Ideal Power Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet figures are as of March 31, 2014, compared with December 31, 2013. Ideal Power develops power converters, principally battery converters and photovoltaic inverters, for commercial energy storage, electric-vehicle charging and solar markets. It remains an early-stage company with limited product revenue and a history of operating losses.
Financial performance
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Revenue | $291,095 | $380,135; down 23% |
| Gross loss | $109,199 | $49,153 |
| Operating expenses | $1,319,680 | $691,921 |
| Operating loss | $1,428,879 | $741,074 |
| Net loss | $1,420,742 | $1,824,503 |
| Net loss per share | $0.20 | $1.23 |
| Cash used in operations | $1,517,477 | $697,133 |
| Cash and cash equivalents, March 31 | $12,444,543 | $1,215,986 at March 31, 2013 |
Products generated $108,500 of revenue, grants $182,595, and royalties none. Product sales were from initial commercial battery-converter orders. Gross margin was negative: revenue was below cost of revenue in both periods. Operating loss increased 93%, as higher operating expenses and gross loss outweighed the benefit of lower interest expense. Net loss improved because Q1 2013 included $1,037,386 of noncash debt-discount amortization; convertible notes had converted to common stock at the November 2013 IPO.
At March 31, current assets were $13,522,674 and current liabilities $782,398, for working capital of $12,740,276. Long-term debt was zero. Total assets were $14,419,129 and stockholders’ equity $13,636,731. Investing cash outflow was $175,068, mainly for patents and equipment; financing cash outflow was $9.
Material changes and unusual items
- Revenue decreased by $89,040: grant revenue fell $39,643 due to ARPA-E spending timing, royalty revenue fell $25,000, and product revenue fell $24,397. Lockheed Martin notified the company in February that it would not pay its 2014 annual royalty and no longer had the exclusive government-use right to the initial patents.
- General and administrative expense rose 112% to $744,968, research and development expense rose 31% to $306,493, and sales and marketing expense rose 154% to $268,219. The filing attributes increases to personnel, professional and legal fees, stock compensation, insurance and board costs.
- Operating cash use more than doubled year over year. Cash declined $1,692,554 during the quarter, from $14,137,097 to $12,444,543.
- Common shares outstanding increased to 7,010,959 from 6,931,968 at year-end. The company reported 776,839 options outstanding and 1,623,824 warrants outstanding at quarter-end.
Outlook, risks and commitments
Management said approximately $15 million of net IPO proceeds was expected to fund activities through at least December 31, 2015. It anticipated adding approximately 10–20 employees over two years and approximately $1.0 million of capital expenditures over that period. These are estimates, not guarantees; the company reported it does not generate enough revenue to sustain operations and has no committed source of future financing.
The company is developing a 30kW three-port hybrid converter and a bidirectional IGBT switch. Its $2.5 million ARPA-E award had approximately $394,000 remaining to be recognized over the next ten months as of March 31. Grant funding reimburses eligible costs and is subject to agreed work plans and “Go/No Go” milestones; the company bears a share of project costs. Management said the grant should fund demonstration of the switch technology, but achievement and commercialization remain uncertain.
A new 48-month Austin office and laboratory lease was signed in March, with expected commencement around June 1, 2014. Base-rent commitments total $638,582 through 2018, excluding operating costs; an early-termination option in May 2017 requires an approximately $99,000 payment. Other stated risks include product adoption and manufacturing, competition and technology changes, patent protection, continued losses, and the ability to obtain financing. The filing reports no legal proceedings, no off-balance-sheet transactions, and effective disclosure controls as of quarter-end.
Important facts for investors to verify
- Whether commercial battery-converter orders grew beyond initial sales and whether customers convert evaluations into recurring or larger orders.
- Whether cash burn, planned hiring and capital spending remain consistent with management’s stated funding runway through 2015.
- ARPA-E milestone progress, remaining grant funding, and the company’s required cost share.
- Revenue and receivables concentration: ARPA-E represented 63% of Q1 revenue and 65% of receivables at March 31; one customer represented 33% of Q1 revenue and 28% of receivables.
- Potential dilution from outstanding options and warrants, and the full cost of the new lease, including operating expenses.