Polar Power, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This filing reports full-year results, not standalone fourth-quarter results. Dollar amounts below are in thousands unless stated otherwise.
Business context
Polar Power designs, manufactures and sells DC power generators and related hybrid, solar and cooling systems, primarily for telecommunications backup and off-grid power. It also serves military, marine, industrial and electric-vehicle-related markets. Telecommunications accounted for 96% of 2022 sales; the company continues to pursue customer and market diversification.
Financial performance and liquidity
| Metric | FY2022 | FY2021 |
|---|---|---|
| Net sales | $16,056 | $16,896 |
| Gross profit | $2,125 | $3,445 |
| Gross margin | 13.2% | 20.4% |
| Operating loss | $(5,533) | $(3,098) |
| Net loss | $(5,584) | $(1,414) |
| Net loss per share, basic and diluted | $(0.43) | $(0.11) |
| Cash used in operating activities | $(6,507) | $(9,380) |
- Sales declined 5%. Cost of sales rose to 86.8% of sales from 79.6%, reflecting weak factory overhead absorption amid labor shortages and component delays.
- Operating expenses increased 17% to $7,658. General and administrative expense rose to $4,727, including $515 of stock-based compensation; R&D expense declined to $1,460.
- Cash and cash equivalents were $211 at year-end, down from $5,101. Working capital was $17,367, versus $21,760 a year earlier. Inventory increased to $15,460 from $9,017.
- Operating cash outflow included a $6,443 inventory build. Investing cash outflow was $25; financing provided $1,642, including $1,884 in credit-facility advances and $242 in equipment-financing repayments.
- At year-end, the company had $1,884 outstanding on its revolving credit facility and $1,137 of availability; the facility has a $4,000 maximum and expires September 30, 2024. Notes payable totaled $268. Operating lease liabilities totaled $268.
- Total assets were $24,188 and total liabilities $6,007 at year-end. The company reported stockholders’ equity of $18,181.
Material changes and notable items
- International sales increased 211% to $3,983, or 25% of revenue, from $1,279, or 8%, in 2021. South Pacific Islands sales contributed $3,678 in 2022.
- The two largest customers generated 66% and 23% of 2022 revenue, respectively; the largest U.S. telecommunications customer alone represented 66%. In 2021, the largest customer represented 67%.
- Supply-chain constraints and labor shortages postponed approximately $3,500 of expected shipments into the first half of 2023. The company reported a $12,001 backlog at December 31, 2022, and said it expected most of it to ship within 12 months, while cautioning that fulfillment and revenue recognition are not assured.
- The 2021 comparison benefited from a $1,715 non-cash gain on forgiveness of a Paycheck Protection Program loan and approximately $2,000 of employee retention credits recorded as expense reductions. The $2,000 ERC receivable remained outstanding at December 31, 2022, pending IRS processing.
- In 2022, Polar received $6.2 million in purchase orders from a South Pacific telecommunications customer; 59% shipped during 2022, with the remainder expected in the first half of 2023. It also received $1.1 million of orders for solar hybrid systems.
- The master service agreement with its largest customer was renewed in September 2022 with product price adjustments intended to help offset inflation and support margins.
Outlook, risks and contingencies
- No formal revenue or earnings guidance is provided. Management expects sales to improve as labor and supply constraints ease, plans to expand sales and engineering efforts in 2023, and anticipated supplier backlogs to normalize around the fourth quarter of 2023. These expectations are uncertain.
- Management said it had taken steps to improve margins and believed available operating cash flow and credit-line capacity would fund the operating plan for more than one year after issuance of the financial statements. The auditor identified going-concern assessment as a critical audit matter; the financial statements were prepared on a going-concern basis.
- Key risks include severe customer and telecom concentration, supply-chain and labor disruption, commodity and freight costs, inventory valuation and demand uncertainty, and dependence on individual purchase orders and key engine suppliers without long-term supply commitments.
- Cash was limited and operating cash use remained significant. Management says additional financing may be needed if operating cash flows and credit availability are insufficient; future funding could be unavailable or dilute shareholders.
- The auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal-control effectiveness. Inventory valuation and liquidity forecasts were identified as critical audit matters.
- The company reported no material pending legal proceedings. A manufacturing-facility lease was extended in January 2023 through February 2026, with aggregate monthly lease payments over the term of approximately $2.6 million.
Important facts for investors to verify
- Whether the $2,000 employee retention credit receivable is collected and whether the $1,137 of reported credit availability remains accessible under the facility terms.
- Shipment timing and conversion to revenue and cash of the $12,001 backlog, including the postponed shipments and South Pacific orders.
- Whether inventory of $15,460 is supportable by customer demand and realizable values; the auditor highlighted this estimate as a critical audit matter.
- Whether gross margins recover as production volumes and supplier availability improve, given the 13.2% FY2022 gross margin and continued losses.
- Whether customer concentration declines and whether international and non-telecommunications growth can be sustained.