Polar Power, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; interim financial statements are unaudited. Polar Power designs, manufactures and sells DC power systems, primarily for telecommunications applications.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Net sales | $4.97 million | $3.39 million; up 47% |
| Gross profit / margin | $1.92 million / 38.6% | $1.44 million / 42.5% |
| Operating income / margin | $966,474 / 19.5% | $952,146 / 28.1% |
| Net income | $592,880 | $576,210; up about 3% |
| Diluted EPS | $0.06 | $0.08; weighted-average shares rose from 7.38 million to 10.14 million |
| Operating cash flow | $1.60 million | $151,265 |
| Cash and cash equivalents | $17.75 million, including $1.00 million restricted | $16.24 million at December 31, 2016 |
| Total debt | $316,821 in equipment notes | $348,799 at December 31, 2016 |
| Current assets / liabilities | $26.93 million / $3.51 million | Current ratio about 7.7 |
Cash from operations increased substantially, helped by collections of receivables and increases in accounts payable and income taxes payable; inventory growth used cash. Investing cash outflow was $55,957 and financing cash outflow was $31,979. The company reported a $1 million Citibank revolving facility, undrawn at quarter-end and fully secured by restricted cash. It stated that available resources should fund operations and capital requirements for at least the next 12 months.
Changes and management commentary
- Revenue growth reflected increased sales of DC base power systems, principally to Verizon Wireless. Verizon represented 91.6% of Q1 sales, versus 80.1% a year earlier, and 94.4% of receivables at quarter-end.
- Gross margin declined 3.9 percentage points. Management cited reduced system pricing, higher labor and overhead relative to sales, and limited efficiency gains while training an expanded workforce. Employee count rose 89% year over year to 102.
- Operating expenses rose to $950,256 from $485,958, including higher public-offering consulting, audit and legal costs, and sales-support spending. Net income increased only modestly despite higher sales.
- Backlog was $1.03 million at March 31, down from $3.1 million at December 31, 2016. Management attributed the decrease to lower-than-expected sales to the largest customer, improved production turnaround and pricing negotiations. The company expected most backlog to ship within six months and believed Verizon order rates would improve in the second half of 2017.
- Management reported approved-vendor status with two additional Tier 1 U.S. wireless carriers and expected orders within the next two quarters. It planned continued investment in sales infrastructure and R&D; it anticipated R&D spending as a share of sales could rise by 1–2 percentage points.
Risks, contingencies and other items
- Customer concentration is significant, and most revenue depends on Verizon; new-carrier approval does not guarantee orders. The company generally lacks firm long-term purchase commitments.
- Key risks include competitive and pricing pressure, order timing and backlog conversion, scaling production and labor efficiency, reliance on two engine suppliers, component availability and cost volatility, and dependence on a single manufacturing facility.
- Warranty accrual was $175,000. The filing reported no legal proceedings expected to have a material adverse effect and no material market-risk disclosure.
- Management concluded disclosure controls were effective at a reasonable assurance level; it reported no material change in internal control over financial reporting. The filing did not include management’s ICFR assessment or auditor attestation due to an SEC transition period.
- The company identified revenue recognition and lease accounting standards as under evaluation. It reported no accrued liability for unrecognized tax benefits.
Important facts for investors to verify
- Whether Verizon orders recover as anticipated and whether the two newly approved carriers begin purchasing on the stated timetable.
- Whether backlog converts to revenue: the filing’s listed backlog mix percentages (46.2% telecommunications, 29.0% military contractors and 38.5% miscellaneous) total more than 100% and need clarification.
- Whether margins improve as workforce training progresses, given Q1 price reductions and increased labor and overhead costs.
- Reconcile the cash figure: the balance sheet and cash-flow statement report $17,750,733, while MD&A states $17,750,773.
- Review the share-count effect on per-share results and the company’s ability to reduce customer concentration while expanding operations.