Ideal Power Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; financial statements unaudited. Ideal Power develops power converters, principally battery converters and photovoltaic (PV) inverters, targeting commercial battery energy storage and integrated PV-plus-storage markets. The company remains development- and commercialization-stage and reports a history of losses and limited product revenue.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $560,526 | $650,284 | $851,621 | $1,030,419 |
| Gross loss | $56,603 | $40,206 | $165,802 | $89,359 |
| Operating expenses | $1,578,355 | $863,822 | $2,898,035 | $1,555,743 |
| Operating loss | $1,634,958 | $904,028 | $3,063,837 | $1,645,102 |
| Net loss | $1,627,564 | $1,987,458 | $3,048,306 | $3,811,961 |
| Net loss per share | $0.23 | $1.34 | $0.44 | $2.58 |
- Q2 product revenue rose to $444,100 from $51,073; six-month product revenue was $552,600 versus $183,970. Product sales were primarily battery converters. Grant revenue declined to $116,426 in Q2 and $299,021 for six months; no royalty revenue was recorded in 2014.
- Gross loss represents negative gross margin: approximately 10.1% of revenue in Q2 and 19.5% for the first half, compared with approximately 6.2% and 8.7%, respectively, in 2013.
- Cash and equivalents were $11.15 million at June 30, 2014, down from $14.14 million at year-end 2013. Working capital was $11.04 million. Current liabilities were $934,888; the balance sheet reports no debt.
- First-half operating cash outflow was $2.50 million, investing outflow $488,780, and financing inflow $4,990, producing a $2.99 million decrease in cash. The comparable 2013 operating outflow was $1.47 million.
- Total assets were $13.17 million and stockholders’ equity $12.24 million at June 30. Shares issued and outstanding were 7,012,397; 7,015,343 were reported as of August 8, 2014.
Material changes versus prior periods
- First-half revenue fell 17%, despite a $368,630 increase in product sales, because grant revenue declined $497,428 and royalties declined $50,000. The SBIR grant program ended in 2013; ARPA-E grant revenue varied with spending timing.
- Operating expenses increased substantially as the company expanded personnel and commercialization activity. First-half general and administrative expense rose 88%, research and development 60%, and sales and marketing 149%.
- Net loss improved year over year, but operating loss worsened. The net-loss improvement primarily reflects the absence of 2013 convertible-note discount amortization; those notes converted to common stock at the November 2013 IPO.
- Product costs exceeded product revenue in the reported periods overall. Management attributed higher gross loss partly to engineering compensation, certification testing, and lost Lockheed Martin royalty revenue, partly offset by improved battery-converter sales margins versus prior PV-inverter sales.
Outlook, commentary, risks, and unusual items
- Management stated that approximately $15.0 million of net IPO proceeds was expected to fund activities through at least December 31, 2015. It anticipated approximately $1.0 million of capital expenditures through December 2015 and a possible increase of 10–20 employees by that date. These are expectations, not guaranteed outcomes.
- The 30kW hybrid converter launched in July 2014, after quarter-end; the company reported its first unit sale and shipment in July. Management described the commercial BESS and PV-plus-storage markets as emerging and cited customer deployments and industry growth forecasts.
- The $2.5 million ARPA-E award had approximately $278,000 remaining to be recognized at June 30, 2014. Grant work has milestones and a company cost-sharing obligation; funding and revenue depend on eligible spending and milestone approvals.
- Management cautioned that the company may never achieve profitability or sufficient revenue, that additional financing may be needed, and that failure to obtain funds could require curtailing or ceasing operations. Other stated risks include uncertain adoption and demand, competition and rapid technology change, manufacturing execution, and protection or defense of intellectual property.
- Revenue is concentrated: ARPA-E accounted for 35% of first-half 2014 revenue; three product customers accounted for 23%, 17%, and 15%. Several customers also represented significant quarterly revenue and receivables. The company reports cash balances above FDIC-insured limits.
- A new 48-month Austin office and laboratory lease began June 1, 2014, with $625,722 of remaining base-rent commitments at June 30, excluding operating costs. Stock-based compensation was $379,282 for the first half; unrecognized compensation cost was $1.62 million.
Important facts for investors to verify
- Whether battery-converter and hybrid-converter orders convert into sustained shipments, recurring revenue, and positive product gross margins.
- Whether cash use, planned hiring and capital spending remain consistent with management’s stated funding horizon through December 2015, and whether additional financing becomes necessary.
- Timing and collectability of grant receivables, ARPA-E milestone approvals, and remaining award funding; also the effect of grant concentration on reported revenue.
- Customer concentration, deployment forecasts, warranty obligations, and the commercial assumptions behind cited market opportunities and customer plans.
- Execution of the new lease and product commercialization plans, along with potential dilution from outstanding options and warrants.