Polar Power, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Financial amounts below are in thousands of dollars, except per-share data. The company designs, manufactures and sells DC power systems, with telecommunications its principal market. The filing was delayed from May 15 to June 29, 2020 because COVID-19 disrupted operations and access to financial-reporting staff.
Financial results and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Net sales | $2,860 | $7,747; down 63% year over year |
| Gross profit (loss) and margin | $(160); (6)% reported | $2,392; 31% |
| Operating expenses | $2,160 | $2,313 |
| Operating income (loss) | $(2,320) | $79 |
| Net income (loss) | $(201), or $(0.02) per share | $71, or $0.01 per share |
| Operating cash flow | $(1,867) | $(1,978) |
| Cash and cash equivalents | $899 at March 31 | $2,840 at December 31, 2019 |
| Working capital | $15,653 | $16,433 at December 31, 2019 |
| Notes payable | $1,025, including $327 current | $1,106 at December 31, 2019 |
Cash decreased by $1,941 during the quarter. Investing activities provided $8, while financing activities used $82. Total liabilities were $5,091; operating lease liabilities were $2,130. The $2,138 income-tax benefit comprised a $1,483 tax receivable and $655 deferred tax asset, recognized following the CARES Act’s net-operating-loss carryback changes.
Material changes and operating developments
- Revenue fell sharply as major U.S. telecommunications customers postponed orders and shipments while prioritizing 5G investment, assessing future power needs, and in some cases divesting tower assets. Telecommunications represented 95% of Q1 sales; AT&T and Verizon Wireless represented 69% and 15%, respectively.
- Lower production volume pushed cost of sales to 106% of revenue and gross margin to a loss, primarily due to under-absorption of fixed factory costs. Sales and marketing and R&D expenses declined; general and administrative expense increased 4%.
- The company sold $2,246 of AT&T receivables to Citibank under its supplier agreement and incurred approximately $9 in fees.
- Inventory was $13,533 net, including a $600 reserve. Management stated inventory exceeded $15 million at March 31 and could support more than $35 million of revenue; the balance-sheet inventory figure is net of the reserve.
- Backlog was $2,900, with management expecting most to ship within six months. The filing cautions that orders may not be fulfilled or recognized as revenue.
Outlook, risks and contingencies
- Management expected sales to improve, particularly in the second half of 2020, as telecom customers resumed backup-power programs and clarified 5G requirements. It reported only modest improvement in customer activity and provided no formal quantified revenue or earnings guidance.
- COVID-19 disrupted manufacturing and demand. The company said it furloughed approximately 65% of its workforce; the risk-factor discussion identified 79 furloughed U.S. employees and 42 continuing to support essential operations. Management described California facility closures and uncertainty over the duration and effects of restrictions.
- The company reported operating losses for Q1 and prior years, operating cash use, and substantial doubt about its ability to continue as a going concern. Management estimated available funds would support operations through approximately December 31, 2020, but said continued operations depend on improved sales/cash flow or additional financing. Further cost reductions or limits on operations may be required if cash sources are insufficient.
- Subsequent to quarter-end, on May 4, the company borrowed $1,715 under the PPP at 1% interest, with a two-year maturity and first six months of interest deferred. Forgiveness is conditional on eligible use; the company intended to use a significant majority for qualifying expenses, but gave no assurance of forgiveness.
- Management reported completing development of natural-gas and LPG products and planned a U.S. launch in Q4 2020; it also reported an initial 50-unit East Asian telecom order, with deliveries beginning in March. A 50 kW military generator development contract targeted first delivery in Q4 2020.
- Key risks include dependence on a small number of telecom customers, COVID-19 and customer order delays, uncertain backlog conversion, supplier and component availability/cost, and financing availability. No material legal proceedings were reported. Management concluded disclosure controls and internal control over financial reporting were effective as of March 31; the auditor did not attest to internal controls.
Most important facts for investors to verify
- Whether telecom orders and shipments recovered, and whether the $2.9 million backlog converted to revenue and cash.
- Cash burn, liquidity runway, and the assumptions behind management’s estimate of funding through December 2020, including availability of additional financing.
- PPP loan use, repayment obligations, and the amount, if any, ultimately forgiven.
- Recoverability and obsolescence risk in inventory, and realization of the CARES Act tax receivable and deferred tax asset.
- Effects of customer concentration, facility disruptions, and workforce furloughs on production capacity, margins, and customer retention.