Ideal Power Inc. Q3 FY2020 Earnings Call

Please standby. We are about to begin. Good day. And welcome to the Ideal Power Third Quarter 2020 Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Ms. Carolyn Capaccio of LHA. Please go ahead.

Thank you very much, and good afternoon, everyone. Thank you for joining Ideal Power’s third quarter 2020 conference call. With me on the call are Dan Brdar, President and Chief Executive Officer; and Tim Burns, Chief Financial Officer. Ideal Power’s second quarter 2020 press release is available on the company’s website at idealpower.com. Before we begin, I’d like to remind everyone that statements made on the call and webcast, including those regarding future financial results and industry prospects are forward-looking and may be subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the call. Please refer to the company’s SEC filings for a list of associated risks, and we would also refer you to the company’s website for more supporting industry information. Now I will turn the call over to Ideal Power’s President and CEO, Dan Brdar. Dan?

Thank you, Carolyn. Good afternoon, everyone. And welcome to our third quarter 2020 conference call. I’ll begin by giving you an update on our progress with our U.S. Navy sponsored program and our accomplishments of our B-TRAN commercialization strategy and summarize our focus for the remainder of 2020. Then Tim Burns, our CFO will take you through the numbers. Our work with the United States Naval Sea Systems Command or NAVSEA, under our partnership with diversified technologies is moving along on schedule. We’ve recently completed the first major milestone in the program. We received wafers from the first fabrication run conducted by Teledyne and are now testing them to determine which die we will package into B-TRAN devices. This first wafer fabrication run under the program incorporates results of the analysis and device simulation work we’ve been performing to optimize the device design. As a reminder on this program, in the second quarter, we signed a $1.2 million contract to partner with diversified technologies on the development and demonstration with a B-TRAN enabled direct current circuit breaker as part of the U.S. Navy’s strategic focus on ship electrification. The contract is funded by Department of Defense’s Rapid Innovation Fund, the intent of which is to accelerate the commercialization of high value, high impact technologies for NAVSEA. The project objective is to demonstrate a B-TRAN-enabled, high efficiency, 12 kilowatt medium voltage direct current circuit breaker for the U.S. Navy, with the subsequent objective of introducing a family of meaningful DC circuit breaker products, incorporating B-TRAN for sale to military and industrial markets. This is a high priority initiative in the Navy as ship electrification can significantly enhance the energy efficiency of ship operations and improve their operational flexibility and operating costs. Distributed power on ships makes them less vulnerable to attack by lowering the noise signature and enhancing their stealth capabilities. And B-TRAN technology offers substantial size, heat, and loss reduction over continuously conducting semiconductor devices, such as IGBTs without using complex, large, and heavy liquid cooling systems. After wafers are tested, the next step is to dice and then package B-TRAN die for testing and characterization. For dies from the initial wafer run, we will utilize our current lab-based packaging design. The results from this testing will be incorporated into the device design and manufacturing process improvements for subsequent rounds. Over the two-year program, we have planned a total of five rounds over six quarters, aiming for optimized device delivery in late 2021, with the final demonstration of a 12 kilovolt MVDC breaker in early 2022. The purpose of deploying multiple wafer fabrication rounds in the program is to assess the trade-offs between maximum theoretical device performance and its manufacturability. As we make changes to the design to enhance performance, it can adversely affect the device yield from a given wafer fabrication round. As the various rounds progress, we anticipate the device performance and device wafer yield to increase as we converge on an optimized design for performance and manufacturability. The second major milestone in the NAVSEA program is completing the next fabrication round at Teledyne. This is slated to begin shortly and will finish in the first quarter of 2021. Also under the NAVSEA program, we’re collaborating with the University of Texas at Austin’s Microelectronics Research Center for new packaging design. The packaging design will be utilized for die from future wafer rounds under the program. The new packaging design improves upon the lab-based packaging that we have used previously and are using for the first wafer round. The device packaging design is intended to provide the electrical connections, form factors, and thermal management required to incorporate the semiconductor device into an end-user product design. The new packaging design will encapsulate the B-TRAN die into a package similar to what is commonly available for commercial IGBTs. To help facilitate B-TRAN adoption, our objective with the new design is to offer a package device that is physically similar to those commonly found in the IGBT market. UT Austin’s initial design of the package is complete and prototypes are being made. We’re collaborating with packaging assembly firms as well to get their feedback on the suitability of the design for high volume manufacturing. Feedback from the packaging assembly firms and the first build with the new design will be incorporated into the final packaging design to be delivered under the NAVSEA program. Additionally, we developed a new high power test rig that allows packaged B-TRAN devices to be tested at high voltage, high current conditions as part of the device characterization required under the NAVSEA program. The rig enables us to test and characterize packaged parts, generate the conduction and switching data we need for a product datasheet, and confirm the performance margins built into the design. Overall, we’re on schedule with NAVSEA and have undergone multiple project reviews and received positive feedback. We’re very excited about the progress being made under the program and the positive impact it’s already having on our validation and commercialization efforts. During the third quarter, we also made strong progress toward readiness to begin engineering prototype sampling. As we discussed with you on our last call, we are also collaborating with the University of Texas at Austin’s Microelectronic Research Center on the development of a new B-TRAN driver. The design and fabrication of an initial version of the driver is complete. As a double sided device, B-TRAN requires a driver specialized to control and coordinate the operation of both sides simultaneously. The new driver is designed by a talented post-doc under the close supervision of Dr. Alex Huang, the leader of the Microelectronic Research Center and a world-renowned expert in power semiconductor devices and power electronics. This initial driver will be used in conjunction with our new high power test rig to generate the data we need to create a datasheet required by prospective end-users, as well as on characterization and devices. Once our testing is completed in the next few weeks, the University of Texas will develop a second version of the driver using our feedback. They’ll remove some of the features that were added purely for our debugging purposes and will also make changes to reduce the physical size of the driver and add some additional operating capabilities to the programming of the driver. The packaging design for the device developed for NAVSEA that I referred to earlier will also be able to be used for our engineering sampling program, and coupled with a packaged B-TRAN with a specially designed driver accelerates potential end-users’ ability and willingness to assess the technologies as the hurdle of driver development is removed. When we have a packaged device, including a driver and datasheet in hand, we can begin generating both increased awareness of B-TRAN in the technical community and increase interest in the sampling program. We received multiple inquiries from potential customers interested in the sampling program, and for many of them, providing a datasheet is the next step in that process. Providing samples to end-users and getting feedback on the device, the driver design, driver feature set, and priorities will allow us to determine the requirements across targeted applications that features commercial B-TRAN enabled devices are likely to meet. We can then incorporate this feature set into an intelligent module design. Look at the B-TRAN patent to date. We currently have 57 issued B-TRAN patents, one more than last quarter, with 21 of those issued outside of the United States, up from 20 and 25 pending patents. Our geographic coverage includes North America, China, Japan, and Europe, with potential to expand coverage into South Korea and India. For the remainder of the year, we may focus on our two parallel paths in Phase 2 of our commercialization strategy. First, working toward a full-scale demonstration of an application with B-TRAN as the enabling technology for NAVSEA, and second, trying to launch our engineering sampling program. Our partnership with diversified technologies offers Ideal Power a significant potentially catalytic opportunity as we further quantify the performance characteristics of B-TRAN power semiconductor technology versus conventional power switches, with higher efficiency, lower cooling requirements, fewer components, and smaller size. And it's a potential game-changer for distributed DC networks across a wide variety of military, industrial, and utility applications, including medium to high voltage DC transmission and distribution systems, microgrids, and electric generation related to renewable solar and wind energy. Not only does the NAVSEA program catalyze both our military and non-military commercialization efforts, but it also puts us on the map for other military and government customers who are often early new technology adopters, and they help fund a significant portion of the development costs and steps necessary for commercialization. As we move to Phase 3 commercialization, which focuses on establishing strategic development and commercial partnerships, building commercial momentum, and laying the foundation for future B-TRAN revenue streams. The first segments we will target for initial commercial sales are the $5.4 billion IGBT market, which is forecasted to grow to $9.4 billion by 2025, as the data center, UPS, renewable energy, and electric vehicle charging markets, all feature relatively shorter technology evaluation periods and development processes and immediate power switching needs. Our effort from Phase 2 commercialization and into Phase 3 commercialization will vary based on target customers and applications as we’ll continue to add potential customers and applications to the engineering sampling program over time, while simultaneously commercializing B-TRAN from initial target markets and applications. The timeline for these phases will also vary as prospective customers, even those with similar applications, have different technology evaluation cycles and design periods for incorporating new technologies into their products. One note on COVID-19, we are fabrication, collaboration, and device packaging partners are carefully observing safety protocols and best practices, including wearing masks, practicing social distancing, and following recommended guidelines to keep our team safe. That’s why we’ve managed well through the pandemic and our supply chain remains intact. We’ll continue to be vigilant in working to stay on our development for commercialization timeline while keeping our team safe. And we believe that Ideal Power’s technology is potentially transformational in its unique bidirectional switching capability and ability to solve immediate needs being experienced in power electronics with bidirectionality, lower switching and conduction losses, which will reduce costs and improve compact thermal management. We’re moving ahead very well, hitting our milestones and maintaining strong momentum toward our commercialization goals, with results that have to-date been gratifying and with a differentiated technology that addresses a large and growing market. Now I’d like to hand the call over to our Chief Financial Officer, Tim Burns for a view of the quarter. Tim?

Thank you, Dan. I will review third quarter 2020 financial results. In the third quarter, we recorded approximately $150,000 of grant revenue with offsetting costs of grant revenue as we continued our work on NAVSEA program which began in late June. Third quarter 2020 operating expenses were $1.2 million, compared to $0.7 million in the third quarter of 2019. An increase in operating expenses in the quarter was due to higher research and development expenses related to B-TRAN wafer fabrication and driver development, and higher general and administrative expenses on hire bonus expense as certain performance objectives were achieved during the quarter and hire non-cash stock compensation expense. As we discussed last quarter in August, we completed an early warrant exercise transaction with certain of the company’s Series A warrant holders, raising $2.5 million in net proceeds. As part of that transaction, we issued 705,688 Series C warrants at an exercise price of $8.90 to these warrant holders as an inducement. The estimated fair value of these Series C warrants of $3.7 million was recorded within other expenses as non-cash warrant inducement expense in our income statement. Excluding warrant inducement expense, our third quarter 2020 net loss was $1.2 million, compared to $0.8 million in the third quarter of 2019 as a result of higher operating expenses. Third quarter 2020 cash used in operating activities was $0.8 million, slightly higher than cash used in operating activities in both the second quarter of this year and the third quarter of 2019, due to the timing of cash outflows. We will have quarter-over-quarter variability in our cash used in operating activities but try to keep our quarterly cash burn within our parameters, even in quarters with higher expenses on an accrual basis. In the nine months ended September 30, 2020, we raised $2.5 million of net proceeds from the early warrant exercise transaction, as well as an additional $0.5 million from other warrant exercises. These inflows strengthen our cash position. We are utilizing the net proceeds to fund B-TRAN commercialization and development, and for working capital and other corporate purposes. Cash and cash equivalents totaled $3.8 million as of September 30, 2020. Our debt outstanding remained $0.1 million, as in the second quarter, we received the Paycheck Protection Program loan to temporarily subsidize payroll and facilities costs in the business landscape impacted by the COVID-19 pandemic. Our current expectation is that this loan will be forgiven. Although, we cannot provide assurance it will be granted forgiveness of the loan in whole or in part. We will apply for forgiveness as soon as our bank BBVA activates their loan forgiveness portal. We remain singularly focused on the development and commercialization of our B-TRAN technology and are well-positioned with a strengthened balance sheet and an asset-wide operating model. Our cash burn rate remains approximately $0.75 million in cash per quarter, subject to both the timing of variability and expenditures and refinements to the B-TRAN development and commercialization plan. At this time, I’d like to open up the call for questions. Operator?

Thank you. And our first question is from Jim McIlree with Bradley Woods. Please go ahead.

Thanks a lot and good afternoon. Dan, in your prepared remarks you were talking about going after other government customers and my question is, do you need to complete or get near the end of the NAVSEA program before you have the internal resources necessary to do that or do you need to demonstrate to government customers overall the efficacy via the NAVSEA program? I am just trying to understand what has to happen before you go after other government customers and if it’s related to, again, the success of the NAVSEA program?

Yeah. The NAVSEA program gives us certainly visibility and credibility since we got put into the Rapid Innovation Fund. There are many processes we have to go through for that. So it helps us in terms of the acceptance of us as something that is moving into commercialization, especially when we look at other parts of DoD. But we actually don’t have to complete anything of significance of that NAVSEA program to go pursue other opportunities. In fact, we’ve been having discussions with some other companies about other applications that we might want to partner on. So we view them as being things that we can do in parallel. The team itself doesn’t have to grow significantly; depending on the opportunity that we would go after, we’d still be relying on the resources of Teledyne. We would be relying on whatever the technical partners that we work with for a specific application, so it doesn’t drive a big resource demand for us. So we are really looking to begin to leverage that to get other opportunities within either DOE or DoD, because people are now viewing this technology as really ready for commercialization. If we can focus on some applications, particularly those related to renewable energy or electric vehicles, I think we can make some compelling proposals and partnerships.

And relative to upcoming proposals and I’m thinking again, on the government side. When is the reasonable time to think that those proposals would be let out by the government and then you would have to respond? Because I’m assuming there’s some seasonality to the bid and proposal activity based on the government year-end?

There are specific cycles that tend to emerge in the first quarter and mid-year regarding small business applications. We typically see a push to secure awards before the fiscal year ends. However, we prefer to approach opportunities like we did with the NAVSEA program, where we did not respond to a solicitation but instead identified needs within the Navy. We established the necessary partnership to advance our circuit breaker technology, prepared a white paper, and submitted it to the Navy. They responded positively, requested a proposal, and funded it outside the usual solicitation process. Our preference is to focus on creating high-value proposals through the B-TRAN technology and seek out opportunities rather than waiting for solicitations to be issued.

Got it. Got it. Great. That’s helpful. And Tim, on the new warrants that were issued, do they have any price protection features?

They do not. No.

Okay. Great. That’s it for me. Thanks a lot guys and good luck with everything.

Thanks.

And our next question is from Orin Hirschman with AIGH. Please go ahead.

Hi. How are you? In terms of the government contract, how is the money flowing, how much have you realized and how much more do you realize? What milestones is this subject to?

So our NAV program is effectively cost reimbursement. I mean, there are some minor timing differences in terms of when we bill. We do bill based on milestones. But it’s also very closely aligned to when we’re actually incurring the costs. So there is no net gross profit from the activity. It will see maybe a small accounts receivable balance or small amount of deferred revenue at the end of any given quarter. But it’s effectively cost reimbursement.

So over what period of time? How much approximately based on depending on if you can say amount?

So it’s a $1.2 million contract. We recorded just over $150,000 through 9/30. It’s heavily weighted towards the first probably five quarters of the program. So it would be in Q4 and into the first three to four quarters of next year and not the entire two-year process, because most of our work is done and handed off to DTI in terms of the circuit breaker design after we get through our rounds.

Got it. And just in terms of when you are hopeful to actually sample file packets chips that we can get into companies that want to sample them and what type of companies will be the first ones to receive the sample?

Yeah. I mean, we’re talking to a variety. We actually have requests from automobile companies, companies in the renewable energy space, companies that are doing microgrids and power switching technology. A lot of it’s going to be based on them. Because we, as we are coming out with the new driver design and new packaging design, some of them are going to express a preference for the new driver design. In fact, there are companies that we are meeting with this week; they indicated they want to use the new driver design. So our key now is really to get the packaged devices back from the first wafer run. We’ll have those in a few weeks. Do some characterization testing on them and start to engage with individual companies on a more definitive timeline in terms of how many devices they’re looking for, how many drivers they’re looking for, and what level of support that they need. So our expectation is we’re going to see some pretty heavy engagement with specific companies in the near future.

Okay. Thanks very much.

The next question comes from Bruce Palmer with MPO Administer. Please go ahead.

Thanks for taking my call. I’m just an individual investor and you kind of just maybe answered part of my question with the last part of it. That you are saying you were meeting with someone here in the next week or so about design and die packaging. Earlier this year in webinars you talked about, hopefully, by the fourth quarter of this year, you might have some agreements signed. I’m just curious; it seems you’re constantly refining your die packages. Did that come as a request to the companies or are you finding it more complicated than what you thought when you were talking earlier in the year? So just a little bit more color on that.

It’s actually the nature of developing a new device. When you do simulations, for example, on a design of how a device will perform, you get an idealized view of the device. And then when you manufacture it, every semiconductor fabrication house is a little different in terms of their equipment, processes, and recipes that they use for any given process. And you find that the real world deviates a little bit from what you can simulate. So you tend to iterate on it to look at how small feature size you can make. I want to make them so small that all of a sudden, the yield on wafer drops off dramatically. But you want to get as small feature sizes as you can because it allows you to get the highest current density in the device that you can. So it is by its nature just an iterative process. And for us, in particular, since it’s a double-sided device, we add complexity in that you’ve got to get good alignment front to back as well. But the things that we have gone through with the rounds seem to take a while to get through that optimization, but it’s really part of the normal course of business in developing a new semiconductor device.

So when you find that same process with every new vendor you go to, that, you’ll have a lot of optimization or do you get to a point where you have the die package that pretty much anybody can use? How does that going to work?

What you get to is a die package that is highly usable by any fab. Now, a new fab may go through a run based on some unique equipment they may have from one fab to another, but you basically get to a recipe that can be replicated.

Okay. All right. Thank you.

You’re welcome.

It appears there are no further questions at this time. I’d like to turn the conference back to Mr. Brdar, President and CEO for any additional or closing remarks.

I just want to thank everyone for joining our call today. We are going to be presenting at the Craig-Hallum Alpha Select and The Benchmark Discovery Conferences next week. We invite you to tune into those webcasts. I hope that you enjoy the rest of the year and stay safe and we look forward to speaking with you again when we report on the fourth quarter. Thank you, everyone.

And this concludes today’s call. Thank you for your participation. You may now disconnect.