Polar Power, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; financial statements are unaudited. Polar Power designs and sells DC power systems, primarily for telecommunications backup and off-grid applications.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $9.24 million | $5.82 million | $16.98 million | $10.69 million |
| Gross profit | $2.96 million | $2.06 million | $5.35 million | $3.55 million |
| Gross margin | 32.1% | 35.5% | 31.5% | 33.2% |
| Operating income (loss) | $573,000 | $238,000 | $651,000 | ($89,000) |
| Net income (loss) | $567,000 | $223,000 | $637,000 | ($95,000) |
| Operating cash flow | — | $62,000 | ($2.29 million) |
Q2 sales rose 59% year over year, principally from higher DC power system sales to U.S. Tier-1 telecom customers. Six-month sales also rose 59%. Earnings improved, but gross margin declined: management attributed the pressure to lower average selling prices on larger orders and manufacturing overhead absorption. Operating expenses increased, including research and development and general and administrative costs.
Financial position and liquidity
- At June 30, cash and cash equivalents were $5.43 million, accounts receivable $5.90 million, inventory $12.13 million, and working capital $21.31 million. Working capital was $21.09 million at December 31, 2018.
- Total liabilities were $6.38 million, including $1.11 million of equipment notes payable and $2.54 million of operating lease liabilities. Equipment notes carry rates of 1.9%–6.9%; aggregate monthly principal and interest payments are approximately $29,000 through 2023.
- Six-month investing cash outflow was $176,000 and financing cash outflow was $95,000; cash declined by $209,000. Inventory increased by $3.65 million from year-end.
- The company terminated its unused $1 million secured credit facility in March 2019, releasing the restricted cash. In June it entered a receivables-sale arrangement with Citibank for eligible AT&T invoices. It sold $5.25 million of receivables and incurred approximately $22,000 in fees by June 30.
Outlook, commentary, and risks
- Backlog was $7.62 million at June 30, versus $5.83 million a year earlier and approximately $16.0 million at December 31, 2018. Management expected approximately 90% of June backlog to ship and be recognized as revenue in Q3 2019; fulfillment and recognition were not assured.
- Management said production capacity had increased approximately 160% and the workforce 78% versus June 2018. Its stated 2019 priorities included improving gross margins and productivity, building subassembly inventory, and expanding sales. It expected margin improvement as newer staff gained experience and production efficiencies improved; these are expectations, not formal financial guidance.
- Customer and market concentration is substantial: telecom represented 98% of Q2 sales and 96% of six-month sales. AT&T and T-Mobile together accounted for 85% of Q2 sales and 86% of six-month sales. Two customers each represented 41% of receivables at quarter-end.
- Supplier dependence is also notable: Yanmar and Perkins accounted for 40% and 16%, respectively, of six-month cost of sales. The filing cites risks from supplier availability and pricing, competition, customer order timing, tariffs and other supply-chain disruptions, and the company’s ability to manage growth and fulfill orders.
- Management believed available resources, operating revenues, and other liquidity sources would fund operations and capital needs for at least the next 12 months. No material legal proceedings were reported. Management concluded disclosure controls and internal control over financial reporting were effective; no independent auditor attestation was included.
Important facts for investors to verify
- Whether expected Q3 shipment and revenue conversion of roughly 90% of backlog occurred, and how subsequent backlog compares with the $7.62 million reported.
- Whether gross margins recovered after the reported year-over-year decline, and whether price discounts and overhead absorption continued to weigh on profitability.
- Whether customer and supplier concentration, including dependence on major telecom carriers and two engine suppliers, changed materially.
- Cash conversion and inventory levels, and the ongoing costs and availability of the Citibank receivables-sale arrangement.
- The cash-flow statement reports six-month operating cash flow of $61,905, while the MD&A text states $61,805; verify the intended figure in the filed statements or subsequent filings.