Polar Power, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Unaudited financial amounts are in thousands of dollars, except per-share data. Polar Power designs and manufactures DC power systems, primarily for telecommunications and also for military, EV charging, marine, industrial, and other applications.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 / prior balance date |
|---|---|---|
| Net sales | $3,709 | $3,290 |
| Gross profit (loss) | $905; 24.4% margin | $(58); (1.8)% margin |
| Operating expenses | $2,012 | $1,840 |
| Operating loss | $(1,107) | $(1,898) |
| Net loss | $(1,120); $(0.10) per share | $(1,903); $(0.15) per share |
| Operating cash flow | $(847) | $(3,381) |
| Cash and cash equivalents | $4,186 at March 31, 2022 | $5,101 at December 31, 2021 |
| Working capital | $20,724 | $21,760 at December 31, 2021 |
| Total notes payable | $450 | $510 at December 31, 2021 |
Sales rose 13% year over year, driven mainly by U.S. Tier-1 telecom demand tied to 5G infrastructure. Lower cost of sales and improved manufacturing labor efficiencies lifted gross margin from negative to 24.4%. Operating expenses increased 9%, including higher general and administrative costs. The company remained loss-making and used cash in operations; inventory rose to $10,485 from $9,017 at year-end.
At March 31, the company had no borrowings on its revolving credit facility and reported $3,127 of availability, subject to borrowing-base limitations and lender terms. The facility has a stated $4,000 maximum and an initial term through September 30, 2022, with annual renewal thereafter. Notes payable are secured equipment financing; operating lease liabilities totaled $814. No material capital expenditures were reported.
Material changes and business developments
- Telecommunications represented 99% of Q1 2022 sales, versus 93% in Q1 2021. One U.S. telecom customer generated 90% of quarterly sales; 93% of accounts receivable at March 31 was due from the largest customer.
- International sales fell to 1% of revenue from 26% a year earlier. Management cited a different customer mix between periods.
- Backlog was approximately $9.1 million at March 31, up 66% from $5.6 million a year earlier. The filing gives $9,055 in one section and $9,054 in another. Management said most backlog was expected to ship within six months, but fulfillment and revenue recognition are not assured.
- A $3.120 million mobile-power order was cancelled in April due to the customer changing its product design; it was excluded from the March 31 backlog. In April, the company received a separate $4.0 million South Pacific telecom order, with deliveries planned to begin mid-year and finish by year-end 2022.
- The company received EPA certification in March for its 4Y Toyota engine project, extending its stated power range to 35 kW on natural gas and LPG.
Outlook, risks, and unusual items
- Management expects sales to increase as labor and supply-chain issues ease, but provided no quantified financial guidance. It said supplier backlogs might normalize in the fourth quarter of 2023 and planned to hold larger inventories of engines and electronics in the interim.
- COVID-19-related labor shortages and supply delays constrained shipments; management said January shipments were about 75% below its projected deliveries for that month. Shortages included PV modules, electronic components, and diesel engines, with increased lead times and costs. Management expects pandemic effects to continue to weigh on results, potentially into 2022 and beyond.
- Management attributed higher shipping costs in part to diesel fuel prices amid Russia’s invasion of Ukraine, while also suggesting geopolitical uncertainty could increase military-contract opportunities. Inflation could erode margins on fixed-price contracts.
- Customer concentration, dependence on telecom orders, supplier availability and pricing, order cancellations, inventory valuation, competition, and the ability to fund operations are key risks. Management noted that additional liquidity might be needed if sales deteriorate and that financing may not be available on acceptable terms.
- The balance sheet includes a $2.0 million employee retention credit receivable recognized for 2021; the filing reports the same amount at March 31 and year-end. Warranty reserves were $600. Management reported no material legal proceedings and said disclosure controls were effective; no material changes to internal control over financial reporting were identified.
Important facts for investors to verify
- Whether the $4.0 million South Pacific order converts to timely shipments, revenue, and cash collection, and how it affects customer concentration.
- Backlog conversion, including the March backlog figure discrepancy, the cancelled $3.120 million order, and the timing and cancellation terms of other purchase commitments.
- Customer and receivables concentration, particularly the largest customer’s share of sales and accounts receivable.
- Whether supply constraints, labor availability, and component cost inflation improve as management anticipates, and the resulting effect on gross margins and delivery schedules.
- Collection and timing of the $2.0 million employee retention credit receivable, and the company’s cash runway given operating cash use and available credit-facility borrowing capacity.