Polar Power, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Dollar amounts are in thousands, except per-share data. Polar Power designs and manufactures DC power systems, with telecommunications the principal market. Financial statements are unaudited.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $1,911 | $1,707 | $11,688 | $9,690 |
| Gross profit (loss) | $(108) | $(247) | $2,122 | $1,719 |
| Gross margin | (5.7)% | (14.5)% | 18.2% | 17.7% |
| Operating loss | $(1,673) | $(2,376) | $(3,018) | $(4,208) |
| Net loss | $(1,844) | $(2,381) | $(3,393) | $(4,240) |
| Net loss per share, basic and diluted | $(0.14) | $(0.19) | $(0.26) | $(0.33) |
- Nine-month sales rose 21%, primarily from more generator customers and higher international telecommunications sales. Q3 sales rose 12% year over year. Telecommunications accounted for 96% of nine-month sales.
- Nine-month gross margin improved to 18.2% from 17.7%, reflecting labor efficiencies, overhead absorption and $323 of previously written-off obsolete inventory used in production. Q3 remained loss-making at the gross-profit level, though its gross loss narrowed year over year.
- Nine-month operating expenses declined 13% to $5,140. General and administrative expense was lower partly because the 2022 period included $515 of stock-based compensation that did not recur. Interest and finance costs increased to $375 from $39, mainly due to greater line-of-credit borrowing.
Cash flow, balance sheet and liquidity
- At September 30, 2023, cash was $296, working capital was $13,316, total assets were $28,396, total liabilities were $13,608 and stockholders’ equity was $14,788. Inventory was $19,155, up from $15,460 at year-end 2022.
- For the first nine months, operating cash use was $3,084, investing cash use was $194 and financing provided $3,363, primarily from credit-facility borrowings. Cash increased by $85 from $211 at year-end 2022.
- The Pinnacle Bank credit facility had $5,194 outstanding and only $119 available at quarter-end. Its maximum advance limit had been raised to $7.5 million; borrowing availability is subject to collateral-based limits and lender terms. The facility expires September 30, 2024, and its rates were 9.75% on receivables-based advances and 10.75% on inventory advances.
- Operating lease liabilities totaled $3,207. The balance sheet also included $233 of notes payable to the CEO, bearing 1% interest and due in 2024; a further $28 CEO note was issued in November 2023.
- Management reported a nine-month net loss of $3,393 and operating cash use of $3,084, but concluded that operating cash flow and available credit would probably meet the operating plan and liquidity needs for one year after issuance. The $2,000 employee retention credit receivable remained under IRS processing. Management warned that insufficient operating cash or financing could require spending cuts and impair operations.
Changes, outlook and key risks
- Customer and market mix: The largest customer represented 52% of nine-month sales, versus 88% in the prior-year period; a South Pacific telecommunications customer contributed 22%. International sales rose to 24% of nine-month sales from 2%. Despite diversification progress, sales remain highly concentrated in telecommunications.
- Backlog and deliveries: Backlog was $5,121 at September 30, with 90% telecommunications, 7% military, 2% marine and 1% other. Management expected most backlog to ship within 12 months, but gave no assurance that orders would be fulfilled or recognized as revenue. The filing says $2.8 million of deliveries to the largest telecommunications customers were rescheduled and expected within the following two quarters.
- Plans: Management anticipated higher sales as supply-chain and labor constraints eased and had purchased engines in anticipation of demand. It was developing LPG/natural-gas systems, 27 kW generators and mobile EV chargers; the new EV charger line was expected to be available before the end of Q1 2024. No specific financial guidance was provided.
- Operational and market risks: Management cited supply delays, labor shortages and overtime, higher material and energy costs, inflation and rising interest rates. Long component lead times, high inventory, dependence on key engine suppliers, competitive pressure and long customer sales cycles could constrain production or margins.
- Other developments: On November 9, 2023, the company issued 12,062 common shares to cancel all 24,122 outstanding warrants. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The company reported no material pending legal proceedings.
Important facts for investors to verify
- Whether the delayed $2.8 million of deliveries shipped as expected and converted to revenue, and how the $5.1 million backlog develops.
- Actual borrowing availability, collateral eligibility, covenant compliance and refinancing or repayment plans before the credit facility expires in September 2024.
- Inventory composition, turnover and realizability, including the effect of the inventory build and the $323 of previously written-off inventory used in production.
- Collection timing for the $2.0 million ERC receivable and the adequacy of cash resources given recurring losses and operating cash use.
- Whether customer diversification reduces dependence on telecommunications and major customers, and whether new products achieve commercial sales.