Craig Irwin - ROTH Capital Partners:.

Good day. And welcome to the Polar Power Inc. Third Quarter 2019 Financial Results Conference Call. Today’s conference is being recorded. And now at this time, I’d like to turn the conference over to Mr. Shawn Severson. Please go ahead, sir. .

Thank you, and good morning, everyone. I’d like to thank you for taking the time to join us today for Polar Power’s third quarter 2019 conference call. The hosts today, Arthur Sams, Polar Power’s Chief Executive Officer; Raj Masina, COO; and Luis Zavala, Chief Financial Officer.

Arthur will begin by providing an overview of the key events from the quarter. This will then 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 has crossed the wire today at 4:05 Eastern Time is available on the company’s website at www.polarpower.com. We would also encourage you to view the website for additional information and overview of Polar Power's business as well as our LinkedIn page.

Following management’s prepared comments, we will open the call up for questions.

Before we begin, I’d like to remind everyone that statements made today on the call and webcast including those regarding future financial results and industry projections are forward-looking and maybe 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.

Arthur?.

Thank you, Shawn. And welcome everyone to Polar Power’s third quarter 2019 earnings conference call. During today’s call, I’ll briefly discuss financial highlights for the quarter, followed by an update on our business strategy. Louis, will then provide greater financial details during this call.

Brief summary of the financial highlights, revenues for our third quarter 2019 were $6.9 million, backlog at the end of the third quarter was $3 million, gross profit for the quarters stood at $2.2 million and net income for the quarter totaled $25,000 -- $48,000, which is $0.07 basic and diluted share. So again, I'm correcting myself at $48,000.

Now, I'd like to provide you with a business update and review some of the key highlights for the quarter. Last quarter, we have initiated a strategic review of our business and strategy to make sure that we are optimizing our resources to pursue the best growth opportunities.

For a basic strategic review, we're making some adjustments to our business plan and operations to better drive growth and diversification. Let me take a moment to remind everyone of our business model. We provide power and cooling solutions. We're not just a generator manufacturer.

One of the major components for solar hybrid micro grid system is the generator set. Polar chose DC generator technology because the solar photovoltaic fuel cells and batteries are all exclusively DC. Also DC micro grids transmit power across distances more efficiently than AC.

Therefore, we believe that DC generators are more efficient than AC generators and modern micro grid and solar hybrid systems. When any application requires AC power, for example, your home a simple DC to AC converters install most solar photovoltaic homes already have DC to AC inverters installed.

As a solar hybrid system or micro grid or distributed power generation becomes more prevalent, we believe that the industry will turn towards the high end performance and reliability of DC generators, which is what we bring.

We compete with traditional power sources of power based on performance for not always the lowest price from a capital expenditure standpoint, but we believe that we are among the lowest from an operational expenditure standpoint.

We believe that our customers will recognize the long-term value of our products, including higher performance, lower operating costs, better reliability, lighter weight, smaller packages, and lower maintenance. I also want to reiterate our belief that the domestic telecom market is a compelling growth for Polar, including the last mile carriers.

As we explained in last quarter, we're experiencing a period of short-term volatility with our Tier-1 wireless communications carriers, mostly centered around shifting budgets to 5G rollouts, mergers and acquisitions among the Tier-1 also there's a uncertainty as to how much backup power is actually required on the site.

Now, shipments and sales are being postponed to 2000 -- excuse me to 2020. But even with this guidance from our Tier-1 wireless communications customers, we're continuing our focus on diversification and accelerating our targeting of last mile or rural carriers. To facilitate this initiative, we're expanding our U.S.

distribution network, while introducing new products, including propane and natural gas generators, powered by Toyota engines. We’re also moving forward with our energy storage systems, offering complete energy and cooling solutions, we believe gives us the leading position in industry technology.

Furthermore, we have recently completed and passed all of our emissions testing required by EPA and presently awaiting for certification to begin marketing our environmentally friendly product line to both residential and commercial customers.

Our strategy for targeting the domestic telecom market is a combination of direct sales and dealerships and leveraging our channel partners who are currently servicing our products. Tier-1 and approximately 12 of the larger last mile telecom companies will continue as a direct account of Polar.

The smaller last mile carriers and emergency services using UHF and VHF radios will be sold through dealerships that can also offer service. Our plans to include having the same dealerships offer our solar hybrid systems for off grid and backup for all applications.

As part of our strategic review, we're actively expanding into markets outside of the telecom market; it’s noteworthy that telecom applications make up less than 15% of the sub 40 kilowatt generator sales among the large generator manufacturers. And most of their sales involve home and commercial backup power applications.

Our market analysis after meeting with 30 of the largest LPG refineries and distribution companies indicates a significant interest in our solar hybrid LPG systems for telecom, industrial, residential and commercial uses.

The recent power shutdown at California or shutdown in California has outlined a significant opportunity for our new propane and natural gas product line. Now, a quick note, LPG stands for liquid petroleum gas, and this is a term commonly used overseas. The fuel -- the LPG field is a combination of propane and butane.

Domestically in the U.S., we use propane 100%. Now moving on the California fires and actions by the electric utilities to minimize the risk of their equipment causing fires has created an unstable grid in many residential areas. Generator companies have rushed in to fill the need with low cost backup generators in the cost range of $4000 to $9,000.

And these generators are operating on either natural gas and propane or both. In short period of time, we expect that many customers will discover that these low cost backup generators will not meet their expectations due to low reliability and higher maintenance costs.

The difference between moving forward with backup power is that we expect the outages to be longer -- of longer duration, instead of being just a few minutes or few hours, they can go in days at a time. Now, the high maintenance of the standard AC generators are centered around oil change and maintenance.

So figure changing the oil every eight days and an engine replacement every 200 days, approximately when running 24 hours a day. In contrast the Polar DC generator can operate up to one year between oil change and maintenance with an engine life of seven years, operating 24 hours a day.

Looking at other technologies, such as fuel sales we’re significantly more cost effective, as changing the oil filters spark plugs and cooling is a very small cost relative to fuel cell, whereas changing the membrane is a very expensive event.

I would also like to point out that we’ll be offering systems that include waste heat recovery for space heating, hot water, pool and spa heating, making our solution even more energy efficient. Soon we'll be able to offer micro cogen systems to make use of 80% of the fuel energy.

Our systems also connect with the solar PV array and uses a solar to provide the AC power for the home appliances. So in other words, the DC generator acts like if it was another solar panel and feeds power along with the other solar panels into the inverter.

We also believe that our new product launch will provide an optimal solution for charging electric vehicles. Many homes cannot fast charge their electric vehicles today and soon, we expect in the near future communities may not get enough energy from the grid to charge electric cars for residential and commercial power systems.

To accelerate our expansion into new markets and diversify customers, we have modified our organization to where our Chief Operating Officer, Raj Masina will manage domestic and international sales. We recently significantly increased our production management personnel, allowing Raj to focus on sales.

As a part of this plan, we're adjusting our international strategy to conduct even a narrower screening process and concentrating our focus on comprehensive power solutions. We plan to evaluate our international sales efforts on an ongoing basis and focus efforts on the highest potential markets only.

In regard to the domestic market, we're expanding our sales infrastructure to reach new markets through strategic partnerships with our existing distribution network. Over the past 12 months, we've been recruiting and training personnel to manage production, sales and service.

This is intended not only to improve manufacturing efficiencies, but also free up more senior management's time to focus on revenue generating activities. This has been a work in progress. But now we're positioned to lever this investment going forward. Business and industry can evolve and shift quite rapidly and we have to stay ahead of these trends.

We have a unique and superior technology platform at our DC power systems, and the challenge for us is to focus and execute on the right strategy. Our core telecom business remains a robust opportunity for Polar and I'm very excited to be moving ahead in military, residential and commercial market.

Now, I'll turn the call over to Raj, who will address our strategy for entering these residential commercial markets.

Raj?.

Thank you, Arthur, and good afternoon, everyone. As I mentioned, I'd like to now review our strategy and target for new market development. We recently completed a strategic review of our international sales effort, and I want to spend a few minutes talking about what we found and adjustments we're making to improve our closing rates.

As we’ve outlined before the international telecom market is a very large and diverse sector, both in terms of geographies and potential customers. Our analysis have shown that the sales effort was spread across too many prospects and as an organization, we were not focusing on resources on the best opportunities with the highest return potential.

This will change, as part of my new role that analyzing and reviewing each of our customer prospects to determine where the best opportunities fit and aligned with sales, engineering and corporate around those targets. We believe this will help improve our close rates, as well as better manager expenses.

Next, I want to expand our strategy to more aggressively target the last mile carriers.

We believe many of the last mile carriers are good candidates for our power systems, as their operations are de-compartmentalized giving greater visibility on the equipment factors driving their OpEx and CapEx costs, which gives Polar a distinct advantage over traditional technologies.

We've already landed a $1.3 million contract that we’ve press released recently, and we are discussions with other carriers. In fact, approximately 12 of the last mile carriers have flowed on contracts from one of our larger customers, and the first net programs giving us a compelling market.

As also Arthur mentioned earlier, we believe there's an attractive market for us in the residential and the small offices, and off grid applications. Extreme weather, manmade and natural disasters are highlighting the benefits and need for distributed energy generation.

Take California and the recent wildfire and the associated grid disruptions as an example. These extreme power outages highlight the need for independent sources of electric power that won't be affected by these outages.

It's important to understand that the majority of solar PV installations which are extensive and installed throughout California failed to supply power when the grid goes down, and we see exactly the same situation repeated throughout the country that fires, floods, tornadoes, hurricanes and extreme temperatures.

I want to emphasize that we're not going to target every residential home and small business and we have no intention of competing in the low end backup our market. With focus on a specific customer profile that is optimal for us. Let me give you an example. In California alone, there are 4.88 million homes with solar.

There are 570,000 electric vehicles. There are 1.18 million homes with pools these are the type of customers that we believe will fit us or fit our profile our product. From January 1st of 2020 solar panels are mandatory in all new homes built in California. We expect others to follow this initiative too.

So as you could see, the market is quite substantial it is important to understand that we’ll pursue this market in a different direction than the incumbent residential and commercial generators suppliers.

So the first question that we ask is, why buy a low reliability light duty generator that's designed to backup your home, but is running a very limited number of hours each year using natural gas or propane. A superior solution and a much better option would be to purchase our prime power generator or micro cogeneration unit.

This system is designed to operate 24 /7 with very little maintenance compared to those generators available in the market today. During peak hours, our prime power system can power your air conditioner, charge your car, keep your pool or spa, along with space heating and hot water, which creates a very high level of efficiency.

Also, one of the most important properties with our prime power systems is that you have the same conveniences during a power outage, given the low cost of propane or natural gas, our solution is very economically competitive with grid power and the added benefits of CHP, with reliability and power under nearly all conditions.

We will be launching this program soon and will be working towards building the necessary sales and service infrastructure. Now, I turn the call to Luis, our CFO for the financial summary. Louis over to you..

Thank you, Raj. Now I will review the financial performance for the quarter and the nine months ended September 30, 2019. Revenues for the third quarter 2019 were $6.9 million, representing a $1.9 million increase or 30% compared to $5.0 million last year.

Backlog as of the end of the third quarter was $3.0 million compared to $11.5 million at the end of the same quarter last year. The decrease in sales backlog was primarily attributable to reduce lead times and lower sales of DC systems to Tier-1 telecom customers.

As we discussed in previous quarter, we are experiencing short-term volatility with our Tier-1 telecom customers, as they are shifting budgets for the second half of this year to favor 5G rollout relative to backup power. As expected this negativity impacted our bookings for the third quarter.

We believe these short-term shifts will remain constant -- and we remain -- I'm sorry, let me repeat that, we believe these short-term shifts -- we believe that these are short-term shifts and we remain confident in our customers forecast for 2020.

Gross profit for the quarter stood at $2.2 million, representing $0.7 million or 46% increase as compared to last year's $1.5 million. Gross margins during the third quarter increase to $32.2 million as compared to $30.2 million -- I'm sorry, let me repeat that.

Gross margins during the third quarter increased to 32.2% as compared to 30.2%, during the same period last year. As a result of improved production efficiency, coupled with reduction in engine prices acquired during the fourth quarter of 2018. Operating expenses decreased to $2.2 million in Q3 2019 from $2.3 million in Q3 2018.

Operating expenses for the nine months ended September 30, 2019 were $6.9 million as compared to $5.9 million for the same period in 2018. Operating expenses remained constant as we continue our strategy to promote our DC powers in international markets.

Net income for Q3 2019 totaled $48,000 or $0.00 per basic and diluted share compared to net loss of $0.7 million or $0.07 per basic and diluted -- negative $0.07 per basic and diluted share in Q3 2018.

Net income increased for the nine months ended September 30, 2019 to $0.7 million or $0.07 per basic and diluted share compared to net loss of $0.8 million or negative $0.08 per basic and diluted shares during the same period in 2018.

The increase in net income is attributable to higher revenues, resulting in higher contribution margins and improved production efficiencies during the third quarter when compared to the same period last year. Current Assets at September 30, 2019 grew to $24.3 million, compared to $23 million at December 31, 2018.

Inventory on September 30, 2019 grew to $14.1 million, compared to $8.5 million at December 31, 2018. Cash at September 30, 2019 totaled $3.6 million as compared to $5.6 million on December 31, 2018. As of September 13, 2019, we had working capital of $21.3 million. Now, I will turn the call back to Arthur..

Thank you, Luis. And I'd like to -- and thank you, Raj and Shawn.

In line with our key strategic initiatives with additional production management that we have hired and closely work with during the last period, we believe that now we have a better bandwidth to be able to manage purchase orders and work in progress inventory more effectively than what we've done in the past.

We believe our new team will be able to work to efficiently to make sure that expedited delivery times are unaffected or expected delivery times are unaffected.

Also our operations managers continue to work on optimizing inventory demand to facilitate cash flow in both the near-term and long-term and throughout this period with expected volatility and product sales. I like to thank our shareholders for their continued support. And I'm looking forward to speaking with you all again next quarter.

Now I'd like to open this call to questions.

Operator?.

Thank you. [Operator Instructions] We’ll take our first question from Craig Irwin with Roth Capital Partners. Please go ahead. .

Hi, good evening and thanks for taking my questions. So Arthur, you were just talking about the balance sheet and the inventory issues. In the quarter you had a $2 million increase in the inventory and that was more than 100% of either your negative 1.7 in free cash or negative 1.8 change in total cash. So the importance of that, I guess is magnified.

Can you maybe walk us through what the items are that you're building in inventory, is this finished goods that possibly didn't make it out of the door to customers during the quarter? Is this components you've accumulated for better pricing? And would you expect to liquidate this in a material way in the next quarter or two.

What do you see as an acceptable inventory level for Polar?.

Well, first of all, as time goes on, I see our inventory levels increasing, along with our market increasing, but we need inventory to reach a certain dollar amount to secure our ability to deliver on time. The other answer and I'll give this over to Luis, who will give you more detail.

But to other answers, yes, we have a large stock of engines and components and work in progress..

Okay. .

Just to add a little bit to that, we are trying to increase the -- speed up the finished goods inventory so that we can have it in stock to speed up delivery time..

Okay.

And can you maybe clarify for us, is any of this inventory specific for any individual customers and programs where you expect to be a supplier over the next year or is most of it sellable to pretty much any customer?.

Mostly sellable to any customer. And that's one of the strategies that we're putting in place with this diversification. The big guys, the big tier ones want us to be able to deliver in two weeks to eight weeks period, which means we have to have product. But their orders, as we've seen, are not consistent.

So we want to be able to supply those to the other telcos and to the other commercial and industrial accounts. A good portion of our inventory is now stacked up with Toyota Engines waiting for launch too.

Raj, do you want to add something to that?.

No, no. That’s exactly the point I was going to address. .

Exclusive to Polar..

Yeah, exclusive to Polar. .

Great, great. So then, one of the opportunities on the telecom side that we've been maybe a little bit optimistic about is the 5G rollout, and the changes to the format of the infrastructure that are going to be used in those sites across the country.

Can you maybe update us on what products you have for 5G? Whether or not you're bidding on any specific programs, where we could see large related orders? Have you delivered cash to prototype unit to customers to potentially secure these orders related to 5G?.

Okay. One of the things that we did to put ourselves in a strategically better situation is that we're working with the manufacturers of the 5G equipment directly in Europe. And that's something being spearheaded by Adam Szczepanek out of Portland. I've made visits and met with some of the manufacturers of 5G equipment over there.

So we're getting kind of a heads up. In terms of the wireless carriers they really don't know how much power they need. We -- I mean, a few years ago, we started at 10 kilowatts, we went to 15-kilowatts, and now we're going to 20 kilowatts, and some are calling for 25 to 30 kilowatts.

But on the other hand, some of the radio equipment manufacturers are suggesting that those upper limits -- those upper sizes may not be required. That's one thing. The second thing is with the 5G rollout, there'll be a lot of micro cells going out there. And the current plan for the micro cells by most of the carriers is not to back goes up.

But that will conflict with the markets that they're trying to service such as autonomous vehicles or self-driving vehicles or hospitals, generally the IoT of things.

So we are working with some backup technologies that don't involve batteries, fuel cells or generators that we can back these micro cell sites up for about somewhere in the neighborhood of 5 seconds to 5 minutes depends on the area. And that covers 90% to 98% of the power outages are just momentary glitches..

Great. That's….

All I said, I answered your question..

No, that does, that broadly catches it. So one of the markets that you were maybe more vocal about in the past that’s been the marine market where, I know your personal interest having had some business there in the past.

And hobby in that market, can you maybe update us on whether or not you're seeing a potential opportunity for Polar at the moment in the marine market is this something where your ability to really satisfy a technical or highly demanding technical application for small run production, it looks like it could be an advantage of over the next few quarters..

Well, on the Marine, as you pointed out, the marine market is a hobby market. Not my hobby. Though, I enjoy boats, but it's a very difficult market, because it's dominated by home hobbyists running businesses. We have put marine on a low priority as it has always been. Marine does take a lot of customer support.

Because what's happening is that you're putting a generator in with batteries and with electric motor on some of these hybrid sailing vessels and then you putting someone to run the equipment that has a basic understanding of electricity and it goes no further than that. We'll continue to support the market.

But there's larger markets out there that can give stockholders a better return on their investments..

Okay. And then the military market in the past has also been an opportunity that we've talked quite a bit about. So you did have some really interesting business with Oshkosh [ph] in the last 18 months..

Yes..

Is that essentially something that could lead to follow on orders? Are there other OEM like Oshkosh that we pursue with the same product? Is there the need to develop additional products to pursue the military opportunity?.

With the military opportunity is whatever product that in our sector in our area of power generation, power conversion and stuff and cooling systems. No matter what you have, it doesn't meet their requirement, they want something custom.

And that does place a lot of engineering pressure or a lot of pressure on your engineering resource to deliver that. But on the nice hand advice the military will pay your R&D, whereas the telecom and other markets won't pay your R&D.

We've been able to be benefited by a lot of the military testing that they perform on our product, allowing us to continuously improve the product. Yes, there are a number of programs out there.

But one thing about the military program -- military market sales is that on the big projects, you work on a project today and that means that you can look forward five years From now on getting an order. So it's a long-term situation.

So we look forward to the military in terms of one up short production runs that could eventually lead to longer production runs. But the biggest benefit is the R&D dollars and the testing support and stuff like that.

Now identifying products for the military, those would be in the larger generator sets, for going upwards around 200 kilowatts, which we do want to go after. .

That sounds good. That sounds really good. So the last question, if I may is kind of a difficult question to ask, but many of your shareholders will have it on their mind. A year ago, we were kind of optimistic that around half of this year’s sales would come from international markets. It's obvious that this expectation is just not in your stock.

But can you maybe describe for us what's worked for you in the international market? Maybe what some of the issues might be for the budget or the potential award of projects there? And should we still keep an eye open for growth on the international side, over the next several quarters?.

Yes. Unfortunately, our predictions and when some of these contracts were to come to fruition, was greatly off. But as anyone knows on the sales cycle, as I can't predict when a customer is going to give you an order until after you received it.

And overseas is maybe a little bit more difficult in terms of prediction as opposed to local domestic market. I would still say, as I say each quarter, we're pretty close to some good contracts.

But what we actually have learned is that, again, as I mentioned on my last call, our field salesmen need more support from Polar headquarters in terms of materials, presentation, training, demonstrations and stuff like that, which is something that we’re beginning to expand our support on.

We -- for example, last month, I was in Spain, working with a major telco there, who is present in about 35 countries, and we're presenting the Toyota unit operating on natural gas and propane or LPG, which is combination of propane and butane.

And we were told, for example, like in Chile, the government is outlawed, or has severely restricted the small diesel generator sets. So the telco has to remove all those generator sets. So it's a perfect opportunity for us to replace it with the Toyota based LPG engines driving our alternators.

We're seeing more and more regulations driving customers our direction..

Excellent. Well, congratulations on what I would call actually pretty good execution in this difficult environment. We look forward to continued progress..

Thank you, Craig..

Thank you. And I take our next question from Chris Bechesky [ph] with a private investor..

Hello. Good afternoon. .

Good afternoon..

Yes, please go ahead..

Hi. So I have a question about the current ongoing quarter. I'm a little bit worried because, the reported backlog is a little low. And you spend the beginning of the year -- beginning of the current year upgrading your factories up to, I believe you mentioned that your plan was up to $15 billion per quarter. And now we have $3 million backlog.

So are you getting short-term orders to keep your factories at least running somehow, are we going to see kind of like big cost from underutilization this current quarter?.

Okay, we are building to -- we are building for inventory and we are still shipping generator set and we are looking forward to receiving orders from a more diversified customer base.

Raj, do you want to add to that one?.

Chris. We've got some follow up orders from tier ones in the past few weeks, and we've got a rolling 12 month forecast from the Tier-1 accounts, so we're building our product to the forecast. And also, the $15 million number that we’ve given you is basically when both factories run in full steam, a ship, shipped and a half.

So obviously, it's not the number to basically hit in order to keep the factory live and growing, it's -- we've demonstrated, but this quarter that even with less than $7 million of revenue without making any major changes in factory expansion.

In fact, actually we have increased our production management, we're still able to post a positive cash flow. So I would say that we are not sure yet in terms of giving you guidance of whether we will be at a loss in this quarter or not.

But we're definitely building to forecast and definitely building against the orders that we’ve received for the past few weeks. .

So if I understand correctly, you do have some orders after the quarter end, but you're also building to forecast from the telecom that are not orders yet they're just forecasts of what they might still probably need and you're putting the generators inventory for that purpose.

Is that correct?.

That is correct..

That is correct. And that is something that most manufacturers do is manufacture on anticipation or a speculation. The key is, is to have enough diversification in your customers. So that if your targeted customer doesn't take the product, you have at least 10 others to fill in that requirement for the same product..

And can you tell us whether those forecasts have proved accurate in the past?.

They've usually been in line with the forecasts or they've been sometimes even exceeding their forecasts.

And as Arthur, said here, once again, we don't want to be working with one customer’s forecast, we want to have enough companies that we're working within the rolodex that if one slows down, we've got three more to pick up and take those product..

Yes, right. But that is the way business is done. You have to be able to produce and deliver when the customer needs it. So that does involve some risk, but you mitigate the risk by increasing your customer base. .

Okay, understand.

And in previous calls, you talked about how you most welcome kind of the calls of orders in Tier-1 account in order to satisfy the Tier-2 customers that you said were not willing to wait that much for order and you told us about this Tier-1 market that’s there just they would just require kind of like the ability for you to execute order on a shorter term.

And now that you don't have this large backlog is that happening are you getting those Tier-2 orders?.

Well, we announced a few weeks back, we got one Tier-2 order or what we like to call last mile of about $1.5 million. That was from one customer..

Okay. .

For example. And we are going to the other company, but it's not like turning on a light switch, whereas you turn on the light switch and they come out. It will take some time to book these orders. Now one of the thing about forecast, the forecast generally from our experience have turned out to be pretty accurate.

The only difficulty is when that's where it's proven not to be so accurate when the amounts are good, but the delivery dates are always changing from our customers..

It’s lumpy within the quarter. .

I see. And they expect short turnaround for everything is that because they don't want to have accounts payable balances or so on. .

These are large companies with a lot of bureaucracy. So I don't think it's so much -- it’s intentional outside the fact that they don't want to warehouse the generators, what they'd like to do is have the generators ordered and drop shipped to the installation site. That's their goal. And that way it minimizes handling.

So they're working on just in time..

Okay. And if I may ask a couple of questions about your new product. First of all, from somebody in California where we've had to fear those in power blackouts, could tell me about your residential commercial product.

I know right now usually that market is still quite Generac [ph], but as you may mentioned, all their products are kind of -- have very short run time until the breakdown and so there does not really kind of a replacement there just for strictly for emergencies.

So, can you tell us what kind of prices you're targeting, is it going to become much more expensive than the Generac generators, is it going to be much smaller, is it going to be -- I mean, you should -- are you going to have advantages with less vibration and less noise and so on?.

So well first of all the Generac packages that I've seen recently advertised that run on natural gas and propane are small 900 cc to 100,000 cc's of displacement operating at 3600 RPM. So that’s pretty loud, pretty hard on the engine and they're squeezing as much power out of the engine to try to get peak rating of 20 kilowatts.

We're taking a similar size 900 cc engine and running in the speed range of 1,600 to 2,400 RPM, and at those speeds we’re really quiet. But our engines are also very heavy duty, they are cast iron blocks, as opposed to aluminum blocks. We’re mounting in sound proof enclosures, as opposed to a lightweight aluminum shield with a plastic top on it.

These engines are coming out of applications that do run them. These Toyota engines are run 24 hours a day, seven days a week in Japan powering their air conditioning equipment that operates off the natural gas grid, as opposed to our air conditioners that operate off the electric utility grid.

And this is another market we see for our cooling solutions is to provide air conditioning off natural gas as opposed to electric grid. We see this equipment going into the backyard being able to heat the home, heat the house, charge the car the whole idea is that you'll have three sources of energy.

One is utility, the other one is your solar and the third is your natural gas. So if you got problems with any one of them, you can switch around and get your best operating costs, your best reliability and more importantly get electric power when you need it.

I mean, I've seen solutions coming from the State of California by using fuel cells or using battery storage. That won't work too much energy demand for a battery storage or way too much CapEx and OpEx costs for fuel cell. And I can imagine that the stuff in your freezer is going to last too well with your power grid going on and off.

I can see people getting sick with tainted food. Eating after it's been defrosted improperly, anyway.

Did I answer your question?.

Yes, mostly. But can you give me any kind of just general information about the price in comparison to say the power world or the Generac Systems..

It's too early to give you sharp pricing. But let me give you something general. One of the ideas about using our product is to minimize the battery. Your battery is a very expensive storage stores.

And very -- in terms of both the capital purchase and the operational costs because -- in anywhere between four to eight years when you have to replace that battery, again, you're hit with a heavy costs. The generators that we have, we're expecting at least a seven year life on those as much as 14 years, 15 years life and that's running them hard.

But what we'd be looking at a price of between, let's say 18,000 to let's say 35,000. Now, here's the difference between let's say what you're buying from Polar is that if you got a swimming pool, you're not spending money on your swimming pool heater or the heater -- or the furnace for your house.

So you're combining appliances into one appliance, one appliance is going to use less fuel energy. One appliance is going to be lower on your monthly bills. So it's a complex comparison of costs. Because again, we're providing more than just a generator set that backs up your home for two hours a day.

We're talking about a generator set that can run your home 24 hours a day.

Did that kind of answer your question?.

Yes.

So you’re saying that your product will also scavenge the heat from the engine or will it use the electrical to heat the pool in the house?.

No, it's guaranteed off the engine. Our goal is to utilize 80% to 90% of the fuel's energy, which is a combination of electricity and heat..

Okay, I see. And -- all right and about the micro the micro sites for telecoms, for 5G there is -- the way I read about them, they're talking about just putting them on light poles and so on.

So, what product are we thinking about there? And how would you -- how is your company kind of positioned to provide such a product? Because when you think of your company, I think you’re kind of experts in the electric motors, alternators and such. And I'm not sure if those products would even have moving parts..

Okay, as I mentioned earlier in the presentation that we agree that you can't -- you don't want to use even batteries on those units. You don't even want to put a small battery in those units. Because some of these carriers are going to have 100,000, 200,000, 300,000 of these cell sites, these micro cell sites out there, one carrier.

And if he has to go around to all those sites every year or every three years replacing a battery, that’s awfully expensive. And there's no way a generator is going to work and no way a fuel cell is going to work. All those are maintenance items. We're looking at capacitance type storage systems in the area of super capacitors.

And, yes, we're working on the electronics to be able to make the most of energy to be able to extract most of the energy out of that fuel, out of that capacitor.

Now in terms of what we've done in the past, we’ve put power systems on aircraft, we put power systems under water, we put cooling systems into the space, we've done a lot more than just build generators and motors..

So you believe you have internal engineering advantage building super capacitor systems?.

Let's just say that there's -- guys out there in other companies that can build wonderful capacitors. We don't need to duplicate that technology, but it's how you package that. How will you grab a super capacitor and squeeze every [indiscernible] of energy out of it to run a micro cell that's our experience..

Yes, you're right..

You don’t have to have -- yeah..

I was going to say you're right, because capacitors as opposed to batteries aren’t constant voltage devices so the electronics will be much more complex. All right that's it for me. Thank you for your time..

Thank you. .

Thank you. We'll take our next question from Jeff Koilodge [ph] with Darenbridge Capital..

Hi guys. I'm curious about that last mile carrier where you got the over 1 million in order that you announced earlier.

Can you say how long of a selling process that to get that order?.

I think it started back in summer of what is it 1998 or before?.

Yes we’re working with this client for a while, Jeff, in small volumes. But, yes, this is the first time that we basically have received an order of this magnitude from them. On this particular contract, the sale cycle was around four to five months. We've been working since the summer on this front..

So they've been using our -- running our generator for generators out in the field for maybe as long as about 10 years..

Yes..

And they can see how the generators that we deliver to them hold up against other products..

And may I also add this that this client also has business in four other countries in the Caribbean. And so now we're talking to them about what we can offer and how we can help improve those sites there in that region. .

Okay. So they bought from you and who do they not buy from? You say just in general….

An overseas company that also provides DC systems..

Okay. All right. And as far as the potential with customer is there much more than this, you did mention the Caribbean, but there is much more behind….

Right, they've got more sites. So yes, they've got more size than the one that we received purchase order for generators first. So, the innovative ways of backing up the site doesn't have to be generators only, like Arthur was discussing with Chris earlier. So we’re talking to them about all those options now..

Right. Okay. And you said that there are 12 other last mile carriers that you're pitching now..

Major, major last mile carriers as part of this particular program, but….

As part of the first net program..

Yes, part of the first net program. But other than that, I mean, we've serviced anywhere between 50 to 100 different last mile carriers over the past five years, 5 to 10 years..

Okay. 10 to 20 years..

Right. Okay.

Do you think is there going to be any beta test by these customers, these 12 that you're pitching or will they require any other concepts?.

Generally not so much with these last mile domestic carriers. At least, we've been domestic since let’s say 1994. So we do have enough local sites we can point our finger at. And we do have good -- they do see our product very frequently when they look at Verizon or AT&T or T-Mobile sites...

So they've got a good endorsement from that..

Yeah. It's not like selling to a company in Thailand or company in Botswana. .

Okay. All right.

And then on the last call, three months ago, you said that you weren't getting orders from the Tier-1, because you didn't have a faster fulfillment time and you’ve reduce the fulfillment time, but now you're saying that they're not ordering because they're pushing their capital spend into next year, is that the gist of it, is that, right?.

Correct. They've got issues where they're moving money around for the 5G for their mergers and acquisitions. I mean, there's some big mergers and acquisitions recently that does tend to wreak havoc on things like generator sets..

And one of the clients also mentioned that their construction schedule -- they are behind on that construction schedules. So they don't want to end up with a ton of generators in their warehouse as Arthur said, this is a just in time logistics kind of a play.

And so that's the reason that we have to work with forecast so that they're not getting delayed, their programs are not getting delayed because of supply chain issues downstream..

Okay.

So when do you think you will hear from these Tier-1 carriers about their 2020 need?.

We are already hearing about that in terms of forecast, but, obviously, that has to be converted to purchase orders only then we'll be able to say that. Now it's also noteworthy to mention that our large competitors also in their most recent earnings calls also mentioned about this slowdown from the Tier-1 telecom carriers.

So it's basically an industry effect, not just -- we're not immune to it..

And again, those are the arguments for diversification..

Sure, that makes sense.

And about this LPG generator, anything to say about your plans to submit the engine for EPA certification, where does that stand?.

Okay. Where it stands is that we've passed all the emission testing required by EPA, they have our data and our forms filled out and right now we're waiting the issue of the certificate..

Okay.

How long that normally takes the EPA to give you that?.

I was trying to think of something fully to say, but….

About the government. .

It could be here in next week, it could take a few days..

And we've been working on this process for a year, almost a year now..

So most of that was first of all tuning the engine to meet the requirements, and then submitting it for testing and then generating the test reports and the paperwork..

The actual testing process happened in the past two or three months we would say..

It happened last month. .

Okay. All right.

And the efforts with this generator in Australia, any comments at all about where that stand?.

Oh, yes, I've already met with the two leading companies, Elgas and Origin. And they explained to me, they've got about 40,000 off grid subscribers. So, right now, we are working very diligently to come up with a sales tool, a presentation tool.

When you look at something like a super duper water heater that’s still a mailer from the Southern California Gas Company, or PG&E, or whatever, the gas company that put that together the vendors is the oil coming of the furnace or water heater did and they had spent a lot of time putting that program together for sales, maintenance, installation and all that other stuff.

So these are the details we're working on now. But if you keep in mind that there's a glut of LPG fuel propane butane fuel out on the market. At the same time you have regulatory agencies wanting to do away with diesel. But these guys are having some issues with trying to sell product.

So what we're saying is that it's perfect for a billion dollar company to be able to say look, we can double or triple our sales if we go after power generation using fuel and presenting this solution to our customer base.

Now, this couldn't happen before because your natural gas and LP generator sets were essentially converted lawn mower engines riding lawn mower engines or weed whacking engines or whatever. These were light weight duty engines converted over to natural gas or propane limited hours, 200 days, service every eight days or so.

Now we're bringing a serious generator onto the market that gives them a year’s maintenance. So in other words, you're changing your oil at every 8,000 to 9,000 hours in generators as virtually maintenance free. Matter of fact, if you look at a fuel cell, a lot of fuel cells, you have to change the membrane at 8,000 hours.

We're going to be changing the fuel. I mean, the oil and the oil is a lot cheaper than changing a fuel cell membrane. Now, Raj has a comment regarding….

Yes, Jeff, there's one more market. I mean, we're pursuing a few market opportunities. One of them is a huge agriculture market in the state of California. All of them are obviously most of -- many of them are grid connected, the water pumps, the variable frequency drives, they’re mostly pretty much all of them run on DC power.

And they're having some major issues with the recent files and the PG&E shutdowns, their crops getting destroyed, close to the harvest season. So we see a lot of big market there for a good quality prime power generator that pays with solar because they want to be energy independent..

Now, there is one other comment on that is that since we're a technology based company, we are a high tech company, we're looking at even other solutions for the agricultural people. For example, on farms, they use fertilizer and one of the fertilizers the generator can run off of it. That's your ammonia fertilizer.

And they say that the ammonia fertilizers are cheaper than the LPG, cheaper than diesel, which means that the farmers can actually generate electricity cheaper than they can buy it off the grid if they use their fertilizer. And a lot of farms will have huge amounts of the ammonia fertilizer on their farms stored there ready to use.

And the nice thing about the ammonia and fertilizers is that it’s zero emissions. It is as clean as a hydrogen fuel cell..

Okay. All right. That's encouraging. Just, with all these very good prospects on the horizon, hopefully next year do you think you'll be able to run at cash flow kind of breakeven until some of these bigger -- some of these new ventures kick in? My last question..

Luis?.

When our sales go back to what they were in the previous two quarters we’d definitely be positive. So we will not be -- we will be better than breakeven..

Okay. But until then, do you think your $5 million revenue -- I am sorry $7 million revenue this quarter, you were a little bit EBITDA positive..

We don't expect to be in this position for too many quarters. I mean, we are expecting -- we are working with Tier-1 carriers, there's a lot of communication. It's just a matter of time of orders coming back in. Now, going back to last year, we kind of ran through the same scenario.

Fortunately, we had just acquired a second Tier-1 carrier or a third Tier-1 carrier that started with very aggressive purchasing in July of 2018, while the other Tier-1 carrier slowed down. This tier 1 carrier was doing significant. So the slowdown was not really visible at that time. But it's pretty much the same thing that's happening this year.

Unfortunately, all our Tier-1 carriers slowed down at the same time, but we believe they're all going to pick up, they usually start picking up definitely towards the end of the year, getting ready for the next year..

Keep in mind that we have been in business since 1979. And we've had -- we've learned how to manage our cash flows so we don't get ourselves too deep into trouble..

Okay, thanks for your help, guys. Good luck..

Thank you..

[Operator Instructions]. We’ll hear from Darren Reski [ph] Private Investor. .

Hi, everyone. I think a decent amount of things that were on my mind were answered previously on earlier questions.

But one area that I want to get a little better understanding of is sort of if you could give us a little more why do you think you have clarity on orders definitely coming Tier-1 over this next year? I know you said that the timing historically has always kind of been unknown.

But last quarter, you told us that you expected orders to kind of comeback either late Q3 early Q4. Obviously that hasn't happened. And I think a lot of your investors still have shell shock for when Verizon orders dropped off a couple of years ago.

And at that time, I believe you were also saying you expected orders to come back and they never really did. So is there anything that you can kind of give us that’s more concrete, more clarity, more certainty that all we have to do is wait out a couple more months I mean, we're not looking at a permanent drop off from your Tier-1. .

Okay, now the Verizon situation was a surprise to us too. We still to-date are just going by theories as to what happened then.

But when you are supplying so much product to these three or four major Tier-1 suppliers what we have learned is that it's too narrow of a focus it’s not enough customer diversification, things come up one company decides to acquire another and in the process wants to where it might save, save all their cash short other budgets.

I mean, even they can't predict when they can even consummate a merger, because now it’s regulated by government. So what I'm trying to say is that the solution ahead, isn't trying to develop a better crystal ball solution ahead is diversify your customer base. Do not be so dependent.

We were very dependent on that one supplier Verizon, yes, one customer horizon. And when that happened, we had to go out and then dig up some more customers, which again, was part of our IPO strategy. We're raising capital, so we can diversify our product and our customer base. And that's what we've been doing fairly successful.

It was a pretty short period of time before we brought on a number of other tier one suppliers to replace Verizon and our sales did get back up there..

Will that roughly along -- all in good on diversifying the customer base. But at least in the short run, you’re still having 1:13:13. And I guess what I'm trying to say assume that their orders are coming in, in the immediate few weeks and they don't come in for another six months.

How long can you maintain this cash neutral, cash positive -- cash flow positive situation without them?.

How long, well, let's just say considering the number of decades we've been in business, I would say we've got the experiences to be able to weather all storms. And in the past even before we're public, yes, we did have storms that took our -- that what happen to us where the sales would go down and we would have to recover.

But here's the thing, though, our Verizon, AT&T and T-Mobile and stuff like that those guys are not the largest guys out there buying generator sets. And we are, again, it's been a much longer process than I anticipated. But we are moving forward with larger telcos that have a greater need for product. And we're close.

But how close I cannot predict today and I am involved directly in some of those negotiations with the customers. And they've just got so much bureaucracy in place that they need to move to place the orders. .

Is there anything that you could give us a little more on explaining why you feel you're close with them right now?.

Let's look at Chile. 2005, the government told them -- told the telco there, which is one of the 7th largest telcos in the world. Not just Chile, their parent corporation, that they could no longer be using diesel fuel on their generators.

But they relaxed to requirements because their supply of natural gas and propane was being disrupted, it wasn't available. So now, this year, the governments telling the wireless companies that they'd have to get three generators off their site and replace with a cleaner fuel.

Now, I'm confident that I'm going to land that account with the Toyota product.

The date in which I get that contract if I was a younger person I would say about -- it would take about two months I am an older person now and I can say that it would be a mistake to advertise and promote that potential sales lead, because you don't know when it's going to happen.

But the key is we will get enough of those so that you are collecting orders from someone that give you a contract sooner as opposed to later. .

Well, that's good to hear. So switching topics a little bit last third quarter, you mentioned that a number of your new product and the timetable for them coming out have been delayed. I know one of those anyway with residential product you said had to do with EPA approval.

But what's the status of all those products you referred to last quarter?.

We're delayed about 30 days to 60 days on those where you’re developing new products, you have your target dates and you have your delays. But we will be shipping these products very shortly. Most notably is a project that involves the U.S. Air Force in Nevada. So we will be shipping that product.

And when we launched that product, we would be advertising and promoting it..

Okay. You had also….

[indiscernible] energy story. .

You had also mentioned last call that you had a new software application that you saw as being key to sales at the time and I believe you launched that over the last quarter.

Do you have anything an update or thoughts on that?.

We're still in beta on that. We're still beta on that, the product is developed. And it's in beta. And it's going through some debugging now. .

Okay. And then one last question, I do applaud that you are reviewing your strategy overtime and making some adjustments to the plan. But just as where, we've been going past these last few years in particular on the international front. Things have been really slow, and not worked out the way we'd all hoped, obviously.

But at what point or what conditions would you have to see to conclude that you say, hey, we don't need to just make minor tweaks to our strategy, we need to make a really big fundamental change like working to distribution partners shutting down certain parts in our efforts.

And maybe in an extreme, what conditions would you look to even consider trying to sell the company. .

Okay.

So what you're saying is, at what point are we going to have our fire sale?.

Well, I mean, at what point do you really say that, hey, our business strategy needs to be fundamentally changed up until the point that we need to look for the buyer? Just how long do we keep going before we keep telling before we term this a real problem?.

Okay, I'm not sure how to answer that question. It's kind of like a lot of gloom and doom there. Well, you’re assuming that we're running the company into the ground and therefore we should sell it or..

I'm not assuming you're running ground, I apologize for not being clear. Just in a worst case scenario let's say orders just they never come, never come, never come eventually a real fundamental shift to the business strategy would have to occur. So what conditions would you see to come….

If you say that the orders never come, never come and at what point is sell the company? Basically you don't -- if the orders don't come you don't have anything to sell..

I thought yes, I guess we are….

You are also talking about a scenario that really hasn't happened with me throughout my lifetime. We design and build equipment. If for some reason next year that the world powers to be decided that they don't want to have any more piston engines. I will still sell product..

All right. Well, I apologize for not being clear on that. Just trying to assess tailwind. .

Exactly. Now, let me put it this way is that my interests are in line with the investors. And if a deal comes across the table, that’s in the best interest of the event. I will take it a very close and hard look at it..

All right. Well, thank you very much for your trust, for the time there. Hoping things would reverse going forward..

Now there's one word that I'd like to leave you with and that's patient.

If you look at what we've been able to do in this renewable energy sector, and in this power selector section, and being able to not lose millions of dollars each quarter like you have on so many other clean tech companies, you will see that we do have the talent and we do have the product to move forward.

I mean, can you point to any companies in our sector that is doing incredibly well with so little dollar investment?.

Operator?.

Thank you. There are no further questions at this time. That does conclude today's conference. Thank you for all your participation. You may now disconnect..

Okay. Thanks..