Polar Power, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. Filed May 14, 2020. This is an annual report, not a standalone fourth-quarter filing.
Business context
Polar Power designs, manufactures and sells DC power generators and renewable-energy and cooling systems, primarily for telecommunications backup and prime-power applications. It also serves military, marine, industrial and other markets. Telecommunications generated 96% of 2019 sales; 95% of total sales were to U.S. telecommunications customers.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $24.80 million | $24.05 million |
| Gross profit | $4.92 million | $7.43 million |
| Gross margin | 19.8% | 30.9% |
| Operating loss | $3.98 million | $1.10 million |
| Net loss | $4.04 million | $0.85 million |
| Net loss per share, basic and diluted | $0.40 | $0.08 |
| Cash used in operating activities | $2.17 million | $7.85 million |
- Sales rose 3%, but cost of sales increased 20%. Management attributed margin deterioration to discounts on large Tier-1 customer orders and higher factory overhead absorption, including capacity and staffing added ahead of expected demand.
- Research and development expense increased 19% to $2.28 million, largely for new natural-gas/LPG generators and solar-hybrid systems. Sales and marketing was $2.62 million; general and administrative expense was $4.00 million.
- Fourth-quarter sales were $878,490, down 87% from the third quarter, after major U.S. telecom customers postponed orders and shipments. The filing states that 96% of annual revenue occurred in the first three quarters.
- Year-end cash and cash equivalents were $2.84 million, down from $5.64 million. Working capital was $16.43 million, versus $21.09 million. Inventory rose to $13.91 million from $8.47 million; receivables fell to $0.93 million from $7.73 million.
- Year-end notes payable were $1.11 million, including $0.33 million current. Operating lease liabilities, recognized upon adoption of the lease standard, totaled $2.28 million. No balance was outstanding under the former $1 million credit facility, which was terminated in March 2019.
Changes, liquidity and unusual items
- Polar sold $13.23 million of AT&T receivables to Citibank during 2019 under a supplier agreement, incurring approximately $51,589 in fees. This accelerated collections and contributed to the decline in reported receivables; it is not equivalent to recurring operating cash generation.
- Cash used in operations improved year over year, but remained negative. The company reported a $5.71 million inventory build and $0.91 million in increased supplier prepayments, including for engines for the new product line.
- The auditor issued an unmodified opinion on the financial statements but highlighted substantial doubt about the company’s ability to continue as a going concern. Management estimated that available funds would support operations only through approximately September 30, 2020, absent additional financing or improved cash generation.
- After year-end, the company obtained a $1.715 million Paycheck Protection Program loan on May 4, 2020, at 1% interest with a two-year maturity. Forgiveness is conditional; the filing provides no assurance it will be forgiven. The company had also applied for an EIDL loan of up to $2 million; approval was not established in the filing.
- In November 2019, the company repurchased 17,477 shares for $39,942 under a buyback authorization; it terminated the agreement in January 2020.
Outlook, commentary and risks
- Management said customer order deferrals reflected 5G investment priorities, uncertainty over future 5G site power requirements and some tower-asset divestitures. It believed the slowdown could be temporary and expected sales to improve after customers defined their requirements, but provided no numerical revenue or earnings guidance.
- The December 31, 2019 backlog was approximately $4.0 million; management expected most to ship within six months, while cautioning that fulfillment and revenue recognition were not assured.
- In March 2020, COVID-19 disruptions led to manufacturing-facility closures under California restrictions and the furlough of 79 U.S. employees, with 42 continuing essential operations. The company cited risks to sales demonstrations, production, suppliers, labor and liquidity, and said the pandemic’s full effects could not be estimated.
- Customer concentration is acute: AT&T represented 68% of 2019 sales, T-Mobile 17%, and Verizon Wireless 6%; the three largest customers together accounted for 91%. The company generally lacked long-term volume commitments.
- Other material risks include dependence on a small number of engine suppliers, international component sourcing, volatile input costs, long sales cycles, competition, and the need for additional debt or equity financing. Equity financing could dilute shareholders; debt could impose restrictions.
- New product initiatives include higher-output generators for 5G sites and natural-gas/LPG and solar-hybrid systems for telecom, commercial and residential markets. Commercial adoption and expected diversification were not assured.
Most important facts for investors to verify
- Whether post-year-end customer orders and shipments recovered as management expected, and whether the $4.0 million backlog converted to sales and cash.
- Current cash runway, operating cash burn, and the availability and terms of additional financing; also verify PPP loan forgiveness status and any EIDL outcome.
- Whether gross margins improved after the 2019 discounts and under-absorbed factory overhead, and whether elevated inventory was sold or required further reserves.
- The sustainability of receivables-sale financing and its fees, alongside customer concentration and any changes in major-customer purchasing patterns.
- Whether COVID-19 restrictions, supplier shortages and workforce reductions materially affected production, product demonstrations and 2020 results.
- The filing reports 2019 gross margin as 19.8% in the results table, while a compensation-goal table lists 20.6% as actual; verify the correct figure against the audited statements and related disclosures.