Polar Power, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; filed August 14, 2017. Polar Power designs and manufactures DC power systems, primarily for telecommunications, with additional defense, industrial, and other applications. Financial statements are unaudited.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $2.44 million | $4.68 million | $7.41 million | $8.07 million |
| Gross profit | $768,000 | $1.45 million | $2.68 million | $2.89 million |
| Gross margin | 31.4% | 31.0% | 36.2% | 35.8% |
| Operating income (loss) | $(585,000) | $775,000 | $381,000 | $1.73 million |
| Net income (loss) | $(349,000) | $362,000 | $244,000 | $939,000 |
| Basic and diluted EPS | $(0.03) | $0.05 | $0.02 | $0.13 |
- Q2 sales fell 48% year over year; first-half sales declined 8%. Management attributed the decreases to fewer systems sold to Verizon Wireless and DC system price reductions effective March 2017.
- Q2 operating expenses rose to $1.35 million from $676,000, including higher R&D ($391,000 versus $47,000), sales and marketing ($270,000 versus $108,000), and general and administrative expense ($684,000 versus $515,000). First-half operating expenses increased 98% to $2.30 million.
- Cash and cash equivalents were $15.05 million at June 30, 2017, including $1.00 million of restricted cash, versus $16.24 million at year-end 2016. Current assets were $23.75 million and current liabilities $732,000.
- Operating cash flow was $(974,000) for the first half, compared with $(283,000) in 2016; investing cash flow was $(158,000), and financing cash flow was $(58,000). Cash decreased by $1.19 million. The filing cites tax payments and operating changes as drivers; taxes paid were $2.42 million.
- Equipment notes payable totaled $291,000, including $108,000 current. The $1.0 million Citibank revolving facility was undrawn at June 30; it is secured by restricted cash and includes restrictive covenants.
Outlook, commentary, and risks
- Management expects Verizon Wireless sales volumes to increase in the second half of 2017 and forecast gross margin of 40%–45% for that half, particularly as sales volume increases. These are management expectations, not a guarantee; the filing provides no quantified revenue or earnings guidance.
- Polar Power reported approved-supplier status with two additional Tier 1 telecommunications customers; one made an initial purchase in Q2. It expanded sales coverage to four continents, opened a Romania service center, and continued product development, including a 15 kW system and international hybrid system.
- Backlog was $1.69 million at June 30; management expected most to ship within six months. Telecommunications represented 68% of backlog, with 67% of that telecommunications portion attributable to the largest customer. Orders may be delayed, unfulfilled, or not recognized as revenue.
- Customer concentration remains substantial: Verizon Wireless accounted for 73% of Q2 sales and 85% of first-half sales. The largest customer represented 88% of receivables at June 30. The company also depends on Yanmar and Kubota engines, which together represented 49% of first-half cost of sales.
- Other material risks include price and margin pressure, variable customer orders and long sales cycles, dependence on key suppliers, component cost or availability, execution of growth and international expansion, product development and competition, and operating from a single manufacturing facility.
- The company reported no legal proceedings expected to have a material adverse effect. Management concluded disclosure controls were effective at a reasonable-assurance level; the filing did not include management’s internal-control assessment or auditor attestation under the applicable transition relief.
Most important facts for investors to verify
- Whether Verizon Wireless orders and sales volumes recover as management expected, and whether new Tier 1 customers become meaningful revenue sources.
- Whether gross margin reaches the stated 40%–45% second-half target despite lower pricing and production ramp costs.
- Whether backlog ships and converts to revenue on schedule, given customer concentration and customer-controlled delivery timing.
- Cash use, tax refund realization, and the extent to which the restricted cash backing the credit facility limits available liquidity.
- Supplier continuity and pricing for key engines and other components, alongside the impact of increased R&D, sales, and staffing expenses.