Polar Power, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Financial amounts below are in thousands of dollars, except per-share data. The interim financial statements are unaudited.
Business context and reporting period
Polar Power designs, manufactures, and sells DC power systems, primarily for telecommunications backup and off-grid applications, with offerings also aimed at military, marine, EV charging, and other markets. Telecommunications represented 97% of Q2 sales and 96% of first-half sales. The filing reports one operating segment.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $5,587 | $4,274 | $9,777 | $7,983 |
| Gross profit | $1,475 | $1,061 | $2,229 | $1,966 |
| Gross margin | 26.4% | 24.8% | 22.8% | 24.6% |
| Operating loss | $(310) | $(725) | $(1,345) | $(1,832) |
| Net loss | $(436) | $(739) | $(1,549) | $(1,859) |
| Basic and diluted loss per share | $(0.03) | $(0.06) | $(0.12) | $(0.15) |
For the six months ended June 30, operating cash flow was $(2,804), investing cash flow $(194), and financing cash flow $3,079. Cash increased $81 to $292. Accounts receivable were $3,718 and inventory was $17,689 at June 30, 2023. Working capital was $15,391, versus $17,367 at December 31, 2022.
At June 30, 2023, the line of credit balance was $4,927, with only $71 of reported availability; its interest rates were 9.5% on receivables-based advances and 10.5% on inventory-based advances. The company also had a $160 unsecured note payable to its CEO, due April 2024 at 1% interest, and $143 of other notes payable. Operating lease liabilities totaled $2,244. Stockholders’ equity was $16,632.
Changes versus the prior comparable period
- Q2 sales rose 31%; first-half sales rose 22%, primarily due to DC generator sales to domestic and international telecom customers.
- Q2 gross margin improved to 26.4% from 24.8%, with management citing manufacturing efficiency and use of $173 of previously written-off inventory. First-half gross margin declined to 22.8% from 24.6%, despite higher gross profit; costs rose faster than sales.
- Operating losses and net losses narrowed in both comparison periods. Higher interest and finance costs partly offset the improvement: $126 in Q2 and $204 for the first half, mainly reflecting greater line-of-credit borrowing.
- International sales grew to 29% of Q2 revenue and 28% of first-half revenue, compared with 2% and 1%, respectively, in 2022. U.S. sales declined in absolute terms for the first half.
- Accounts receivable and inventory increased from year-end, while the line-of-credit balance rose from $1,884. First-half operating cash use increased from $2,311 to $2,804.
Outlook, commentary, risks, and unusual items
- Outlook: Management expects sales to increase as supply-chain and labor constraints ease and plans to expand customer diversification. The filing provides no numerical revenue or earnings guidance. Backlog was $5,936 at June 30; management expects the majority to ship within 12 months, but cautions fulfillment and revenue recognition are not assured.
- Operational constraints: Parts shortages postponed approximately $900, or 37 generators, of expected Q2 shipments to the second half of 2023. The company also cited difficulty sourcing qualified engineers, overtime, and higher material, labor, rent, and shipping costs.
- Product initiatives: The company had begun shipping Toyota-engine-based generators and is developing a 27 kW system, control software, solar-hybrid products, and mobile EV chargers. It expected its new universal-standard mobile chargers to be available before the end of Q1 2024.
- Customer and backlog concentration: The largest U.S. telecom customer represented 49% of sales in Q2 and the first half; a South Pacific telecom customer represented 26% in each period. The largest customer accounted for 51% of backlog. Telecom customers accounted for 89% of backlog overall.
- Liquidity: Management concluded that operating cash flow and available line-of-credit resources should be adequate to fund its operating plan and liquidity needs for one year after issuance. This assessment is notable alongside $292 of cash, only $71 of line availability, and $2,804 of first-half operating cash use. The $2,000 employee retention credit receivable remained uncollected and was still being processed by the IRS.
- Other risks and contingencies: Risks include customer concentration, supply and component availability, inventory valuation, international operations, inflation and interest rates, competition, and the need for future financing. The company reported no material legal proceedings and said disclosure controls were effective; it reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the deferred shipments and $5,936 backlog convert to timely deliveries and cash receipts, and how much backlog depends on major telecom customers.
- Whether the company can restore positive operating cash flow, given low cash and limited remaining credit availability.
- Collection timing and eligibility of the $2,000 employee retention credit receivable.
- Whether inventory levels, product costs, and supply-chain constraints support sustainable margins; first-half gross margin declined year over year.
- Progress, customer demand, and required spending for Toyota-engine generators, EV chargers, and other diversification initiatives.
- Reconcile management’s liquidity expectations and financing needs with actual borrowing capacity, interest costs, and future capital requirements.