Polar Power Inc (POLA) 2018 Q4 法說會逐字稿

Good day, and welcome to the Polar Power Fourth Quarter 2018 Financial Results Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mr. Shawn Severson. Please go ahead, sir.

Thank you. Good afternoon, everyone. I'd like to thank you all for taking the time to join us today for Polar Power's Fourth Quarter and Full Year 2018 Conference Call.

Your hosts today are Arthur Sams, Polar Power's Chief Executive Officer; Raj Masina, Chief Operations Officer; and Luis Zavala, Chief Financial Officer. Arthur will begin by providing an overview of the key events in the quarter. This will be followed by Raj, who will provide an operational update as well as updates on key strategic objectives, after which, Luis will discuss the financial results.

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

Before we begin, I'd like to remind everyone that statements made on the call and webcast today, including those regarding future financial results and industry prospects, are forward-looking and may be subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the call. Please refer to the company's SEC filings for a list of associated risks, and we also would refer you to the company's website for more supporting industry information.

At this time, I'd like to turn the call over to Arthur Sams, Polar Power's CEO.

Thank you, Shawn, and welcome, everyone, to Polar Power's fourth quarter 2018 earnings conference call. During today's call, I will briefly discuss our key highlights for the fourth quarter 2018 before I'll provide you with an update for each of our core markets.

First, I would like to give a brief summary of financial results, and then Luis will provide greater financial details later during this call. As a reminder, on January 25, we reported a preliminary 2018 revenue of between $23.7 million and $24.1 million, including fourth quarter total revenue of between $8.0 million to $8.4 million. Actual sales for Q4 2018 increased 108% to $8.3 million compared to $4 million during the same 3-month period last year.

On a sequential basis, gross margins improved 30% in Q4 2018 to 31% Q4 2018 -- must be a typo. No, that's correct. But was well below last year's 33% for the same period as significantly higher volumes to key customers drove modest pricing concessions, higher fixed costs overheads associated with our recent capacity expansion and raw material price increases associated with additional tariffs put on our raw materials during the quarter.

Backlog at the end of Q4 2018 was $16 million compared to $11.5 million at the end of Q3 2018 and $1.8 million same quarter of last year. A significant portion of the growth is a result of production orders from 2 of our Tier 1 telecom, and this validates the strong product demand trends, mainly from our U.S.-based telecom customers. During Q4 2018, we posted a slight net loss of $0.2 million in Q3 or $0.02 per basic and diluted share as compared to a net loss of $0.4 million or $0.04 per basic and diluted share in Q4 of 2017.

Now I'd like to provide a business update and review. I'm proud to say that 2018 has been a pivotal and positive year for Polar. Since our IPO, we've been pushing hard to drive our strategic initiatives forward and leverage the growth opportunity I believe we have in front of us. Raj will provide details later in the call, but I can say that since founding the company in 1979, I have never been more optimistic about the opportunities in front of us.

There is a convergence of cast taking place that we believe will provide long-term tailwinds for our business. Specifically on the telecom side, we're seeking Tier 1 carriers increasing -- we are seeing Tier 1 carriers increasing their focus on network hardening, for which I believe we have a superior solution with our DC power systems. And this is being reflected today in our diversified revenue and backlog in telecom.

5G is around the corner as well, and we expect the need for generators of larger kW capacity and adding more site capacity favors DC, especially where the cell site space is critical.

We also feel that the small microcells will create another type of backup technology, and this may be the use of ultracapacitors. This will relieve the maintenance required of batteries and provide a more reliable backup service. These loads are too small for an engine-based generator, and fuel cells pose too much maintenance and cost to service the microcell applications.

Internationally, telecom providers in emerging markets are experiencing significant growth as many of these countries and regions are bypassing line lands -- landlines and going directly to wireless networks. This is a compelling opportunity for our power systems as our products allow the wireless providers to bypass the utility grid.

Our hybrid systems combine an efficient DC generator with zero-emission solar energy to create low-cost and sustainable energy. We take the right amount of fuel with the right amount of solar and create systems that have lower CapEx and lower OpEx costs than an all-solar or all-generator based systems. This is an ideal product for all applications that are off the grid or service with bad grid.

Outside of telecom, unmanned vehicles are also driving the need for our DC power systems, and this is being spearheaded by the military today. As a reminder, we are currently working on a key program for the U.S. Army, where we have designed and manufactured a lightweight compact DC power system. This is a good example of how we can leverage our DC power platform for new and innovative applications for commercial opportunities.

We're also developing new applications for the residential market, where we believe our DC systems have distinct advantages over incumbent technologies. The increased frequency of natural disasters and emergencies during the past decade has resulted in increased demand for backup power systems for residential and commercial applications.

In addition, we feel that the rising popularity of electric vehicles and trucks will strain the electrical grid, creating the need to use natural gas to charge these electric vehicles via a DC generator set.

During 2018, we developed a supply relationship with Toyota engines in Japan, Bosch in Germany to develop a series of long-life, low-maintenance, very fuel efficient engines that run on natural gas and propane. This will increase our competitiveness in both telecom and solar hybrid applications and lead our way into residential and industrial markets.

We believe the ease of access to natural gas and propane during natural emergencies in residential and commercial sites is a key advantage for our new product line. We plan to release this product line to the market sometime in the third quarter 2019, initially targeting select and local regional markets in the West while later expanding it internationally.

As a reminder to everyone, our continuing key strategic objectives are: One, to increase our market share with top-tier U.S. telecom providers. With our larger service network in place, we will pursue the smaller and local wireless telcos, we estimate about 500 of them are in North America, and expand our presence in international markets. Two, to continue to diversify our customer and product base by providing more comprehensive services to our telecom customers and increasing our exposure in other key markets, including military, commercial, residential and electric car charging. Three, to increase our production capacity and efficiency by opening up our second manufacturing plant and facilitate revenue growth. And fourth, to provide industry-leading technology and power solutions through our R&D and technology road map.

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 4 strategic objectives Arthur mentioned. The first one, increasing market share and market share gains and international expansion. Our traction 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 path to initial forecast for 2019.

On the international front, during the fourth quarter, we installed a few DC hybrid systems in Sri Lanka to demonstrate the use of -- in remote sites, off-grid remote sites. And this is to demonstrate the use of our DC generator and our lithium battery system. Due to the minimum electrical -- electric infrastructure, a significant percentage of telecom power sites in emerging countries are not connected to the grid and thereby require renewables and battery storage devices in combination with generators to provide power to the radio equipment. We believe a successful demonstration of our DC hybrid power systems in a prime power application like this is a key milestone and will help us expand our market share in Sri Lanka and in other emerging countries.

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

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

As Arthur mentioned earlier, we're working to launch a new LPG product that we believe will help drive our market share with the U.S. top tier carriers and grow international emerging markets sales. We believe this product will help drive incremental sales as we can provide a solution using a lower-cost and widely available fuel source and dependency on diesel. We also believe this will enable telecom customers to better comply with emission standards and permitting titles as it pertains to their backup power systems and provide primary power when necessary.

The second objective is diversification. The second strategic objective is to diversify our customer and product base by providing more comprehensive services through our telecom customers and increasing our exposure in other key markets and applications.

Namibia is a perfect example of an opportunity to expand our products and services. We have the opportunity to increase revenue from the same customer by providing ancillary services like installing the cell equipment, maintaining their sites, along with providing solar hybrid systems to power -- that power their cell equipment. We believe this horizontal expansion will give us a platform to leverage our sales infrastructure costs in these regions and yield more profitability in the future.

Outside of telecom, we are seeing good traction in other applications as well, like Arthur was saying about the SMET program, the military programs that is part of a U.S. government military initiative to utilize electric propulsion powered vehicles to remotely provide surveillance, transportation and reconnaissance over wide areas. During the fourth quarter, we delivered 20 such systems, and we delivered a total of 40 such systems in 2018, and these would be integrated into robotic mules during the first half of 2019.

Completed robotic mules are being field tested now under various challenging operational environmental conditions. And there, so far, we've been hearing very good result coming from those tests. We anticipate receiving production orders sometime during later half of 2019 upon successful completion of these field tests. We believe this type of automation is expected to have additional applications in the commercial sector as well as by law enforcement, border patrol, et cetera, and we'll be able to leverage this technology in the future.

The third objective is expanding capacity. It's expanding our capacity to meet what we believe is a solid demand profile in the coming years. As a reminder, in November of 2018, we opened our second manufacturing plant, which is approximately 29,000 square feet and is located just minutes away from our corporate office in Gardena. This expansion is expected to nearly double the production capacity when it is operating at full efficiency. This is an ongoing process that we expect to continue throughout 2019. We expect progress to be made each quarter throughout the year.

The fourth objective is technology. Our fourth key strategic initiative is to provide industry-leading technology and power solutions through our R&D and technology road map. We are currently focused on 2 key opportunities. First one, integrate -- within R&D -- within technology. First one is integrating solar and lithium-ion battery storage solutions with our DC generators and provide a complete site solution. And the second one is, as Arthur discussed, it is the LPG product.

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

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

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

And the next one is the key project is the next generation of LPG and natural gas fueled power systems. Applications include telecom, on-grid, bad-grid and off-grid sites to electric vehicle charging, to solar hybrid systems for rural electrification and peak power-sharing, et cetera. A goal of this program is to improve the fuel efficiency significantly, increase the engine life up to 60,000 hours and reduce the overall engine cost, thereby reducing the overall generator cost. We plan to launch this product in the second quarter of 2019. We have initiated some discussions with a few key large LPG suppliers domestically and overseas.

Overall, we believe our technology and power solutions demand a high level of innovation for seamless integration into our customers' systems. We believe this will be a key differentiator and also a key success factor and gives us the competitive advantage in the market compared to generic power solutions.

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

Thank you, Raj. Net sales for the year ended December 31, 2018, totaled $24.0 million, an increase of 67% as compared to $14.4 million in 2017. On a quarterly basis, net sales increased 108% to $8.3 million for the 3 months ended December 31, 2018, as compared to $4.0 million in Q4 2017. The increase in net sales was primarily a result of an increase in sales of our DC power systems to Tier 1 wireless telecom customers in the U.S.

Backlog totaled $16.0 million at December 31, 2018, as compared to $1.8 million at December 31, 2017. The increase in backlog at the end of 2018 as compared to the end of 2017 was attributable to an increase in sales of DC power systems to our domestic Tier 1 wireless carriers -- carrier customers. We believe that the majority of our backlog will be shipped within the next 6 months.

Gross profit increased by $2.7 million to $7.4 million for the year ended December 31, 2018, as compared to $4.7 million for the year 2017. Gross profit as a percentage of sales decreased to 30.9% for the year 2018 as compared to 33% in 2017. The decrease in gross profit as a percentage of sales over the last year was attributable to a combination of pricing concessions tied to higher volume orders from Tier 1 telecom customers and an increase in manufacturing overhead costs associated with the expansion of our manufacturing facilities. In addition, we experienced a slight increase in the cost of raw materials as a result of new tariffs on aluminum and other imports from China.

Operating expenses increased to $8.5 million in 2018 from $5.6 million in 2017. Of this amount, $0.6 million and $1.2 million was attributable to an increase in investment in R&D and sales and marketing activities, respectively.

Net loss in 2018 totaled $0.8 million or negative $0.8 million -- I'm sorry. Negative -- I'm sorry. Let me start that over. Net loss in 2018 totaled $0.8 million or negative $0.08 per basic and diluted share compared to net loss of $0.8 million or negative $0.07 per basic and diluted share in 2017.

Cash at December 31, 2018, totaled $5.6 million as compared to $14.2 million at December 31, 2017. The decrease in cash as of the comparative period end of December 31, 2018 and December 31, 2017 was the result of a $7.8 million cash used in operating activities, of which $2.9 million was associated with an increase of inventory and $4.7 million increase in accounts receivable associated with increased shipments to Tier 1 telecom customers with net-90 payment terms.

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

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

Now I would like to open up this call to questions. Operator?

(Operator Instructions) We'll hear now from [David Stanton] with Pacific Financial Corp.

I got a question on fourth quarter margins. I see we're -- they're at 28%, and that included -- I would assume that included with your bulk discount on engines. Where do you see them going forward in 2019?

We price the products to kind of reflect the mid-30s in terms of gross margins. But obviously, we're not able to get there yet because of a few things. One is the factory. We just started the factory so that's a lot of -- significant amount of overhead going into that one. And the overtime costs have also added there. So we're not able to realize efficiencies yet. So I would say that maybe second half of the year, our margins would improve. But the first half of the year, we still would suffer, and I would say -- Luis would say that the margins would be probably in the low 30s. Is that...

The margins will be fairly flat for the next 2 quarters being, and we're ramping up. And we're quite -- adding quite a bit of equipment and new [stock]. I believe right now, we are at about 165 employees as to -- as compared to roughly, I believe we had 105 employees as of end of last year. So there's a lot of -- there's still a lot of inefficiencies in our operations simply because we're ramping up quite -- really, really fast. So as we get our staff trained and our new facility up and running 100%, we'll start seeing the gross margin improve.

That sounds good. I'm glad you mentioned the number of employees. I was wondering about that. I see where you're running ads for people all the time. On that topic, in your January PR, you mentioned that it's vital that you increase your production capacity -- or your production ability going forward to just even go after the U.S. telecom market, let alone anything else. Will we start to see that show up in revenues in Q1?

Once again, the starting part of Q1 will still be slow because we are moving -- we've moved some key departments from one factory to another, but it's ramped up. For example, the month of February is more than January. March is -- will be more than February. So we're scaling up on a monthly basis. So overall for the quarter, it's too early to kind of give guidance on how we'll compare to the last quarter. But yes, we'll be seeing some positive results in Q1, but most of the results will be seen in Q2 and thereafter.

Okay. For expenses, I thought we were -- the additional number of people have your expenses at $2.5 million for fourth quarter. Should we see that go up a little bit going in the first quarter and second quarter? Or do you think you can kind of hold it flat or with less overtime?

We believe we'll hold it flat. Right now, I think we've -- other than maybe just 2 or 3 key positions, I think we pretty much completed our hiring process. Right now, moving forward, we'll be managing the overtime, which our goal is to reduce it.

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

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

Well, we believe that we're going to do well in the next round of contract awards, but unfortunately, when you have large companies and government-tied companies, you can never really predict what's going to be the outcome. We did a good job. We feel that we're very competitive in our costs and our capabilities. So we'll just have to see what comes up over the next couple of weeks or so. It may even be delayed a month or more.

Okay. Do you expect to get generator orders from Namibia?

We'd expect to get generator orders from Namibia. How soon and how many is not clear to us. But the need for electrical power is there. And -- but here's the important point: overseas, it's important to have facilities in country where you have inventory parts, mechanics. You have an infrastructure in country in order to support the local market. It's like if you're buying some Lithuanian car and you're not going to expect too much service from it so maybe it just becomes a collector item. Well, no one's interested in having collector DC generator sets or power systems. They want to buy power systems that they can count on, that there's going to be parts, service, support. And with that, we feel that we've got an edge over everybody by having an office in South Africa.

Excellent. Now speaking to offices internationally, you mentioned you have 1 in Australia. And in a few conference calls, maybe even was a year ago, you mentioned you thought Australia could be your second-largest market going forward. Can you give any update on what's happening there?

Well, we're still waiting for the orders to turn our way. We participated in a number of demonstrations. But one of the things that we have to reach out to overseas is that we have to be able to provide more training in terms of product orientation, in terms of capabilities and in terms of application support to our overseas offices. So we have a little bit of ways to go there before we can really turn on the overseas market to us. In other words, we have wonderful sales execs overseas who have been able to operate -- open up many doors, but the number of questions and requests for support and demonstrations is a bit overwhelming. So we intend to meet this additional support demand for overseas sales starting sometime this -- in next quarter.

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

I think I heard -- it was said about the $16 million of backlog that, that will all be pushed out as sales in the first half of this year. Did I hear that right?

Yes, that is right.

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

No, no, Jeff. This is Raj. I was answering the previous caller's question by saying -- their question was can we expect to see those production efficiencies already or the margin improvements already in Q1 versus Q4. And I was basically answering saying not yet, it would be more realized in Q2 because we still have ways to go in Q1. But yes, Q1 will still be decent, but obviously, Q2 would be the one that would show some -- the results that our shareholders wanted to see.

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

Yes, at this point of time, I think on our part, it'll be a little premature to give guidance based on the forecast that we are getting from our customers because their requirements are changing every week, and it's so dynamic that it would basically -- better keeping backlog as a good reference point and then working off the backlog. Basically, we are at a point where demand is more than supply, and we're walking away from a lot of sales. So our current focus is to increase the supply, get the production to a point where we can fulfill those orders before we can go back. As I think one analyst mentioned somewhere that the backlog number that we have is too high, and we as management agree that it is too high, and we want to cut that down. We want to bring to a point -- our production to a point where our backlog reflects not more than 2 months of revenue. So we want to get to a run rate first before we give some guidance on that one.

Okay. Do you have a feel when you will get to that point where the backlog is just 2 months of revenue?

Yes, it's a continuous process. Once again, it's weekly progress that we'll have to make. But yes, probably, end of Q2 is something that maybe -- might be a better time for us to kind of look at that from that perspective.

Okay. All right. And then about this Bosch engine of propane/natural gas you're going to, you said release this product to the market in the third quarter, I think I heard you say, in select Western U.S.A. markets. Is this going to be kind of starting very small? Or is this -- can you comment at all about the materiality of this [every] unit?

Okay. Well, we've got 2 markets that we'll be releasing it in into. Telecom, which would be the first market that we'll release it into, and that's going to be sooner than the third quarter. And then we've got some residential applications that we're looking at releasing it into, and we'll probably do that towards the third quarter. The engine is made by Toyota. The controls are Bosch and Polar Power. The alternator is Polar Power.

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

There's 2 applications in telecom. One is backup and one prime power. And in terms of prime power, they're very excited about it because it drastically reduces their maintenance, improves their fuel efficiency and gives them a little bit more power than what we've been able to deliver in the past. That's prime power. In terms of backup power, we've been using the Kubota 973 natural gas engine, and this provides about 20% to 30% more power than that unit does. So some of the telcos would appreciate an engine that gives them more power and does so at about the same fuel efficiency. So that's pretty exciting about that.

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

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

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

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

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

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

No. Yes, no, we're not giving guidance in terms of total number of units that were shipped because that would kind of reflect our ASPs in there. So that's -- yes. We're only talking about the percentage of revenue coming from different clients, the large clients. But yes, our legal has advised against giving guidance on the number of units or the price per unit mainly because of competitive reasons.

How about the international? Can you talk about how much revenue you had from international sources in 2018?

Sure.

Yes, in 2018, international revenue was 6% of our total net sales for the year, which is approximately $1.4 million.

And it sounds like...

And that increased from 1.7% of total revenue in 2017, totaling $247,000. So we did -- we had a significant increase in international sales.

Okay. It was -- it sounds like Namibia and Sri Lanka were the 2 international sources. Is that roughly correct?

Yes, yes. Those are the 2 big ones. And then we had Thailand as well. We had a decent order from Thailand as well.

Australia battery.

Yes, and Australia with the...

And Australia with some battery systems.

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

Yes. I mean we have informed our clients about that headwinds in terms of the tariffs. But at the same time, what's happening is our customers are expecting price discounts as their volumes are going up. And it's kind of balancing out there where we, on one hand, are reducing our costs, increasing our efficiency or in the process of increasing our labor efficiencies, and we would like to pass on those savings back to our customers. And obviously, we were not able to do that yet because we had a negative -- a negating effect from the tariffs. So yes, but we are constantly informing our clients about what we are undergoing and how much our material costs went up on a quarterly basis because of the tariffs.

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

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

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

Well, technically our working capital is still fairly high when you consider current assets as a whole. But in terms of cash and cash equivalents, yes, it's pretty much -- we depleted quite a bit of it due to the ramping up and in terms of our operating expenses but also because of the sales that are coming in from Tier 1 carriers that have net-90 terms. We are looking into different options. We feel that with the large amounts of accounts receivable that we have with Tier 1 telcos, we easily qualify for a line of credit if we needed to go that route. We feel that as we go into the later stages in this year that we'll start balancing out our receivables with our liquid cash, and we should be in a better situation. So our cash flow will increase as we move into the later part of this year.

We'll now move on to our next question from [Chris Michovsky] with -- as a private investor.

So I guess my first question is on the backlog. You mentioned in your prepared comments that the backlog -- I don't remember the exact words, but I think you said the backlog continues to be strong and continues to increase in the current first quarter. Could you give us kind of an estimate as you did the last quarterly call of what the current backlog is as of today?

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

Okay, then I'll be looking forward to that. And most of my questions have really been answered. Just about the new engine, is there a danger of kind of hitting a pause in orders while people are kind of waiting for the new engine or testing out the new engine not wanting to buy the old engine?

I'm not sure if I understand the question.

(inaudible) this quarter (inaudible).

No, I wouldn't worry about the -- our Kubota inventories are relatively small so I wouldn't really worry about that. Our current inventories on Toyota engines are pretty good.

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

Our customers are seeing this as a seamless change from one engine to the other. And this new engine does have about a 25-year history to it. So on one hand, it's new, from what we're doing with it, adding Robert Bosch the controls to it. But this engine has evolved slowly over the past 25 years. And about 1998 to about 19 -- or to about 2002, we probably moved approximately 1,000 of these, whether you want to say, this engine's model predecessor. The engine back then in those years were built by a company called Daihatsu. And Daihatsu was bought out by Toyota, and Toyota then took the engine off the U.S. market. While they continued to manufacture and sell the engine in Japan and other countries, they made some improvements in terms of carburation and compression ratios. So the real difference between what we're selling now and what we sold in the 1998 to about 2003 or '04 timeframe is a higher compression engine and an engine with an electronic throttle body and the Robert Bosch controls. So this is not something that's going to be a developmental risk or something that we're coming out onto the market with some unknown problems or issues. Did I answer your question?

All right, that's -- yes, yes, that's great to hear and very welcome detail. All right. Now on the tariffs, as I understand from listening -- researching other companies, there are kind of 2 different fields of price increases due to tariffs. One of them is things like aluminum and steel, which you already talked about. But there's like another area for things that have not been actually hit by tariffs but there was talk about tariffs, and these are like electronic components and kind of small mechanical components coming from China. And prices on these kind of increase just because of shortages because everybody was trying them out before the perceived tariffs. So have you seen prices on those things decrease at least? And would that be -- could that be [a financial] in Q1?

Not decrease in cost, increase in cost, yes. Even subject to capacitors and all kinds of electronic components, shortages, you name it, we've seen it.

And those are not decreasing yet after, I guess, after a little bit of thawing of relations between China, those are not decreasing?

Let's put it this way. When the idea, the concept or the possible announcement of a tariff on aluminum was put forth to the public, that day, pricing increased without it even being in effect. And so things -- the prices haven't come down yet. We're hoping and expecting that they will. But one of the things, too, is that a lot of the electronic components we are sourcing other than Chinese manufacturers, one strong reason is quality. But China's also a supplier of raw materials to other countries where these electronic components are being manufactured. So it's a wave effect. It's a ripple effect.

All right. And my last question is on residential. Here in California, we've been kind of hit by kind of effective price increases for people that have solar power just because they moved the window for the highest price electric power. They moved it later in the day. And there's been an incredible surge in sales for battery systems and the Tesla Powerwalls backordered several months in advance. So would you be able to make a system where a resident in California with their own solar power can completely go completely off the grid and just use natural gas? Is that what you're talking about when you talk about residential?

It's one of the applications we can service. We don't believe that could be a sizable market. I mean, everybody would like to tell their electric utility to jump off a cliff or something. But when it comes to paying that bill to cut the utility line, most people won't do that. However, we believe that, for example, with the electric rates going up, that people will want to escape those peak power demands and possibly switch over to natural gas to offset those costs. That's one thing. The other thing is that we believe that people who are charging their cars at home would consider using natural gas as the energy supply to charge their car. And at the same time they're charging their car, they can be using the waste heat of the engine to heat the pool, to heat the spa, to heat the house. So with this cogeneration and electric car charging, we see there could be a sizable market. I mean currently at my apartment, I don't have enough electric utility service to charge my electric car. If I wasn't renting, I'd put my own generator in and charge my electric car from there so I would be able to charge my car in 4 to 8 hours as opposed to 1 or 2 days off my current electrical service.

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

Let me answer that this way. There is, let's say, a couple of applications. One is where the solar array is put onto, let's say, a factory and the factory wants to consume all the power, there's no incentive to sell it back to the utility. But as the clouds cause shading over the panels, the output fluctuates throughout the day, making that power more difficult to use. So what you do is you connect the DC generator into that system. And so what you're doing is you're combining solar with the right amount of fuel so you have a stable power supply so that you can source all of your electricity needs from that. Was I clear on that?

Yes, yes. So you think there's a (inaudible).

Then there's the other application, whereas, let's say, you're off grid, and the ideal off-grid situation is, one, minimize that battery bank because that's expensive in both the capital costs and the maintenance costs. Because even if it's a Tesla power cell connected on the wall or whatever they call the product, at some point in time, that's going to be -- that's going to have to be replaced. So what you do is you minimize your battery and instead of using energy stored in the battery, use the energy stored in the natural gas line or in the propane tank and you use that to run the generator to supplement the solar power. So the battery becomes less of an important component in the system. And then while the generator is running, you can make use of the waste heat for, again, for heating the house, the hot water, the swimming pool, the spa or what have you. If it's a dairy, helping process the milk, if you're a farmer, for example.

(Operator Instructions) We'll hear now from [Eric Briskie], another private investor.

I just have a few related questions with regards to production capacity. Once your second facility is fully running, roughly what would you think the sort of sustainable throughput is if you're managing overtime, et cetera, the way that you would like to? So is that -- could you do $12 million, $15 million a quarter? What are you trying to reach to? And then whatever that number is, do you believe that would require the SG&A to move up meaningfully from where it is now? And two, do you believe you have enough current capital to make that happen? Or would you need to find capital, either debt or equity to make it?

Okay. So I'll -- this is Raj. I'll take those questions. So first, in terms of our targets, yes, once it comes to full capacity, with a little bit of overtime and maybe some warehousing space that might be required, our goal is to get to that $12 million, $15 million range per quarter or, basically, $4 million to $5 million run rate a month. And so the second question is, do you have the capital to get there? Obviously, we will need some sort of working capital assistance to get there. But we don't think that we will need to go raise equity capitals to get there because we, at that rate, we're profitable, cash flow coming into the bottom line, and also it's not highly capital intensive, this whole -- this move. That was your second question. What was the third question?

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

Yes. Yes, not by much. Not by much. We are already putting the infrastructure in place to kind of support that level of revenue structure. So it should -- it will probably increase a tad bit, maybe 1% or maybe a couple of percentage points but not much.

We'll now take our next question from Ashok Kumar with ThinkEquity.

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

Right. Right. Okay, yes, so ideal backlog numbers for us would be 2 months' worth of revenue. So that would be basically telling the customer that we'll deliver the product, once he orders it, we'll deliver the product within 8 weeks. So that would basically be anywhere between $8 million to $10 million. Whenever we get there, whenever we get the production capacity to that rate, it would be between $8 million and $10 million. That would be the backlog that we'll prefer to have on our books from our perspective.

Now in terms of your international, I mean you've made investment in the sales infrastructure to address some of the opportunities throughout the world. And I guess 2018 was not particularly a standout in terms of international contribution. So are you looking to -- so are you satisfied with the resources you have committed thus far? And then I'd assume that you're probably looking to see a high level of contribution from the international markets this year.

That is correct. We believe we don't need to invest any further in terms of sales infrastructure in international markets. But the sales cycles are long, and the products would need customization, which is what we've done over the past 1.5 years that we've been playing those markets, in select markets, by the way. So we expect to see some meaningful results this year. We saw some results as evidenced in last year, but we hope that, that would actually go up significantly this year or the following years.

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

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

Okay. Looks like there's no further -- yes. Let's close it up. Thank you, everybody.

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