Polar Power, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Polar Power designs, manufactures and sells DC power systems, primarily for telecommunications and also for defense and other markets. Financial statements are unaudited.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $5.06 million | $3.03 million | $15.75 million | $10.44 million |
| Gross profit / margin | $1.53 million / 30.2% | $0.83 million / 27.4% | $5.08 million / 32.2% | $3.51 million / 33.7% |
| Operating loss | $0.76 million | $0.69 million | $0.85 million | $0.31 million |
| Net loss | $0.76 million | $0.41 million | $0.85 million | $0.17 million |
| Net loss per share | $0.07 | $0.04 | $0.08 | $0.02 |
- Q3 sales rose 67% year over year, primarily on increased U.S. Tier-1 telecom system sales. Gross margin improved 2.8 percentage points, which management attributed to lower material costs, labor efficiencies and better overhead absorption.
- For the nine-month period, sales increased 51%, but gross margin fell 1.5 percentage points. Management cited higher raw-material costs, tariffs beginning in July, and increased direct labor costs.
- Operating expenses increased 51% in Q3 and 55% for the nine months. Higher sales and marketing and R&D spending supported expansion, customization and product development; G&A also rose, including stock-based compensation.
- Cash and cash equivalents were $10.61 million at September 30, down from $14.20 million at December 31, 2017; these balances include restricted cash of about $1.00 million. Nine-month operating cash use was $3.30 million, investing cash use $0.21 million, and financing cash use $0.08 million.
- Current assets were $23.24 million and current liabilities $1.87 million. Notes payable totaled $817,436, including $196,323 current; the company had not drawn on its $1.0 million revolving credit facility. Stockholders’ equity was $22.28 million.
- Working-capital use included a $1.93 million increase in inventory and a $0.60 million increase in prepaid expenses. Net inventory was $7.41 million, with a $330,000 obsolescence reserve.
Material changes and developments
- Telecom customer concentration shifted materially: for the first nine months of 2018, AT&T represented 61% of sales, T-Mobile 12%, and Verizon 13%; in the comparable 2017 period, Verizon represented 82%. Two customers together accounted for most revenue, according to the risk disclosure.
- Yanmar supplied 76% of raw materials used in cost of sales during the first nine months of 2018, versus 19% in 2017. The company said it negotiated a 25% engine-cost reduction under a long-term supply agreement, effective for shipments beginning October 2018.
- In September, the company received $7.5 million in new purchase orders from two Tier-1 telecom providers. Backlog was $11.40 million at September 30 and $15.19 million at November 12; management expected to ship a significant portion, and the majority of September backlog, within six months.
- Operations began at a second 29,000-square-foot manufacturing facility in November 2018. The company also reported an October service agreement in Namibia valued at $150,000 for work on 91 telecom towers.
- Equipment notes payable increased from $237,055 at year-end 2017 to $817,436, including approximately $663,000 of equipment acquired through financing during the nine-month period.
Outlook, risks and other matters
- Management believed available capital, operating revenues and other liquidity sources would fund operating and capital needs for at least the next 12 months. No formal earnings or revenue guidance was provided.
- Management cited production ramp-up inefficiencies for a newer generator model and component and engine shortages associated with tariff uncertainty as factors that reduced shipments and hurt Q3 revenue and profits; it said the disruptions had been resolved. Near-term priorities include improving production efficiency and fulfilling backlog.
- Management expected the Yanmar price reduction to lower overall sales costs and support margins as volumes grow. Results depend on achieving higher production and capacity utilization; the expected improvement is not assured.
- Key risks include dependence on a small number of telecom customers, reliance on Yanmar, order timing and lack of long-term purchase commitments, execution of production expansion, competition, tariffs and component availability, and international-market and regulatory risks.
- The company reported no material legal proceedings, compliance with credit-facility covenants, and effective disclosure controls and internal control over financial reporting as of September 30. The external auditor did not attest to internal-control effectiveness.
Important facts for investors to verify
- Reconcile customer concentration disclosures: the filing gives differing sales percentages for AT&T and the Tier-1 customer totals in its concentration note, MD&A and risk section.
- Confirm conversion of reported backlog and the timing of shipments, revenue recognition and collections; backlog is not guaranteed revenue.
- Track actual production capacity and shipment performance at the new facility, and whether the claimed engine-cost reduction offsets tariffs, labor and other input costs.
- Monitor customer and supplier concentration, receivables collection, inventory growth and operating cash burn.
- Verify the new facility’s address: the filing identifies it as 400 E. Gardena Blvd. in MD&A and 400 W. Gardena Blvd. in the lease note.