Polar Power, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Polar Power designs and manufactures DC power systems, primarily for telecommunications, with additional military and other markets. Financial statements are unaudited.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $5.82 million | $2.44 million | $10.69 million | $7.41 million |
| Gross profit | $2.06 million | $0.77 million | $3.55 million | $2.68 million |
| Gross margin | 35.5% | 31.4% | 33.2% | 36.2% |
| Operating income (loss) | $238,260 | $(585,041) | $(89,057) | $381,433 |
| Net income (loss) | $223,441 | $(349,129) | $(95,361) | $243,751 |
- Q2 sales rose 138%, mainly on increased DC power system sales to AT&T. Six-month sales rose 44%.
- Q2 gross margin improved year over year, attributed to labor efficiencies and manufacturing overhead absorption. Six-month margin fell, with management citing higher raw-material costs and direct labor absorbed in Q1.
- Sales and marketing expense increased substantially as the company expanded its sales team. Six-month R&D expense also rose, reflecting engineering changes and customer customization.
- Basic and diluted earnings per share were $0.02 in Q2 and $(0.01) for the six months.
Cash, liquidity and debt
- Cash and cash equivalents were $11.71 million at June 30, 2018, including approximately $1.00 million of restricted cash pledged to secure the credit facility; cash was $14.20 million at December 31, 2017.
- Six-month operating cash use was $2.29 million, versus $0.97 million in 2017. The company cited increased receivables and inventory, as well as the net loss. Investing cash use was $139,000 and financing cash use was $55,000.
- Accounts receivable were $4.23 million and inventory, net, was $6.29 million. Current assets were $23.40 million and current liabilities were $1.42 million.
- Notes payable totaled $845,227, including $219,820 current and $625,407 long term. The company acquired approximately $663,000 of equipment through financing in the first half; outstanding notes have approximately $23,000 in aggregate monthly principal and interest payments, due through 2023.
- The $1.0 million revolving credit facility was undrawn and fully available at June 30. The company reported covenant compliance. Management said available capital and expected operating resources should fund operations and capital needs for at least 12 months.
Material changes, outlook and risks
- Customer concentration shifted: AT&T generated 76% of Q2 sales and 71% of six-month sales; Verizon generated 11% and 18%, respectively. At June 30, AT&T represented 78% of receivables. Management identifies dependence on a small number of customers and purchase orders, rather than firm long-term commitments, as significant risks.
- Backlog was $5.83 million at June 30, versus $1.69 million a year earlier: 64% telecommunications, 32% military contractors and 4% other markets. Management expected most to ship within three months, but cautioned that fulfillment and revenue recognition were not assured.
- After quarter-end, the company reported an $800,000 Namibia order in July; initial orders for five Sri Lankan telecom sites, with no order value stated; and an August 6 T-Mobile order of $1.9 million, additional to a previously disclosed $1.8 million order. These are subsequent developments, not Q2 revenue.
- Management’s 2018 priorities included diversifying customers and markets, increasing U.S. telecom share, and expanding inventory and production capacity to meet demand. It expected general and administrative costs to remain flat in absolute dollars while declining as a share of sales. No quantified full-year revenue or earnings guidance was provided.
- Key operating risks include reliance on Yanmar, which supplied 23% of six-month cost of sales, raw-material and component price or availability changes, production concentration at one California facility, lengthy customer sales cycles, and the challenge of scaling production on time.
- Warranty reserves were $175,000. No material-adverse legal proceedings were reported. ASC 606 adoption had no reported financial-statement impact. The company reported effective disclosure controls and internal control over financial reporting; the filing did not include an auditor attestation.
Important facts for investors to verify
- Whether AT&T, Verizon and newer customers sustain orders, and whether concentration declines without disrupting revenue.
- Conversion of the reported backlog and subsequent orders into timely shipments, recognized revenue and cash collections.
- Whether receivables and inventory growth can be funded and managed while operating cash flow remains negative.
- Production capacity, supplier availability and cost trends, particularly for Yanmar engines and other key components, and the effect on margins.
- Terms and execution of the new facility lease commencing July 1, 2018, and the impact of equipment-financing obligations on liquidity.