Good day, everyone, and welcome to the Polar Power First Quarter 2019 Financial Results Conference Call. Today's call is being recorded. And at this time, I'd like to turn the conference over to Shawn Severson. Please go ahead, sir..

Thank you, and good morning, everyone. I'd like to thank you all for taking the time to join us today for Polar Power's first quarter 2019 conference call. Your host today are, Arthur Sams, Polar Power’s Chief Executive Officer; Raj Masina, Chief Operations Officer; and Luis Zavala, Chief Financial Officer.

Author will begin by providing an overview of the key events in the quarter. This will then be followed by Raj, who'll provide an operational update as well as updates on key strategic objectives after which Lewis will discuss the financial results. A press release detailing the quarter's results has crossed the wire today at 9 a.m.

Eastern time and is available in the company's website at www.polarpower.com. Following management's prepared comments, we will open the call to questions.

Before I begin, I'd like to remind everyone that statements made on the call and webcast today including those regarding future financial results and industry projections, 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 will 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..

Thank you, Shawn, and welcome, everyone, to Polar Power's first quarter 2019 earnings conference call. During today's call, I will briefly discuss our key highlights for the quarter, first quarter 2019, before I'll provide you with an update for each of our core markets.

First, I'd like to give a brief summary of financial results and then, Luis, will provide greater financial details later during this call.

Revenues for Q1 2019 were $7.75 million, which is a 59% increase compared to $4.87 million last year, with a majority of the growth driven by sales of our DC power system, the Tier-1 telecommunications customers in the U.S.

Our backlog at the end of the quarter stood at $14.16 million compared to $2.56 million last year and $16 million backlog at the end of Q4, 2018. The increase over last year was, again, driven by increasing sales to our Tier-1 telecommunication customers in the U.S., which we believe will remain steady for the next several quarters.

Gross profit was for the quarter stood at $2.39 million compared to $1.48 million last year. Gross margin for the quarter was 31%, an increase of last year -- over last year's 30%. During Q1 2019, we boasted a profit of $70,703 compared to a loss of 3,000 -- excuse me $300,018 -- excuse me -- $318,802.

On a per share basis, we earned $0.01 per basic and diluted share as compared to net loss of $0.03 per basic and diluted share Q1 of 2018. Now I'd like to provide a business update and review. I'm happy to say that we are starting out strong in 2019 with higher revenues in backlog.

We are clearly still in an investment phase as a company, as we are investing to meet expected higher demand and leverage the numerous growth opportunities we see in front of us.

During the first quarter of 2019, we continue to invest heavily in developing our production infrastructure and increase our production labor force by 21%, including key production management positions. And we have implemented new state-of-the-art manufacturing equipment. Raj will provide more color later during this call.

For a big picture perspective, I believe we have to take these steps in order to build a world-class global business. We could invest in our business labs, but then we would grow at a slower rate.

And I believe that with the window of opportunity we have today, the prudent action is to grow and take advantage of the conversions towards DC power systems in the market for both primary and backup power. Raj will provide you with a business update on our primary business category.

We view our business in two general silos Telecom and Emerging growth. As a reminder, one of our key advantages is that our core DC power system have numerous advantages over incumbent technologies. We are able to expand on our core technology to develop and customize new and innovative solutions for multiple markets and applications.

Beginning with telecom, we view this segment as having three major categories domestic Tier 1 domestic last mile and international. The demands for our DC generator system from domestic Tier 1 markets are being driven by a couple of key factors.

First is that Tier one carriers are increasingly focused on network hardening and improving the reliability and they are using our systems to provide backup power. The second driver which is more on the Verizon is 5G. This will also be a backup power but with larger sized DC generators and the 15 to 25 kilowatt range.

Our momentum in the Tier one continued from fourth quarter as evidenced by our high backlog. I'm optimistic that this segment will see more sustained strength of 2019 based on current forecast. Most last mile providers are small private firms with owner operators managing the telecom infrastructure.

These providers also sublet their infrastructure to various other providers for improving site efficiency. Due to off grid and back grid nature of these installations I believe we bring a higher value proposition to the customer with our DC solar hybrid power system.

What's unique about this market is that it's highly fragmented among what I believe are approximately 500 carriers within the U.S. With the manufacturing capacity addition and the new production management we are now able to target these customers and will help diversify our telecom business in the up-and-coming year.

On the international front, we saw accelerated sales activity in 2018 which led to the sales later half of this year. We are seeing repeat sales from customers acquired in the previous quarter and I see no reason for this to slow down.

Since 2017, we've invested in sales infrastructure in the international market which now has led to a number of active programs internationally and we expect to gain momentum as we move from pilot program to more commercial orders in the second half of this year.

We have four key areas of our focus in our emerging gross category specialty hybrid electric vehicles, propane, natural gas, DC generators and solar hybrid or noble energy business. Our distributed power for residential and rural needs along with electrical vehicle charging.

Our push into supplying power systems for specialty hybrid vehicles is being driven by the military and Air Force application. As a reminder we are currently working on a few key programs for the U.S.

Army and we've been designated and we have designed a lightweight compact DC power system that charges the batteries within these robotic vehicles being used to transport personnel and goods. In 2018, we delivered our onboard generator to military contractor's responsible delivering integrated vehicles to the military for testing.

This program is still on the field trial stage and there is no new procurement development since our last update. But we expect more updates as the year progresses. We believe this program will give us an excellent launching point to take our technology to other similar applications involving robotics and autonomous vehicles.

Propane and natural gas generators will be -- sales will be driven by high cost of diesel, engines meeting new emissions regulations. In other words, diesel engines have been increasing in cost due to additional equipment to reduce submissions of these engines.

The very low maintenance of propane and natural gas fuels, diesel is a high maintenance fuel compared to these LPG, propane and natural gas fuels. Natural gas and LPG are lower cost per energy source in many regions of the world. Diesel in many regions of the world is much higher in cost than propane or natural gas.

And this could mean substantial savings for the operators. Natural gas and LPG have a lower separate than diesel. They operate at so many sites, telecom sites throughout the world can be as much as 20%. Increase power consumption worldwide has resulted in the need for power off-grid and bad-grid area.

Distributed power is a megatrend in the market today and we believe that our solar hybrid systems using clean fuel will be the most cost-effective and reliable solution of the micro-grid power. These DC solutions have a great potential for applications in residential and commercial markets in both domestic and overseas.

We believe the up and coming popularity of electric vehicles will straighten the grid. If air conditioners during the summer restrain the grid in California and New York and adding millions of electric vehicles was certainly escalate the problem.

The solution is to use natural gas with the DC generator to charge the vehicle and then make use of the waste heat for various applications including full and power gaining, laundry, house heating or even air conditioning using absorption technology. Charging electric vehicles could launch a micro CHP combine heating power market. Conclusion.

Looking ahead towards the rest of the year, our focus is on continuing to train our new production labor force, improve our labor efficiency and strengthen our business relationships with top tier communication carriers, both domestically and internationally, increase our inventory of subassemblies to reduce the order fulfillment time and have the infrastructure and people we need in place to meet our growing demand.

As a reminder to everybody, our continuing key strategic objectives are; one, to increase our market share with top tier U.S.

telecom providers, target last mile carriers and expand our presence in international market; two, to diversify our customer and product base by providing more comprehensive services to our telecom customers and increasing our exposure to other markets including military, commercial, residential and electric car charger; three, to increase in production capacity and efficiency by opening up our second manufacturing plant and facilitate revenue to grow; and four, 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 that Arthur mentioned. The first one to increase our market share with top-tier U.S. telecom providers target the last mile carriers and expand our presence in international markets. So the first one is top-tier telecom -- U.S. telecom providers. Attraction with our tier-1 U.S.

carriers continued in the quarter as evidenced by our high backlog. This momentum has continued in the first quarter and we are seeing some positive forecast for the remainder of the year. Also AT&T and FirstNet jointly launch their program, which was geared towards America’s first responder is expected to start soon.

Organized by Congress in 2012, it's mission is to develop, build and operate the nationwide broadband network that eclipses first responders to save lives and protect U.S. communities. The number of programs that these Tier 1s are launching this year are very encouraging for us.

We view the last-mile carriers as a great opportunity like Arthur mentioned. We will be pursuing these customers more actively from the second half of 2019. This sector also has attractive margins. We expect international sales will become a larger portion of our business through the end which will diversify us further from the Tier 1 carriers.

Since the past quarter, we've been actively engaged in submitting several proposals to keep Tier 1 clients in select countries around the world. It's a little too early the details, but we'll update our shareholders as some of these materialize over time.

Second objective is diversifying our customer and product base by providing more comprehensive services to our telecom customers and increasing our exposure to other markets and applications. Sales in international markets are giving us the opportunity to capture more revenue per site than the average revenue we generate from the U.S. Tier 1s.

As mentioned in the last quarter, we now have the infrastructure and the ability to provide ancillary services in select countries. These services include installation of radios, construction of sell sites and maintaining all equipment liquid within the site.

As part of this initiative, we have continued providing such services in the Namibia, partnering with Huawei for the past three months. We believe this strategy will uniquely position us as a comprehensive solutions provider for telecom carriers internationally.

We think that developing these capabilities and relationships will enable us to pursue additional markets and applications which are interrelated. The third one is expanding capacity.

I want to spend a bit more time on this as we have made significant investments in the business during the past three quarters which has created a modest headwind on the contribution margins in the short-term. We are a growth company with numerous opportunities as Arthur highlighted in his section.

Historically, we have been limited by production, engineering, and sales in terms of pursuing business outside of the top-tier telecoms. This bottleneck was likely to be exacerbated even further by the fact that the seeing strong demand from the same customers. In order to grow and diversify, we need to take several steps.

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.

However, the steps they've taken are way deeper than just adding facility. In April, we completed a six month project to restructure our operations management. Our goal was to reduce the number of responsibilities that key management had an increase the overall production management experience and resource.

So, we're talking about the mid-level bench-depth that we're adding to. Now, we brought up the following specialists.

First we increased the high level production managers from one to two, then we added the material management department with its own staff, then we created a separate production planning department with junior planners along with production control clerks, then we increased the technical services of team that directors from one to two.

We created a metrology department with calibration, tool crib, and tool training. We also added staff to our quality control including inspectors, quality auditors, test operators. This would also lead into our goal of being an ISO 2009 certified company.

We're also presenting -- we're also presently researching material and labor flow on the shop floor to increase production efficiencies and improve production lead-times. With experienced staff we have now in place, we are becoming more proactive in solving late vendor shipments and related bottlenecks.

In summary, we're investing in our business which we believe is a prudent step and we expect to pay dividends throughout 2019 and beyond as we drive more revenue through our investments. The last objective, the fourth one is to provide industry-leading technology and power solutions through our R&D and technology roadmap.

We have continued to make progress on the two key platforms mentioned last quarter. I won't spend too much time on this as we provided an update only a few weeks ago.

As a reminder, the two key platforms in development are; one is integrating solar and lithium battery storage solutions with our DC generators; and the second one is the new LPG product that we're about to launch in the second half of the year.

The first one, regarding the renewables, with our integrated systems, we are currently upgrading our battery management systems and in the process of developing a new remote monitoring solutions that not only monitors, but also controls our systems remotely in the field.

We believe this is a key differentiator in the international market and improves our competitiveness. And the second one is LPG product.

As we explained last quarter LPG product is focused on the next generation of LPG and natural gas power systems and we will have application across a wide variety of markets including the telecom on grid, bad grid and off these sites.

But also it opens avenues in distributed power for commercial and residential electric vehicle charging and solar hybrid systems for rural electrification and peak power saving etcetera. Again we expect to be able to use this platform in multiple markets. We're still planning to launch this product in the second half of 2019.

We've initiated some key discussions with a few large LPG suppliers domestically and overseas. Overall we had a good start in 2019 and we believe we are on the right track. It is a critical year for us to leverage investments we've viewed back year or two we have made and we expect operating improvements as the year progresses.

I'll now turn the call over to Luis, our CFO for his financial summary.

Luis?.

Thank you, Raj. Net sales for the three months ended March 31, 2019 totaled $7.75 million which is an increase of 59% as compared to $4.87 million for the three months ended March 31, 2018. The increase is primarily a result of an increase in sales of our DC power systems to tier-1 wireless telecom customers in the U.S.

Our backlog totaled $14.16 million at March 31, 2019 as compared to $15.92 million at December 31, 2018 and as compared to $2.55 million at March 31, 2018, 98% of our March 31, 2019 backlog. Our purchase orders were seen from tier-1 telecom customers in the U.S.

Gross profit during the three months ended March 31, 2019 increased 61% to $2.39 million as compared to $1.48 million during the same period in 2018. Gross profit as a percentage of net sales was 31% for the quarter ended March 31, 2019 as compared to 30% in the same period in 2018.

The increase in gross profit margin was actually attributable to production efficiencies gains for the use of new manufacturing equipment added in the previous quarter coupled with slight increases and labor efficiencies.

For our operating expenses during the three months ended March 31, 2019 increased 28% to $2.31 million as compared to $1.81 million in Q1, 2018. The increase in operating expenses was primarily due to a 52% increase in G&A which included increases in salaries, addition of key management staff, increase in stock compensation expense and office rates.

Sales and marketing expenses increased by 3% as we continue to promote our product at international levels and R&D expense increased by 21% as we continue to customize our DC power systems for our clientele.

Net income in Q1, 2019 totaled $70703 or $0.01 per basic and diluted share compared to net loss of $318802 or negative $0.03 per basic and diluted share in Q1, 2018. Cash at March – cash as of March 31, 2019 totaled $3.53 million as compared to $5.64 million at December 31, 2018.

Working capital as of March 31, 2019 totaled $20.63 million as compared to $21.09 million as of December 31, 2018. This was the result -- the decrease in cash was the result of increased inventories of $1.6 million, a $1.5 million in accounts receivable associated with increased shipments to Tier-1 carriers with net 90 payment terms.

Now, I would like to turn the call back to Arthur.

Arthur?.

Yes, thank you, Luis. I'd like to thank everyone for their support -- 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 each one of you in the first quarter and year-end financial results conference call.

Now, I would like to open up this call to questions.

Operator?.

[Operator Instructions] And we will take our first question today from Dawin Staten [ph] with Pacific Financial Corporation. Please go ahead..

Congratulations guys on a profitable quarter. It's exciting to hear all the potential markets that are opening up, but I have to admit, it's a bit frustrating that your revenue wasn't moving up quicker. In the last conference call, Raj talked about how Q1 started off a week in January and got better in February, better in March.

Can you give a better breakdown of that in terms of revenue and then the trend you see going into Q2 please?.

Raj or Luis, do you want to handle that?.

Luis, do you want to handle that?.

That’s regarding our revenue. In terms of how fast -- I believe, we have a steady forecast on DC power systems from our domestic Tier-1 carriers. We believe that revenue will remain constant from the domestic markets where we're betting on gaining some international and military and then also....

Luis, the question was the breakdown of January to March and how that is kind of looking in Q2. So let me take that. So yes I mean as indicated last quarter, revenue started small in January and then increased in February and then increased in March because mainly supply chain constraints and we're in the process of ramping the production.

So those are the problem that we had. So it was less than $2 million. I can't give the exact number because we don't diverge monthly numbers. It was basically, yes, it was less than -- it was between $1.5 million and $2 million in the month of January. So that's the main culprit. And then February and March, we definitely improved..

Okay. That's the trend I wanted to see because right now your biggest restraint seems to be not demand or even potential market getting the product out there. On terms of your new facilities that are opening up, you talk about doubling your production capacity when it's operating at full efficiency.

What is the estimated debt capacity when it is today?.

We believe that we have the capabilities with both factories running at full efficiencies to do up to $5 million a month in revenue..

Okay. Excellent, excellent. And one last question is, how is your cash position? I mean your inventory is going up, your accounts receivable go up.

In the last conference call, you talked about needing to get a line of credit against your Tier-1 receivable? Is this going to be needed? Or is the cash position good enough to keep things flowing smoothly?.

I'll take that Raj. Yes, we will be moving forward with one of the options that we have on the table which -- our best deal right now is to -- is the one that you just mentioned. So, we're looking at executing that agreement within the next week or so. And we believe that will sustain us for the next year or two..

Okay. Excellent. Thank you very much and I'll get back in the queue..

Let me add one thing to that question is that -- as we increase our production efficiencies, we will be able to turn our inventory faster which will also diminish our need for capital or inventory..

Excellent. Hey thank you so much..

We'll go to the next question and that comes from Tim Chatard with Quantum Capital..

Hi. Thanks for the rundown on all the operation things that you've been talking about. Raj talked about number of things there production manager, quality control.

How many people have you add as a part of that effort?.

We have to count them on our fingers as opposed to knowing it off the top of our head.

But Raj have you counted them on your fingers?.

Yes as a percentage we added -- we increased it by 21 -- we increased our staff by 21%..

In our overall workforce..

Overall workforce. But yes, in terms of the operations team, the mid-level management team, it's close to like 12, 14 people looks like an average..

Yes. I haven't counted..

Yes. We haven't counted yet..

But what we did say that we probably spend about $0.5 million on the new team?.

Easily. Yes, so, on that point of spending busy obviously we can spend less like Arthur mentioned in one of his commentary. We could spend $1 million less in sales, we can spend $0.5 million less in service; definitely spend $0.5 million to invested in R&D.

But we believe that growing the topline is extremely important for us so that we can leverage these investments into more EBITDA for our investors..

Let me shine a different light on that. Old management that's been managing production let's say for the past 10 years couldn't break the 7,000 -- $7 million a quarter mark. So, what we did is we brought in a new management to come from production line significantly larger than ours -- dwarfing ours from larger companies and we put them in charge.

So, we expect them to greatly break our bottleneck of $7 million to $8 million a quarter..

So, a couple of related questions there.

The expense run rate that you showed in this quarter about the $2.3 million across G&A R&D and sales do you expect to maintain that level when the course of this year or should you grow further from there?.

So, it's relatively flat. So, we can model it to remain flat for the rest of the year..

And the progress on getting towards full production at any facility how far along are you in that process? Percentage-wise or utilization managing along the lines that you can just comment on quantitatively?.

We would say between 60% to 70%..

And last quarter end you talk about a couple of supplies--.

We're currently -- let's just say in the month of April March April timeframe where we're about there..

You expect to hit the full utilization or something near that by the end of 2019 or do you think that'll that the 2020?.

Yes, we believe that we'll get there in 2019..

Great. Well thanks for answering my question..

No problem..

And we'll now go to Eric Grossman with Aquaman Financial..

Good morning, gentlemen. Thank you for getting early for us. My questions have been answered by the previous callers. And I've enjoyed the call very much. Thank you very much..

Thank you very much. [Operator Instructions] And we'll now go to Jeff Kobylarz with Diamond Bridge Capital. Please go ahead..

Hi. Good morning guys. Maybe if you could talk about the LPG generator.

Any developments now where that stands as far as getting that item to the market?.

Okay. Right now we're caught up with, how can I say, we are getting ready to let the engines to EPA for certification. And we're still doing testing of the integration of the Robert Bosch equipment onto the Toyota engine. We're pushing that along as quickly as we can as we have approximately 400 engines purchased from Toyota.

We want to turn that inventory. So I would say that we could be anywhere between four weeks to nine weeks out in terms of getting the EPA certification for those engines. As soon as we do then we open up the U.S. market. But in the meantime, if we get overseas markets buying it, we’d probably will be able to market them first overseas.

So we're not sure on that we’re still working with the integration of the controls with the engine..

Okay. How difficult is that? Is that how new is the designs for doing that? Integrating with the sort of….

We've got the resource in place certainly between Toyota and Robert Bosch is just coordinating activities that take time between these two large companies. It just simply takes their own time to move forward on that. But it is pretty close, it is very close..

Okay. All right.

And then you said what's the average price would be relative to the price of your typical generator that you sell? Roughly what is that?.

It is the same price mix. It will not increase the price. Matter of fact the way things are going now, this new engine will lower our price over the older Kubota engine that we're using..

Okay. All right..

That we want..

Thank you.

Any comment about tariffs and any impact on your raw materials for any materials you buy?.

Well, the tariff's still affecting the prices of steel and aluminum that as far as we know they haven't fallen down yet. We purchased significant inventories because there's two things, prices going up and materials are becoming scarce, so if reduced, we purchase a very large inventory of aluminum and steel for application.

The price of electronics will continue to rise. How much? We really don't know. For the past 15 years, we've tried to avoid purchasing electronic components out of China because of quality issues that always are concerned with that.

Magnets that we purchased for our alternators are originating out of China and we understand that the tariffs are not touching even the new tariffs..

Okay. All right. And then I saw on the earnings release you said that you brought in -- you hired consultants to restructure the manufacturing over the last six months. And so I think you last said, you increased your staff….

No. We did not bring in consultants. We brought in full-time employees..

I see. Okay.

And I'm just curious about all the dozen or so additional managers is there -- are they starting like kind of with a clean sheet and trying to do restructure operations?.

Yes. Definitely, definitely. We’re giving….

Got it.

And where is that -- when did that clean sheet kind of started? Are they still debating – deciding like how to optimize the flow of the product – work in process or where does that stand? How far along that they would with this optimization efforts?.

Okay. First of all, we're talking about clean sheet in terms of implementing SAP with the ERP with the Enterprise Resource Planning and Material Resource Planning. So each department in terms of planning, in terms of quality control, in terms of production scheduling which is then planning all of them are starting-off with clean sheets of paper.

They started implementing these. There is a review process ongoing. So this process of material and label enhancement is going on now and will go on throughout the next six months to nine months or so. It's not an overnight switch that turns the light on. It will take time. And we do see some results.

Our results are barely measurable, but we do see results now..

Okay.

And can you tell us what the biggest bottlenecks are for you right now?.

The biggest bottlenecks for us is still material planning. It's making sure that we have the right amount of subassemblies in place ready to go into final assembly and still management of the supply chain and getting materials for our vendors at the right time at the right place..

Okay. Good luck for all this efforts. Thank you..

Yes. Thank you for the question..

Next is Robert Marcin with Penn Capital. Please go ahead..

Hey, guys. Congratulations on a teeing this up. Apparently, we're – we've learnt how to crawl and we're ready to walk. International sales when are we going to see real volumes there you just mentioned that 98% of your backlog was domestic Tier 1. At one point, two years ago were supposed to be bigger part of the U.S.

business and three in this year perhaps as we speculated then. When do you expect to see the production orders really make a difference on the income statement from the international business? Shareholders are getting impatient. We are starting to get impatient gentlemen..

We understand that. So are we. 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..

All right. Let me….

Go ahead..

Let me phrase it in a different way at what point on the calendar on a quarterly basis might you expect international a quarter of the revenue? Is this two quarters out or 12 quarters out? I know that's a challenging question..

Okay.

At what point is the international sales will be 25% of our sales was that the question?.

Yes..

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..

Towards the end of this year? Okay. That's encouraging. All right.

But definitely in four to six quarters you would hope?.

Yes..

Okay, great. Margins, gross….

Go ahead..

Okay. Gross -- I'm going to go away from there. Gross margins, we started out in the 40's, very proud that it was much higher than conventional generator manufacturers with a one customer. I don't think we appreciate how much cost and investment we needed to do layer into -- in order to grow the business the way we want to grow.

And that's all recurring and you guys are doing a great job there. I think shareholders should be delighted with how you're positioning the company to hit the $65 million and then $100 million revenue levels over the next few years.

What's the -- what would be intermediate and longer-term gross margin targets as you get to $5 million a month at full production and even grow for another year or two from there.

Are we thinking now that it's still a mid-30, high-30? We know it's not a fore-handle anymore, but we would sincerely hope we're not stuck in the low 30s at peak efficiency production levels.

Can you give us an idea on where you see the gross margins at various revenue levels, say, $50 million and $100 million over the next few years, if everything is working right?.

Okay. Let me answer that question in two parts. The first part is what are we doing to increase the margin. First part of it is, is that we went after the Tier 1s. And with their volumes and stuff like that, we got squeezed. We have too much customer concentration with these Tier 1s.

But with many companies, manufacturing companies, generator companies, they have a more diverse customer base. So the big guys who are ordering large quantities get the best deal. But the overall margins, at the end of the day, are offset by the smaller guys, who buy an equal quantity but pay a higher price.

In other words, looking after the last mile carriers, they may buy, instead of 1,000 generators a year they may buy 20 generators or 15 generators a year. But because the lower volume, they'll pay a higher price. But here's the trick, the trick is that there's more of the small guys than the big guy.

And I'm estimating that we should be able to get 1 to 200 smaller guys buying or generators at a higher-margin than the two or three large guys we have and their overall volume should be equal or greater to the big guy. That's one area. Second area, is that we have to improve our production efficiencies, our labor efficiency.

And we've got a long ways to go on that. I consider that good news, because it gives us --.

All upside..

-- ease. Exactly, exactly. So with that, let me have Raj answer the second part of your question..

Yes, yes. Robert, we would like our investors to also look at contribution margins, operating contribution margins, along with the gross margins. Because you look at the first quarter results, we are slightly be as faster, but call it a breakeven point.

So at $7.75 million if we are breakeven with all the expenses that we're incurring to hire the additional production infrastructure, the production management and the second factory and all the development we're doing there. So every $1 million that we are adding to it, to the top line, would add whatever gross margin that you've reported.

Like, let's just say, even in the low 30s, even if you take 30%, even if we target want to go super aggressive on pricing for some of 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.

So a percentage that of the gross margin -- a significant percentage of that gross margin is directly going as EBITDA. So that is what we'd like our investors to look at, as -- that's why it's critical for us to grow the top line to leverage up the fixed and semi fixed overhead and G&A costs that we're occurring.

Ultimately, that increases the earnings for the company and our shareholders..

All right. We hope so.

We don't want a $100 million breakeven company, because there's a lot of costs associated with it that we didn't anticipate right?.

No. I understand. We, obviously, don't want to grow the company that way. But this was a conscious decision taken in terms of the investment we want to make is investments, which are manageable, investments that don't break the bank..

And back to the original question there was a number required in that answer? What kind of gross margins what would you expect to do…?.

It would be lumpy quarter-to-quarter. It would still be in the 30% to 35% range. The products have been priced to get to 35% but we're not there yet, because we haven't gained those efficiencies yet. So if all things being equal, if we’re not pursuing so many other international opportunities that are strictly the U.S.

business, yeah, you could say 35% is probably good to model it. But too many balls juggling in the air right now in terms of international..

Okay. Now it's my turn to ask you a question.

Okay, we've got a significant window of opportunity to generate much higher revenue, should we take that? Or should we -- there's two ways we can do, we can go for higher profit margin and reduce our revenue growth or we can lower our margins for now, take the high revenue growth direction, which would you take?.

I think balance is important. You kind of need to -- balance is important. So let's say you get an opportunity to price a massive contract at a 25% gross margin.

We don't care about that, okay? And here is why, you don't get service, you don't get spares, you don't get a material amount of revenue, recurring revenue out of this business for quite a long time. So this is a capital investment that an entity makes once every X amount of years for that one generator.

It’s a capital good with a long lifetime without a considerable amount of service revenue too.

So we're not like Boeing, which is selling planes and then just minting money on the spares and service, right? So considering the nature of the sale for us to be able to grow and fund our growth with profitability and cash flow, we have to have legitimate profits all along the process, okay? So I would say you take the revenue growth up to a level of profitability that is acceptable to the shareholders and the management team and the cash full requirements of the business, right? But we don't want profitless prosperity.

We don't want $40 million sales, then $80 million of sales and $100 million of sales, breakeven along the way.

That’s -- I don't think that -- because what is $100 million in revenue get you? Unless you have an exit strategy to sell the business for two or three times revenue at some point, what does that get the shareholders? That is an economic downturn and then suddenly we're doing $50 million or $60 million or $80 million again.

So because we're not compensated with tremendous amount of free cash flow per dollar general revenue generated at 30% or lower gross margins I would strongly encourage the corporation to avoid that type of business..

Got it. So….

The stock market is not paying us either for that type of revenue, right guys? Is that fair with where the valuation is? You have exceptional revenue growth now and there's a very low valuation on the business.

Why would the valuation improve if we take even higher level of revenue without profitability?.

Now one thing is that you've noticed the way we run the business for 35 years and you've seen how much capital I consume. I think we’re kind of frugal. And I think we’re kind of agreeing with you in the way we actually run the business.

I mean, how many other company you know have been able to get to $20 million in revenue sales within investment of $1.2 million..

I thought the equity capital was far bigger..

We're talking about before going public. We went public at about $20 million to $24 million in sales. That's the point we went public. But to get to that sales, we spent $1.2 million. Now of the $17 million that we netted out on the IPO, we spent very little of that in terms of lost capital.

Most of that money is back into machines on the shop floor and to inventory in the warehouses and into accounts receivables and work-in-progress. So we're kind of frugal there. Now I agree with you.

I've studied other clean-tech and high-tech enable companies over the past 40 years and one of the biggest problems that these companies do is they create a situation where they instead of selling product, they just focus on selling stocks.

All their resources are put under the next capital raise or in the next loan or whatever because they are creating company that gets revenues from products, they create a company that gets revenues from investors. And that's an awfully stable situation to be in. So our plans are to grow the revenues.

Our plans are not to get deep into the red ink to stay in the black. And our security is by making money..

Okay. Keep in mind that we need to generate valuations or composed of two things in my opinion. The growth rate, for the organic revenue growth rate, opportunities and the profitability of free cash flow characteristics of that growth rate. And if you sacrifice one at the expense of the other, you're not going to get paid in the stock market.

You won't be able to sell equity to grow ever again. If you want to sell stock at $4, I would be very disappointed. And if you want the stock market to value the stock incredibly higher, you have to grow revenues a lot and show profitability. Not breakeven..

That's what we aim to do. And in our presentation, we've given you areas of improving our profitability by increasing our labor production efficiencies and by having a greater diversification on our customer base..

I hope, I answered your question, Arthur.

My final question is this, what happened to the data center business?.

What happened to the data center business? Our engineers were over-loaded with production. The data center plans have not gone away.

But what we have to do, we had -- engineering has to shift its focus over to customizing some of the products for our Tier-1 customers and focus on engineering with the new production equipment rollout and stuff like that. So we got delayed and distracted by some of the other case..

I understand that but you talk to your customers only letting you make 30% gross margins again. And from what I can tell as an investor in many companies that sell products into the data center, they really pay for performance, they pay for quality, they pay -- they don't mind their suppliers making decent gross margins.

They're not as price sensitive as the traditional Tier-1 carriers. So as soon as we can get that product into the field, I think that would be an excellent diversification and profit center for the company..

Well, here's the motivation for that. One is military; two, is a solar hybrid system, getting to larger solar hybrid systems; and three is the data center. Now not in any particular order, but those are the tremendous incentive for us to that. But if we go after too many developmental projects at the same time then we get deeper into the red ink..

I understand that. At one point a year ago I just thought they way we position that was our priority developmental product, so it seems to have shifted down on the priority..

It has shifted, but it will shift back..

Okay, all right. Thank you very much..

Thank you..

[Operator Instructions].

Actually, there are no further questions?.

That's correct. There are no further questions, sir..

All right. Thank you. We can wrap-up the call..

All right. Thank you very much. That does conclude our conference for today. I'd like to thank everyone for your participation. And you may now disconnect..