Polar Power, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are with FY2020. Amounts are in U.S. dollars and, unless noted, in thousands.
Business context
Polar Power designs, manufactures and sells DC power generators and related renewable-energy, cooling and control systems, primarily for telecommunications backup and off-grid power. It also serves military, advanced mobility, EV charging, marine and industrial markets. The company reports one operating segment. Its results remain heavily exposed to U.S. telecommunications demand and a small number of customers.
Financial performance and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net sales | $16,896 | $9,031 |
| Gross profit (loss) | $3,445 | ($5,623) |
| Gross margin | 20.4% | (62.2)% |
| Operating loss | ($3,098) | ($12,964) |
| Net loss | ($1,414) | ($10,871) |
| Operating cash flow | ($9,380) | ($6,548) |
| Cash and cash equivalents at year-end | $5,101 | $1,646 |
- Revenue rose 87%, primarily from higher U.S. Tier-1 telecom orders associated with 5G deployments and improved customer ability to deploy systems as COVID-related restrictions eased. U.S. Tier-1 telecom customers generated 70% of sales; the largest customer alone generated 67%. Telecom overall represented 89% of sales.
- Cost of sales fell 8% despite higher sales; the company attributed the improvement to manufacturing efficiencies and overhead absorption. FY2020 included a $3,400 inventory write-down. FY2021 cost of sales benefited from a $1,300 Employee Retention Credit (ERC), while operating expenses benefited from another $700 ERC credit. The $2,000 ERC was recorded as a receivable at year-end.
- FY2021 net loss included a $1,715 non-cash gain from forgiveness of the PPP loan. The improvement in reported loss therefore reflects both stronger gross performance and this unusual gain. No income-tax benefit was recorded in FY2021; FY2020 included a $2,139 benefit.
- Working capital was $21,760 at year-end, versus $10,123 a year earlier. Cash increased by $3,455 after $9,380 of operating cash use, $71 of investing cash use and $12,906 of financing cash inflows. Financing included $12,466 net proceeds from a February 2021 stock offering and $707 from warrant exercises.
- Debt included $510 of equipment notes payable ($242 current and $268 long-term); the revolving credit line had no balance drawn, with $2,943 available under a facility capped at $4,000. Operating lease liabilities totaled $989. The $1,715 PPP loan was forgiven.
Changes, outlook, risks and unusual items
- Sales backlog was approximately $11,807 at December 31, 2021: 72% telecom orders, 27% advanced mobility and 1% other markets. Management expected most of it to ship within 12 months, but noted delivery timing and revenue conversion were not assured; customer delivery dates extended as far as nine months amid commodity shortages.
- Management expects sales to increase as markets recover and plans to expand sales of natural-gas/LPG systems, develop higher-capacity systems and diversify customers and markets. The filing gives no quantified revenue, margin or earnings guidance.
- Management cited supply shortages, higher material and freight costs, and longer standard delivery times—14 weeks versus eight weeks previously. The company may not be able to pass cost increases through, particularly on fixed-price work. Yanmar supplied about 84% of engines used in systems sold in 2021; Toyota supplied about 6%, and there are no long-term supply commitments with key engine suppliers.
- Customer concentration is a principal risk: one customer accounted for 67% of FY2021 sales, and 72% of backlog was attributable to the largest U.S. telecom customer. International sales fell to 8% of revenue from 17% in FY2020. Military sales increased to 6% of sales from 1%.
- The company reported a net loss, $9,380 operating cash use and a $13,527 accumulated deficit. Management stated that cash, working capital and available credit were expected to fund obligations for at least one year after issuance of the statements, but continued operations depend on adequate revenue and liquidity. The auditor identified the going-concern assessment as a critical audit matter; the financial statements received an unqualified audit opinion.
- Management reported effective disclosure controls and internal control over financial reporting as of year-end. The auditor did not attest to internal-control effectiveness. The auditor also identified inventory valuation as a critical audit matter, reflecting judgment in forecasting demand and estimating net realizable value.
- Other items: the company received EPA certification in March 2022 for a larger Toyota engine intended for 20–30 kW systems. COO Rajesh Masina resigned effective January 21, 2022. The company disclosed no material pending legal proceedings.
Important facts for investors to verify
- Whether the largest telecom customer’s purchasing levels and the 5G-related order cycle remain strong, and what proportion of backlog ships and converts to revenue.
- Whether customer concentration declines and non-telecom growth—including the advanced mobility orders—produces repeat sales and viable margins.
- Whether operating cash use, receivable collection and the $2,000 ERC receivable improve, and whether management’s liquidity forecast remains adequate.
- How much of the FY2021 margin improvement is sustainable after the $2,000 ERC benefit, and how inflation, freight and component costs affect pricing and gross margin.
- Whether key engine and other component supplies support the backlog and stated delivery expectations; confirm the credit-line availability and covenant status.
- The compensation scorecard lists FY2021 gross margin at 12.7%, whereas reported financial statements show gross margin of 20.4%; clarify the differing calculation or basis.