Polar Power, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unless otherwise noted, dollar amounts are in thousands. Polar Power designs and sells DC power systems, principally for telecommunications backup and off-grid applications.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $1,126 | $9,236 | $3,987 | $16,983 |
| Gross profit (loss) | $(711) | $2,962 | $(871) | $5,354 |
| Gross margin | (63.1)% | 32.1% | (21.8)% | 31.5% |
| Operating income (loss) | $(2,295) | $573 | $(4,616) | $651 |
| Net income (loss) | $(2,298) | $567 | $(2,499) | $637 |
| Net loss per share | $(0.23) | $0.06 income | $(0.25) | $0.06 income |
- Sales fell 88% in Q2 and 77% in the first half year over year. Lower production utilization, discounts, and somewhat higher raw-material costs drove gross margins below zero.
- Operating expenses declined 34% in Q2 to $1,584 and 20% in the first half to $3,745, reflecting cost reductions and lower sales, marketing, and R&D activity.
- For the six months, operating cash flow was $(3,672), versus $62 provided in 2019. Investing cash flow was $8 and financing cash flow was $1,551; cash decreased $2,113 to $727.
- At June 30, current assets were $18,109 and current liabilities $2,963; reported working capital was $15,146. Inventory was $13,883, including a $600 reserve.
- Cash was $727 at June 30, versus $2,840 at year-end 2019. Equipment notes payable totaled $942; the PPP loan was $1,715. Operating lease liabilities totaled $1,976.
- A $2,139 income-tax benefit for the first half reflected CARES Act provisions, including a $1,484 tax receivable and $655 deferred tax asset. The filing says the tax amount was expected to be payable later in 2020.
Business changes, outlook, and risks
- Management attributed the sales decline to U.S. telecom customers redirecting spending toward 5G networks and delaying backup-power deployments, compounded by COVID-19 restrictions on installation, inspections, and purchasing. Telecom accounted for 97% of Q2 sales; two customers generated 76%.
- Backlog at June 30 was $3,764: 70% U.S. telecom, 17% international telecom, 9% military, and 4% other. Management expected most to ship within six months, but cautioned that orders may not be fulfilled or recognized as revenue.
- Management had no quantified revenue or earnings guidance. It expected sales to improve as the economy recovers and telecom customers resume backup-power programs, but anticipated COVID-19 could negatively affect 2020 results and possibly beyond. It reported cost-reduction measures and plans to diversify beyond telecom.
- Product initiatives included a 50 kW military-generator development contract, with the first unit planned for Q4 2020, and completed natural-gas/LPG product development. Management planned U.S. residential and commercial launches in Q4 2020 and further hybrid solar-and-storage development.
- The filing states substantial doubt exists about the company’s ability to continue as a going concern within one year. Management estimated funds on hand would support operations through approximately December 31, 2020, but continued operations depend on additional financing, improved sales, or positive cash flow. Failure to obtain funds could require further operating reductions.
- On July 7, 2020, the company closed a private placement of 1,250,000 shares and warrants for approximately $2,629 net proceeds, intended for working capital. Pro forma June 30 cash was $3,356; the transaction also diluted existing holders. Warrants cover up to 625,000 shares at $3.13 per share.
- The company received a $1,715 PPP loan at 1% interest, with a two-year maturity. It expected full forgiveness but gave no assurance forgiveness would be granted. COVID-19, customer and telecom concentration, supply interruptions, liquidity, and uncertain backlog conversion are material risks. At June 30, management reported 55% of its U.S. workforce on furlough.
- Management concluded disclosure controls and internal control over financial reporting were effective at June 30; the auditor did not attest to internal controls. The filing reports no material pending legal proceedings.
Important facts for investors to verify
- Whether telecom customers resume orders and whether the $3,764 backlog ships and converts to revenue as expected.
- Subsequent cash burn, actual tax-refund timing, and whether additional financing is needed beyond the July placement.
- Whether the PPP loan is forgiven and the resulting repayment obligations if it is not.
- Progress on gross-margin recovery as production utilization improves, and any additional inventory write-downs.
- Customer and supplier concentration, workforce capacity, and execution and demand for the military and natural-gas/LPG product initiatives.
- The dilution and potential future share issuance associated with the July placement and warrants.