Ideal Power Inc. — Q3 2016 Form 10-Q
Business context and period: Quarterly report for the three and nine months ended September 30, 2016. Ideal Power develops power-conversion systems for commercial and industrial energy storage, solar-plus-storage, and microgrid applications. The company reported limited product revenue and continued to fund operations primarily through equity financing.
Key financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Product revenue | $439,270 | $895,490 | $1,258,030 | $3,292,518 |
| Gross profit (loss) | $(298,667) | $53,065 | $(273,598) | $374,454 |
| Operating expenses | $2,635,153 | $2,983,292 | $7,945,270 | $7,799,193 |
| Loss from operations | $(2,933,820) | $(2,930,227) | $(8,218,868) | $(7,424,739) |
| Net loss | $(2,922,266)* | $(2,918,199) | $(8,192,090) | $(7,403,587) |
| Net loss per share | $(0.31) | $(0.31) | $(0.86) | $(0.91) |
Gross margin was approximately negative 68% for Q3 2016, versus positive 6% a year earlier; for the nine-month periods it was approximately negative 22% versus positive 11%. Cash and cash equivalents were $6.81 million at September 30, 2016, down from $15.02 million at December 31, 2015. Net working capital was $6.98 million. Operating cash outflow was $7.62 million for the first nine months, investing outflow was $0.63 million, and financing inflow was $0.04 million. Total liabilities were $1.96 million, including a $0.26 million long-term license-related liability; the filing reports no long-term debt in MD&A.
Material changes and unusual items
- Revenue declined 51% year over year in Q3 and 62% for the first nine months. Management attributed the drop to timing and variability in the early standalone-storage market, particularly delayed California Self-Generation Incentive Program awards.
- A $328,537 charge for excess and obsolete inventory followed the planned end-of-life of the IBC-30 battery converter. The company expects to sell through existing inventory rather than manufacture more; finished-goods inventory increased substantially amid lower-than-expected sales.
- Q3 operating expenses fell year over year, mainly due to lower R&D costs; nine-month operating expenses increased modestly, with R&D and sales and marketing spending higher overall.
- Cash used in operations increased from $5.70 million in the first nine months of 2015 to $7.62 million in 2016. The 2015 period included $15.92 million of net proceeds from a public stock offering; no comparable offering proceeds were received in 2016.
Outlook, risks, and contingencies
Management stated that the company needs additional third-party financing to meet operating requirements and gave no assurance financing will be available on acceptable terms or at all. If financing is unavailable or forecast revenue growth does not materialize, cost reductions may be required and could jeopardize strategic initiatives. The financial statements were prepared on a going-concern basis.
Management expected the delayed California incentive awards to continue adversely affecting results in the quarter ending December 31, 2016, despite the revised program being finalized in July 2016. California legislation enacted in September 2016 added $187 million of energy-storage incentives for 2017–2019 and raised the state’s 2020 storage target to 1,825 MW. These market developments are not company revenue guidance.
The company shipped its first uncertified SunDial solar inverter units in September 2016 and intended to pursue UL1741 certification in Q4 2016. Management also reported prototype B-TRAN device fabrication in October 2016 and expected packaged-device testing to begin in Q4. Commercialization, certification, market adoption, customer demand, and contract-manufacturer performance remain uncertain. Revenue and receivables are concentrated: three customers represented 69% of Q3 revenue, two customers represented 57% of nine-month revenue, and two customers represented 76% of trade receivables at period-end. The filing reported no material changes to previously disclosed risk factors and no applicable legal proceedings.
Important facts for investors to verify
- Cash burn, available financing, and expected operating runway, including any subsequent financing or cost-reduction actions.
- Whether California SGIP awards translated into customer orders and whether the anticipated Q4 2016 revenue impact occurred.
- Inventory recoverability and sell-through of IBC-30 units, as well as the timing and costs of the product transition.
- SunDial certification and commercial uptake, and progress toward packaged B-TRAN testing and commercialization.
- Customer concentration, receivable collectability, and the effect of any changes in major customers’ purchasing plans.
- The filing’s Q3 net-loss figure: the financial statements report $(2,922,266), while MD&A reports $(2,922,226); investors should verify the correct value.
*The Q3 2016 net-loss amount differs between the financial statements and MD&A, as noted above.