewables with generators, provides us with an opportunity to enter these emerging markets with our hybrid storage and renewable energy solutions. We also market our products through our web site and by exhibiting our products at trade shows globally. Our primary sales are generated through product demonstrations and short-term rentals to demonstrate the capabilities of our products and value proposition to large mobile network providers worldwide. We believe this strategy of demonstrating our products and technologies to prospective customers expedites the sales process for our DC power systems. The COVID-19 pandemic has taken a toll on the global economy and has disrupted business operations globally. We market our products to a large global customer base through actual product demonstrations. In 2020, the spread of COVID-19 led to various government travel restrictions which resulted in the inability of our sales team to meet with existing or new customers to demonstrate our products. In addition, our service staff and engineers have generally been unable to travel to customer locations to setup demonstrations and assist in the integration and optimization of our products to specific customer application needs. During the second half of 2020 and early part of 2021,we have experienced a modest resumption of sales activity with our U.S. Tier-1 telecommunications customers as their construction activities resume. Given the daily developments of the COVID-19 pandemic and the global responses to curb its spread, we are not able to accurately estimate all of the long term effects of the COVID-19 pandemic on our business. Distribution and Service We market our products through various distribution channels that promote our products and brand and provide effective aftermarket support and service. While most of our sales are achieved through our direct sales force, we also utilize independent service providers and dealers to complement our global sales effort. The promotion of our natural gas powered Mini-Grid product, targeting off-grid and bad grid rural areas, will be undertaken by mainly certified independent dealers. We believe expansion of our dealer network will also provide additional opportunities for our DC power systems in the U.S. and other countries. We utilize a combination of factory trained technicians and independent service providers to provide installation, maintenance, service and training at customer locations throughout the U.S. In the international markets, we utilize local service partners to perform installation and service on our equipment. We have hired trained personnel in Namibia, Australia and Romania to assist in regional training of technicians and also in product demonstrations. 12 Competition Within the telecommunications power generation market, we compete with a few manufacturers of AC and DC generators that offer generators with an output power of 6 kW to 30 kW. In the U.S. market, our competitors are global manufacturers of AC generators designed primarily for the residential and industrial off-grid power markets. Internationally, our competitors include regional manufacturers of both AC and DC generators. In the U.S. market, our competitors are large volume manufacturers of AC generators with a primary focus on emergency power backup generation for the residential marketplace. These AC generators are constructed using steel enclosures and are therefore heavier and can rust more easily in outdoor applications as compared to our products which generally have a smaller footprint and are constructed using aluminum enclosures. Due to the inherent design of AC motors, their units are approximately 40% larger in size than our DC generators. In order to monetize on our positives, we targeted telecommunications markets where generators are used to provide backup power during power outages. Due to the lighter weight and smaller size of our products as compared to AC products, we specifically target customers with the telecommunications towers located on roof-tops in urban areas. We believe that the smaller size, lighter weight and higher fuel efficiency of our products are performance parameters that offset the lower price alternative of AC generators. In addition, we believe that our recently introduced long-life (90,000 hours), natural gas-powered DC generator product line significantly increases our competitive advantage in densely populated urban markets. Increased digitization of our lives has resulted in the need for more power usage in both residential and commercial applications. In the telecommunications tower market, the majority of the outdoor power needs are DC power since most components are DC powered. Historically, AC generator companies have utilized conversion technologies to convert AC output to DC output. This conversion results in an approximately 40% loss in energy. Meanwhile, our DC generators supply DC power directly to the telecommunications tower systems increasing the system’s overall efficiency. These efficiencies are further enhanced in off-grid and bad-grid applications where more power is being used from the generators due to the lack of grid power. Below are our primary competitors across these applications: DC Power : 3Tech Corporate Limited, Ascot Industrial srl, Ausonia srl, and Controllis. AC Power : Generac Power Systems, Inc., Kohler Co., Onan, FG Wilson and many other companies. Manufacturing and Assembly A significant percentage of our business comes from multinational global corporations seeking configured product solutions ready to be field deployed with a minimum installation time. Our manufacturing process begins with our direct sales force and engineering team defining customer application needs and concludes with the production of a custom configured product solution. We believe our ability to have total control over the sales and manufacturing process is a key competitive differentiator in the markets we serve. By implementing vertical integration throughout our manufacturing process, we believe that we reduce overall manufacturing costs, thereby increasing profitability and market competitiveness. Our production processes encompass all aspects of production of our DC power systems, which includes alternators, aluminum enclosures, engine configurations, control electronics, cooling systems, wiring harnesses, exhaust systems and final assembly. Manufacturing of our proprietary technologies requires proprietary automated equipment that ensures total control and agility in our production processes. Over the past decade, we have made significant investments in highly specialized manufacturing tooling, jigs and fixtures that allow us to manufacture products at lower cost while maintaining the highest quality. Our production assembly lines are designed to be flexible, and we utilize advanced manufacturing planning software to predict, monitor and control demand levels and product mix to provide the shortest delivery time to our customers. We utilize 3-D CAD software to product design and document assembly instructions throughout our production process. All our products are 100% tested to customer specific application requirements prior to shipment. 13 Throughout our operations we utilize computerized ERP software that integrates all our processes from lead generation to product shipment and aftermarket support. Our focus on safety, quality and on-time delivery is supported by employee training and information systems that monitor process and product quality and communicate trends and findings to senior management on a real-time basis. Design Engineering/Research and Development Our research and development efforts are market driven and are focused on the development of new technologies and product improvements, as well as reducing costs and improving product quality and reliability. The primary focus of our research and development activities is the development of lighter-weight, more compact and lower cost DC power generation systems for our Tier-1 wireless provider customers in the U.S. and international markets. Over the years, we have expended significant resources in enhancing our system controls like our Supra Controller™ and BMS. A significant part of our research and development effort has focused on the development of control software that integrates engine controls, power management and battery algorithms to fully optimize fuel consumption in both prime power and backup power generation applications. We use a high level of integration with a single control and communication module, our Supra Controller™, rather than competitive system designs with a number of independent control modules controlling a single function. Our integrated approach ensures software compatibility, reduces complexity in wiring, increases reliability and reduces cost. We maintain an in-house design, prototyping, testing and application engineering capabilities including expertise in 3-D solid modeling and finite element analysis, computer-based modeling and testing, rapid prototyping, design verification testing and document publication, which includes manufacturing assembly instructions, supplier drawings and product manuals. In addition, we utilize third party testing laboratories to certify our products’ compliance with current applicable UL standards. Our research and development expenditures decreased by $553 to $1,723 during 2020, as compared to $2,276 in 2019. This decrease in research and development expenditures is primarily attributable to the negative impact of COVID-19 on resources such as labor and materials. We have implemented systems to monitor project status and utilize remote access and cloud-based systems to maintain engineering efficiencies. Our research and development efforts during 2020 primarily focused on launching our new LPG / natural gas line of generators and hybrid power systems for off-grid and unreliable grid cell sites, and supporting existing sales activity related to our DC back-up power systems. During 2021, we expect research and development expenses to gradually increase as control over COVID-19 improves and we continue investing into new products as part of our strategy to diversify our product lines. However, it is not possible for us to predict the duration or magnitude of the adverse results of the outbreak and its effects on our ability to continue our design engineering and research development projects during the remainder of 2021 and perhaps beyond. Intellectual Property We possess a broad intellectual property portfolio comprised of electronics, software, engines, alternators, thermal systems and production techniques. We rely on trademark, copyright and trade secret laws to protect our intellectual property. Currently, we rely on common law rights to protect our “Polar Power, Inc.” trade name. We protect our trade secrets and other proprietary information by requiring confidentiality agreements from our employees, consultants and third parties that have access to such information. Despite these efforts, there can be no assurance that others will not gain access to our trade secrets, or that we can meaningfully protect our technology. In addition, effective trademark, copyright and trade secret protection may be unavailable or limited in certain foreign countries. We consider our manufacturing process to be a trade secret and have non-disclosure agreements with our employees to protect the trade secrets held by us. However, such methods may not afford complete protection, and there can be no assurance that others will not independently develop similar know-how or obtain access to our know-how and manufacturing concepts. We may register patents and trademarks in future to protect our intellectual property rights and enhance our competitive position. 14 Suppliers We attempt to mitigate the adverse effect of component shortages in our business through detail material planning and by qualifying multiple vendor sources for key components and outside processes. We conduct supplier audits of all major suppliers for initial qualification and to ensure reliability, quality, and sustainability of critical components. To meet our customer demands, we forecast the supply of our long lead time items such as engines, castings and electronic components through use of sales forecasting tools and ERP system. Our suppliers are extensively surveyed and audited; and field or process generated non-conformities communicated with our Suppliers to continuously improve quality. To improve our costs and deliveries, our ERP system invites for all qualified suppliers to participate in relevant bids to ensure best proposals are selected. The recent outbreak of COVID-19 has taken a toll on the global economy and has disrupted raw material supply chains all over the world. During the first half of 2020, we experienced material shortages and delays while during the second half we experienced supplier lead times returning to pre-COVID normal. We are actively sourcing the domestic supply chain for key components to ensure no future delays. We anticipate modest price increases post pandemic, although we believe we can mitigate a portion of these anticipated cost increases by passing through some cost increases to our customers while the other increases can be mitigated through increases in efficiency. Quality Control We began concentrating on our quality control in the early 1980s, much of which was required by our customers at the time, including NASA and Hughes Aircraft. In the late 1980s, we implemented the MIL-I-45208A quality control system monitored by U.S. Department of Defense, to meet prime source requirements for a contract we received from the U.S. Army Picatinny Arsenal, to design and manufacture an advanced battery and monitoring system for a security device used in nuclear munitions depots around the world. We are currently in the process of obtaining an ISO 9000 certification. Certifications Our DC generator systems comply with UL2200 safety standards. Our products also comply with applicable regulatory emission standards of the Environmental Protection Agency, and the California Air Quality Management District. 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. Our standard warranty on new products is two years from the date of delivery to the customer. We offer a limited extended warranty of up to five years on our certified DC power systems based on application and usage. Our warranties are of an assurance-type and come standard with all of our products to cover repair or replacement should a product not perform as expected. Under our standard warranty, 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. Information Systems We utilize integrated information systems (i.e., ERP) that link our lead management, sales planning, order entry, purchasing, engineering, production control, manufacturing, inventory and accounting systems. During the past five years we have made significant investments to upgrade and customize our information systems to improve productivity and our ability to accurately forecast inventory and manpower requirements. We plan to invest additional capital in software and information systems to integrate aftermarket sales and service with our ERP system to improve post sales customer experience with our products and services. 15 Government Regulations and Environmental Matters Our business operations are subject to certain federal, state, local and foreign laws and regulations. For example, our products, services and technologies are subject to regulations relating to building codes, public safety, electrical connections, security protocols, and local and state licensing requirements. The regulations to which we are subject may change, additional regulations may be imposed, or existing regulations may be applied in a manner that creates special requirements for the implementation and operation of our products or services that may significantly impact or even eliminate some of our revenues or markets. In addition, we may incur material costs or liabilities in complying with any such regulations. Furthermore, some of our customers must comply with numerous laws and regulations, which may affect their willingness and ability to purchase our products, services and technologies. Additionally, we are subject to laws, regulations and other governmental actions instituted in response to the COVID-19 outbreak. The modification of existing laws and regulations or interpretations thereof or the adoption of future laws and regulations could adversely affect our business, cause us to modify or alter our methods of operations and increase our costs and the price of our products, services and technology. In addition, we cannot provide any assurance that we will be able, for financial or other reasons, to comply with all applicable laws and regulations. If we fail to comply with these laws and regulations, we could become subject to substantial penalties or restrictions that could materially and adversely affect our business. Employees As of March 31, 2021, we had 106 full time employees, which includes 96 employees in the U.S. and 10 employees outside the U.S. None of our employees are represented by labor unions. We consider our relationships with our employees to be generally satisfactory. In addition, from time to time, we utilize outside consultants or contractors for specific assignments. In March 2020, in response to the COVID-19 outbreak, the governor of California issued a state-wide “shelter-in-place” order and placed 79 employees on furlough status. We have implemented a Business Continuity Plan designed to keep employees safe, follow regulatory guidelines, and continue essential business operations. In September 2020, the majority of our employees that were on furlough status returned to work. We are actively monitoring the global situation and how it affects our financial condition, operations, suppliers, industry, and workforce. Given the daily developments of the pandemic and the global responses to curb its spread, we are unable to estimate the effects of the pandemic at this time. If the COVID-19 pandemic continues, it may have an adverse effect on our ability to source qualified employees during the remainder of 2021 and perhaps beyond. Facilities Our principal offices are located in Gardena, California, where we lease a 40,000 square foot facility that includes our corporate staff offices, our manufacturing facility, and our research and development center. We also lease a 29,000 square foot facility as our second manufacturing facility and a 20,000 square foot warehouse facility across the street from our corporate offices. We believe that our current facilities are sufficient to accommodate our anticipated production volumes for the next twelve months. If required, additional office and manufacturing space is available within less than three miles from our present location.