Polar Power, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Polar Power designs, manufactures and sells DC power systems, primarily for telecommunications customers. Financial statements are unaudited and prepared under U.S. GAAP.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $4.872 million | $4.967 million |
| Gross profit / margin | $1.484 million / 30% | $1.917 million / 39% |
| Operating income (loss) | $(327,317) | $966,474 |
| Net income (loss) | $(318,802), or $(0.03) per share | $592,880, or $0.06 per share |
| Operating cash flow | $(2.408) million | $1.597 million |
| Capital expenditures | $55,062 | $55,957 |
- At March 31, cash and cash equivalents were $11.711 million, including $1.002 million of restricted cash; accounts receivable were $4.804 million and inventory was $5.430 million.
- Total assets were $23.993 million; total liabilities were $1.385 million. Notes payable totaled $209,821. The $1 million revolving credit facility was undrawn, and the company reported compliance with its covenants.
- Cash declined $2.490 million during the quarter. Operating cash use reflected a $1.746 million increase in receivables, higher prepaid expenses, lower accounts payable and the net loss.
Changes versus Q1 2017
- Sales declined 2%, although the number of DC systems sold increased 15%. Management attributed the revenue decline primarily to lower system prices introduced in March 2017.
- Cost of sales rose 11%, reducing gross margin to 30% from 39%. Management cited higher material costs, including steel and other raw materials, and higher direct labor costs.
- Operating expenses increased 91% to $1.811 million. Sales and marketing expense rose to $610,337 from $195,094, and R&D expense rose to $464,101 from $76,003, reflecting expanded sales capacity and engineering changes/customization for customer requirements.
- The company moved from net income to a net loss, and operating cash flow moved from positive to negative.
- Customer mix shifted: AT&T generated 64% of revenue versus none in Q1 2017; Verizon Wireless generated 27% versus 91.6% in Q1 2017. Telecommunications customers overall accounted for 92% of sales in both periods.
Outlook, risks and notable items
- No formal numerical earnings or revenue guidance was provided. Management said it expected sales to AT&T and military customers to grow over the next several quarters before flattening, and expected R&D as a percentage of sales to decrease. Sales and marketing costs were expected to rise in the short term.
- Backlog increased from $2.556 million at March 31 to $4.347 million at May 14, 2018. Management expected most of the May backlog to ship within three months; fulfillment and revenue recognition are not assured. The May backlog was primarily telecommunications (67%) and military contractor orders (25%).
- Management said available capital and expected operating resources should fund expenses and capital needs for at least 12 months. Approximately $800,000 of receivables was delayed about 30 days by AT&T billing-process changes; management did not expect similar delays to recur.
- Customer concentration remains material: AT&T and Verizon accounted for 91% of Q1 sales combined. Yanmar, the key engine supplier, represented 91% of cost of sales, compared with 13% a year earlier. The filing notes the company has no long-term commitment with Yanmar.
- Other key risks include commodity and component cost volatility, dependence on a single Gardena manufacturing facility, order timing and execution, competition, and the ability to scale production and meet customer requirements.
- ASC 606 was adopted January 1, 2018 with no financial statement impact. No material adverse legal proceedings were reported. Management stated disclosure controls and internal control over financial reporting were effective; the company’s emerging-growth-company status meant the filing did not include auditor attestation of internal controls.
- After quarter-end, on April 2, the company granted executive options covering 330,000 shares, with exercise prices of $4.97 for 180,000 options and $5.47 for 150,000 options, and vesting over three years.
Investor verification points
- Whether the higher backlog converts to timely shipments, recognized revenue and collected cash, particularly for AT&T and military orders.
- Whether gross margin recovers as production volume grows, given lower pricing, rising materials and labor costs, and the sharp increase in Yanmar purchases.
- Whether receivables and operating cash flow improve after the reported AT&T billing delay; assess customer concentration and payment timing.
- Whether expanded sales, production staffing and R&D spending deliver sales growth and operational efficiencies without further margin pressure.
- The potential dilution and compensation expense from the April 2018 executive option grants, alongside existing options and warrants.