Good day and welcome to the Polar Power's Fourth Quarter 2018 Financial Results Conference Call. Today’s conference is being recorded. At this time, I'd like to turn the conference over to Shawn Severson. Please go ahead..

Thank you and good afternoon everyone. I'd like to thank you all for taking the time to join us today for Polar Power's fourth quarter and full-year 2018 conference call. Your hosts today are Arthur Sams, Polar Power's Chief Executive Officer; Raj Masina, Chief Operations Officer; and Luis Zavala, Chief Financial Officer.

Arthur will begin by providing an overview of the key events in the quarter. This will be followed by Raj, who will provide an operational update as well as updates on key strategic objectives. After which, Luis will discuss the financial results.

A press release detailing this quarter's results crossed the Wires today at 4:15 Eastern Time and is available on the company's website at www.polarpower.com. Following management's prepared comments, we will open the call for questions.

Before we begin, I'd like to remind everyone that statements made on the call and webcast today, including those regarding future financial results and industry prospects, are forward-looking and may be subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the call.

Please refer to the company's SEC filings for a list of associated risks and we would refer you to the company's website for more supporting industry information. At this time, I'd like to turn the call over to Arthur Sams, Polar Power's CEO..

one, to increase our market share with top-tier US telecom providers. With our larger service network in place, we will pursue the smaller and local wireless telcos, we estimate about 500 of them are in North America and expand our presence in international markets.

Two, to continue to diversify our customer and product base by providing more comprehensive services to our telecom customers and increasing our exposure in other key markets, including military, commercial, residential, and electric car charging.

Three, to increase our production capacity and efficiency by opening up our second manufacturing plant, and facilitate revenue growth. And fourth, to provide industry-leading technology and power solutions through our R&D and technology roadmap. Now, I'd like to hand it over to Raj, so he can provide an operational update on our strategic objectives..

Thank you, Arthur. Let me expand on those four strategic objectives Arthur mentioned. The first one, increasing market share and – market share gains and international expansion. Our traction with our tier-1 US carriers continued in the quarter as evidenced by our high backlog.

This momentum has continued in the first quarter and we're seeing some positive initial forecasts for 2019.

On the international front, during the fourth quarter, we installed a few DC hybrid systems in Sri Lanka to demonstrate the use of -- in remote sites, off grid remote sites, and this is to demonstrate the use of our DC generator and lithium battery system.

Due to the minimum electrical -- electric infrastructure, a significant percentage of telecom tower sites in emerging countries are not connected to the grid and, thereby, require renewables and battery storage devices in combination with generators to provide power to the radio equipment.

We believe a successful demonstration of our DC hybrid power systems in a prime power application like this is a key milestone and will help us expand our market share in Sri Lanka and other emerging countries.

As a reminder, we have been demonstrating our technology in select international markets and we believe that should result in additional orders. For example, we received an order for 25 DC power systems for a tier-1 telecom in Thailand during Q4 based on a demonstration site that we did earlier in the year.

Furthermore, in December of 2018, we completed the construction and installation of 10 telecom towers in Namibia which was part of the initial phase of a national program to bridge digital divide between urban and rural Namibia.

As Arthur mentioned earlier, we're working to launch a new LPG product that we believe will help drive our market share with the US top-tier carriers and grow international emerging market sales.

We believe this product will help drive incremental sales as we can provide a solution using a lower cost and widely available fuel source and reduce dependency on diesel.

We also believe this will enable the telecom customers to better comply with emission standards and permitting titles as it pertains to their backup power systems and provide primary power when necessary. The second objective is diversification.

The second strategic objective is to diversify our customer and product base by providing more comprehensive services to our telecom customers and increasing our exposure in other key markets and applications. Namibia is a perfect example of an opportunity to expand our products and services.

We have the -- we have the opportunity to increase revenue from the same customer by providing ancillary services like installing their cell equipment, maintaining their sites, along with providing solar hybrid systems to power – that power their cell equipment.

We believe this horizontal expansion will give us a platform to leverage our sales infrastructure costs in these regions and yield more profitability in the future. Outside of Telecom, we're seeing good traction in other applications as well, like Arthur was saying about the SMET program, the military program.

That is part of the US government military initiative to utilize electric propulsion powered vehicles to remotely provide surveillance transportation and reconnaissance over wide areas. During the fourth quarter, we delivered 20 such systems and we delivered a total of 40 such systems in 2018.

And these would be integrated into robotic mules during the first half of 2019. Completed robotic mules are being field tested now under various challenging operational environmental conditions. And, so far, we've been hearing very good results coming from those tests.

We anticipate receiving production orders sometime during latter half of 2019, upon successful completion of these field tests.

We believe this type of automation is expected to have additional applications in the commercial sector as well as by law enforcement, border patrol, etc., and we'll be able to leverage this technology platform in the future.

The third objective is expanding capacity -- is expanding our capacity to meet what we believe is a solid demand profile in the coming years. As a reminder, in November of 2018, we opened our second manufacturing plant, which is approximately 29,000 square feet and is located just minutes away from our corporate office in Gardena.

This expansion is expected to nearly double the production capacity when it is operating at full efficiency. This is an ongoing process that we expect to continue throughout 2019. We expect progress to be made each quarter throughout the year. The fourth objective is technology.

A fourth key strategic initiative is to provide industry leading technology and power solutions through our R&D and technology roadmap. We're currently focused on two key opportunities. First one, integrate -- within R&D -- within technology.

First one is integrating solar and lithium ion battery storage solutions with our DC generators and provides the complete site solution. And the second one is, as Arthur discussed, it is the LPG product. So, first we'll talk about the solar hybrid systems.

We believe that increased environmental regulations combined with the declining cost of solar and advanced storage -- storage technology has accelerated the shift of the telecommunications tower -- tower companies towards solar hybrid systems in off grid and back grid regions worldwide, which is key for our expansion international markets.

In order to provide telecom services, companies will need a combination of renewable and fossil fuel based power generation solutions to be cost effective. We positioned ourselves as a technology leader in designing the optimized the right amount of DC power optimized solutions that combine the right mix of solar storage and fuel generation.

To enhance our hybrid systems capabilities, we are upgrading our battery management systems and in the process of developing a new remote monitoring solution that not only monitors but also controls remotely our systems in the field. We believe this is a key differentiator in the international market and improves our competitiveness.

And -- and the next one is, the key project is the next generation of LPG and natural gas field power systems. Applications include telecom on grid, back grid, and off grid sites to electric vehicle charging to solar hybrid systems for rural electrification and peak power saving etc.

A goal of this program is to improve the fuel efficiency significantly, increase the engine life up to 60,000 hours and reduce the overall engine cost, thereby reducing the overall generator cost. We plan to launch this product in the second quarter of 2019.

We have initiated some discussions with a few key large LPG suppliers domestically and overseas. Overall, we believe our technology and power solutions demand a high level of innovation for seamless integration into our customers systems.

We believe this will be a key differentiator and also key success factor and it gives us the competitive advantage in the market compared to a generic power solution. I will now turn the call over to our CFO Luis for his financial summary.

Luis?.

Thank you, Raj. Net sales for the year ended December 31, 2018, totaled 24.0 million, an increase of 67% as compared to 14.4 million in 2017. On a quarterly basis, net sales increased 108% to 8.3 million for the three months ended December 31, 2018 as compared to 4.0 million in Q4 2017.

The increase in net sales was primarily a result of an increase in sales of our DC power systems to tier-1 wireless telecom customers in the US. Backlog totaled 16.0 million at December 31, 2018, as compared to 1.8 million at December 31, 2017.

The increase in backlog at the end of 2018 as compared to the end of 2017 was attributable to an increase in sales of DC power systems to our domestic tier-1 wireless carriers -- carrier customers. We believe that the majority of our backlog will be shift within the next six months.

Gross profit increased by 2.7 million to 7.4 million for the year ended December 31, 2018, as compared to 4.7 million for the year 2017. Gross profit as a percentage of sales decreased to 30.9% for the year 2018 as compared to 33% in 2017.

The decrease in gross profit as a percentage of sales over the last year was attributable to a combination of pricing concessions tied to higher volume orders from tier-1 telecom customers and an increase in manufacturing overhead costs associated with expansion of our manufacturing facilities.

In addition, we experienced a slight increase in the cost of raw materials as a result of new tariffs on aluminum, and other imports from China. Operating expenses increased to 8.5 million in 2018 from 5.6 million into 2017.

Of this amount, 0.6 million and 1.2 million was attributable to an increase in investments in R&D, and sales and marketing activities respectively. Net loss in 2018 totaled 0.8 million or negative 0.8 million -- I'm sorry, negative eight -- I'm sorry, let me start that over.

Net loss in 2018 total 0.8 million or negative $0.08 per basic and diluted share compared to net loss of 0.8 million or negative $0.07 per basic and diluted share in 2017. Cash at December 31, 2018, totaled 5.6 million as compared to 14.2 million at December 31, 2017.

The decrease in cash as of the comparative period end of December 31, 2018, and December 31, 2017, was the result of a 7.8 million cash used in operating activities of which 2.9 million was associated with an increase in inventory and 4.7 million increase in accounts receivable associated with increased shipments to tier-1 telecom customers with net 90 payment terms.

Now, I would like to turn it back to Arthur.

Arthur?.

Yes, thank you, Luis. I'd like to thank everyone for their time today and all of our shareholders for their continued support as we continue to work on executing our growth strategy. We look forward to speaking with you on a first quarter and year-end financial results conference call. Now, I would like to open up this call to questions.

Operator?.

[Operator Instructions] We’ll hear now from David Stanton with Pacific Financial Corp [ph]..

Hi there, gentlemen. I got a question on fourth quarter margins. I see where they're at 28%.

And that included, I would assume that included with your bulk discount on engines, where do you see them going forward in 2019?.

We price the products to kind of reflect the mid-30s in terms of gross margins. But obviously, we're not able to get there yet because of a few things. One is the factory, we just started that factory. So, a lot of -- significant amount of overhead is going into that one. And overtime costs have also added there.

So we're not able to realize efficiencies yet.

So I would say that maybe second half of the year, our margins would improve, but the first half of the year, we still would suffer and would say, Luis, we would say that the margins would be probably in the low-30s, is that?.

The margins will be fairly flat for the next two quarters, being that we're ramping up and we're adding quite a bit of equipment and new staff. I believe right now, we are at about 165 employees as compared to roughly, I believe, we had 105 employees as of the end of last year.

So, there's a lot of -- there's still a lot of inefficiencies in our operation simply because we're ramping up quite – really, really fast. So as we get our staff trained and our new facility up and running 100%, we will start seeing this gross margin improve. .

That sounds good. I'm glad you mentioned the number of employees. I was wondering about that.

I see where you’re running ads for people all the time? On that topic, in your January PR, you mentioned that it's vital that you increase your production capacity -- your production ability going forward to just even go after the US telecom market, let alone anything else.

Will we start to see that show up in revenues in Q1?.

Once again, the starting part of Q1 will still be slow, because we're moving – we’ve moved some key departments from one factory to other, but it's ramped up. For example, the month of February is more than January, March will be more than February. So, we're scaling up on a monthly basis.

So overall for the quarter, it's too early to kind of give guidance on how we will compare to last quarter, but yes, we'll be seeing some positive results in Q1, but most of the results would be seen in Q2 and thereafter..

Okay. For expenses, I saw we're -- the additional number of people have your expenses at 2.5 million for fourth quarter.

Should we see that go up a little bit going into first quarter and second quarter? Or do you think you can kind of hold it flat or with less overtime?.

We believe we will hold it flat. Right now, I think we’ve -- other than maybe just the two or three key positions, I think we've pretty much completed our hiring process. Right now, moving forward, we will be managing the overtime, which our goal is to reduce it..

Okay, excellent, excellent. On the international front, glad to hear you're making progress on different locations. Now on the Namibia contract, will there be a second phase? Are you expecting that? And also do you expect to get a larger percentage? I think, there's like 400 and some more towers that need to be built. You did like 10 of the first 100.

Do you think you can get a higher percentage of the remaining towers?.

We did 10 of the first 47 because the other 60, yeah, the other 60 is not allocated yet. It's still in the planning phase, which we also might get a share there. So Arthur, you can talk to Namibia recently..

Well, we believe that we're going to do well in the next round of contract awards. But unfortunately, when you have large companies and government tied companies, you can never really predict what's going to be the outcome. We did a good job. We feel that we're very competitive in our costs and our capabilities.

So we'll just have to see what comes up over the next couple of weeks or so. It may even be delayed a month or more..

Do you expect to get generator orders from Namibia?.

We expect to get generator orders from Namibia. How soon and how many is not clear to us, but the need for electrical power is there. And, but here's the important point. Overseas, it's important to have facilities in country where you have inventory parts, mechanics, you have an infrastructure in country in order to support the local market.

It's like, if you're buying some Lithuanian car and you're not going to expect too much service from it. So maybe, it just becomes a collector item. Well, no one's interested in having collector DC generator sets or power systems. They want to buy power systems that they can count on that there's kind of the parts service support.

And with that, we feel that we've got an edge over everybody by having an office in South Africa..

Excellent. Now, speaking of offices internationally, you mentioned -- you have one in Australia, and in a few conference calls, maybe even was a year ago, you mentioned you thought Australia could be your second largest market going forward.

Can you give any update on what's happening there?.

Well, we're still waiting for the orders to turn our way. We participated in a number of demonstrations. But one of the things that we have to reach out to overseas is that we have to be able to provide more training in terms of product orientation, in terms of capabilities, and in terms of application support to our overseas offices.

So we have a little bit of ways to go there before we can really turn on the overseas market to us. In other words, we have wonderful sales execs overseas, who have been able to operate, open up many doors, but the number of questions and requests for support and demonstrations is a bit overwhelming.

So we intend to meet this additional support and demand for overseas sales, starting sometime this next quarter..

Thank you. We will now take our next question from Jeff Kobylarz with Diamond Bridge Capital..

Hi, guys. Congrats on how well things have gone so far. I think I heard it was said about the 16 million of backlog that that will all be pushed out as sales in the first half of this year.

Did I hear that right?.

That is right..

Okay. All right. So that's obviously at least 8 million of revenue a quarter roughly, but you said first quarter is going to be a little bit slower. And the second quarter will be more of a catch up as you're ramping up your manufacturing plan..

No, no, Jeff. This is Raj. I was answering the previous caller’s question by saying, the question was, can we expect to see those production efficiencies already or the margin improvements already in Q1 versus Q4. And I was basically answering saying not yet, it will be more realized in Q2 because we still have ways to go in Q1.

But yeah, Q1 will still be decent. But obviously, Q2 would be the one that would show some -- the results that our shareholders wanted to see..

Okay.

Do you have any way you can comment about what we should expect for revenue in the second half of this year? Or does it just depend on orders that you're going to get?.

Yeah. At this point of time, I think an odd part, it'd be a little premature to give guidance based on the forecast that we are getting from our customers because their requirements are changing every week, and it's so dynamic that it would basically better, keeping backlog as a good reference point and then working off the backlog.

Basically, we're at a point where demand is more than supply and we're walking away from a lot of sales. So, our current focus is to increase the supply, get the production to a point where we can fulfill those orders before we can go back.

As I think one analyst mentioned somewhere that the backlog number that we have is too high and we as management agree that it is too high and we want to cut that down, we want to bring to a point -- production to a point where backlog reflects not more than two months of revenue.

So we want to get to the run rate first before we give some guidance on that one..

Okay.

Do you have a feel when you will get to that point, where the backlog is just two months of revenue?.

Yeah. It’s a continuous process once again, it’s a weekly progress that we will have to make, but yeah, probably end of Q2 is something that maybe might be a better time for us to kind of look at that from that perspective. .

Okay. All right. And then about this Bosh engine of propane, flash natural gas. You're going to, you said, release this product to the market in the third quarter. I think I heard you say in, it’s like Western USA markets.

Is this going to be kind of starting very small or just any comment at all about the materiality of this unit?.

Okay. Well, we've got two markets that we will be releasing it into, telecom, which would be the first market that we’ll release it into and that's going to be sooner than the third quarter. And then we've got some residential applications that we're looking at releasing it into, and we’ll probably do that towards the third quarter.

The engine is made by Toyota, the controls are Bosh and Polar Power, the alternator is Polar Power..

Okay.

Can you comment about, all right, so the telecom product, can you comment about any initial indications from the telecom industry, how excited they are about it?.

There's two applications in Telecom. One is backup and one is prime power. And in terms of prime power, they're very excited about it. Because it drastically reduces their maintenance, improves their fuel efficiency and gives them a little bit more power than what we've been able to deliver in the past. That's prime power.

In terms of backup power, we've been using the Kubota 973 natural gas engine and this provides about 20% or 30% more power than that unit does. So some of the telcos would appreciate an engine that gives them more power and does so about the same fuel efficiency. So that's, pretty excited about that..

Yeah. But at this point of time, we don't have any meaningful backlog from that engine. So let's, we want to be clear on that one, that's a new product and there will be several new markets that we’re chasing. So, we don't have anything definitive on that one yet..

But at the same time, the Toyota engine is going to be replacing the Kubota engine. And most people that we talk to would rather have a Toyota as opposed to a Kubota..

Okay, good. All right.

So the sales to the telecom industry, will that be -- is it just one customer that's going to be buying this initially or are there a few that are sampling it?.

When we start to introduce it, we probably expect to hit somewhere between 8 to 12 major telcos out there. And that will be both domestically and internationally..

We’ll now move on to our next question from Tim Chatard with Quantum Capital..

Can you talk about how many units you shipped in 2018?.

No. Yeah, no, we’re not giving guidance in terms of total number of units that we ship because that would kind of reflect our ASPs in there. So that's -- yeah, we’re only talking about the percentage of revenue coming from different clients.

The large clients like yeah, our legal has advised against giving guidance on the number of units or the price per unit, mainly because of competitive reasons..

How about international, can you talk about how much revenue you had from international sources in 2018?.

Sure. Yeah. 2018 international revenue was 6% of our total net sales for the year, which was approximately 1.4 million. And that increased from 1.7% of total revenue in 2017, totaling $247,000. So, we had a significant increase in our international sales..

It sounds like Namibia and Sri Lanka were the two international sources, is that roughly correct?.

Yeah. Those are the two big ones and then we had Thailand as well, we had a decent order from Thailand as well. Australia with some battery systems..

And just on the cost of goods, raw material issue that you described with some tariff items, is that not anything you can recapture via pricing with your customers? Have you reflected it, I guess, in new list prices for 2019? I'm just trying to think about how difficult that is for you to recapture?.

Yeah, I mean, we have informed our clients about the headwinds in terms of the tariffs, but at the same time, what's happening is our customers are expecting price discounts as their volumes are going up.

And, it's kind of bouncing out there where, we, on one hand are reducing our costs, increasing our efficiency or the process of increasing our labor efficiencies. And we would like to pass on those savings back to our customers. And, obviously, we were not able to do that yet because we had a negating effect from the tariffs.

So yeah, but we are constantly informing our clients about what we are undergoing, how much our material costs went up on a quarterly basis because of the tariffs..

A little offset to the increase in the cost, we are sharing some of our suppliers have agreed to share some of that cost. But, of course, it's still an additional expense that we're going through..

Yeah, we're not getting any sharing of the aluminum and steel cost. But, the – on those costs, we’re not able to pass on to the customer. And they do erode our margins. So hopefully, sometime in the near future, those tariffs of aluminum and steel would be lifted..

It's early in 2019 right now, but do you expect working capital to continue to consume cash. I had recall from the third quarter conference call that you thought there might be a release of cash [Technical Difficulty] towards the end of the year, but that did not turn out to be the case.

What's your thought?.

Well, technically, our working capital is still fairly high, when you consider current assets as a whole.

But in terms of cash and cash equivalents, yes, it's pretty much, we depleted quite a bit of it due to the ramping up and in terms of our operating expenses, but also because of the sales that are coming in from tier 1 carriers that [indiscernible]. We are looking in to different options.

We feel that with the large amounts of accounts receivable that we have, with tier 1 telcos, we easily qualify for a line of credit if we needed to go that route.

We feel that as we go into the later stages in this year, it will start balancing out our receivables with our liquid cash and we should be in a better situation, so our cash will increase as we move into the later part of this year..

We’ll now move on to our next question from [indiscernible] as a private investor..

Good afternoon, gentlemen and congratulations again for a great quarter. So, I guess, my first question is on the backlog. You mentioned in your prepared comments that the backlog, I don't remember exact words, I think you said the backlog continues to be strong and continues to increase in the current first quarter.

Could you give us kind of an estimate as you did last quarterly call of what the current backlog as of today is?.

We don't have those numbers prepared for this call. But we will be releasing that information soon in an official press note, but basically backlog as of March 30 is something that we want to share it out to the public..

Okay, then. I will be looking forward to that. And most of my questions have already been answered, just about the new engine.

Is there danger of kind of getting a pause in orders, while people are kind of waiting for the new engine or testing out a new engine, not wanting to buy the old engine?.

Hi. I'm not sure if I understand the question. No, I wouldn't worry about the -- our Kubota inventories are relatively small. So I wouldn't really worry about that. Our current inventories on Toyota engines are pretty good..

All right.

So, but you wouldn't worry about customers just stopping ordering, stopping the orders, while they test out the new engine or would you still have the continuing backlog for the new engine kind of seamlessly?.

Our customers would see this as a seamless change from one engine to the other. And this new engine does have about a 25 year history to it. So on one hand, it’s new for a model we're doing with it, adding the Robert Bosch controls to it.

But this engine has evolved slowly over the past 25 years and about 1998 to about 2002, we probably moved approximately 1000 of these , what do you want to say, this engine’s model predecessor. The engine back then, in those years, were built by a company called Daihatsu. And Daihatsu was bought out by Toyota.

Toyota then took the engine off the US market. While they continue to manufacture and sell the engine in Japan and other countries, they made some improvements in terms of collaboration and compression ratios.

So the real difference between what we're selling now and what we sold in the 1998 to about 2003 or 2004 timeframe is the higher compression engine and an engine with an electronic throttle body and the Robert Bosch controls.

So, this is not something that's going to be a developmental risk or something that we're coming out onto the market with some unknown problems or issues.

Did I answer your question?.

Yeah, that's great to hear and very welcomed detail. All right. Now, on the tariffs. As I understand from listening, researching other companies, they're kind of two different fields of prices and price increases due to tariffs. One of them is, things like aluminum and steel, which you already talked about.

But there's like another area for things that haven't been actually hit by tariffs. But there was talk about tariffs and these are like electronic components, and kind of small mechanical components, coming from China, and prices on this kind of increase just because of shortages, because everybody was tying them out before the perceived tariffs.

So if you’ve seen prices on those things decrease at least? And would that be -- could that be a benefit in Q1?.

Not decreasing costs, increasing costs. Yes. We've been subject to capacitors and all kinds of electronic components, shortages, you named it. We’ve seen it..

And those are not decreasing yet after, I guess, after a little bit of falling off relations between China, those are not decreasing..

Let's put it this way, when the idea, the concept, or the possible announcement of a tariff on aluminum was put forth to the public, that day pricing increased, without it even being in effect. So, things -- prices haven't come down yet. We're hoping and expecting that they will.

But one of the things too is that a lot of electronic components we are sourcing other than Chinese manufacturers, one strong reason is quality. But China's also a supplier raw materials to other countries, where these electronic components are being manufactured. So, it's a wave effect. It's a ripple effect..

All right. And my last question is on residential, here in California, we've been kind of hit by kind of effective price increases for people that have solar power, just because they moved the window for the highest price electric power, or they moved it later in the day.

And there's been incredible surge in sales for battery system [indiscernible] in advance.

So would you be able to make a system where, a resident in California with their own solar power can completely go completely off the grid and just use natural gas? Is that what you're talking about when you talk about the residential?.

It’s one of the applications we can service. We don't believe that to be a sizable market. I mean, everybody would like to tell their electric utility to jump off a cliff or something. But when it comes to paying that bill to cut the utility line, most people won't do that.

However, we believe that, for example, with the electric rates going up, that people want to escape those peak power demands, and possibly switch over to natural gas to offset those costs. That's one thing.

The other thing is that we believe that people who are charging their cars at home would consider using natural gas as the energy supply to charge their car and at the same time, they're charging their car, they can be using the waste heat off the engine to heat the pool, to heat the spa, to heat the house.

So with this co-generation and electric car charging, we see there could be a sizable market. I mean, currently at my apartment, I don't have enough electric utilities service to charge my electric car. If I wasn't renting, I'd put my own generator in and charge my electric car from there.

So I would be able to charge my car in 4 to 8 hours as opposed to one or two days off my current electrical service..

So do you envision putting -- selling a generator as well as kind of like an electrical controller that hooks up with the grid power and the solar and kind of turns on the generator when there isn't enough solar or grid power is too expensive or something like that?.

Let me answer that this way. There's, let’s say, a couple of applications. One is where the solar array is put on to, let's say, a factory. And the factory wants to consume all the power, there's no incentive to sell it back to the utility.

But as the clouds cause shading over the panels, the outputs fluctuate throughout the day, making that power more difficult to use. So what you do is you connect the DC generator into that system. And so what you're doing is you're combining solar with the right amount of fuel.

So you have a stable power supply so that you can source all of your electricity needs from that.

Was I clear on that?.

Yes, yes. Yes. You’ve been very thorough. Thanks so much..

Then there's the other application, whereas, let's say, you're off grid and the ideal off grid situation is one, minimize that battery back, because that's expensive to -- in both the capital costs and the maintenance costs because even if it's a Tesla power cell, you connect on the wall or whatever they call their product, at some point in time, that's going to have to be replaced.

So what you do is you minimize your battery. And instead of using energy storage in the battery, use the energy storage in natural gas line or in the propane tank and you use that to run the generator to supplement the solar power. So the battery becomes less of an important component in the system.

And then while the generator is running, you can make use of the waste heat for again, for heating the house, the hot water, the swimming pool, the spa, or what have you, if it's a dairy helping process the milk, if you're a farmer, for example..

[Operator Instructions] We’ll hear now from [indiscernible], another partner..

Hi. I just have a few related questions having to do with where you're going for production capacity.

Once your second facility is fully running, roughly, what would you think the sort of sustainable throughput is, if you're managing over time, et cetera, the way that you would like to, so is that -- could you do 12 million, 15 million a quarter, or what are you trying to reach to? And then whatever that number is, do you believe that would require the SG&A to move up meaningfully from where it is now? And two, do you believe you have enough current capital to make that happen or would you need to find capital, that are equity related..

Okay. So, this is Raj. I'll take those questions. So first, in terms of our targets, yeah, once it comes to full capacity, with a little bit of overtime and maybe some warehousing space that might be required, our goal is to get to that 12 million, 15 million range per quarter, basically 4 million to 5 million run rate a month.

And so, the second question is, do you have the capital to get there? Obviously, we will need some sort of working capital assistance to get there. We don't think that we’ll need to go raise equity capital to get there. Because, at that rate, we’d be profitable cash flow coming in for the bottom line.

And also, it's not highly capital intensive, this move. That was your second question.

What was your third question?.

And third, do you believe that your SG&A would have to meaningfully move up higher?.

Yeah. Not by much, not by much. We’re already putting the infrastructure in place to kind of support that level of revenue structure. So, it will probably increase a tad bit, maybe a percent or maybe a couple of percentage points, but not much..

We will now take our final question from Ashok Kumar from ThinkEquity..

Hi, thank you very much.

A question on backlog and I was wondering, what do you estimate the backlog sweet spot to be? And would it be around 10 million or thereabout and then in terms of what would be the right level of inventory turnover, that we should be monitoring and with the increase in manufacturing capacity, do you believe you'll be at in the 2x type of inventory turnover by year end 2019?.

Right, right. Okay. Yeah. So, ideal backlog numbers for us would be two months worth of revenue. So that would be basically telling the customer that we will deliver the product once the [indiscernible] deliver the product within eight weeks.

So that would basically be anywhere between 8 million to 10 million whenever we get there, whenever we get the production and capacity to that rate, it would be between 8 million and 10 million. That would be the backlog that we would prefer to have on our books from our perspective..

In terms of international, I mean, you have made investment in the sales infrastructure to address some of the opportunities throughout the world.

And I guess 2018 was not particularly a stand-out in terms of international contributions, are you looking to be satisfied with the resources you're committed thus far and does that assume that you're probably looking to see a high level of contribution from the international markets this year?.

That is correct. We believe that we don’t need to invest any further in terms of sales infrastructure in international markets. But the sales cycles are long. And the products would need customization, and which is what we've done over the past one and a half years that we've been playing those markets, in select markets, by the way.

So, we expect to see some meaningful results this year. We saw some results as evidenced in last year, but we hope that that would actually go up significantly this year or the following years..

And one last question is in terms of profitability, I mean, historically, a more reasonable price to your products to yield an average of mid 30s type of margins and of course, some verticals like military carry higher margins, and then international projects slightly lower and then assume in a near term, there are some ramp up issues working with key customers like T-Mobile, but would you state that you expect product profitability to normalize by the second half of this year?.

Correct. Correct. Second half would be the target for us to normalize the margins. But, yeah, the later half of the year, yeah, the first few quarters basically as Luis earlier mentioned, it would be still in the low-35, high-20s, low-30s, basically in that range. And we expect that to improve in the later half..

Okay. Looks like, there's no further questions..

Yeah. Let's close it up. Thank you everybody..

Thank you. That does conclude Today's conference. Thank you all for your participation. You may now disconnect..