Polar Power, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Polar Power designs, manufactures and sells DC power systems, primarily for telecommunications applications. Financial statements are unaudited.
Financial performance and position
| Metric | Q1 2019 / March 31, 2019 | Comparable period / December 31, 2018 |
|---|---|---|
| Net sales | $7.75 million | $4.87 million in Q1 2018; up 59% |
| Gross profit / margin | $2.39 million / 31% | $1.48 million / 30% in Q1 2018 |
| Operating income (loss) | $78,224 | $(327,317) in Q1 2018 |
| Net income (loss) | $70,703; $0.01 per share | $(318,802); $(0.03) per share in Q1 2018 |
| Operating expenses | $2.31 million | $1.81 million in Q1 2018; up 28% |
| Cash and cash equivalents | $3.53 million | $5.64 million at December 31, 2018 |
| Operating cash flow | $(1.98) million | $(2.41) million in Q1 2018 |
| Working capital | $20.64 million | $21.09 million at December 31, 2018 |
| Notes payable | $1.16 million, including $279,000 current | $1.21 million at December 31, 2018 |
| Total assets / liabilities | $29.26 million / $6.73 million | $25.24 million / $2.86 million at December 31, 2018 |
Cash used in investing activities was $79,029, principally for property and equipment; financing activities used $49,166 for note repayments. Receivables rose to $9.22 million and net inventory to $10.12 million from $7.73 million and $8.47 million, respectively, at year-end. The company reported no income-tax provision. Gross margin improved by one percentage point, reflecting production efficiencies and overhead absorption; net income improved from a year-ago loss.
Business changes and management commentary
- Sales growth was primarily from DC power systems sold to U.S. Tier-1 telecom customers. Telecom generated 94% of revenue, versus 92% in Q1 2018. AT&T and T-Mobile accounted for 60% and 27% of Q1 2019 sales, respectively.
- Sales backlog was $14.16 million at March 31, 2019, versus $2.56 million a year earlier and $15.92 million at December 31, 2018. Telecom systems comprised 98% of backlog; AT&T represented 74%. Management expected most backlog to ship within six months, while noting fulfillment and revenue recognition were not assured.
- Management said sales to major U.S. telecom customers should remain steady for the next several quarters. It aimed to improve margins and lead times, train an expanded production workforce, increase subassembly inventory, and develop international carrier relationships. This is management commentary, not quantified full-year guidance.
- Sales and marketing expense rose 3%, R&D rose 21%, and general and administrative expense rose 52% year over year. Management expected modestly higher near-term sales and marketing costs, higher R&D in dollars but lower as a share of sales, and G&A flat or slightly lower as a percentage of sales.
Liquidity, debt, and notable items
Operating cash use reflected working-capital investment, including increases in receivables, inventory and prepaid purchases. The company said available capital, operating revenues and other liquidity sources should fund operating and capital requirements for at least the next 12 months. It terminated its $1 million Citibank revolving facility in March without having borrowed; the formerly restricted $1 million deposit became available cash. Equipment notes bear rates of 1.9%–6.9%, with aggregate monthly principal and interest payments of approximately $29,000 due through 2023.
Adoption of ASC 842 on January 1, 2019 resulted in recognition of operating lease right-of-use assets and lease liabilities. At March 31, lease liabilities totaled $2.68 million, including $543,000 current; Q1 operating lease cost was $195,560. The balance-sheet increase in liabilities versus year-end primarily includes lease recognition.
Risks, contingencies, and controls
- Revenue and receivables are highly concentrated: the two largest customers generated 87% of Q1 sales and represented 89% of receivables at March 31. Backlog was also concentrated in AT&T.
- Yanmar and Perkins supplied components representing 64% and 31% of Q1 cost of sales, respectively. The company reported no long-term commitments with these key engine suppliers, creating supply, cost and production risks.
- Other disclosed risks include order timing and lack of firm long-term customer commitments, capacity and growth execution, competition, component shortages and price volatility, international operations, product liability, technology changes, and customer or supplier concentration.
- Product warranty accrual remained $175,000; actual claims may differ from estimates. Management reported no legal proceedings expected to have a material adverse effect.
- Management concluded disclosure controls and internal control over financial reporting were effective as of March 31, 2019; the auditor did not attest to internal control effectiveness.
Important facts for investors to verify
- Whether the large telecom backlog converts to shipments, revenue and cash on the expected schedule, especially given AT&T’s 74% share of backlog.
- Whether receivables and inventory growth can be collected, deployed and financed without continued material operating cash outflows.
- Whether margin improvement and production expansion continue, and whether dependence on two engine suppliers creates delivery or cost constraints.
- How the newly recognized lease liabilities and equipment-note payments affect future liquidity; monitor cash against management’s stated 12-month funding expectation.
- The product-sales disaggregation in the filing contains an apparent malformed DC power systems figure; verify the underlying reported value rather than relying on that line.