Ideal Power Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Ideal Power develops and sells power-conversion systems for commercial and industrial energy storage, solar, and microgrid applications, using its proprietary Power Packet Switching Architecture. The company reports limited product revenue and continues to fund substantial research and development.
Financial results
| Metric | Three months ended Sept. 30, 2015 | Nine months ended Sept. 30, 2015 | Comparable 2014 period |
|---|---|---|---|
| Revenue | $895,490 | $3,292,518 | $438,029 quarter; $1,289,650 nine months |
| Gross profit (loss) | $53,065; approximately 5.9% gross margin | $374,454; approximately 11.4% gross margin | $(95,506) quarter; $(211,443) nine months |
| Operating expenses | $2,983,292 | $7,799,193 | $1,762,955 quarter; $4,710,855 nine months |
| Net loss | $(2,918,199), or $(0.31) per share | $(7,403,587), or $(0.91) per share | $(1,851,844) quarter; $(4,900,150) nine months |
| Operating cash flow | Not presented for quarter | $(5,704,527) | $(3,819,732) nine months |
At September 30, 2015, cash and cash equivalents were $17.33 million, working capital was $16.75 million, and long-term debt was zero. Current liabilities were $2.13 million. Financing activities provided $16.16 million in the first nine months, principally from the May 2015 stock offering; investing activities used $1.04 million.
Changes versus 2014
- Revenue increased 104% for the quarter and 155% year to date, driven by product sales—particularly the 30kW battery converter. Grant revenue was zero in 2015, versus $149,029 for the quarter and $448,050 year to date in 2014, as the ARPA-E grant had been fully funded by year-end 2014.
- Gross results improved to a profit, but operating expenses rose substantially. Research and development expense increased 149% for the quarter and 132% year to date, including self-funded bidirectional-switch development, new-product work, staffing, and certification costs.
- Net loss increased to $2.92 million for the quarter and $7.40 million year to date. Operating cash use also increased year over year.
- Cash rose from $7.91 million at December 31, 2014, primarily reflecting the follow-on offering, which generated approximately $15.9 million net proceeds. Shares outstanding increased to 9,379,939 at quarter-end from 7,048,235 at year-end 2014.
Outlook, risks, and notable items
- No formal revenue, earnings, or profitability guidance is provided. Management says revenue does not yet sustain operations, expects operating losses until a substantial and stable revenue base is developed, and cannot assure future profitability or financing availability.
- The company reported approximately $2.2 million of released and firm orders in backlog at September 30, 2015, but cautioned that timing changes or cancellations mean backlog may not convert to revenue in a particular period.
- Management expects additional research and development spending in the remainder of 2015 and first half of 2016 after engaging an additional semiconductor fabricator to produce a B-TRAN proof of concept. The company’s BD-IGBT and B-TRAN development plans remain subject to technical and commercialization risk.
- Customer concentration is significant: two customers generated 55% and 12% of quarterly revenue; four customers generated 29%, 22%, 15%, and 13% of nine-month revenue. Two customers represented 83% of trade receivables at quarter-end.
- Other key risks include a limited operating history and recurring losses, dependence on customer adoption and third-party integrators, long and variable sales cycles, competition and technology changes, supplier and contract-manufacturer dependence, warranty exposure, and reliance on incentives and utility policies.
- Notable items included $109,788 of capitalized patent costs written off after the company discontinued pursuit of the related patents, a $45,641 software write-off, and a $26,624 favorable inventory-reserve adjustment. The quarter-end warranty reserve was $312,721. The company also disclosed an unresolved competitor patent assertion received in 2013; it reported no further correspondence after early 2014. Legal proceedings were otherwise reported as not applicable.
- The 125kW grid-resilient AC-DC product received UL 1741 certification in October 2015, after the reporting date. Management stated that disclosure controls were effective as of September 30, 2015.
Important facts for investors to verify
- Whether revenue growth and the reported backlog translate into sustained shipments, repeat orders, and improved gross margins.
- Cash burn and the adequacy of available cash to fund operations and planned product development without further financing.
- Customer and receivable concentration, collections, and the status of the customer balances representing 83% of trade receivables.
- Progress, cost, performance, and commercialization timelines for the BD-IGBT, B-TRAN, and newer power-conversion products.
- Exposure to warranty claims, patent protection and the unresolved competitor assertion, and dependence on incentives, certification, suppliers, and distribution partners.