Polar Power, Inc. 10-K

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Market Information Shares of our common stock trade on The Nasdaq Capital Market under the symbol “POLA.” As of March 31, 2021, we had 12,788,203 shares of common stock outstanding held of record by approximately 13 stockholders. These holders of record include depositories that hold shares of stock for brokerage firms which, in turn, hold shares of stock for numerous beneficial owners. Recent Sales of Unregistered Securities None. Purchases of Equity Securities by the Issuer and Affiliated Purchasers On November 6, 2019, we entered into a Rule 10b-18 Stock Repurchase Agreement authorizing ThinkEquity to repurchase up to $500 of our common stock. On January 20, 2020, we terminated the Stock Repurchase Agreement. As of December 31, 2020, we had purchased 17,477 shares common stock and held them as treasury stock at a cost of $40. Period Total number of shares (or units) purchased Average price paid per share (or unit) Total number of shares (or units) purchased as part of publicly announced plans or programs Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs November 14, 2019 to November 22, 2019 17,477 $ 2.29 17,477 0 Total 17,477 $ 2.29 17,477 0 Item 6. Selected Financial Data. Not applicable. Item 7. Management 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 Annual Report on Form 10-K. 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 Annual Report on Form 10-K. 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. 34 Overview We design, manufacture and sell DC power generators, renewable energy and cooling systems for applications primarily in the telecommunications market and, to a lesser extent, in other markets, including military, electric vehicle charging, marine and industrial 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 . These systems integrate a DC generator and automated controls with remote monitoring, which are typically contained within an environmentally regulated enclosure. ● DC hybrid power systems . These systems incorporate lithium-ion batteries (or other advanced battery chemistries) with our proprietary battery management system, or BMS, into our standard DC power systems. ● DC solar hybrid power systems . These systems incorporate photovoltaic and other sources of renewable energy into our DC hybrid power system. Our DC power systems are available in diesel, natural gas, LPG / natural gas and renewable formats, with diesel, natural gas and propane gas being the predominate formats. During the years ended December 31, 2020 and 2019, 96% and 96%, respectively, of our total net sales were within the telecommunications market. In 2020, 81% of our total net sales were derived primarily from three customers which are in the telecommunications industry and each accounted for 52%, 15% and 14% of total net sales for 2020. In 2019, we had 91% of our total net sales derived from our three largest customers which are in the telecommunications industry and each accounted for 68%, 17% and 6% of our total net sales for 2019. In March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic, and, in the following weeks, many U.S. states and foreign countries issued lockdown orders negatively impacting the operations of our manufacturing facilities and customer demand for our products. Since then, the COVID-19 situation within the U.S. and foreign countries has rapidly escalated. We have implemented new procedures to support the health and safety of our employees and we are following all guidelines issued by the U.S. Centers for Disease Control and Prevention, as well as federal, state and regional public health authorities. Our manufacturing facilities have remained opened with certain limitations and restrictions to comply COVID-19 safety guidelines and provide a safe work environment for our employees. COVID-19, has had and is likely to continue to have, a material and substantial adverse impact on our results of operations including, among others, a decrease in our sales, delays in sourcing of raw materials from suppliers which, in turn, has raised liquidity concerns. In addition, our inventory write-off increased during 2020 due to current uncertainties regarding specific product shipments. Our business is directly dependent upon, and correlates closely with, the marketing levels and ongoing business activities of our existing customers and suppliers. In the event of a continued widespread economic downturn caused by COVID-19, we will likely experience a further reduction in current projects, longer sales and collection cycles, deferral or delay of purchase commitments for our DC power systems, a reduction in our manufacturing functionality, higher than normal inventory levels, a reduction in the availability of qualified labor, and increased price competition, all of which could substantially adversely affect our net revenues and our ability to remain a going concern. During December 2020, the Food and Drug Administration authorized the release of vaccines to help control COVID-19. Although there are many unknown factors of its success to control COVID-19 and the timeline of making the vaccine available to a great majority of people around the world, we believe these are significant events aimed to control COVID-19 that may lead to improvements to the global economy and to our business. 35 The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, the impact on our customers and our sales cycles, the impact on our customer, employee or industry events, and the effect on our vendors, all of which are uncertain and cannot be predicted. At this point, we are uncertain of the full magnitude that the pandemic may have on our financial condition, liquidity and future results of operations. Critical Accounting Policies The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. On an ongoing basis, management reviews its estimates and if deemed appropriate, those estimates are adjusted. Significant estimates include those related to assumptions used in determining reserves for uncollectible receivables, assumptions used in valuing inventories at net realizable value, impairment analysis of long term assets, estimates of useful lives of property and equipment, assumptions used in valuing stock-based compensation, the valuation allowance for deferred tax assets, accruals for product warranties, accruals for potential liabilities, and assumptions used in the determination of the Company’s liquidity. Actual results may differ from those estimates. We believe that the following critical accounting policies, among others, affect our more significant judgment and estimates used in the preparation of our financial statements: Revenue Recognition We recognize revenue in accordance with Financial Accounting Standards Board Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”). ASC 606 requires entities to recognize revenue through the application of a five-step model, which includes: identification of the contract; identification of the performance obligations; determination of the transaction price; allocation of the transaction price to the performance obligations; and recognition of revenue as the entity satisfies the performance obligations. Substantially all of the Company’s revenue is derived from product sales. Product revenue is recognized when performance obligations under the terms of a contract are satisfied, which occurs for the Company upon shipment or delivery of products or services to its customers based on written sales terms, which is also when control is transferred. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring the products or services to a customer. The Company determines whether delivery has occurred based on when title transfers and the risks and rewards of ownership have transferred to the customer, which usually occurs when the Company places the product with the customer’s carrier or deliver the product to a customer’s location. The Company regularly reviews its customers’ financial positions to ensure that collectability is reasonably assured. 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. The Company’s warranties are of an assurance-type and come standard with all Company products to cover repair or replacement should product not perform as expected. 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. The Company estimates the actual historical warranty claims coupled with an analysis of unfulfilled claims to record a liability for specific warranty purposes. 36 Inventories Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out (“FIFO”) basis. The Company records adjustments to its inventory based on an estimated forecast of the inventory demand, taking into consideration, among others, inventory turnover, inventory quantities on hand, unfilled customer order quantities, forecasted demand, current prices, competitive pricing, and trends and performance of similar products. If the estimated net realizable value is determined to be less than the recorded cost of the inventory, the difference is recognized as a loss in the period in which it occurs. Once inventory has been written down, it creates a new cost basis for inventory that may not subsequently written up. Stock-Based Compensation Stock-based payments to employees, directors, and for acquiring goods and services from nonemployees, which include grants of employee stock options, are recognized in the financial statements based on their grant date fair values in accordance with ASC 718, Compensation-Stock Compensation . Stock option grants, which are generally time vested, are measured at the grant date fair value and depending on the conditions associated with the vesting of the award, compensation cost is recognized on a straight-line or graded basis over the vesting period. 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. Income Taxes The Company accounts for income taxes using the asset and liability method whereby deferred tax assets 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. 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. 37 Impact of Recent Accounting Pronouncements See “Note 1 – Organization and Summary of Significant Accounting Policies – Recent Accounting Pronouncements” of the Notes to Financial Statements commencing on page F-7 of this Annual Report on Form 10-K for management’s discussion as to the impact of recent accounting pronouncements. Jumpstart Our Business Startups Act of 2012 On April 5, 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies. We are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, if as an “emerging growth company” we choose to rely on such exemptions, we may not be required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis), and (iv) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer’s compensation to median employee compensation. These exemptions will apply until we no longer meet the requirements of being an “emerging growth company.” We will remain an “emerging growth company” until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1 billion or more; (ii) December 31, 2021 (the last day of our fiscal year following the fifth anniversary of the date of the completion of our initial public offering); (iii) the date on which we have issued more than $1.07 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC. Financial Performance Summary – Year Ended December 31, 2020 Our net sales for the year ended December 31, 2020, were $9,031, as compared to $24,801 for the year ended December 31, 2019. We reported a net loss of $10,871 for 2020, as compared to net loss of $4,045 for 2019. We believe this decline in revenues is primarily due to our Tier-1 telecommunications customers shifting their investments to the deployment of their new 5G networks rather than making investments in back-up power generators. We also believe that COVID-19 has had a negative impact on our customers’ ability to deploy new systems due to precautionary measures focused at slowing down the spread of COVID-19 within their employee base. The focus on the deployment of new 5G networks has had a direct negative impact on our ability to increase sales of our products to our Tier-1 telecommunications customers. During 2020, our international sales increased to $1,522, as compared to $230 during 2019. The increase was due primarily to shipments of our new LPG DC power systems during the second half of 2020. Our sales backlog as of December 31, 2020, was $4,239, with 65% of that amount being attributable to U.S. telecommunications customers, 21% to telecommunications customers outside the U.S., 2% to military customers, and 12% to other customer in other markets. The recent increase in our backlog is as a result of U.S. Tier-1 wireless carriers increasing their orders of our DC backup power systems. During the fourth quarter of 2020, we believe the major Tier-1 wireless providers reached a point in the implementation of their 5G programs where they are starting to increase orders on backup power solutions. In December 2020, our backlog increased by $2.0 million primarily from sales orders from our largest Tier-1 telecommunications customer. With the release of COVID-19 vaccines in December 2020, we remain hopeful that the global economy will gradually return to normality allowing us to expand our sales and marketing initiatives. We are also working on expanding our research and development capacity to enhance our sales support and new product development programs. We are focused on diversifying our customer base within the telecom market while seeking new opportunities in other markets. 38 We anticipate that our future sales will improve as the U.S. economy recovers from the impact of the COVID-19 pandemic, our U.S. telecommunications customers return to their backup power programs, and we succeed in diversifying our customer base. However, the full impact of the COVID-19 pandemic on our financial and operating performance will depend significantly on the duration and severity of the outbreak, the actions taken to contain or mitigate its impact, disruption to our supply chain, and the pace with which our clients return to more normalized purchasing behavior, among others factors beyond our knowledge or control. See section “Risk Factors” in this Annual Report for additional considerations. Results of Operations The tables presented below, which compare our results of operations from one period to another, present the results for each period, the change in those results from one period to another in both dollars and percentage change, and the results for each period as a percentage of net revenues. The columns present the following: ● The first two data columns in each table show the absolute results for each period presented. ● The columns entitled “Dollar Variance” and “Percentage Variance” shows the change in results, both in dollars and percentages. These two columns show favorable changes as a positive and unfavorable changes as negative. For example, when our net revenues increase from one period to the next, that change is shown as a positive number in both columns. Conversely, when expenses increase from one period to the next, that change is shown as a negative in both columns. ● The last two columns in each table show the results for each period as a percentage of net revenues. Comparison of the Years Ended December 31, 2020 and 2019 Year Ended December 31, Dollar Variance Percentage Variance Results as a Percentage of Net Revenues for the Year Ended December 31, Favorable Favorable 2020 2019 (Unfavorable) (Unfavorable) 2020 2019 Net sales $ 9,031 $ 24,801 $ (15,770 ) (64 )% 100.0 % 100.0 % Cost of sales 14,654 19,882 5,228 26 % 162.2 % 80.2 % Gross profit (loss) (5,623 ) 4,919 (10,542 ) (214 )% (62.2 )% 19.8 % Sales and marketing expenses 1,556 2,621 1,065 41 % 17.2 % 10.6 % Research and development expenses 1,723 2,276 553 24 % 19.1 % 9.2 % General and administrative expenses 4,062 4,004 (58 ) (1 )% 45.0 % 16.1 % Total operating expenses 7,341 8,901 1,560 18 % 81.3 % 35.9 % Loss from operations (12,964 ) (3,982 ) (8,982 ) 226 % (143.5 )% (16.1 )% Interest and finance costs (60 ) (103 ) 43 42 % (0.7 )% (0.4 )% Other income (expense), net 14 40 (26 ) (65 )% 0.2 % 0.2 % Loss before income taxes (13,010 ) (4,045 ) (8,965 ) 222 % (144.1 )% (16.3 )% Income tax benefit (2,139 ) — 2,139 — % (23.7 )% 0.0 % Net loss $ (10,871 ) $ (4,045 ) $ (6,826 ) 169 % (120.4 )% (16.3 )% 39 Net Sales. Net sales decreased by $15,770, or 64%, to $9,031 for the year ended December 31, 2020, as compared to $24,801 for the year ended December 31, 2019. The decrease was primarily due to a decrease in sales of our DC power systems to U.S. Tier-1 telecommunications customers. U.S. telecommunications customers accounted for 83% of our total net sales during 2020, as compared to 95% of total net sales in 2019. Our revenue from telecommunications customers, U.S. and international, accounted for 96% of total net sales during 2020 and also during 2019. Our three largest customers are in the telecommunications industry and each customer accounted for 52%, 15%, and 14% of total net sales for 2020, as compared to our three largest customers in 2019, also customers in the telecommunications industry, each accounting for 68%, 17%, and 6% of total net sales. Our revenues as a percentage of total net sales for the year to international customers increased from 1% during 2019 to 17% during 2020. We believe the decline in revenues during 2020 is a result of a combination of factors including, among others, a temporary shift by our U.S. Tier-1 telecommunications customers in budget allocation towards acquiring wireless communication spectrum and the deployment of their 5G networks rather than purchasing back-up power generators. We also believe that COVID-19 has had, and continues to have, a negative impact on our customers’ ability to deploy new back-up power systems due to precautionary measures aimed at slowing down the spread of COVID-19. During the fourth quarter of 2020, we began to see an increase in sales orders for our DC power systems from our U.S. telecommunications customers compared to the fourth quarter of 2019. We believe telecommunications customers have made substantial progress in launching their 5G networks during 2020. Their 5G programs have many elements that will be deployed and enhanced at different times over the upcoming years and we believe our DC back-up power systems are an ideal fit to their infrastructure buildout and provide needed backup power support to enhance network reliability. In addition, the Food and Drug Administration authorized the release of vaccines to help control COVID-19 in December 2020. Although there are many unknown factors of its success to control COVID-19 and the timeline of making the vaccine available to a great majority of people around the world, we believe these are positive signs that may lead to improved revenue numbers for Polar Power in upcoming quarters and beyond. Cost of Sales . Cost of sales decreased by $5,228, or 26%, to $14,654 during 2020, compared to $19,882 during 2019. Cost of sales as a percentage of net sales increased from 80.2% in 2019 to 162.2% in 2020 as a result of an increase in factory overhead absorption and an inventory reserve of $3,400 during 2020. The increase in factory overhead absorption during 2020 is primarily attributed to underutilization of manufacturing facilities and staff resulting primarily from COVID-19 related factors mentioned in previous sections of this report. Gross Profit (Loss) . We experienced a gross loss of $5,623 during 2020, as compared to a gross profit of $4,919 during 2019, which represents a decrease in gross profit of $10,542 or 214%. Gross profit as a percentage of net sales decreased to (62.2)% in 2020, as compared to 19.8% in 2019. The decrease in gross profit as a percentage of net sales during 2020 was primarily due a combination of sales discounts offered for large volume orders from Tier-1 telecommunications customers, an increase in factory overhead absorption, and an increase to inventory write-off of $3,400 recorded in cost of sales during 2020. Sales and Marketing Expenses. Sales and marketing expenses decreased $1,065 to $1,556 during 2020, as compared to $2,621 during 2019. The decrease was attributable to a decrease in marketing and promotions of our DC power systems in the U.S. and international markets due to travel restrictions and other measures aimed to reducing the spread of COVID-19. As part of our ongoing strategy to expand our customer base, we plan to increase our sales and marketing expenditures as travel restrictions are lifted and tradeshow and similar events become available. 40 Research and Development Expenses. During 2020, research and development expenses decreased by $553 to $1,723, as compared to $2,276 during 2019. The decrease was primarily because of COVID-19 and its implications to safety measures and availability of personnel. 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. General and Administrative Expenses . Our general and administrative expenses increased by $58, to $4,062 during 2020, as compared to $4,004 during 2019. The increase was primarily due to an increase of approximately $500 in legal, audit, and broker fees services related to an equity raise that took place in July 2020 and consulting services for additional disclosures required as a result of COVID-19. Interest and Finance Costs. During 2020, our interest expense was $60, as compared to $103 during 2019, an increase of $43. Our interest expense during 2020 included approximately $12 in fees in connection with selling $2.6 million of receivables to Citibank under our Supplier Agreement, $41 in interest paid for financing of production equipment, $4 in interest paid under our line of credit with Pinnacle Bank, and $3 in interest paid for financing of insurance policies. Other Income (Expense), Net. During 2020, our interest income was $14, as compared to $40 during 2019, a decrease of $26. Our other income included a $10 Economic Injury Disaster Grant. Income Tax Benefit . In 2020, we recognized a benefit from income taxes of $2,139 attributable to refundable federal and state income taxes. During 2019, we did not recognize any benefit from income taxes as carry back claims of income taxes were applied. Net Loss. As a result of the factors identified above, we generated a net loss of $10,871 for 2020, as compared to net loss of $4,045 for 2019, an increase loss of $6,826. A significant portion of the increase in net loss can be attributed to the results of a decrease our of DC back-up power systems to US telecommunications customers, and an increase in factory overhead absorption, and $3,400 increase inventory reserve reported in our cost of sales during 2020. Liquidity and Capital Resources Sources of Liquidity During the year ended December 31, 2020, we funded our operations primarily from cash on hand and sales of receivables under our Supplier Agreement with Citibank. These funds were also used to increase inventory to support research and development projects and the launch of our new line of LPG / natural gas generators. As of December 31, 2020, we had working capital of $10,123, as compared to working capital of $16,433 at December 31, 2019. This $6,310 decrease in working capital is primarily attributable to a $1,194 decrease in cash and cash equivalents resulting from net cash of $6,548 used in operating activities, net cash used in investing activities of $19 from the acquisition of new property and equipment, and net cash from financing activities of $5,372 which included proceeds of $1,715 from a Paycheck Protection Program (“PPP”) Loan, proceeds of $2,812 from the issuance of common stock and warrants in our July 2020 private placement and proceeds of $1,174 from the exercise of certain of these warrants. On December 31, 2020 and December 31, 2019, our net trade receivables totaled $1,190 and $934, respectively. On December 31, 2020, $1,041 (87%) and $53 (5%) represented the two largest open customer account balances, while $652 (70%) and $183 (20%) represented the two largest open customer account balances on December 31, 2019. Our available capital resources on December 31, 2020 consisted primarily of $1,646 in cash and cash equivalents, as compared to $2,840 as of December 31, 2019. We expect our future capital resources will consist primarily of cash on hand, cash generated by operations, if any, and future debt or equity financings, if any. In light of the COVID-19 crisis, the U.S. Department of the Treasury enacted the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, to provide emergency assistance and health care response for individuals, families, and businesses affected by the COVID-19 pandemic. On May 4, 2020, we entered into a loan agreement with Citibank, N.A. in the amount of $1,715 through the PPP which we expect will be forgiven in whole or in part. On July 2, 2020, we received net proceeds of $2,812 from a private placement of securities and during the last four months of 2020, received proceeds of $1,174 from warrants exercised. We believe these programs, together with our credit facility with Pinnacle Bank, or Pinnacle, described below, will supplement our current and future available capital resources. 41 Credit Facility Effective September 30, 2020, we entered into a Loan and Security Agreement, or Loan Agreement, with Pinnacle. The Loan Agreement provides for a revolving credit facility under which Pinnacle may, in its sole discretion upon our request, make advances to us in an amount, subject to certain limitations and adjustments, of up to (a) 85% of the aggregate net face amount of our 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 of our inventory or (ii) $2,500. In no event will the aggregate amount of the outstanding advances under the revolving credit facility be greater than $4,000. Interest accrues on the daily balance at a rate of 1.25% above the prime rate, or Standard Interest Rate, but in no event will the Standard Interest Rate be less than 3.75% per annum. Interest on the portion of the daily balance consisting of advances against inventory accrues interest at a rate of 2.25% above the prime rate per annum, or the Inventory Interest Rate, but in no event will the Inventory Interest Rate be less than 4.75% per annum. The Loan Agreement also contains a financial covenant requiring us to attain an effective tangible net worth, defined as our total assets, excluding all intangible assets, less our total liabilities plus loans to us from our officers, stockholders or employees that have been subordinated to our obligations to Pinnacle, greater than $6,000 as determined by Pinnacle as of the end of each fiscal quarter. During 2020, we advanced $2,500 from the revolving credit facility, which we also paid off during the year. As such, the balance outstanding under the Loan Agreement at December 31, 2020 was $0. As of December 31, 2020, we had availability under the Loan Agreement of $1,070. Supplier Agreement Effective June 4, 2019, we executed a Supplier Agreement with Citibank, N.A. Under the terms of the Supplier Agreement, we could from time to time offer to sell to Citibank certain of our accounts receivable relating to invoiced sales made to AT&T. Once AT&T approved the invoice, AT&T would send payment instructions to Citibank. The sale price was equal to the face amount of the receivable less the applicable discount charge calculated by multiplying the face amount of the receivable by (i) the annual discount rate (which is equal to the 90-day London Inter-bank Offered Rate plus 1.00%) and (ii) the discount acceptance period (which is equal the number of days in the payment terms less the number of days necessary to approve the invoice) divided by 360. On October 8, 2020, we terminated the Supplier Agreement with Citibank, N.A. During the year ended December 31, 2020, a total of $2,621 of accounts receivables had been sold to Citibank by us, and we incurred fees of approximately $12 during the twelve-month period then ended. Paycheck Protection Program Loan On May 4, 2020, we entered into a loan with Citibank, N.A. in an aggregate principal amount of $1,715, or the PPP Loan, pursuant to the Paycheck Protection Program, or the PPP, under the CARES Act. The PPP Loan is evidenced by a promissory note dated May 4, 2020. The PPP Loan matures two years from the disbursement date and bears interest at a rate of 1% per annum, with the first nine months of interest deferred. Principal and interest are payable monthly commencing nine months after the disbursement date and may be prepaid by us at any time prior to maturity with no prepayment penalties. Under the terms of the CARES Act, recipients of PPP loans can apply for and be granted forgiveness for all or a portion of loans granted under the PPP. The PPP Loan is subject to forgiveness to the extent proceeds are used for payroll costs, including payments required to continue group health care benefits, and certain rent, utility, and mortgage interest expenses (collectively, “Qualifying Expenses”), pursuant to the terms and limitations of the PPP. We intend to use a significant majority of the PPP Loan amount for Qualifying Expenses and expect the full amount of the PPP Loan to be forgiven. However, no assurance can be given that we will obtain forgiveness of the PPP Loan in whole or in part. 42 Future Capital Requirements On February 7, 2021, we entered into an underwriting agreement with ThinkEquity, a division of Fordham Financial Management, Inc., pursuant to which we agreed to sell an aggregate of 750,000 shares of our common stock in a firm commitment underwritten public offering at a price per share to the public of $18.00. The public offering closed on February 10, 2021. We received net proceeds of approximately $12.5 million and we plan to use the net proceeds for general corporate purposes. We believe that the current funds on hand will be sufficient to fund our operating expenses and capital expenditure requirements for at least the next twelve months. We continue to review operations in order to identify additional strategies designed to generate cash flow, improve our financial position, and enable the timely discharge of our obligations. Cash Flow The following table sets forth the significant sources and uses of cash for the periods set forth below: Year Ended December 31, 2020 2019 Net Cash Provided By (Used In): Operating Activities $ (6,548 ) $ (2,167 ) Investing Activities $ (19 ) $ (338 ) Financing Activities $ 5,373 $ (295 ) Net decrease in cash $ (1,194 ) $ (2,800 ) Operating Activities Net cash used in operating activities for 2020 was $6,548, as compared to $2,167 for the same period in 2019. This increase in net cash used in 2020 was primarily due to a net loss of $10,871, a write-down of $3,400 for excess and obsolete inventory, an increase in income tax benefit of $2,139, coupled with a decrease of $907 in prepaid assets resulting from engines imported from Japan which had been prepaid in 2019. Investing Activities Net cash used in investing activities for 2020 totaled $19, as compared to $338 for 2019, a decrease of $319. The net cash used in investing activities in 2020 was attributable to a slight increase in new manufacturing equipment. Financing Activities Net cash provided by financing activities totaled $5,373 for 2020, as compared to $295 used in financing activities during 2019, an increase of $5,668. This increase was primarily due to borrowing $1,715 in May 2020 from Citibank, N.A. pursuant to the PPP under the CARES Act., receiving an aggregate net proceeds of $2,812 from a private placement of common stock and warrants and proceeds of $1,174 from the exercise of certain of these warrants during the last four months of 2020. 43 Backlog As of December 31, 2020, we had a backlog of $4.2 million. The amount of backlog represents revenue that we anticipate 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. Backlog at December 31, 2020 was comprised of the following elements: 65% in purchases of DC power systems, parts and services by telecommunications customers in the U.S., 21% in purchases from telecommunications customers outside the U.S., 2% by military contractors; and 12% from other markets. We believe the majority of our backlog will be shipped within the next six months. However, there can be no assurance that we will be successful in fulfilling such orders and commitments in a timely manner or that we will ultimately recognize as revenue the amounts reflected in our backlog. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Not applicable. Item 8. Financial Statements and Supplementary Data. Reference is made to the financial statements, which begin at page F-1 of this Annual Report on Form 10-K. Item 9. Changes in and Disagreements with Accountants on Accounting and Finance Disclosure. None.