Polar Power, Inc. — financial distress indicators

Interest coverage (EBIT / interest) is -9.03×.

When EBIT < interest, debt service is funded from cash reserves or new borrowing — the classic precursor to payment default and covenant breach.

At the current free-cash-flow burn, cash covers ~1 months.

Going-concern standard: management must assess ability to continue for 12 months (ASC 205-40). Runway below that horizon forces dilution, asset sales or default.

Merton distance-to-default 0.08 σ → PD 47%.

Structural (Merton/KMV) model: equity is a call option on assets; low distance-to-default means assets are close to the default point.

Net income negative in 3 of 3 fiscal years.

Persistent losses erode equity and the capacity to absorb shocks.

Revenue changed -55% year over year.

A >30% sales drop typically breaches leverage covenants and starves fixed-cost coverage.

Debt is 43% of assets while EBITDA is not positive.

With no operating earnings, repayment depends entirely on asset sales or fresh capital.

Operating cash flow negative in 3 of the last 3 years.

A business that cannot fund itself from operations depends on external capital to survive.

O-score 5.87 → model probability 100%.

Ohlson (1980) logit model of 1-year corporate failure; O > 0 (p > 50%) is the original failure cut-off.

Price is -80% from its 52-week high.

For financial firms a share-price run often precedes a deposit or funding run (confidence channel).

Operating margin fell from -39% to -126% in two years.

Sharp margin compression signals loss of pricing power or cost control.

Revenue declined every year for three years.

Structural, not cyclical, decline.