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, 2025, we had 2,511,532 shares of common stock outstanding held of record by approximately 22 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. Item 6. [RESERVED]. 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. We are continuously diversifying our customer base and are selling our products into non-telecommunication markets and applications at an increasing rate. Within the various markets we service, our DC power systems provide reliable and low-cost DC power to service applications that do not have access to the utility grid (i.e., prime power applications) or have critical power needs and cannot be without power in the event of utility grid failure (i.e., back-up power applications). Serving these various markets, we offer the following three configurations of our DC power systems, with output power ranging from 5 kW to 50 kW: ● DC base power systems . These stationary systems integrate a DC generator and automated controls with remote monitoring, which are typically contained within an environmentally regulated enclosure. ● DC hybrid power systems . These systems incorporate lithium-ion batteries (or other advanced battery chemistries) with our proprietary battery management system into our standard DC power systems. ● DC solar hybrid power systems . These stationary systems incorporate photovoltaic and other sources of renewable energy into our DC hybrid power system. ● Mobile power systems . These stationary 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 / propane and renewable formats, with diesel, natural gas and propane gas being the predominate formats. During the years ended December 31, 2024 and 2023, 88% and 95%, respectively, of our total net sales were within the telecommunications market. In 2024, our two largest customers represented 48% and 14% of our total net sales, respectively, one being a Tier-1 telecommunications customer in the U.S. and one being a telecommunications customer outside the U.S. In 2023, our two largest customers represented 50% and 18% of our total net sales, respectively, one being a Tier-1 telecommunications customer in the U.S. and one being a telecommunications customer outside the U.S. There was no other revenue from customers in excess of 10% of total net sales in either period. During those periods, the majority of our sales were of our DC base powers systems. During 2024 and 2023, sales to international customers accounted for 13% and 21% of total revenue, respectively. Sales to military customers during 2024 and 2023 accounted for 8% and 3% of total revenues, respectively. During 2024 and 2023, sales to the marine and other markets accounted for 4% and 2% of total revenue, respectively. We launched our prime power DC generators incorporating the Toyota 1KS engines optimized for propane, natural gas, and extremely long operational life. We believe that with the increasing installation restrictions on small diesel engines along with their limited availability due to stringent EPA regulations will force a change to natural gas and propane (LPG) generators. LPG and natural gas are lower in cost than diesel fuel in many areas throughout the world. Our new LPG and natural gas generators will provide strong opportunities for growth and diversification in line with our long-term plan. At the international level, we have several telecommunications customers in the south pacific region purchasing our DC generators to develop the telecommunications infrastructure in this region. We believe the implementation and ongoing development of 5G networks along with programs to develop the telecommunications infrastructure in rural and underdeveloped countries will continue to fuel our growth in the telecommunications market over the next five to ten years. In May 2023, we announced plans to expand our mobile offerings by upgrading our mobile CHAdeMO EV chargers to the universal combined charging system standard to reach the mobile EV charging market. Mobile EV chargers are used for emergency roadside service providing a fast-charging solution for EVs that have run out of charge before reaching a stationary charging facility. During second half of 2024, we have successfully tested our demonstrator model on several platforms and made appropriate improvements and changes. We believe this configuration of remote mobile electric vehicle charger is just an initial model and based on power and fuel needs will result in various additional configurations. We also continue to market our DC generators for the military, advanced mobility and marine markets as part of our ongoing customer diversification strategy. The military’s increasing use of robotics, drones, and computerization in the field is driving the demand for battery charging with DC generators. Military sales are advantageous because of their long-term contracts and they tend to cover the cost of product development. We expect that opportunities in the bad-grid (i.e., areas where wireless towers are connected to an electrical grid that loses power for more than eight hours), and off-grid (i.e., areas where wireless towers are not connected to an electrical grid) applications, which include telecommunications towers, commercial and residential backup power, electric vehicle charging, “mini-grid” and various other power applications, will help to expand the market for our natural gas/LPG (propane) product lines domestically and internationally. In 2024. We demonstrated a microgrid product that can provide 24/7 electric power to a commercial facility. This project was funded by UNHCR a United Nations organization. The product included DC generator, battery storage, AC inverter, solar charge controller and remote monitoring in a single container which can be delivered to any remote location to provide power. We believe this product in its current configuration can serve mid-level micro grid needs in residential and commercial areas. We plan to develop new configurations of DC power system, battery storage and solar products to optimize the match between our solutions and various application needs. 35 Critical Accounting Policies 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 our revenue is derived from product sales. Product revenue is recognized when performance obligations under the terms of a contract are satisfied, which occurs for us upon shipment or delivery of products or services to our customers based on written sales terms, which is also when control is transferred. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring the products or services to a customer. We determine 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 we place the product with the customer’s carrier or deliver the product to a customer’s location. We regularly review our customers’ financial positions to ensure that collectability is reasonably assured. We also recognize revenue from the rental of equipment. Our rental revenues have not been significant to date and have accounted for less than one percent of total revenues for the years ended December 31, 2024 and 2023. Warranty Costs . We provide limited warranties for parts and labor at no cost to our 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 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. We estimate the actual historical warranty claims coupled with an analysis of unfulfilled claims to record a liability for specific warranty purposes. Inventory . Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out (“FIFO”) basis. We record adjustments to our 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. 36 Effects of Inflation The impact of inflation and changing prices during 2024 has not been significant on the financial condition or results of operations of our company. Rapid changes in the global economy may cause significant spikes in inflation which may have an impact in our financial condition during 2025 and beyond. Because some of our contracts are at a fixed price, we face the risk that cost overruns or inflation may exceed, erode or eliminate our expected profit margin, or cause us to record a loss on certain projects. We are taking actions to manage the potential impacts of these matters and we will continue to assess the actual and expected impacts and the need for further action. 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. Financial Performance Summary – Year Ended December 31, 2024 Our net sales for the year ended December 31, 2024, were $13,970, as compared to $15,293 for the year ended December 31, 2023. We reported a net loss of $4,677 for 2024, as compared to net loss of $6,548 for 2023. Cost of sales includes inventory write-downs of $900 in 2024, and $450 in 2023, to adjust inventory to net realizable value. During 2024, we saw significant volatility in revenue primarily from our largest customer which greatly affected overall performance. We believe the drop in sales is attributed to excess inventory at customer warehouse collected during COVID-19 and customer concerted effort to reduce inventory. We believe the excess inventory has largely been reduced and anticipate normalization in purchases during second half of 2025. We reached profitability in the second and third quarters of the year with gross margins at 39% and 29%, respectively. We experienced net losses and negative margins in the first and fourth quarter. We believe economic and geopolitical factors continue to influence our customers’ buying patterns. During 2024, sales to our customers in the U.S. were $12,108, or 87% of total net sales, as compared to 79% in 2023. During 2024, our largest customer represented 48% of our total net sales, as compared to 50% in 2023. Our international sales were $1,862, or 13% of total net sales in 2024, as compared to $3,216, or 21%, during 2023. Our sales backlog as of December 31, 2024, was $1,306, with 53% of that amount being attributable to our largest U.S. telecommunications customer, 3% attributed to other telecommunications customers, 36% to customers in the military markets, and 9% to customers in marine and other markets. The Company expects to complete shipment of these orders within the next six to twelve months. We plan to continue to market our products globally and expand our customer base in all market segments. We plan to continually improve our inventory turns to generate cash flow from operations combined with austerity measures on non-essentials overhead to manage cash flow while sales improves. During 2024, we successfully reduced overhead expenses by $996 to improve cash generated through operations. We plan to continue take proactive steps to manage our operations and mitigate the financial impacts of higher costs, supply chain issues, and geopolitical factors. We have $12.9 million in inventory and completed updating our manufacturing facilities to accommodate three to four times the annual revenue of 2024. However, the full impact on our financial and operating performance of these factors will depend significantly on the duration and severity of these factors, the actions taken to mitigate their 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 “Risk Factors” commencing on page 17 of this Annual Report on Form 10-K for additional considerations. 37 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, 2024 and 2023 (in thousands) Year Ended December 31, Dollar Variance Percentage Variance Results as a Percentage of Net Revenues for the Year Ended December 31, Favorable Favorable 2024 2023 (Unfavorable) (Unfavorable) 2024 2023 Net sales $ 13,970 $ 15,293 $ (1,323 ) (9 )% 100.0 % 100.0 % Cost of sales (includes inventory write-downs of $900 and $450, respectively) 12,656 14,598 1,942 13 % 90.6 % 95.5 % Gross profit 1,314 695 619 89 % 9.4 % 4.5 % Sales and marketing expenses 1,010 1,172 162 14 % 7.2 % 7.7 % Research and development expenses 771 1,222 451 37 % 5.5 % 8.0 % General and administrative expenses 3,908 4,291 383 9 % 28.0 % 28.1 % Total operating expenses 5,689 6,685 996 15 % 40.7 % 43.7 % Loss from operations (4,375 ) (5,990 ) 1,615 (27 )% (31.3 )% (39.2 )% Interest and finance costs (649 ) (559 ) (90 ) 16 % (4.6 )% (3.7 )% Other income (expense), net 347 1 346 34600 % 2.5 % 0.0 % Loss before income taxes (4,677 ) (6,548 ) 1,871 (29 )% (33.5 )% (42.8 )% Income tax — — — — — — Net loss $ (4,677 ) $ (6,548 ) $ 1,871 (29 )% (33.5 )% (42.8 )% 38 Net Sales. Net sales decreased by $1,323, or 9%, to $13,970 for the year ended December 31, 2024, as compared to $15,293 for the year ended December 31, 2023. The decrease in net sales is primarily due to a decrease in deliveries of our DC power generators to our largest telecommunications customer in the U.S. During 2024, revenue from telecommunications customers accounted for 88% of total net sales, as compared to 95% of total net sales during 2023. Our two largest customers represented 48% and 14% of our total net sales in 2024, as compared to 50% and 18% in 2023. Our largest customer in each year was a Tier-1 telecommunications customer in the U.S., and our second largest customer in each year was a telecommunications customer outside the U.S. There was no other revenue from customers in excess of 10% of total net sales in either period. During 2024 and 2023, sales to international customers accounted for 13% and 21% of total revenue, respectively. Sales to military customers during 2024 and 2023 accounted for 8% and 3% of total revenues, respectively. Sales to marine and other markets during 2024 and 2023 accounted for 4% and 2% of total revenue, respectively. Most of our sales were of our DC base powers systems during the two years. Cost of Sales . Cost of sales decreased by $1,942 or 13%, to $12,656 during 2024, compared to $14,598 during 2023. Cost of sales as a percentage of net sales decreased from 95.5% in 2023 to 90.6% in 2024 primarily as a result of a decrease in factory overhead absorption as compared to the same period in 2023. We believe we can achieve significant reductions in the cost of sales in 2025 as a percentage of net sales as volumes in production increase. Cost of sales includes inventory write-downs of $900 in 2024, and $450 in 2023, to adjust inventory to net realizable value. Gross Profit . We recognized a gross profit of $1,314 during 2024, as compared to a gross profit of $695 during 2023, which represents an increase in gross profit of $619 or 89%. Gross profit as a percentage of net sales increased to 9.4% in 2024, as compared to 4.5% in 2023. The increase in gross profit during 2024 was primarily because of improved labor efficiencies in manufacturing resulting from higher production volumes primarily during the second and third quarters of 2024. Sales and Marketing Expenses. Sales and marketing expenses decreased $162 to $1,010 during 2024, as compared to $1,172 during 2023. The decrease was attributable to a slight decrease in sales support staff during 2024 as compared the same period in 2023. We plan to increase our sales force and increase our marketing and tradeshow activities in 2025 to support our diversification strategy and expand our customer base in all market segments. 39 Research and Development Expenses. During 2024, research and development expenses decreased by $451 to $771, as compared to $1,222 during 2023. The decrease in 2024 is attributed to a decrease in engineering staff during 2024 as compared to 2023. Our research and development efforts during 2024 primarily focused on product customization on new customers orders, our mobile EV chargers, and solar hybrid power systems. We continue to search for qualified engineers to join our engineering team and to support our customer diversification efforts. General and Administrative Expenses . Our general and administrative expenses decreased by $383 to $3,908 during 2024, as compared to $4,291 during 2023. The decrease in general and administrative expenses during 2024 was primarily due a decrease in the number of general and administrative staff during 2024, as compared to 2023. Interest and Finance Costs. Our interest expense was $649 in 2024, as compared to $559 in 2023. Our interest expense is primarily from borrowings from our credit facility. Net Loss. As a result of the factors identified above, we generated a net loss of $4,677, or ($1.86) per basic and diluted share, for 2024, as compared to net loss of $6,548, or ($3.45) per basic and diluted share, for 2023, a decrease loss of $1,871. Liquidity, Capital Resources and Going Concern Going Concern The Company’s financial statements have been prepared under the assumption that the Company will continue as a going concern. For the year ended December 31, 2024, the Company recorded a net loss of $4,677 and used cash in operations of $536. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements are issued. In addition, the Company’s independent registered public accounting firm, in their report on the Company’s December 31, 2024, audited financial statements, raised substantial doubt about the Company’s ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to obtain additional financing, drive further operating efficiencies, reduce expenditures, and ultimately, create profitable operations Our ability to obtain additional financing in the debt and equity capital markets is subject to several factors, including market and economic conditions, our performance and investor sentiment with respect to us and our industry. The Company has taken action to improve its margins, and is continuing to build a strong back log, and expects to continue investing in product development and sales and marketing activities. In the event that the Company does not generate sufficient cash flows from operations and is unable to obtain funding, the Company will be forced to delay, reduce, or eliminate some or all of its discretionary spending, which could adversely affect the Company’s business prospects, ability to meet long-term liquidity needs or ability to continue operations. Sources of Liquidity During the year ended December 31, 2024, we funded our operations primarily from cash on hand. As of December 31, 2024, we had working capital of $7,037, as compared to working capital of $11,775 at December 31, 2023. This $4,738 decrease in working capital is primarily attributable to a $51 decrease in cash and cash equivalents resulting from net cash of $536 used in operating activities, net cash used in investing activities of $19 for the acquisition of new property and equipment, and net cash from financing activities of $504 which includes net proceeds of $559 from our credit facility. On December 31, 2024, and December 31, 2023, our net trade receivables totaled $2,153 and $1,676, respectively. On December 31, 2024, $1,771 (82%) represented the largest open customer account balance, while $1,156 (69%) and $264 (16%) represented the two largest open customer account balances on December 31, 2023. At December 31, 2021, we recognized $2,000 related to the ERC for salaries and benefits expenses incurred during 2021 resulting in a refundable tax credit. The ERC assist business owners and their employees by providing an incentive to keep workers on the payroll and eligible businesses received a tax credit for a percentage of each eligible employee’s wage. In May 2024, the Company received $2,000 of the ERC receivable. Our available capital resources on December 31, 2024, consisted primarily of $498 in cash and cash equivalents, as compared to $549 as of December 31, 2023. We expect our future capital resources will consist primarily of cash on hand, cash generated by operations, drawdowns on our credit facility with Pinnacle Bank and future debt or equity financings, if any. 40 Credit Facility Effective September 30, 2020, we entered into a Loan and Security Agreement, or Loan Agreement, with Pinnacle. The Loan Agreement was amended by the First Modification to Loan and Security Agreement on October 7, 2020. The Loan Agreement’s initial term ended on September 30, 2022. On November 3, 2022, we executed the Second Modification to Loan and Security Agreement with Pinnacle for a two-year term with an expiration date of September 30, 2024. On September 23, 2024, the Loan and Security Agreement with Pinnacle was renewed for two years and expires September 30, 2026. 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. The aggregate amount of the outstanding advances under the revolving credit facility were initially limited to $4,000. On May 25, 2023, we executed the Fourth Modification to the Loan Agreement to amend the amount of available advances under the Loan Agreement such that the aggregate amount of the outstanding advances under the revolving credit facility may not be greater than $6,000 and raised the concentration percentage applicable to certain Tier-1 telecommunication customers from 50% to 75% in the definition of eligible accounts. On September 5, 2023, the Company entered into a Fifth Modification to the Loan Agreement under which the parties (a) agreed to amend the amount of available advances under the Loan Agreement such that the aggregate amount of the outstanding advances under the revolving credit facility may not be greater than seven and a half million dollars ($7.5 million), (b) extended the standard of eligibility applicable to certain Tier-1 telecommunication customers from ninety (90) days to one hundred twenty (120) days of invoice date in the definition of eligible accounts, (c) increased the inventory advance rate from 35% to 40% of the aggregate eligible inventory value of eligible inventory, and (d) raised the inventory advance limit from two million dollars ($2.0 million) to four million dollars ($4.0 million). Interest accrues on the daily balance at a rate of 1.25% above the prime rate, or the 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. We have an outstanding balance of $4,797 under the Loan Agreement at December 31, 2024. During 2024, we advanced a net of $559 under the Loan Agreement. As of December 31, 2024, we had availability under the Loan Agreement of $654 and we believe that we are in compliance with the terms and conditions of the Loan Agreement. 41 Cash Flow The following table sets forth the significant sources and uses of cash for the periods set forth below (in thousands): Year Ended December 31, 2024 2023 Net Cash Provided By (Used In): Operating Activities $ (536 ) $ (3,430 ) Investing Activities $ (19 ) $ (194 ) Financing Activities $ 504 $ 3,962 Net increase (decrease) in cash $ (51 ) $ 338 Operating Activities Net cash used in operating activities for 2024 was $536, as compared to $3,430 for the same period in 2023. This decrease in net cash used in 2024 was primarily due to a net loss of $4,677, a decrease in ERC receivable of $2,000, a decrease in refundable income taxes of $787, and a decrease in accounts payable of $1,354. Investing Activities Net cash used in investing activities for 2024 totaled $19, as compared to $194 for 2023, a decrease of $175. Net cash used in investing activities was primarily due to acquisitions of property and equipment. Financing Activities Net cash provided by financing activities totaled $504 for 2024, as compared to $3,962 provided by financing activities during 2023, an decrease of $2,894. This cash provided was primarily borrowings from the line of credit with Pinnacle. 42 Backlog As of December 31, 2024, we had a backlog of $1,306. 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, 2024 was comprised of the following elements: 56% in purchases of DC power systems by telecommunications customers in the U.S., 35% in purchases in military markets, and 9% in purchases by customers in the marine and other markets. We believe the majority of our backlog will be shipped within the next six to twelve 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.