Polar Power, Inc. — Q3 2017 Form 10-Q
Business context and reporting period. The filing covers the unaudited quarter and nine months ended September 30, 2017. Polar Power designs and manufactures DC power systems, primarily for telecommunications, with additional defense, industrial and other markets. Verizon Wireless remained its largest customer.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $3.03 million | $7.46 million | $10.44 million | $15.53 million |
| Gross profit / margin | $829,000 / 27.4% | $3.40 million / 45.5% | $3.51 million / 33.7% | $6.28 million / 40.5% |
| Operating income (loss) | ($689,000) | $2.63 million | ($307,000) | $4.36 million |
| Net income (loss) | ($410,000) | $1.78 million | ($166,000) | $2.72 million |
| Basic and diluted EPS | ($0.04) | $0.24 | ($0.02) | $0.37 |
- Cash and liquidity: Cash and cash equivalents were $14.78 million at September 30, 2017, including $1.00 million of restricted cash pledged against the credit facility. Cash was $16.24 million at December 31, 2016. Current assets were $23.62 million and current liabilities $1.01 million.
- Cash flow: For the first nine months of 2017, operating cash flow was negative $1.20 million, investing cash flow negative $182,000 and financing cash flow negative $85,000. Cash decreased $1.46 million. Operating cash use included substantial tax payments; the company reported $1.26 million in refundable income taxes at quarter-end.
- Debt and credit: Equipment notes payable totaled $264,000, including $109,000 current. A $1.0 million Citibank revolving facility was undrawn at September 30; it is secured by restricted cash of $1.0 million and includes negative covenants.
- Customer concentration: Verizon generated 74% of Q3 sales and 82% of nine-month sales. The largest customer represented 75% of receivables at quarter-end.
Material changes versus the prior comparable period
- Q3 sales fell 59% year over year; nine-month sales fell 33%. Management attributed the decline to lower sales volumes to Verizon and product price reductions effective March 2017.
- Gross margin declined to 27.4% in Q3 from 45.5%; for the nine-month period it declined to 33.7% from 40.5%. The company cited price reductions, lower supplier volume discounts and production interruptions related to R&D work.
- Operating expenses increased sharply: Q3 R&D rose to $480,000 from $59,000, and sales and marketing to $396,000 from $99,000. For the nine months, R&D was $947,000 and sales and marketing $861,000, reflecting product development and expansion of the sales organization.
- The company moved from net income to net loss in both comparative periods. Weighted average shares were 10.14 million in 2017 versus 7.38 million in 2016.
Outlook, commentary and risks
- Management said it expected improved Q4 sales and reported that it had shipped $2 million of products during Q4 as of the filing date. It also cited a new Tier 1 carrier order worth $1.2 million in October 2017; these are post-quarter developments, not Q3 revenue.
- Management expected gross margins to improve to 40%–45% if sales and production volumes increased. The filing also describes product development and international growth initiatives, including work with 32 overseas carriers on RFPs exceeding $100 million; no assurance was given that RFPs would become orders.
- Backlog was $1.55 million at September 30, 2017; management expected most to ship within nine months but cautioned that orders may be delayed or not recognized as revenue. Backlog included 45% from the largest telecommunications customer.
- Key risks include customer and telecommunications-market concentration, dependence on two engine suppliers, input-cost and pricing pressure, long sales cycles, competition, and execution risks in product development and expansion. The company reported no legal proceedings expected to have a material adverse effect.
- Management reported disclosure controls and procedures were effective at a reasonable assurance level and no material changes in internal control over financial reporting during the period. The filing did not include management’s internal-control assessment or auditor attestation, citing the SEC transition period for the company.
Important facts for investors to verify
- Whether revenue diversification and the October Tier 1 customer order translate into recurring shipments, while monitoring continued dependence on Verizon.
- Whether sales volumes recover sufficiently to restore the margin range management discussed, given Q3’s 27.4% gross margin.
- Whether the $1.55 million backlog converts to revenue on schedule and whether the larger reported RFP opportunities produce firm orders.
- Cash use, the recoverability and application of the $1.26 million tax refund, and the restrictions and covenants attached to the cash-secured credit facility.
- The filing’s quarterly tax presentation warrants review: it reports a $264,681 income tax provision for Q3 despite a pretax loss, while MD&A describes that amount as a tax credit.