Polar Power, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Financial amounts are in thousands of dollars unless noted; interim statements are unaudited. Polar Power designs and manufactures DC power systems, with sales concentrated in telecommunications.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $4,274 | $4,847 | $7,983 | $8,137 |
| Gross profit | $1,061 | $967 | $1,966 | $909 |
| Gross margin | 24.8% | 19.9% | 24.6% | 11.2% |
| Operating loss | $(725) | $(865) | $(1,832) | $(2,763) |
| Net loss | $(739) | $(866) | $(1,859) | $(2,769) |
| Basic and diluted loss per share | $(0.06) | $(0.07) | $(0.15) | $(0.22) |
For the six months, operating cash flow was negative $2,311, investing cash flow negative $15, and financing cash flow negative $119. Cash declined $2,445 from year-end 2021 to $2,656 at June 30, 2022.
Financial position and liquidity
- At June 30, 2022, total assets were $27,251, total liabilities $5,860, and stockholders’ equity $21,391. Working capital was $20,138, down from $21,760 at December 31, 2021.
- Inventory rose to $11,985 from $9,017 at year-end; accounts receivable was $3,994, versus $4,243.
- Notes payable totaled $391, including $248 current and $143 long-term. The revolving credit facility had no balance outstanding and $2,806 available; the facility limit is up to $4,000, subject to borrowing-base limits. Its initial term ends September 30, 2022 and may be renewed.
- Operating lease liabilities totaled $635. Management stated it expects cash from operations and available credit to be adequate through June 30, 2023, supporting going-concern status for at least one year from issuance of the statements.
Changes versus prior comparable periods
- Q2 sales fell 12% year over year; six-month sales fell 2%. Management attributed delayed shipments to component shortages and labor constraints; about 12% of expected Q2 shipments were postponed to the second half of 2022.
- Gross margin improved notably: 4.9 percentage points in Q2 and 13.4 points for the first half. Management cited better manufacturing productivity, labor efficiencies and factory overhead absorption, as well as use of previously written-off inventory ($139 in Q2; $195 in the six-month period).
- Six-month net loss narrowed by $910, while operating expenses increased $126. The prior-year periods included insurance refunds recorded as other income ($14 in Q2 and $25 for six months); there was no corresponding income in 2022.
- Operating cash use improved to $2,311 from $6,131, but cash still declined. The 2021 financing comparison included $12,466 net public-offering proceeds and $707 from warrant exercises, versus no such proceeds in 2022.
Outlook, commentary and risks
- Backlog was $14,087 at June 30, 2022, 97% telecommunications-related; management expected most to ship within six to nine months but cautioned that orders may not be fulfilled or recognized as revenue. Q2 new orders totaled $9,916, including $6,279 from a new South Pacific telecommunications customer, with shipments expected to begin in the second half of 2022.
- Management expects sales to increase as supply-chain and labor constraints ease, but gave no quantified revenue or earnings guidance. It said suppliers’ backlogs might normalize in the fourth quarter of 2023 and planned to maintain larger inventories to mitigate disruption.
- Management cited COVID-19, inflation, rising interest rates, higher shipping costs and Russia’s invasion of Ukraine as uncertainties affecting costs, supply, demand and liquidity. Fixed-price contracts may expose margins to cost overruns and inflation.
- Customer concentration is substantial: the largest customer generated 88% of Q2 sales and 89% of six-month sales; telecommunications accounted for 99% of first-half sales. At quarter-end, 94% of receivables were due from the largest customer. The filing identifies AT&T as a principal customer in its risk discussion.
- Other key risks include dependence on engine and component suppliers, inventory write-down exposure, competition, long customer sales cycles, and the possibility of needing additional financing. The filing reports no material legal proceedings and says disclosure controls were effective at the reasonable-assurance level.
Most important facts for investors to verify
- Whether the $14,087 backlog converts to timely shipments and revenue, especially the South Pacific order, given supply and labor constraints.
- Whether gross-margin improvements persist without the benefit of previously written-off inventory and as input costs change.
- Customer concentration, including ongoing order levels and collectability from the largest customer.
- Cash burn, borrowing-base availability, and renewal or continuation of the credit facility after its stated initial term.
- The filing’s risk-factor discussion says Q2 net loss was approximately $1.1 million, whereas the financial statements and results discussion report $739 thousand; confirm this apparent inconsistency.