Polar Power, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Polar Power designs and sells DC power systems, primarily for telecommunications backup and off-grid applications. Financial statement amounts below are in thousands of dollars, except per-share data.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Net sales | $3,290 | $2,860; up 15% |
| Gross loss (margin) | $(58) (-1.8%) | $(160) (-5.6%) |
| Operating expenses | $1,840 | $2,160 |
| Operating loss | $(1,898) | $(2,320) |
| Net loss | $(1,903), or $(0.15) per diluted share | $(201), or $(0.02) per diluted share |
| Cash from operating activities | $(3,381) | $(1,867) |
| Cash and cash equivalents | $11,358 at March 31 | $1,646 at December 31, 2020 |
| Working capital | $21,256 | $10,123 at December 31, 2020 |
Gross loss narrowed as sales rose and manufacturing labor efficiency improved, but cost of sales still exceeded revenue. Operating expenses fell 15%, mainly due to lower sales and marketing and general and administrative costs. The larger reported net loss versus Q1 2020 chiefly reflects the absence of the prior-year $2,138 income tax benefit; the pre-tax loss improved by $436.
Financing activities provided $13,093, including approximately $12,466 net proceeds from a February public offering of 750,000 shares and $707 from warrant exercises. These proceeds drove the increase in cash despite operating cash use. The company had no borrowings under its revolving credit facility and reported $2,536 of availability. At quarter-end, notes payable were $698, the PPP loan balance was $1,715, and operating lease liabilities were $1,497. The company expected the PPP loan to be forgiven but stated forgiveness was not assured.
Business trends and changes versus prior year
- Telecommunications accounted for 93% of sales, down from 95%; the two largest telecom customers represented 74% of sales, compared with 84% a year earlier. The largest customer alone accounted for 59% of Q1 2021 revenue.
- International sales increased to $866 from $180 and made up 26% of revenue, compared with 6% in Q1 2020.
- Backlog was reported at $5,563 at March 31, 2021, up 31% from $4,239 at December 31, 2020. Management attributed the increase primarily to telecom demand related to 5G buildout; 71% was telecom, 19% military, and 10% other markets. The company expected most backlog to ship within six months, with no assurance of timely fulfillment or conversion to revenue.
- Sales of DC power systems were $3,155; engineering and technical support were $28; accessories were $107. Inventory was $8,554, down from $9,094 at year-end; cumulative inventory write-downs were $3,899 at March 31.
Outlook, risks and unusual items
Management anticipated improved sales in 2021, citing expected recovery in telecom customers’ backup-power programs, 5G deployments, new products, and customer diversification efforts. It said new customers and products could return sales to pre-2020 historical levels, but provided no specific revenue or earnings guidance. Management also planned to increase marketing as travel restrictions eased. Its outlook is qualified by uncertainty around COVID-19, customer purchasing patterns, supply-chain disruptions, and manufacturing utilization.
COVID-19 had adversely affected sales, sourcing, productivity, gross margins, and liquidity. Management warned that continued disruption could delay orders and collections, constrain manufacturing and labor, increase inventory, and intensify price competition. Other key risks include significant reliance on a small number of U.S. telecom customers; under-absorbed factory overhead and component-cost increases; dependence on suppliers, including engine suppliers; competition and product-development execution; and potential future financing needs. Management reported disclosure controls were effective at the reasonable-assurance level and no material change in internal control over financial reporting during the quarter. The filing reported no material legal proceedings.
The company raised $12.5 million net through an equity offering, increasing issued shares; this strengthened liquidity but diluted existing holders. The filing presents inconsistent quarter-over-quarter sales growth figures: 26% in one section and 29% in another. It also appears to refer to the backlog date as March 31, 2020 in one passage, although the surrounding discussion identifies March 31, 2021.
Important facts for investors to verify
- Confirm backlog date, composition, expected shipment timing, and actual conversion into revenue.
- Reconcile the filing’s 26% versus 29% quarter-over-quarter sales growth statements.
- Track gross margin recovery, manufacturing utilization, and whether cost reductions persist as sales and marketing activity increases.
- Monitor customer concentration, 5G-related order timing, international growth, and diversification beyond telecom.
- Verify PPP loan forgiveness outcome and continued compliance with the bank facility’s tangible-net-worth covenant.
- Assess operating cash use and liquidity needs against the cash raised through equity financing, including dilution from future capital raises.