Polar Power, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unless noted, dollar amounts are in thousands. Polar Power designs, manufactures, and sells DC power systems, primarily for telecommunications and also for defense, marine, EV charging, and other applications.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $1,707 | $4,136 | $9,690 | $12,273 |
| Gross profit (loss) | $(247) | $966 | $1,719 | $1,875 |
| Gross margin | (14.5)% | 23.4% | 17.7% | 15.3% |
| Operating loss | $(2,376) | $(762) | $(4,208) | $(3,525) |
| Net income (loss) | $(2,381) | $942 | $(4,240) | $(1,827) |
| Net loss per diluted share | $(0.19) | $0.07 | $(0.33) | $(0.14) |
- Q3 sales fell 59% year over year; nine-month sales fell 21%. Management attributed the decline primarily to labor shortages and delayed components that postponed shipments.
- Q3 cost of sales was 114.5% of sales, producing a gross loss; management cited underutilized production capacity and lower factory overhead absorption. Nine-month gross margin improved year over year, but gross profit declined in dollars.
- Q3 general and administrative expense rose 80% to $1,482, including $515 of stock-based compensation. Nine-month G&A increased 30% to $3,648.
- Q3 2021 net income included a $1,715 gain from PPP loan forgiveness; there was no comparable gain in 2022.
Cash, liquidity, and debt
- At September 30, cash was $363, versus $5,101 at December 31, 2021. Working capital was $18,445, down from $21,760; current assets were $24,319 and current liabilities $5,874.
- Nine-month operating cash use was $4,532, compared with $6,890 in 2021. Cash declined by $4,738 over the period. Inventory increased to $15,625 from $9,017, while accounts receivable fell to $1,216 from $4,243.
- Notes payable totaled $329, including $248 current; no revolving-credit balance was outstanding. The company reported $2,920 of availability under its Pinnacle Bank facility at September 30. On November 3, 2022, it extended the facility through September 30, 2024; the maximum facility is $4,000, subject to borrowing-base limits and lender terms.
- Management stated that projected operating cash flow and available credit were expected to support the company as a going concern through September 30, 2023. The filing also says insufficient operating cash or financing could require spending reductions and could adversely affect operations.
Business developments, outlook, and risks
- Backlog was $13,614 at September 30; 98% was telecommunications-related. Management expected most of it to ship within three to six months, while cautioning that fulfillment and revenue recognition were not assured.
- Backlog included a $6,279 South Pacific Islands order for off-grid generators, expected to ship by year-end 2022, and $5,198 of orders from U.S. telecommunications customers. Management expected a significant Q4 2022 sales rebound as components arrived and delayed orders shipped.
- Management said supply constraints and labor availability remained obstacles, and anticipated supplier backlogs would normalize sometime in Q4 2023. It planned to maintain larger inventories to mitigate disruptions.
- The company renewed its master service agreement with its largest customer in September, including product price adjustments management believed would help offset inflation and improve margins. Fixed-price contracts nevertheless leave the company exposed to cost overruns.
- Customer concentration is substantial: the largest customer generated 87% of Q3 and 88% of nine-month sales; it represented 96% of accounts receivable at quarter-end. Telecommunications represented 97% of nine-month sales.
- Other cited risks include COVID-related and geopolitical disruption, component shortages and rising costs, inventory write-downs, competition, long sales cycles, and execution risk in diversifying beyond telecommunications. The company reported no legal proceedings expected to have a material adverse effect. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Confirm the timing and completion of shipments underlying the $13.6 million backlog, particularly the South Pacific order, and whether backlog converts into collected revenue.
- Track cash burn, credit-facility availability and borrowing-base limits, and whether the November 2022 extension’s terms or covenants constrain liquidity.
- Assess whether production volumes, labor availability, and component supply recover sufficiently to restore positive gross margins and support management’s Q4 rebound expectation.
- Monitor customer concentration, including the largest customer’s share of sales and receivables, and progress in diversifying revenue.
- Reconcile international-sales disclosures: the customer-type note reports international sales of 7% of Q3 2022 revenue, while one MD&A passage says 2%; the filing text does not explain this discrepancy.