Polar Power, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2020. Dollar amounts are in thousands, except per-share data. Polar Power designs and manufactures DC power systems, with sales concentrated in telecommunications.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $2,501 | $6,939 | $6,488 | $23,922 |
| Gross profit (loss) | $(2,699) | $2,232 | $(3,570) | $7,586 |
| Gross margin | (107.9)% | 32.2% | (55.0)% | 31.7% |
| Operating income (loss) | $(4,713) | $43 | $(9,329) | $694 |
| Net income (loss) | $(4,723) | $48 | $(7,222) | $686 |
| Basic and diluted loss per share | $(0.42) | $0.00 | $(0.68) | $0.07 |
- Sales fell 64% year over year in Q3 and 73% for the nine-month period. Management attributed the decline mainly to U.S. telecom customers shifting spending toward 5G deployments, COVID-19-related installation and purchasing delays, and slower customer activity.
- The company recorded a $2,400 inventory reserve in Q3, citing lower-than-expected demand and uncertainty about product shipments. It reported inventory of $11,380 net of a total $3,000 reserve at September 30, 2020.
- Operating expenses were $2,014 in Q3, down from $2,189, and $5,759 for nine months, down from $6,892. Cost reductions included lower sales and marketing and R&D spending; Q3 general and administrative costs rose partly due to equity-raise and credit-facility fees.
- Nine-month operating cash use was $6,152, versus $1,489 in 2019. Investing cash use was $3; financing provided $5,386. Cash declined to $2,071 from $2,840 at year-end 2019.
- Working capital was $14,165, down from $16,434 at December 31, 2019. Current liabilities were $3,112. At September 30, the company had $859 of equipment notes payable, a $1,715 PPP loan, and $245 drawn on its line of credit; operating lease liabilities totaled $1,819.
- The Pinnacle Bank revolving facility has a stated maximum of $4,000, subject to eligible receivables and inventory, other limitations, and lender discretion. Reported availability was $2,560. The agreement includes a tangible-net-worth covenant requiring more than $6,000.
Material changes and unusual items
- The company completed a July private placement of 1,250,000 shares with warrants for net proceeds of approximately $2,812; warrant exercises added $861. Shares outstanding at September 30 were 11,650,681, compared with 10,125,681 at December 31, 2019.
- A $2,139 nine-month income tax benefit reflected CARES Act NOL carrybacks. The balance sheet included a $1,715 income tax receivable and $655 of deferred tax assets.
- International sales increased to $588 in Q3 from $38 and to $866 for nine months from $566, primarily reflecting shipments of new LPG systems. The company reported a $3,411 sales backlog at September 30.
- The company terminated its Citibank receivables Supplier Agreement on October 8, 2020. It had sold $2,621 of receivables under the agreement during the nine-month period.
Outlook, risks, and contingencies
- Management said sales were expected to remain sluggish for the rest of 2020 and anticipated negative COVID-19 effects during 2020 and possibly beyond. It expected improvement as telecom customers resumed backup-power programs, the economy recovered, and customer diversification progressed; these expectations are uncertain.
- Management estimated existing funds would support operations through approximately March 31, 2021. The filing states that substantial doubt exists about the company’s ability to continue as a going concern within one year absent improved cash generation or additional financing. Further financing may be unavailable, restrictive, or dilutive; additional operating reductions may be required.
- Management expected full or partial forgiveness of the PPP loan but provided no assurance that forgiveness would be obtained. The $3,411 backlog was expected largely to ship within six months, but fulfillment and revenue recognition were not assured.
- Management described plans to deliver a first 50 kW military generator unit in Q4 2020 and launch the natural-gas/LPG product line in U.S. residential and commercial markets in Q4. The filing also notes risks from customer and telecom concentration, inventory valuation, supply-chain disruption, underused manufacturing capacity, and dependence on key engine suppliers.
- Management reported disclosure controls and internal control over financial reporting were effective as of September 30, 2020. The auditor did not attest to internal control effectiveness.
Important facts for investors to verify
- Whether customer orders and telecom purchasing recover, and whether the company can diversify revenue beyond its concentrated customer base.
- Whether the $3,411 backlog ships and converts to revenue on the expected timetable.
- Whether further inventory write-downs are needed and how quickly inventory can be converted to cash.
- Whether cash runway estimates remain valid and additional financing is available before the projected March 31, 2021 funding horizon.
- Whether the PPP loan is forgiven and whether the company satisfies the Pinnacle facility’s borrowing limits and financial covenant.