Polar Power, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Unless noted, amounts are in thousands of dollars. Polar Power designs and manufactures DC power systems, primarily for telecommunications, with products also serving military, EV charging, marine and industrial applications.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Net sales | $4,190 | $3,709; up 13% |
| Cost of sales | $3,435 | $2,804; up 23% |
| Gross profit / margin | $755 / 18.0% | $905 / 24.4% |
| Operating expenses | $1,790 | $2,012 |
| Operating loss | $(1,035) | $(1,107) |
| Interest and finance costs | $78 | $13 |
| Net loss / diluted loss per share | $(1,113) / $(0.09) | $(1,120) / $(0.10) |
| Cash from operating activities | $(1,156) | $(847) |
| Cash and cash equivalents | $119 | $211 at Dec. 31, 2022 |
| Working capital | $15,880 | $17,367 at Dec. 31, 2022 |
| Inventory | $16,875 | $15,460 at Dec. 31, 2022 |
Sales growth was primarily from DC power systems. Gross margin declined as labor costs, overtime and material costs rose, while supply constraints and a wider product mix reduced manufacturing efficiency and overhead absorption. Operating expenses fell, but increased borrowing drove higher interest expense. Operating cash use worsened; increased receivables and inventory were significant working-capital uses. Financing provided $1,064, primarily from credit-facility advances, and cash fell by $92 during the quarter.
At March 31, 2023, the balance sheet reported a $3,010 line-of-credit balance, $205 of equipment notes payable, and $2,467 of operating lease liabilities. The revolving facility expires September 30, 2024, has a $4,000 maximum, and had $664 available. The company reported compliance with its tangible-net-worth covenant. A new three-year facility lease was recognized in Q1, adding $2,392 of right-of-use asset and lease liability.
Material changes, outlook and risks
- Customer and market concentration remains significant: telecommunications accounted for 95% of Q1 sales. Two customers generated 49.5% and 26.7% of sales, respectively, compared with 90.2% from the largest customer in Q1 2022. International sales rose to approximately 27% from 1%.
- Backlog was $8,949 at quarter-end; 97% related to telecommunications DC power systems. Management expected most backlog to ship within 12 months but cautioned that timing and revenue recognition are not assured. The company planned to deliver the remaining $1,480 of a South Pacific customer order over the next two quarters.
- Management said it expects sales to increase as supply-chain and labor challenges ease. It planned to add sales and engineering capacity, expand diversification, and increase marketing. No quantitative financial guidance was provided.
- The Toyota-based generator launch and shipments have begun after delays. Management expects production volumes to build, but timing and demand remain uncertain. In May 2023, the company announced plans for upgraded mobile EV chargers, expected to be available before the end of Q1 2024.
- Management concluded that cash from operations and available credit should be adequate to fund the operating plan and liquidity needs for one year after issuance. However, cash was only $119, credit availability was $664, and the filing states that failure to generate cash or obtain funding could force spending cuts and threaten operations.
- Key risks include supplier and component shortages, labor constraints, inflation and fixed-price project exposure, customer concentration, inventory and execution risk, dependence on the credit facility, and the company’s history of losses. The $2,000 employee retention credit receivable remained unpaid and was still being processed by the IRS.
- The company reported no material legal proceedings, effective disclosure controls at the reasonable-assurance level, and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile the line-of-credit balance: the balance sheet and Note 4 report $3,010, while MD&A states $2,959; MD&A also says cash increased by $119, whereas the cash flow statement shows a $92 decrease.
- Confirm the timing and collectability of the $2,000 employee retention credit receivable and whether remaining facility availability is sufficient given cash burn and working-capital needs.
- Track gross-margin recovery, production throughput, labor and component costs, and conversion of the $8,949 backlog into shipments and cash.
- Monitor customer concentration, especially reliance on telecommunications customers and the two largest Q1 customers, alongside progress in non-telecom diversification.
- Assess execution and funding needs for new products, including Toyota-engine generators and mobile EV chargers, against the company’s limited liquidity and stated timelines.