Ideal Power Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; financial statements are unaudited. Ideal Power develops power-conversion products for solar-plus-storage, microgrid and stand-alone energy-storage applications.
Financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $444,640 | $439,270 | $973,680 | $1,258,030 |
| Gross profit (loss) | $26,111 | $(298,667) | $(920,388) | $(273,598) |
| Gross margin | 5.9% | (68.0%) | (94.5%) | (21.7%) |
| Operating expenses | $2,247,575 | $2,635,153 | $7,591,359 | $7,945,270 |
| Operating loss | $(2,221,464) | $(2,933,820) | $(8,511,747) | $(8,218,868) |
| Net loss | $(2,217,599) | $(2,922,266) | $(8,496,307) | $(8,192,090) |
| Basic and diluted loss per share | $(0.16) | $(0.31) | $(0.66) | $(0.86) |
Q3 revenue was nearly flat year over year, while the gross result improved, primarily because Q3 2016 included a $328,537 charge for excess and obsolete legacy-product inventory. For the nine-month period, revenue fell 23%; the gross loss widened, reflecting higher legacy-product inventory and warranty charges. Operating expenses declined overall, but operating and net losses increased year over year.
Cash flow, liquidity and balance sheet
- Cash and cash equivalents were $11.68 million at September 30, 2017, up from $4.20 million at December 31, 2016. Net working capital was $11.03 million.
- Nine-month operating cash outflow was $5.92 million, compared with $7.62 million in 2016. Investing cash outflow was $266,000; financing cash inflow was $13.67 million.
- The financing inflow primarily came from a March 2017 private placement: $15.0 million gross and $13.66 million net proceeds. The company reported no long-term debt; other long-term liabilities were $493,088, primarily related to patent-license payment obligations.
- Current liabilities were $1.54 million. The filing reports remaining lease base-rent commitments of $109,978 through 2018.
- The company does not generate enough revenue to sustain operations and has historically relied on equity financing. It reported $58 million of availability under its shelf registration statement at quarter-end.
Material changes, outlook and risks
- Management shifted its commercial focus from stand-alone storage toward solar plus storage, with microgrids also a target. It expected revenue growth in the next several quarters to be driven primarily by solar-plus-storage; no quantified revenue or earnings guidance was provided.
- A Q2 cost-reduction plan narrowed the product roadmap to 30kW SunDial and Stabiliti products, discontinued legacy products, and postponed international-market and electric-vehicle fast-charging development and certification work. Management said the changes reduced, and were expected to continue reducing, cash burn.
- Q3 R&D expense declined 13% year over year, primarily due to lower personnel costs; nine-month R&D declined 14%, primarily due to lower bi-directional switch development costs. Management said B-TRAN development was taking longer than anticipated because of manufacturing complexity. It was pursuing a second fabricator in parallel and expected packaging work from at least one packaging house to be completed during 2017.
- Customer and market risks remain significant: stand-alone storage deployments, particularly those tied to California’s SGIP program, were slow; a customer that represented a majority of 2015–2016 backlog exited the system-integration business. The company said this materially harmed backlog and was evaluating possible recourse. Backlog may not convert to revenue, and customer financing difficulties have contributed to higher bad-debt expense and days sales outstanding.
- At September 30, the company had fully reserved receivables from two customers. The nine-month period included a $703,220 noncash inventory charge, largely for end-of-life legacy converters, and patent-related write-offs and impairments.
- Ideal Power and former contract manufacturer Libra Industries are in arbitration over alleged breaches of their supply agreement; discovery was in progress and a hearing was scheduled for Q1 2018. The company could not estimate any possible loss.
- The private placement included warrants to purchase 5.93 million common shares at $2.41 per share, in addition to common and convertible preferred shares issued. These securities create potential dilution. Management identified supplier and contract-manufacturer performance, customer concentration, product acceptance, B-TRAN development, financing needs and the company’s history of losses among its risks.
Important facts for investors to verify
- Whether solar-plus-storage sales and orders convert into sustained revenue, and how backlog and customer concentration are changing.
- Cash burn relative to the $11.68 million quarter-end cash balance, including the timing of any additional financing needs.
- Receivable collectibility, warranty exposure and further inventory obsolescence or write-downs.
- Progress and timing of B-TRAN prototype packaging, testing and development milestones.
- Developments and potential financial exposure in the Libra arbitration.
- Potential dilution from outstanding warrants, options and convertible preferred shares.