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ebase22... The analysts on Yahoo (I believe that'd be Roth Capital and the other guy who used to be on the cc calls and who put out an update this last spring) has them at $7.5M and 0 cents/share. It doesn't even make sense, but perhaps they are looking to put the bar so low that even POLA can crawl over it.
ebase....I'll pass on giving estimates. I'm always too optimistic. I will say under normal circumstances (and if this was any other company) that I would think they would be good based on:
1. They saying they are running at 60-70% in March & April. I'm assuming that's $3.0-$3.5M based on their stated claim that full capacity is $5.0M/month. I'd think May and June would be better.
2. The fact they cashed in $5.2M worth of AT&T receivables---as I explained in a prior post I think that is for 60 days at most, not 90 days.
3. Them saying they want to get inventory levels down to 2 months and it being possible with the increased capacity if it ramped up as projected.
4. COO saying at the end of March (for Q4 cc call) that Q2 would have results that shareholders have always been waiting for.
I could go on and on and on. The question is does it actually show up? That I don't know.
Worthy....they did that last Q also. Waited until like the Thursday before they announced the next week. I asked them about it back then and they said they were dependent on the auditors reaching a certain point before they could put out a date. Nothing bad came of it last time.
My bet is the announce the earnings date next Thursday and the earnings are on Tuesday the 13th.
Generac reported today. I haven't seen the transcript yet, but they in the earnings pr they see 5G in U.S. producing a market for several years for them on backup power. Also, more residential demand in Calif with potential power outages.
Seeking Alpha article out today:
https://seekingalpha.com/article/4278562-polar-power-5g-play#alt1
Hopefully those who have been selling back off a bit. It'd be nice to see the stock get up above $5 before earnings. It seems to want to move up some more. I'd still like a pr on some kind of international news soon, but if they put out solid earnings I think the stock would bounce up nicely. The analyst #s are low so it'd be easy to beat them and get a "pop". Then perhaps some news in late August/Sept could get it to break to a new high as momentum in the business and manufacturing starts to roll.
It's been 9 weeks since Q1 cc call. It's 4 weeks (probably) till 2Q one. I'm a bit disappointed there hasn't been any news on the international front. It's fine if international takes longer, but the question then becomes can they ramp up sales quite a bit more to U.S. telecom in the meantime? I'm sure it can happen in Q2 because of the backlog, but they will need regular strong follow up orders going forward from US Tier 1 and developing orders from US Tier 2. It'll be great if the manufacturing capacity capability went up nicely the rest of the year, but would suck if they aren't selling all they can produce.
Hitting resistance now. It'd be nice to get some news before the Q2 report. I will be disappointed if there isn't. It'd make me concerned they can't break through internationally for whatever reason. On the other hand, with some news, the stock could be above $5 before earnings report.
wadurum1.... directly---it allows Huawei to continue to expand sales around the world. You figure they are supposed to do 5G in Thailand and Sri Lanka, two places that we are (desperately) waiting for POLA to get large contracts from. You figure Huawei is also providing all the technology to Namibia for their towers.
Indirectly--- in that if we aren't restricting their technology, then they won't do a restriction on rare earth materials and byproducts (namely super magnets).
The stock price move up is nice from a chart point of view, but I'll be more satisfied when it's based on actual news that is the basis for 24 months more of stock movement upwards as it plays out.
There appears to be a trade truce with China forming. That bodes well for POLA. It'd mean going forward that the prior eliminated tariffs on steel & aluminum from Canada and Mexico should help them with lower costs. Those savings won't be replaced with increased costs on their magnets from China. It puts them in a good spot for now to succeed and get more money to the bottom line.
They just need to prove they truly have the demand to sell all the product the manufacturing facilities can produce going forward as it continues to ramp up.
worth....bids back to $4. There isn't much to read in any of this.
If you want a grump.....it's coming up on 6 weeks since the cc call and we still don't have any international news. I don't doubt that Q2 is solid. They may even be able to make Q3 better just from U.S. sales alone, but they have to get their darn foot in the door internationally soon with big contracts or else this stock upside will be limited long term.
Wadirum... What POLA needs is international exposure. Four things are happening right now that hopefully they can be a part of:
1. Namibia obviously. There are 400+ more towers that need to be built + back up for a certain % of them. I've heard no updates on this at all lately.
2. Huawei is involved with putting true 5G in Thailand. POLA has indicated they have done demos in the country. They are also doing electrical installation for Huawei in Namibia so they already have exposure to Huawei. Hopefully this all goes together.
3. Same thing---Huawei and Sri Lanka. Big push on 5G. Again, POLA has mentioned demos here.
4. The Philippines want to build approx 50K towers in the next 7 years. The first contract for 150 towers and equipment just went to Malaysia Edotco last week. In the past POLA has mentioned Malaysia and working with a company that has exposure through Asia and demoing with them. This is Edotco imo. The question is can they get something through this?
---If they can get international exposure soon and at the level the CEO mentioned in the cc call: "you're talking about revenues which are 4 times to 8 times the size of what they're getting here from Verizon or an AT&T." then I think we are in great shape not 24 months from now, but 6 months from now. As investors we want POLA to be selling everything their plant can produce in 2019---i.e. $48M in manufacturing capacity.
---this is the unknown factor that may be a big winner in the long run. Generac's CEO discussed it as a whole new area opening up. You could see this coming into play all over California, southern U.S., SE U.S., international.
https://qz.com/1632555/californias-wildfires-may-benefit-home-batteries-and-solar-panels/
---your point on Arthur being frugal.....exactly. He spent $44K for some reason to get that cash now. On the other hand, say they did $1.4M in March with AT&T. I don't see him paying 0.86% of that or approx $10.3K to get it immediately when he'd just have to wait 2-3 weeks to get the full amount. It's why I say the $5.2M they just got was April & May revenue only.
Credit Facility: My new thoughts.....
I found in the Nov 2016 S-1 where it said Verizon is a 60 day payment period on account receivables. I said before that in the Q1 2018 10Q it says the same thing about AT&T. However, in the last earnings report pr on May 15th it says "and a $1.5 million increase in accounts receivable associated with increased shipments to Tier-1 carriers with net 90-day payment terms."
As such, I'm going to go with 90 days for payment terms for AT&T accounts receivables.
However, when you read the 8-K from June 6th, it sure sounds like you pay for using 90 days in the Citibank payment fee calculation no matter if the time from when you sent the invoice to AT&T is 90 days ago or just 10 days ago. As such, I could see them paying Citibank fees to convert Q2 deliveries into immediate cash---assume the $5.2M was delivered to AT&T in two orders (ex. end of April and end of May). They used 90 days for the calculation to convert to cash even though the regular payment deliver would be the end of July and end of August. This alone cost them approx $44K in fees. ($5.2M divided by .9916 retention after fees = $5.244M is what the original number was). Remember, this is $44K in pure net income from the quarter! (i.e. 0.4 cents/share). I can see it worth it if growth is ramping up and you want to make sure you have constant delivery of engines from Japan, magnets from China, and electronics from Germany. This is coming in freight containers by sea and can easily get stuck in port in California for various reasons. They need to order lots and often to stay on top of it.
On the other hand, I seriously doubt they converted a March delivery into cash and paid a fee for 90 days from Citibank on June 10th when AT&T is going to pay them the full amount between 1 to 20 days after that (assuming they made a delivery end of March and normal payment would come 90 days later in late June).
As such, it is my opinion that the $5.244M (original amount) is revenue from AT&T in Q2.
If we take a step back, in last 10Q it said AT&T was 74% of the $14.1M backlog. The CEO said in his interview a couple of weeks ago that their first goal with the ramp up in production is to lower backlog on U.S. Tier 1 companies and shorten lead time. Say they get $6M in more orders this quarter as they deliver product (about what they got in Q1). That's $14.1M + $6.0M. If their goal is to have the backlog down to 6-8 weeks. then they need to do close to $10M just from U.S. Tier 1 in Q2.
If we assume all their sales so far in Q2 are U.S. Tier 1 and 74% of it is AT&T, then $5.244M divided by 0.74 = $7.09M in revenue in April and May.
Is $7.09M reasonable? Well, the COO said in the last cc call that March and April were running at 60-70% of eventual max capacity (with max capacity being $5M/month eventually). If we assume April is at 3.3M (which would be 66% which fits what COO says) and May is $3.7M as things continue to improve, then the $7.09M is very doable.
In last CEO interview, he said the plant will have capacity to do $48M this year. They did $7.7M in Q1 (we'll round it to $8.0M). Figure Q4 is full capacity or $15M. That means Q2 + Q3 have to be $25M. You don't do $25M unless Q2 is coming in over $10M. Again, his comment makes sense if they are doing $7.09M in April and May.
I'm not going to say all of this is certain, but it would make sense based on the huge build up of inventory, added machinery, and addition of personnel.
ebase...more:
Q1 2018:
"Sources of Liquidity
.............On March 31, 2018 and December 31, 2017, our trade receivables totaled $4,803,925 and $3,058,266, respectively, of which $3,661,057 (76%) and $21,825 (0.6%), respectively, represented customer account balances of our new largest Tier-1 wireless telecommunications carrier customer, AT&T, with 60-day payment terms.
If it really is 60 days net, than that means all of the $5.2M from receivable/cash exchange is from Q2.
However:
in the 8-K they use 90 days. Yet, it doesn't necessarily say it is 90 days, just that they use it as an example, e.g., in calculating it for the reader. I
https://www.sec.gov/Archives/edgar/data/1622345/000121390019010225/f8k060419_polarpower.htm
Without clarification from the company, I'd say it's 90 days vs 60 days. However, I agree with you that there isn't necessarily a reason they would need to sell all of the accounts receivables from March 1 to June 1. The question is why did they do $5.2M of it already unless business bumped up nicely already.
There is no doubt Q2 will be stronger than Q1. If the plant is running at 65-70% in April (according to COO in cc call) and goes up from there in May and June PLUS they are selling everything they are producing, then they are on target for a nice bump up in revenue. Imo, it'd be why you'd do a non-deal roadshow last week too.
The real question is how much stronger?
Also, they may be close to signing the big international contracts and are lining up inventory from overseas to deal with it (i.e. buying $2M in magnets before a risk of tariffs or rare earth issus so the market doesn't worry about the company having an issue)
ebase.... I wondered the same thing. I even went and looked up & calculated info (they break rev and accounts receivables down by % customer in the SEC filings):
Q3 2018: AT&T revenue for quarter = 1.72M.
Q3 2018: AT&T share of accounts receivable at end of quarter= $1.17M
Q4 2018: AT&T revenue for quarter = $3.48M
Q4 2018: AT&T share of accounts receivable at end of quarter= $3.36M
Q1 2019: AT&T revenue for quarter = $4.62M
Q1 2019: AT&T share of accounts receivable at end of quarter= $4.61M
On the basis of this, it seemed a correlation could be made that the two are similar. I wasn't sure enough about it so I didn't write up a post on the subject.
I did find a note in the 10Q of Q1 2018 where it said the accounts receivable term for AT&T was 60 days. As such, I'm not sure why they are calculating it for 90 days? Perhaps it changed during 2018?
Also, the $ paid out was up to May 30th to June 1rst. They can draw on any invoice that was submitted to AT&T from 10 days prior. They applied to Citibank on the 8th and got paid on the 10th. As such, it should be from 10 days prior to the 8th? That's the way I took it. It could also be 10 days prior to the payment (i.e. June 1rst). June 1rst was a Saturday. Either way, it has to be from 10 days before. As such, it was 2/3rds of the quarter.
SMET update.....it's now the "Small Multi-purpose equipment transporter" vs Squad. It appears the # of units is 1014 units now.
It also appears that this is a contract for a "final" choice (up to 2 picks), not one that goes to phase III. It says it's a production contract.
It does say it's "pre-solicitation" notice, so I assume there will be another one coming?
Wadirum......Is that what you think?
https://www.fbo.gov/index.php?s=opportunity&mode=form&id=7c0535027b639aece23a131463cbf68d&tab=core&tabmode=list&=
Nice to see the price reversal. Hopefully some news on the international front will show up soon (eventually/finally/ever) to solidify the move upward and get the stock back above $5.
Wadirum....here is the Textron Grizzly in action this last May and the POLA partner that I think wins it. The contest has gone from a vehicle that just carries gear to one that does lots of functions.
POLA's other partner, HDT, has solid flexible bullet proof wheels. The other two vehicles have pneumatic ones. You can see why that would be a huge disadvantage and why I'm fairly confident that one of POLA's two partners win.
https://assets.realclear.com/images/41/415957_5_.jpg
wadirum....it's supposedly a specifically designed water cooled DC generator that POLA is selling them. You figure it doesn't have the steel support, aluminum cabinet, or as much electronics as a telecom system. As such, perhaps $6K-7K/each?? Just a guess
It must be pretty decent as they initially were in only the HDT system, then Howe & Howe added it to theirs after Phase I.
It'd be $18-21M or so then spread out over like 3-4 years if I remember right on the Army's projected deployment. It's not a game changer for the company, but it could be a nice steady $1-1.5M/qtr product and positions them well for other military contractors to be looking at them for similar needs involving batteries & powering.
In the last cc call the CEO mentioned trying to get some R&D contracts with military.
Army SMET update:
The latest article (it's been awhile since I've seen an update) shows that the Army was very pleased with the program in it's latest testing in May at Ft Bening. Enough so that they are pushing it ahead. However, they have decided that it doesn't work at the squad level and would be more appropriate at the battalion level where it can be maintained easier and then assigned down to squads and companies for certain deployments.
It will probably reduce the total # needed (3000-5000 from before down to ??), but makes it more likely that the contract occurs with this latest classification. There was always the worry that the Army decided that the technology "wasn't there yet". They've done that many times on other projects.
As for POLA, they still need to get one of their partners (they have 2 of the 4 in the phase 2 testing) as the final choice to be rewarded. I still say that they have a very good chance as it's tough for the Polaris unit to put a machine gun on it when there is a roll cage in the way. That takes it down to 3. The next non-POLA partner has pneumatic tires. I think the best chance is with the two partners the have....HDT's unit with flexible solid wheels and, especially, the Textron Grizzly with tank tracks.
---"The SMET is currently going through the requirements approval process in the Army Requirements Oversight Council.
Benning officials hope that process will be complete by this summer, so the Army can begin the down-select process to choose the SMET prototype that will go into into production for fielding next year.
So that is moving quickly because we want to begin fielding in fiscal year 2020," Sando said.---
https://www.military.com/daily-news/2019/06/12/army-hopes-field-robotic-mules-carry-gear-next-year.html
It's good to see them "playing the game"....i.e. CEO interview + COO doing a "non deal" roadshow (I looked it up and that is an actual term that means roadshow to institutions/large investors without looking to sell shares). I'm hoping it's because they see good things coming (i.e. now that production is up, the limiting factor is demand and it's already going to come into play in Q2).
The stock traded today like whoever is the big seller is now gone.
It'd be nice to see it over $4 before any news on international came out.
Non-deal Roadshow:
On their Linkedin....
Rajesh Masina, COO of Polar Power, and his team are meeting with investors in a non deal roadshow (NDR) in Chicago, Milwaukee and Minneapolis over the next three days and invite anyone interested in speaking with Management to contact Shawn Severson of alphaDIRECT on shawn@alphadirectadvisors.com
perhaps, but the stock did close at a bid of $3.58 x $3.70. It was there for the last 1/2 hour of the day without the ask dropping like it always has before.
Also, see my other post to Wadirum on Nasdaq listed trades & daily volume.
The trading numbers today were odd. There was a trade at one point for 12.9K shares that made no sense on why it would happen really. As such, I went to Nasdaq right after it occurred. They didn't even show it as an actual trade in their list of every trade transacted today. I'm not sure who's #s are correct, but they only showed 16.6K shares overall today:
https://www.nasdaq.com/symbol/pola/real-time
I told the COO twice (earlier this week and in my last message) that insider buying would be very supportive. In the last one I said if there are no insider buys, then the next best thing for a show of support is a buyback. I agree that the effectiveness of a buyback would be limited and the important thing is they show improving results and contracts. However, imo, a buyback would send a confident message at least for now.
The CEO's trading plan expired at the end of March. It was an odd one in that it was only good for like 6-8 months.
The CEO and the COO both own a lot of shares and don't need more, but buying a few shares would support what they own for sure. I was surprised that no one received options this year. They rewarded themselves nicely last year, but did nothing this year. It surprised me because I've seen very few management teams that aren't pigs at the trough when it comes to this.
Can you link/star (?) my post on the CEO interview to keep it at the top of the messages for a week or so? I think it's worth reading if someone else comes to the board. I doubt many do, but it'd be worth not having it buried in the messages too much.
Wadirum... $48M in manufacturing capacity in 2019. $40M for the next 3 quarters. If they can get the demand (probably first from Tier 2 US companies, then international, then Army SMET, then their upcoming residential idea) then it would produce the type of growth that investors have been waiting for since the IPO. I'm not saying it's going to happen, but it sure would be nice.
It's why I prodded them on the buyback. If they think they can do it (and they would know based on what's happening with Tier 2 this quarter), then $1M allocated to a buyback now is easily done with the cashflow generated later this year. It also gives them an option to seriously consider depending on how worried they are on the stock price vs the future.
One thing I pointed out was that the "premium" they have always received on their stock price for the large future potential is now gone. They don't want to risk losing it forever. It gives a higher p/e going forward which gives options to the company for expansion plus rewards shareholders (and management's shares) more. As such, they need to show confidence in the company now and a buyback announcement would do it.
Heck, they many not even need to buy shares. Just an announcement might swing the tide and change the momentum back upward. It's so oversold now that any little push would do it.
Wadirum1... I had wrote the COO earlier on Tuesday asking about the bank line of credit that was supposed to have already been done from what was said in the cc call (it'd been 3 weeks already). I said that it was important they put out an 8-K on it as the stock price was such that it seemed like they were looking to do a surprise capital raise. I'm glad to see that they did put out the 8-K the moment they could. Even better, it's not a bank line of credit, but an ability to sell their AT&T accounts receivables to the bank for 99.2+ cents on the dollar. It means they can raise cash super easy and it costs them very little.
The COO even wrote me last night back to tell me the 8-K was available.
I took the opportunity today to write him again saying now that they can easily access $4.4M or so from the AT&T receivables + the $3.3M+ in cash they have on the books, perhaps a buyback announcement of a $1M would be wise. I said with the stock price down as hard as it is the company needs a positive pr. This would be a self-generated one. They could put strong comments in it too and it'd get wider distribution vs the narrow one the CEO interview just did through their IR firm.
I admitted to him that lowering the float even more isn't a good thing long term as it's the reason for the price decline now.....namely too few buyers + some sellers + market makers + computer algorithm trading can push the price around horribly. I said a $1M buyback could be used just to buy under $4 with the idea you sell those shares back in a capital raise a year from now at $7+ if the company is truly able to grow revenues and diversify the customer base. Once some outside good news comes----international contract or rev growth shows up in Q2---then the buyback wouldn't be needed anymore.
My last point I made to him was that, if they truly thought this could be a $100M or even $300M company, then they will have to raise capital in the future for further manufacturing capacity. It has to be done above initial IPO prices to show the company rewards all investors---new and old--- to bring in the next wave. To get it above IPO prices the company then needs to show strength here. If insiders aren't going to buy, then the most powerful thing they could do is a buyback announcement.
Obviously the company isn't happy with the stock price. You can see it in the fact the 8-K was released immediately. You can see it in that they scheduled a CEO interview on Wed with their IR firm explaining the expansion and what it can do. I thought I'd put the idea in their heads that maybe a buyback announcement could break this selling pressure and turn the price upward. In microcap stocks price momentum is a big thing.
We'll see. I told him it should be something to at least consider.
POLA CEO interview.
This interview that was released yesterday through their IR. It discusses the expansion of their manufacturing facilities primarily in Q4 2018 and Q1 2019. Namely what money was spent, the personnel added, why it was done, and what the company expects to gain for it.
You can access the interview at https://alphadirectadvisors.com/2019/06/06/polar-investments/ You just need to sign up and will receive it for free. Shawn Severson is POLA's IR guy through Integra-IR. This interview is done through a side company of that main one.
Highlights of it:
1. They did $24M in rev in 2018 from their facilities. With the expansion of equipment, space, and personnel in Q4 and Q1, they think they have the ability to support $48M in revenue in 2019. He isn't specifically saying that's what they will do, but that they could support it. (Me: They did $7.7M in Q1, but they were clear in the last two cc calls that January was expected to be --and turned out to be-- very weak as they moved departments around from one facility to another. Each month has improved from there and they were running at 60-70% of their capacity in the March & April time frame).
2. He discusses how they expect to improve margins. (Me: They were at 30.7% in Q1. Their goal in cc calls is that they eventually want to get to 35% in the U.S. at least. International will be lower, but the opportunities are much larger---though they haven't shown the ability yet to break through on big contracts yet).
3. They get 90% plus of their business now from U.S. Tier 1 telecom. He says they potentially could split it 50/50 by Q3 with other opportunities. (in the last cc call they mention they expect Tier 1 sales to remain constant going forward and using the extra capacity as it builds for diversification on higher margin customers).
Shawn Severson: First, I would like to thank you, Arthur for taking the time to speak with us again today. Last time we spoke, we covered an overview of Polar Power’s corporate organization and structure and a brief review of your market strategy. Today, our focus will be on your recent expenditures and investments. So, let’s get started. You have made a number of investments in the business over the past year. Can you explain what the catalysts are that drove this to occur?
Arthur Sams: Thank you, Shawn. Let me begin by saying that since the launch of our IPO it has always been our plan to diversify our customer base domestically and overseas, increase production to meet opportunities, and increase the diversity our products and services. Everything we are doing is centered around those strategic objectives. In regard to the specifics, there is not just one catalyst at play here as there are a number of factors that have been driving our investments. To start with, on the international telecom front, there is a heightened interest resulting from our marketing activity over the past two years. As a reminder, the international market represents over 90% of the global market and it is critical that we build our position in high- growth regions. Domestically, there is also another untapped opportunity outside of our US Tier-1 Carriers and that is found in the last- mile rural telecom providers. In fact, we estimate there are over 500 of them for us to target. We are attacking that opportunity by leveraging our visits to Tier-1 regional offices and then following on with visits to an increasing number of local and regional carriers and of course this demands additional resources to execute.
Our technology roadmap is also a key driver. We are preparing for new product launches in the June/July time frame which requires additional engineering resources and time to develop. Innovation is not a one-time event, but rather a continuous effort and we must maintain our competitive edge over the legacy domestic providers of AC systems and overseas against other DC systems providers.
We believe that we are still in the early stages of a multi-year cycle and require investments across the organization ranging from sales and engineering to manufacturing. With this expectation, it is critical to reduce our production lead times to meet our customer expectations. It’s noteworthy to mention that new customers want to start their programs ASAP and we have to be able to accommodate this or their procurement process delays the contract award and there are expectation for Polar to deliver sooner to make up for their lost time. At the same time, I want to drive our sales staff to seek contracts on projects that can commit to long range deliveries (example Military).
I guess if I were to simply summarize what is driving our investments, it is that we have a significant growth opportunity in a trillion-dollar market for power and cooling systems. I believe we have a technology advantage over our competitors, and we need to move ahead aggressively to capture our share.
Shawn Severson: About how much additional expense was incurred on a quarterly basis? Can you compare the first quarter of 2018 with the first quarter of 2019?
Arthur Sams: One of the key pillars of our growth strategy outlined in our IPO included international expansion and diversification of our sales through the addition of Tier-1 telecom providers to our existing customer base. During the past two years we established sales and service offices in Australia, Namibia, Romania, Dubai, Singapore, Dominican Republic, and Poland to build relationships with local telecom providers through product demonstrations and development of new product configurations better suited for local markets. These facilities also provide regional technical support for our sales personnel located in Singapore, Sri Lanka, Dubai, Poland and Dominican Republic.
Unlike the majority of our U.S. and European competitors, our strategy remains to develop direct sales and service infrastructure that greatly reduces the need for distributors and importers. During 2018, we invested $1,5 million in infrastructure, product demonstrations and salaries in development of international sales infrastructure, which resulted in initial orders from Africa, South East Asia and Australia totaling 6% of our sales. During 2019 we anticipate our international sales will follow a similar growth pattern as our U.S. Tier-1 customers.
Our U.S. sales during Q1 2019 grew by 55 when compared to Q1 2018. In the U.S. markets we are faced with large competitors who offer lower cost legacy AC technology products with short delivery times as an alternative to our higher quality and more efficient power systems. In 2018, we reached historic order bookings resulting from signing national agreements with Tier-1 telecom providers. In 2018, we invested into new plants and facilities to increase production output, shorten lead times and improve production efficiencies.
Shawn Severson: Can you provide more details on where the money is being spent and the split between people and capital equipment?
Arthur Sams: We are a vertically integrated manufacturing company with in-house processes including machining, sheet metal, welding, electronic assembly and final assembly. Many of the in-house processes were previously implemented due to lack of production volumes required to cost-effectively outsource and the uniqueness of certain processes that are not easily replicated in the industry. Our decision to purchase capital equipment is based upon payback in labor efficiency, improved quality and lower costs when compared to third party vendors. We finance all our major capital equipment through a third-party equipment finance company, the cost of which is exhibited as depreciation on our income statement. The acquisition of new equipment during the last 6 months has impacted our income statement by approximately $8,100 a month. In addition, the impact of hiring new staff and production management personnel to support the expansion of production capacity is approximately $293,000 a month.
Shawn Severson: Let’s expand on the personnel aspect a bit. What are the positions you have been hiring and why?
Arthur Sams: Vertical integration gives us more supply chain control and lower component costs - but it also requires a higher level of production management. Last year’s management team incorrectly felt that it had fixed the shortages issues and had the resources to contain various weekly surprises. In April of this year we completed hiring for the new positions developed to complete our operations management team. Our goal was to streamline roles and responsibilities of key management positions in order to improve the effectiveness of each manager and assist with improving production capacity and efficiencies. We brought in the following specialists:
? Increasing the high-level Production Managers from 1 to 2
? Added Material Management Department with staff
? Created a separate Production Planning Department with Sr and Jr Planners along with Production Control clerks
? SAP Administrator, managing ERP, MRP, CRM
? Increased Technical Services Directors from 1 to 2
? Created a Metrology Department with calibration, tool crib, tool training
? Added staff to our Quality Control including: Inspectors, Quality auditors, test operators
We are currently restructuring material and labor flow on the shop floor to increase production efficiencies and improve production lead times. With the experienced staff we have in place, we are becoming more proactive in solving late vendor shipments and related problems that plague every manufacturer. We should see a net result in the coming quarters, bearing in mind that the restructuring production will take time to see the results in our profit margins.
During 2017 and the first half of 2018, most of our investments in personnel were focused in sales, service and engineering. Once we gained confidence in our ability to grow sales and diversify customer mix, we began investment in operations.
I would note that all our new Managers and Directors in operations have significant experience in working for large manufacturing firms with senior roles in operations management. This represents a significant change in Polar’s production environment as we transition from a small to a large manufacturer.
Shawn Severson: Are you planning on marking any other significant capital expenditures this year?
Arthur Sams: In order to maintain high quality and low cost of manufacturing we have vertically integrated our manufacturing. In 2018, we made significant investments in our fabrication process to automate key labor-intensive processes. We invested over $1.2 million into new fabrication equipment to improve production capacity, quality and lead times. We believe investments made in 2018 met our forecasted production rate for 2019 and therefore would not require any significant investment in property, plant and equipment.
Shawn Severson: With the new facility operating efficiently and the people you have in place, how much revenue can you support at Polar?
Arthur Sams: In 2018, with primarily one plant operating and the addition of second plant during the fourth quarter, we generated $24 million in revenues. During Q4 2018 we added 29,000 sq. ft. of manufacturing space and automated equipment to double our production capacity. In addition, in Q4 2018, we increased our direct labor workforce by 24% to support higher sales growth in 2019. We believe in 2019 with the current sales mix combined with the addition of new plant and equipment, we are provided with 50% additional production capacity or approximately $48 million in sales.
Shawn Severson: I would like to better understand the impact this is having on margins. I understand there were some supply chain constraints that negatively impacted margins in the first quarter. Can you clarify what were the short-term disruptions versus the expenditures to increase capacity?
Arthur Sams: In 2018, we had a record bookings year with new orders received during the 12-month period exceeding $38 million with backlog of $16 million compared to $14 million in new orders during 2017 with backlog of $1.8 million. In order to support this growth, we decided to add additional production and invested over $1.2 million in automated plant equipment and tools. In Q4, 2018 we also increased our direct labor force by over 24%, which required increased effort in training the new employees. Leasing a new facility, investment into automated equipment and hiring of additional direct labor - all events that relied on proportional increase in production throughput. The Lack of proportional increase in throughput during the first quarter was primarily due to the inexperience and training of the new employees, which did negatively impact our gross margins during Q1 2019. Higher labor hours per unit shipped combined with material shortages resulting from production ramp up also adversely effected our gross margins. In fact we estimate the in experience of the new labor workers negatively impacted our labor cost by 5.7%, which was exacerbated further by higher fixed costs, supervision costs, etc.
Shawn Severson: Given where things were at the end of the first quarter, what must happen to improve margins for the remainder of the year?
Arthur Sams: One of the key initiatives in Operations for the past six months has been a comprehensive organizational structuring to help improve production efficiencies. Prior to that Polar’s production managers were “wearing too many hats” and this adversely affected our ability to transition to larger scale production.
We recruited our team from some of the leading manufacturing companies in the region and plan to utilize their cumulative knowledge to improve production processes. Key initiatives in Operations remain documenting systems and procedures, training employees, automation, real time measurements and analytics. We are also investing in improving our current designs to improve manufacturability and reliability while reducing product costs. We believe as our new direct labor staff gain more familiarity with production processes and procedures, our process efficiency will improve and thereby the margins. We believe an increase in direct labor workforce will facilitate higher revenues which will help absorb our fixed costs related to our investments into new plant and equipment in Q4 2018.
Shawn Severson: Are you saying this is all revenue-driven now or is execution still a significant variable impacting margins throughout 2019?
Arthur Sams: In 2018 our margins were initially impacted due to price discounts offered to Tier-1 customers in return for higher volume of orders. We are in a continuous process to mitigate a significant portion of these discounts through material cost decreases and improvement in process efficiency. As mentioned earlier, the recent drop in margins was mainly attributable to investments in Plant and Equipment and slower than anticipated integration of new direct labor force. Higher revenues will offset the increases in fixed costs while training the new workforce is expected to improve efficiencies. With increased revenues, we plan to reduce the backlog to provide shorter lead times to our customers, however, additional new sales can be a significant metric that impacts gross margins and profitability during the remainder of 2019. So, specifically to your question, there is still some execution risk, but I think we are now well- positioned to drive an increasing contribution margin as the year progresses assuming higher revenue levels.
Shawn Severson: Lastly, can you please explain how mix could impact margins as well. I am particularly interested in the Top-Tier telecom, second-tier, international and military.
Arthur Sams: During 2018 and prior to commissioning of the second plant, we had limited production capacity as evidenced by $16 million in backlog at 12/31/2018. This limitation caused us to focus our production effort on only Tier-1 customers. As we discussed previously, all Tier-1 customers are offered sales discounts for large production orders. This strategy has resulted in a sales mix of predominantly lower unit prices and thereby lower gross margins. With the commissioning of the new plant and hiring of additional workforce, our first stage is to reduce the backlog and lead time for our Tier-1 customers, and in parallel, increase our sales effort to Tier-2 and smaller telecom providers with higher prices and gross margins. Since Q4 2018, we have also experienced increased international activity and therefore anticipate higher percentage of international sales integrated into the sales mix once the lowering of Tier-1 backlog is achieved. We believe that by Q3 we could have 50% of our capacity allocated to Tier-1 with the remaining 50% available for International, Military and Tier-2. This strategy, once implemented, will balance the manufacturing overhead absorptions and gross margin contribution between Tier-1 and remaining customers, thereby improving the cumulative margins of the company.
Shawn Severson: Thank you for your time today, Arthur, and for helping alphaDIRECT Investor Network better understand the drivers and opportunities behind the investments being made at the company.
8-K: New bank line of credit that allows them to borrow against their accounts receivables. The CFO mentioned that it would happen during the last cc call.
https://ir.polarpower.com/sec-filings-email/content/0001213900-19-010225/f8k060419_polarpower.htm
Imo, good sign.
wadirum. I hope so. There needs to be buying on the ask to do it. Everything sits on the bid for the most part right now. Once the algorithms change direction on their trading, then individual investors will breath easier and not panic sell anymore.
Hopefully that last burst of selling at $3.50 will do it. If it could close over $3.60 I think the worst would be over. We'll know for sure if the 100 share trades start to hit at the full ask (not .001 below it) and slowly push it up vs hitting on the bid and driving it down.
ebase.... there are 8.5K shares on the bid now at $3.50. If there truly is a problem with the company and some shareholder desperately wants out, then they would take those for sure imo.
I think this whole move down is just a bad play on volatility + low float + some seller started it and momentum carried it + no news on international + etc.
It's just taken too long for the jump in growth to show up. That's the sad irony of it all---the company should finally show some real progress in Q2, but the patience is gone.
Wadirum...we'll know in Q2. They have $14.1M in backlog and a repeatedly stated desire to get that backlog down to 6-8 weeks at most going forward. With that they can take more orders from Tier 1 U.S., or go after Tier 2, or deliver to military, etc without long delays. It's a real incentive for them to work on it hard. They have the factory running at a decent level. So even if international is orders, but no delivery in Q2, they should be able to do well with minimal excuses. Can it (finally) happen?!?
Wadirum...obviously we are all in the hole here on this investment, but honestly think we are still ok. I went through the cc call transcript. Here's all the comments on international sales combined. They don't sound false. If they do come through, then the stock price will be ok and whoever is selling is making a mistake.
"We'd like to see our stock value increased too and we'd like to let's just say be comfortable that the investment that we made in international markets over the past two years payoff. Now, of course we have the confidence that they will or else we would shut down operations a while ago but our biggest problem is to sometimes and overconfidence in our sales directors overseas and then two the naturals delays that customers actually signing the contract that they promised to us. So these contracts without exaggeration going to start appearing next week or maybe get delayed as much as two months from now. We're going to day-to-day on looking and trying to close the three contracts in the Southeast Asia and Africa."
ME---I get the impression here that they are just as frustrated in delays as everyone else, but that they truly believe that they will happen.
"these international customers, because the revenue per site so high with these Tier 1 carriers around the world, even though they're price-sensitive. Now there we're building sell-sites from the ground up, there we’re providing hybrid systems, complete solar hybrid systems, as opposed to just selling a generator. So you're talking about revenues which are 4 times to 8 times the size of what they're getting here from Verizon or an AT&T."
ME---This response was the CEO making a point on margins. In doing so, imo, he wants to emphasize the size of orders they are looking at to everyone. Again, it doesn't come across as b.s. It comes across as what they are looking at in getting contracts signed.
"Okay. At what point is the international sales will be 25% of our sales was that the question? Okay. I'd have to do some math on that, but I'm just going to throughout a reasonable guess. In my view towards the end of this year."
I'm not worried about a capital raise. They don't need to do it if the quarterly results start growing in positive numbers to the bottom line going forward. That cash + quicker turnover in inventory will do it (plus potential bank line of credit against receivables). The only reason they would need to do that is if they needed a 2nd plant. The only reason they would need that is if they exceeded the capacity of this one. That'd be $15M/qtr in generator revenue + rev from any international tower builds + hybrid solar/battery pack installs. You figure the last two don't need manufacturing capacity to generate revenue.
The only way they exceed $15M/qtr in generator sales is if they sign some big international sales or domestic residential takes off with NG/LPG distributor partners or US telecom ramped up way beyond what is expected. If all that happened, then, imo, the stock isn't below IPO prices anymore no matter what.
The problem with it sub $4 is that someone isn't believing they ramp up significantly in the next 12 months. All future growth is now being pushed out of the stock for some reason. I'm not sure anyone knows anything other than an institutional owner wanting POLA off their books.
The company thinks they could have capacity at $5M/month by the end of the year. I don't doubt they can get the plant operating at that level, the question is will the demand be there to do it? If it is, shareholders don't have a problem even with the current stock price.
International order...it's frustrating obviously with nothing announced. One little tidbit that may be more my hope than meaningful:
The Director of Telecom and Business Development for Africa for POLA put out a thank you & #goingaboveandbeyond post to the Sales Coordination Manager at POLA (in L.A.) on Linkedin 3 days ago. I would assume she is helping him with a project concerning MTC in Namibia. Hopefully something comes of it, is signed, and announced going forward.
https://www.linkedin.com/feed/update/urn:li:activity:6540480429110108160
On the cc call the CEO discussed international order contract 4-8x AT&T rev at one point. At another he talked about pursuing large orders of building towers + hybrid systems. He also mentioned Huwaei at a point. Imo, the easiest path for all of this to happen is Namibia. They have the local office there. They built the towers in 2018 already. If they got a contract for just 25% of the 400+ towers left to be built + generators + install equipment for Huwaei, then we are talking about $10M-11M easily on a contract.
I know it's wishful thinking until it happens, but it would be the news the stock needs.
Q2 estimate: COO Raj commented in cc call that March and April were running at 60-70% of capacity (with capacity being $5M/month). He interjected separately to make this point.
Figure in Q1 Jan (based on their cc call comments of it being weak and giving a rough estimate of #s) of approx $1.8M. Figure Feb moved up from there to $2.8M as things got worked out. Figure March was probably $3.1M. Add it up to give $7.7M for the quarter.
It means that Q2 "should" do at least $9.5M as the factory ramps up more. I say "should" because, imo, that's at least what they should do. However, we know how that always goes with POLA when we predict things. I'd also like to think that Q2 production/month would continue to ramp up each month sequentially resulting in a higher overall revenue #. You aren't getting to $5M/month (as they said was possible by the end of 2019) by little jumps per month. It also depends on how much AT&T and T-mobile take on their backlog and/if POLA was able to start to get some Tier 2 US sales. We know there won't be any international this quarter---at least through today.
Let's say $9.5M though....
$9.5M x 31.5% margins. They did 30.8% last quarter and that's with how much of January labor being spent to move equipment around vs doing work. So at 31.5% = $2.992M gross.
G&A and R&D were $2.31M last quarter. Let's assume it goes to $2.35M. That gives $679K before interest & taxes. Interest will be approx $11K. = $669K left. They have approx $250K or so in tax loss carryforward. After you subtract that out and multiple the balance by 0.74 for Fed & State, it gives $560K or approx 5.5 cents/share.
Imo, $9.5M and 5.5 cents/share "should" be the low number expected. I doubt the stock price is predicting this. The key is will there be international orders announced between now and when Q2 earnings come out? Can they make comments that show they can truly get this to $15M/qtr? There is no way the stock price is pricing any of this in right now. They are saying the company will struggle like always. History says they are right, however, I'm still hopeful that good things are coming.
eventually whoever is selling will finish. The question is will that change the tide enough to get any small buys to start to move it up? If so, then the trend will change and those on the sidelines may nibble more feeding itself the other way. If it can get back over $4 on closing in time, it will psychologically help heal the stock. You figure there were buyers over $4.30 just over a week ago.
If you look at the individual trades that have gone through today:
https://www.nasdaq.com/symbol/pola/time-sales
A lot of them are duplicates. I.e. a market maker's computer buys/sells to itself for slight pennies difference or partial penny. They are trying to find a spot where others will come in and buy or sell. Since they can't find buyers, they make it so the price fades slightly (hitting bid with 100 share trades) trying to find an area where someone will come in.
Right now POLA has no new buyers and existing shareholders are sitting on the sidelines. As the price slides, people worry (appropriately so) and sell some off. It feeds itself. The way it's broken is a solid buyer comes in and take enough at the ask that they trend is changed the other way. They will need news of some kind on international front to do that imo.
One plus to the Lindedin post is that the company is aware of the issue in shareholders/investors minds and was proactive in saying something about it. At first I thought it should have been a pr, but then, upon reflection, that would highlight the issue too much imo. Best to be subtle about it.
It does say that if/when/if there is news on the international front concerning signed contracts that there should be a pr asap. The company obviously put out the magnet statement as they are not happy with the share price. They will want to put out good news as quickly as they can going forward. The question comes down to "when".
I have not seen anything on Army SMET or Namibia. MTC of Namibia (the cell company POLA deals with) just did a public IPO in Namibia. It could be why the next round of contracts has been delayed. They obviously have 400+ towers that need to be built going forward and have been adamant about doing it as quickly as possible.
wadirum... you're welcome. It's reassuring they already have a strong inventory of the magnets.
I'm not sure China putting export limitations on rare earth materials will even happen. It depends on if Trump ramps up his rhetoric or if he just lets things simmer a bit and leaves the door open for negotiations again. Hopefully both sides just want things to stay where they are for now until talks can start again. We'll know by Trump's tweeting going forward. He's avoided saying anything on China for a few days.
POLA's statement on Linkedin concerning China magnets:
https://www.linkedin.com/feed/update/urn:li:activity:6541002988717203456
"The USA-China trade war is spurring concerns that China could withhold shipping of magnets to USA. Polar is a direct importer of such magnets. Having "burned & learned" from previous artificial shortages & price gouging of Chinese magnets, we typically carry a 1 year stock of magnets and,
facing potential escalation of this trade war, will increase inventory stocks to 18 months.
A year magnet supply affords us time to switch to Japanese suppliers if required.
Another solution could be to move magnet procurement and assembly to Polar’s Australian location, either continuing to procure Chinese magnets or develop new sources in Australia, which is the second largest producer of rear earth magnets.
If magnet costs climb too high in the future, Polar could change its technology from Permanent Magnet to either Homopolar or Switched Reluctance. This would drop efficiency by 4% to 8% but our machines will still be far more efficient that AC generators.
Polar’s business model is based on providing unique Power and cooling solutions developed from extensive engineering experience. Being able to change and evolve technologies and products is the direct advantage of having our own engineering teams and vertical manufacturing.