Polar Power, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. The company designs and sells DC power systems, primarily for telecommunications backup and off-grid power applications. Financial statements are unaudited.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $6.94 million | $5.06 million | $23.92 million | $15.75 million |
| Gross profit | $2.23 million | $1.53 million | $7.59 million | $5.08 million |
| Gross margin | 32.2% | 30.2% | 31.7% | 32.2% |
| Operating income (loss) | $43,239 | $(763,956) | $694,042 | $(853,013) |
| Net income (loss) | $48,241 | $(757,117) | $685,731 | $(852,478) |
| Operating cash flow | Not separately provided | Not separately provided | $(1.49) million | $(3.30) million |
Quarterly sales rose 37% year over year; nine-month sales rose 52%. Growth was primarily from DC power system shipments to U.S. Tier-1 telecom customers. Q3 profitability turned positive from a prior-year loss. For the first nine months, gross margin declined 0.5 percentage points, which management attributed to higher factory overhead absorption; Q3 margin improved with lower material costs, labor efficiencies, and better capacity utilization.
Cash, liquidity, debt, and other metrics
- Cash and cash equivalents were $3.67 million at September 30, 2019, down from $5.64 million at December 31, 2018. Cash decreased $1.97 million during the first nine months.
- Working capital was $21.31 million, compared with $21.09 million at year-end 2018. Operating cash use reflected, among other items, a $5.67 million increase in inventory, partly offset by collections that reduced accounts receivable by $2.69 million.
- Equipment notes payable totaled $1.19 million, including $329,490 current and $858,983 long term. The notes carry stated rates of 1.9% to 6.9%, with payments due through 2023.
- Operating lease liabilities totaled approximately $2.41 million following adoption of ASC 842; the company recorded $2.34 million of lease right-of-use assets. Nine-month lease cost was $524,601.
- Capital expenditures were $311,369 for the first nine months. Financing cash outflow was $172,761, primarily for note repayments.
- The company sold $9.37 million of AT&T receivables to Citibank during the first nine months under a receivables sale agreement, incurring approximately $42,000 in fees. The prior $1 million secured revolving credit facility was terminated in March 2019 without any borrowings.
Material changes and business developments
- Nine-month operating expenses increased 16% to $6.89 million. R&D rose 20%, mainly for customer requirements and new product development; G&A rose 24%, reflecting added management, rent, benefits, and recruiting costs.
- Telecom accounted for 97% of sales in both the three- and nine-month 2019 periods. AT&T and Verizon represented 84% and 7.5% of Q3 sales; AT&T and T-Mobile represented 68% and 19% of nine-month sales.
- Inventory increased substantially to support production and improve fulfillment times. The filing gives conflicting September 30 inventory figures: the balance sheet reports $14.14 million, while the inventory note reports $14.80 million. The note’s amount also does not reconcile with reported current assets.
- Management said Q3 bookings were affected by Tier-1 telecom customers shifting second-half 2019 budgets toward 5G rollout and evaluating future power requirements, temporarily slowing backup-generator orders.
Outlook, risks, and contingencies
- Backlog was $3.0 million at September 30; more than 99% related to telecom DC power systems. Management expected approximately 90% to ship during the next two quarters, while cautioning that fulfillment and revenue recognition were not assured.
- Management remained confident in customers’ 2020 forecasts and stated that available capital, operating revenues, and other liquidity sources should fund operations and capital needs for at least 12 months. No formal revenue or earnings guidance was provided.
- The company is developing higher-power systems for next-generation telecom sites and LPG/natural-gas and solar-hybrid products for telecom, commercial, residential, and other markets. It reported successful EPA emissions testing of 10–15 kW LPG and natural-gas generators.
- Key risks include high dependence on a small number of telecom customers, order timing and budget volatility, limited long-term customer commitments, supplier concentration (including Yanmar and Perkins engines), component availability and cost, and execution of diversification and product development.
- Management reported disclosure controls and internal control over financial reporting effective as of September 30, 2019. The auditor did not attest to internal-control effectiveness. The company reported no material legal proceedings and no income tax expense for the periods presented.
Important facts for investors to verify
- Reconcile the conflicting inventory amount of $14.14 million versus $14.80 million and its effect on current assets and working capital.
- Track whether the $3.0 million backlog shipped as expected and whether telecom customers’ 5G-related budget shifts continued to affect orders.
- Monitor customer and receivables concentration, particularly the share of sales and receivables attributable to AT&T and other major carriers.
- Assess whether increased inventory converts into shipments and operating cash generation; operating cash flow remained negative despite the return to net income.
- Evaluate the progress and commercial demand for new LPG, natural-gas, and hybrid products, alongside supplier concentration and component-cost exposure.