Ideal Power Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Ideal Power develops power-conversion systems for solar-plus-storage, microgrid, and energy-storage applications. It reported limited product revenue and continued operating losses.
Financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Product revenue | $253,370 | $322,116 | $529,040 | $818,760 |
| Gross profit (loss) | ($511,239) | $23,179 | ($946,499) | $25,069 |
| Gross margin | (201.8%) | 7.2% | (179.0%) | 3.1% |
| Operating expenses | $2,706,119 | $2,497,271 | $5,343,784 | $5,310,117 |
| Net loss | ($3,210,324) | ($2,467,477) | ($6,278,708) | ($5,269,824) |
| Net loss per share | ($0.23) | ($0.26) | ($0.50) | ($0.55) |
Revenue fell 21% in Q2 and 35% for the first half year over year. The first-half operating loss was $6.29 million, versus $5.29 million a year earlier. Cost of product revenue included a $712,083 non-cash inventory charge for the first half, principally tied to excess legacy-product inventory. The company also recorded increased warranty accruals, patent impairments, and bad-debt expense.
For the six months, operating cash outflow was $4.35 million, compared with $5.01 million in 2016; investing outflow was $189,280, and financing provided $13.67 million. Cash rose to $13.34 million from $4.20 million at year-end 2016. Current assets were $14.16 million and current liabilities $1.39 million, yielding reported working capital of $12.77 million. The company reported no long-term debt; total liabilities were $1.88 million.
Material changes and financing
- The company raised $15.0 million gross in a March private placement of common and preferred shares bundled with warrants; net proceeds were $13.66 million. It issued 5.22 million common shares, 708,430 preferred shares, and warrants for 5.93 million common shares. At June 30, 7.48 million warrants were outstanding, in addition to 1.52 million outstanding convertible preferred shares.
- Management said it completed the transition from legacy products to third-generation SunDial and Stabiliti products by quarter-end. Legacy-product inventory write-downs and warranty adjustments materially affected gross results.
- Customer receivables included amounts from three customers fully reserved as collection was considered remote. Net accounts receivable declined to $205,646 from $378,658 at year-end.
Outlook, risks, and contingencies
Management shifted emphasis from stand-alone storage, where deployments and customer financing have been weak, toward solar-plus-storage and, to a lesser extent, microgrids. It expects revenue growth in coming quarters to be driven primarily by solar-plus-storage, but provided no quantified revenue or earnings guidance. A cost-reduction plan narrowed the 2017 product roadmap to SunDial and Stabiliti, discontinued legacy products, and postponed international-market and EV fast-charging development. Management expects these changes to reduce cash burn.
The company said B-TRAN development is taking longer than anticipated because of manufacturing complexity; it engaged a second fabricator to pursue a simplified device on a parallel path. EV fast-charger product development was expected to begin in 2018, subject to the stated postponement. Key risks include continued operating losses, limited product sales, uncertain market adoption, customer funding and collection problems, dependence on contract manufacturers, product certification, and the ability to develop and commercialize new technology.
A former contract manufacturer initiated arbitration alleging breach of the supply agreement and seeking damages. Ideal Power filed a defense and counterclaim; the parties were appointing an arbitrator. The company could not estimate any potential loss. It also recorded a $529,941 estimated present value of future payments under a patent license agreement, including $40,000 due in December 2017.
Important facts for investors to verify
- Whether solar-plus-storage and microgrid sales convert the company’s product strategy into sustained revenue and improved gross margins.
- Actual cash burn after the cost-reduction plan, and how long the $13.34 million cash balance can support operations.
- Customer concentration, receivable collectability, and whether the stand-alone-storage customer exit further reduces backlog or sales.
- Potential arbitration exposure and any developments in the dispute with the former contract manufacturer.
- Progress and costs for B-TRAN prototypes, product certifications, and any further delays or changes to the development roadmap.
- Potential dilution from outstanding warrants and convertible preferred shares, alongside future financing needs.