Ideal Power Inc. — Q2 2015 Form 10-Q
Business context and period. The unaudited quarterly report covers the three and six months ended June 30, 2015. Ideal Power develops and sells power-conversion systems using its proprietary Power Packet Switching Architecture, primarily for commercial and industrial energy storage, solar-plus-storage, and microgrid applications. Products are manufactured by contract manufacturers. The company reported limited operating history and continued to fund operations mainly through equity offerings, with government grants previously providing additional support.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $1.20 million | $0.56 million | $2.40 million | $0.85 million |
| Gross profit (loss) | $142,899 | ($9,808) | $321,389 | ($115,937) |
| Gross margin | 11.9% | (1.8%) | 13.4% | (13.6%) |
| Operating expenses | $2.44 million | $1.63 million | $4.82 million | $2.95 million |
| Operating loss | ($2.30 million) | ($1.63 million) | ($4.49 million) | ($3.06 million) |
| Net loss | ($2.29 million) | ($1.63 million) | ($4.49 million) | ($3.05 million) |
| Net loss per share | ($0.28) | ($0.23) | ($0.59) | ($0.44) |
| Cash used in operating activities | — | ($3.48 million) | ($2.50 million) |
- Product revenue was $1.20 million in Q2 and $2.40 million for the six-month period. There was no grant revenue in 2015; comparable 2014 grant revenue was $116,426 for Q2 and $299,021 for the half year.
- At June 30, cash and cash equivalents were $19.97 million; working capital was $19.64 million. Total assets were $23.41 million, current liabilities $2.04 million, and long-term debt was zero.
- Investing activities used $538,586 in the first half. Financing activities provided $16.07 million, principally from the May follow-on stock offering. Cash increased by $12.05 million during the half.
Material changes and notable items
- Revenue increased 114% in Q2 and 181% for the six months year over year, driven by higher product sales, particularly the 30kW Battery Converter and, in Q2, newer grid-resilient and 125kW products. Gross profit turned positive, though low-volume new-product costs and higher personnel and supply-chain costs constrained margins.
- Operating expenses rose substantially: first-half R&D increased 119%, G&A 28%, and sales and marketing 59%. Management attributed increases to advanced-switch and new-product development, personnel, certification, legal and patent costs, stock compensation, and sales-related costs. With the ARPA-E grant fully utilized by year-end 2014, advanced-switch development is now self-funded.
- On May 20, 2015, the company sold 2,225,825 shares at $7.75 per share in a follow-on offering, receiving approximately $15.9 million net. By June 30, approximately $11 million of equity-offering proceeds had been used, primarily for operations, R&D, intellectual-property protection, equipment, and software.
- Q2 included a $45,641 write-off of capitalized software. First-half G&A included a $103,289 write-off of capitalized patent costs after the company discontinued pursuing the related patents. The company also recorded severance-related expense under a former executive’s resignation agreement; $33,181 remained accrued at quarter-end.
- Inventory increased to $665,481 from $251,338 at year-end, mainly reflecting finished goods. The company eliminated its inventory-obsolescence reserve after a planned design change was delayed, while also recording inventory write-offs during the period.
Outlook, risks, and contingencies
- No numerical revenue, earnings, or cash-flow guidance was provided. Management stated that revenue remained insufficient to sustain operations and that profitability was uncertain.
- Management expected a significant increase in R&D spending for the remainder of 2015 and the first quarter of 2016 to engage an additional semiconductor fabricator on a B-TRAN proof of concept. The company’s primary development path remained the BD-IGBT; projected efficiency benefits were based on simulations, not reported commercial results.
- The company expected to seek UL 1741 certification for its 125kW grid-resilient AC-DC product in the second half of 2015. Two 30kW grid-resilient products received grid-tied certification in June 2015; the 125kW multi-port product was in prototype production, with its first customer shipment in June.
- Management cautioned that equity proceeds might not be sufficient to develop the technology and sustain operations. The company had no committed source of future financing and could need additional equity or debt financing, partnerships, licensing, or reductions or suspension of operations if funds proved inadequate.
- Key risks include continued losses, uncertain customer adoption and demand, competition and technology changes, manufacturing and development execution, patent protection and third-party claims, and the ability to obtain financing. Three customers represented 28%, 21%, and 20% of Q2 revenue; three customers represented 36%, 21%, and 17% of first-half revenue. Three customers accounted for 78% of trade receivables at quarter-end.
- The company disclosed $471,102 of remaining base-rent commitments under its Austin lease, assuming no early termination. No legal proceedings or off-balance-sheet transactions were reported. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether product-sales growth converts into sustainable gross margins and recurring customer demand, given continuing operating losses and concentrated revenue.
- Cash runway and expected spending, particularly the planned B-TRAN proof-of-concept work and other product-development programs; confirm whether additional financing will be required.
- Execution and timing of product certifications, commercialization, and customer shipments, including the 125kW product and the B-TRAN/BD-IGBT development paths.
- Customer collections and receivable quality, including the large customer concentration and first-half trade-receivable write-offs.
- Use of remaining offering proceeds, future equity dilution, and the outstanding options and warrants; issued and outstanding common shares were 9,345,263 at June 30 and 9,352,263 as of August 10, 2015.