Ideal Power Inc. Q3 FY2021 Earnings Call

Good day, and welcome to the Ideal Power Third Quarter 2021 Results Conference Call. Today’s conference is being recorded. At this time, I would now like to turn the conference over to Carolyn Capaccio of LHA. Please go ahead, ma'am.

Thank you, Sara. Thank you and good afternoon everyone and thank you for joining Ideal Power's third quarter 2021 conference call. With me on the call are Dan Brdar, President and Chief Executive Officer; and Tim Burns, Chief Financial Officer. Ideal Power’s third quarter 2021 financial results press release is available on the Company’s website at idealpower.com. Before we begin, I would 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. 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 2021 financial results conference call. I will begin by giving you an update on our progress and achievements on our strategy to commercialize our B-TRAN semiconductor technology as well as the work we’re doing with the U.S Navy and the Department of Energy. And Tim Burns, our CFO, will take you through the numbers and then we will take your questions. So let's get started. We made significant progress on our B-TRAN commercialization roadmap during the third quarter, moving toward our objective of commercially launching B-TRAN in the second half of 2022 as a differentiated technology addressing a large and growing market. During the past several weeks, we made several announcements regarding large global companies that will be participating in our test and evaluation program. We have deliberately targeted leading companies in each of our target market segments that are adopters of new technology, have demonstrated a desire to take a new approach to their product offerings, and have the technical resources in-house to commit to evaluating a new innovative technology and the new approaches it can offer them in their product designs. Our announcements included a top 10 global automaker, a top 10 solar power conversion provider, and an EV charging company, each of which will test and evaluate B-TRAN for use in their applications. We've signed additional test and evaluation agreements we've not announced that represent collaboration partners or relationships with additional commercial businesses in our target markets and with universities that present opportunities to pursue additional funding from the Department of Energy or the Department of Defense. Subsequent to the third quarter, we announced an additional participant in our sampling and evaluation program with a Forbes Global 500 leader in diverse power management markets. We'll evaluate B-TRAN for use in bi-directional direct current solid state circuit breaker applications for solar and wind systems. This is Ideal Power's first test and evaluation announcement with a global power management product supplier to the industrial and utility circuit breaker market and builds on our work with the Department of Defense and Department of Energy on B-TRAN enabled solid state circuit breakers. This global power management leader will evaluate B-TRAN initially for multiple solid state circuit breaker applications with other power conversion and distribution applications expected to follow. We're very excited to work with this market leader and with our B-TRAN's opportunity in the solid state circuit breaker market. We now have large program participants in all our target end markets, which include electric vehicles, EV charging, renewable energy, UPS systems for data centers, and solid state circuit breakers. What is common among these collaborations is the level of effort and resources these potential customers are committing to their comprehensive evaluation of B-TRAN for their applications. We're finding that the talented engineering teams at these companies are identifying new design approaches and rethinking their applications and power management for both DC and AC implementations to enable low loss and bidirectional capabilities of B-TRAN. It's our hope that as these relationships progress, we'll be able to begin naming at least some of these companies as they lead to more collaborative and potentially strategic supply agreements. In terms of next steps, we will provide package B-TRAN devices along with a driver to these initial participants in the program to facilitate and accelerate testing. These customers will share their testing results with us and provide application-specific feedback on the design and operation of the package devices and driver, the feature set they require, and their priorities for individual applications. This feedback will enable us to determine common requirements across applications, but may also engage with certain of these customers for custom modules, particularly for electric vehicles and solid state circuit breaker applications as multiple devices may need to be combined into a single package. We anticipate feedback from these initial entities to provide meaningful input into the design of our intelligent power module, and we plan its introduction for commercial sales in the second half of 2022. To support the evaluation program, we've already incorporated early feedback from some of our partners into an updated packaging design, which is now in fabrication. We're also in discussions with additional companies in our target end market applications for the testing and evaluation of B-TRAN, including additional electric vehicle, EV charging, traditional automotive, and industrial equipment companies. We view the evaluation program as an ongoing activity as part of our effort to introduce the technology to OEM end-user markets and to raise awareness of its potential. These ongoing engagements will likely result in a variety of intelligent power modules over time, targeted for specific market applications and uses, as we commonly see in the traditional power semiconductor market. We will announce future engagements with additional companies in the program as we're able. As evidenced by our most recent announcements, we're seeing growing interest in government funded R&D and commercial partnering on solid state circuit breakers, which is a tremendous opportunity for B-TRAN as an enabling technology. This is being driven by the need to upgrade our electrical distribution and transmission systems to accommodate the growing use of distributed generation, the adoption of intermittent generation in the form of solar and wind, a continued build-out of the EV charging infrastructure, and the coming widespread adoption of batteries for peak shaving and to enhance the value of renewable energy systems when energy storage is coupled with solar and wind generation. Circuit breakers perform a critical function in power generation, transmission, and distribution systems to protect against power surges and short circuits. The circuit breaker market overall is projected to grow at a compound annual growth rate of over 6% to approximately $26 billion by 2027. As you may have seen, we recently released a white paper, B-TRAN devices and solid state circuit breaker applications, which examines how B-TRAN's fast switching, low conduction losses and bi-directional capability can solve the challenges the current solid state circuit breakers face, potentially enabling solid state circuit breakers to become a broadly adopted solution. This applies to both existing mechanical circuit breakers and high loss semiconductor solid state circuit breaker alternatives. This is particularly applicable as the expected increase in electrification of all aspects of daily life creates increasing demand on our circuit protection requirements from solar and wind power, energy storage, electric vehicles, and EV charging, and associated vehicle to grid networks. All of these circuit breakers offer significant advantages over mechanical circuit breakers. Mechanical circuit breakers operate roughly 10 times slower than solid state circuit breakers, which can open or close a circuit in microseconds. Due to their slower speed of operation, mechanical breakers can see fault currents that are orders of magnitude higher than a solid state device. These high fault currents can damage downstream equipment and also result in arcing, which can be a potential fire and safety hazard as well as create wear on the mechanical contacts in the breaker, shortening its operating life. Limitation to the adoption of solid state circuit breakers using conventional switches such as IGBTs has been their high conduction losses, which results in significant wasted energy that must be dissipated in the form of heat. B-TRAN technology inherently lowers conduction losses, solving this problem. Along with energy savings, the inherent bi-directionality of B-TRAN also reduces component count and thermal management requirements, thus lowering the cost of solid state circuit breakers. For perspective, B-TRAN could potentially reduce power loss in a unidirectional solid state circuit breaker application by nearly two-thirds and in a bi-directional application by almost 80%. Let's move on now to our work with the United States Navy. In our first of two collaborations with Diversified Technologies, Ideal Power is working with the Naval Sea Systems Command (NAVSEA) on the development and demonstration of a B-TRAN enabled direct current medium voltage solid state circuit breaker. This program is part of the U.S Navy's strategic focus on ship electrification and is funded under the Department of Defense's rapid innovation fund, the purpose of which is to accelerate the commercialization of high value, high impact technologies. Our project with DTI for NAVSEA is intended to develop and demonstrate a B-TRAN enabled high efficiency scalable medium voltage direct current circuit breaker for the U.S Navy. The subsequent objective is to introduce a family of medium voltage DC circuit breaker products incorporating B-TRAN for sale to the military, industrial, and utility markets. Our fabrication partner Teledyne completed their most recent run and will be testing and packaging devices from that run with our updated packaging design. We'll be providing packaged devices to DTI for evaluation this quarter. The final fabrication run is now underway, the completion of which represents the final major milestone in the program for us. We will subsequently deliver optimized B-TRAN devices to DTI and continue to provide program support through the full-scale demonstration of the B-TRAN enabled breaker in mid 2022. Let's move now to our work with the Department of Energy. We are working with DTI on a second collaboration under a Phase 1 small business innovation research grants funded by the U.S Department of Energy. This grant is to develop a B-TRAN based low-loss alternating current solid state breaker intended to be used in medium voltage power distribution, renewable energy, and microgrid applications connected to the authority power grid. Phase 1 of the SBIR project focuses on simulation, device design, and module packaging concepts that allow B-TRANs to be assembled in series or parallel configurations for high voltage rating capability, leveraging our current B-design. This phase of the project is primarily a packaging and module development activity that enables B-TRAN to be used in applications like AC circuit breakers that require more than 1,200 volt capability. We've completed the first milestone of the program, which is to conduct device simulations to assess the current B-TRAN design for the alternating current circuit breaker. These simulations evaluated breakdown voltage, conduction losses, turn on and turn off performance, and looked at initial approaches for parallel devices. These parameters will be evaluated for applications to the current B-design, and any changes required will be addressed in the second major program milestone. The last milestone in Phase 1 for the program will be to develop a multi-module conceptual design that allows for double-sided cooling to maximize performance and operating life. If Phase 1 of the project is successful, we expect to be awarded Phase II. The Phase Two objective will be to build and demonstrate a 50 megawatt 13.8 kV AC solid state circuit breaker, a voltage level that is commonly found in utility distribution networks. The resulting breaker design can be applied directly to existing utility transmission and distribution systems and microgrids. Following that demonstration, DTI would have the ability to sell the breaker designed to utility, industrial, and military customers, and license the design to others for sale to end users. We also expect to partner with other circuit breaker companies so they can design and bring their own B-TRAN based products to market. We will provide more insight into the project as our work progresses. The program does not carry the confidentiality restrictions of our U.S Navy program. Also, we expect to leverage the knowledge we gain on combining multiple devices in parallel and in series configurations for other applications such as electric vehicles. To support our future growth, we are progressing in our qualification of a second domestic semiconductor fabricator that has strong experience making bipolar devices to ensure sufficient supply capacity for future potential large customers and to mitigate supply chain risk. Utilizing a second semiconductor fabrication partner will enable us to provide both packaged devices and data independent of the confidentiality requirements of our DOD funded activities. We are close to completing our qualification of the wafer fabrication run, and the interim testing we have had with them has been very positive. We expect to have working devices from their first run shortly. These will be diced, packaged, and tested and will likely be used as part of our initial customer sampling deliverables. To support our need for additional technical information with our potential customers, we intend to use devices from our second source for testing in an independent third-party lab. Although most semiconductor companies generate their own device data, we intend to leverage a third party for a significant portion of our testing. This will enable us to conduct some of the tests that we're not equipped to perform in our lab, and also provide an independent source of data that is not constrained by the confidentiality requirements of our DOD funded activities. We're in the process of evaluating and selecting the third-party service we will use, and expect to make that selection this quarter. Looking at the B-TRAN patent estate, we currently have 65 issued B-TRAN patents with 27 of those issued outside the United States and 23 pending patents. Our current geographic coverage includes North America, China, Japan, South Korea, and Europe, with the potential to expand coverage into India. Since the beginning of this year, eight B-TRAN patents have issued, six of which were issued outside of the United States, including Ideal Power's first patent issuance in South Korea. We've made tremendous progress toward commercialization in 2021, and our plan for the remainder of the year remains the same. First, to continue to engage with prospective customers and support existing participants in our test and evaluation program. Second, to continue to achieve our milestones under the program with a target of delivering an optimized packaged device for incorporation into the demonstration of a 12 kilovolt MVDC breaker in mid-2022. And third, to achieve our initial objectives on the Phase one SBIR grant, which is to deliver a low-loss B-TRAN, multi-module concept suitable for subsequent incorporation into a 13.8 kilovolt alternating current solid state circuit breaker. If we are awarded Phase two, we will continue to apprise you of the companies we add to our customer test and evaluation program as we are able. We will also update you as we are permitted on the feedback we receive from the program and how this data feeds into determinations of common requirements across applications that can then be incorporated into an intelligent power module that we anticipate will accelerate B-TRAN's commercial adoption. It's a very exciting time for Ideal Power as we move closer to realizing the potential of B-TRAN's unique advantages in bi-directional switching capability, lower switching and conduction losses, and as a result, lower user costs and improved and more compact thermal management requirements for OEM products incorporating B-TRAN. This technology is innovative with the capability of enabling emerging markets, displacing conventional power semiconductors in many applications and solving problems in existing markets, while also addressing the immediate needs of many power electronics applications, both in high growth and high demand market segments. We are executing well and making consistent progress toward the commercialization of our technology. Before I turn the call over to Tim for the financials, I want to take a moment to acknowledge the passing of our Chairman of the Board of Directors, Mr. David Eisenhaure. Dave served on Ideal Power's Board since August of 2013, was named Chairman in June of 2020, and was an engineering visionary, a successful entrepreneur, and an accomplished inventor with over 20 engineering patents to his name. Dave made instrumental contributions to Ideal Power, particularly as we made the very weighty decision of selling our power converter business and embarked exclusively on developing B-TRAN. His guidance and technical expertise were invaluable. We all miss him and send our deepest sympathies to his family. The Board of Directors has begun the process of identifying and interviewing candidates for additional Board members, as well as the identification of a new Chairman. We'll keep you apprised as that process continues. Now, I'd like to turn the call over to our Chief Financial Officer, Tim Burns, for a review of the third quarter of 2021 financial results. Tim?

Thank you, Dan. I will review third quarter 2021 financial results. In the third quarter, we recorded $121,000 in grant revenue, offsetting the cost of grant revenue as we continued our work on the Navy funded NAVSEA demonstration under the DTI subcontract, which began in mid-2020. As we've noted on previous calls, the amount of grant revenue recognized each quarter will vary, as this is a function of the timing of spending in scheduled milestones under the program. We continue to expect almost all of the grant revenue for this program and our SBIR Phase 1 project to be recognized by early next year. Operating expenses were $1.2 million in the third quarter of 2021, flat compared to $1.2 million in the third quarter of 2020. While we invested over $200,000 more in research and development and sales and marketing in the third quarter compared to the third quarter of 2020, this increase was largely offset by lower general and administrative expenses. We continue to expect research and development and sales and marketing spending to trend higher in the fourth quarter and throughout 2022 as we accelerate the development and commercialization of our B-TRAN technology, including conducting additional wafer fabrication runs, third-party testing of the B-TRAN, adding more engineering and front-end talent supporting our Test and Evaluation program, designing an intelligent power module, and other B-TRAN commercialization activities with potential new customers and partners. We do expect some quarter-to-quarter variability in operating expenses, particularly our research and development spending due to the timing of semiconductor fabrication runs and other development activities. Net loss in the third quarter of 2021 was $1.2 million, compared to $4.9 million in the third quarter of 2020. The year-ago period included a one-time non-cash warrant inducement expense of $3.7 million. Third quarter 2021 cash used in operating and investing activities was $1.2 million, up from $0.8 million in the third quarter of 2020 and $1.1 million in the second quarter of this year. Our third quarter cash burn was consistent with the guidance we provided in our second quarter call. We continue to invest in both sales and marketing and research and development, and expect fourth quarter cash burn of approximately $1.3 million and a full year cash burn of approximately $4.5 million. Cash and cash equivalents totaled $24.5 million on September 30, 2021. Our balance sheet gives us ample liquidity, particularly given our plan of continued modest cash burn to fund multiple years of operations. We are a well-capitalized partner for larger companies that are engaged and we expect to engage in the testing and evaluation of our B-TRAN technology. As of September 30, we had 5,872,046 shares outstanding and 1,040,248 warrants outstanding, including 455,937 stock options outstanding; our diluted shares outstanding on September 30 were 7.4 million shares, unchanged from our diluted shares outstanding at June 30. At this time, I'd like to open up the call for questions. Operator?

Thank you. We'll take our first question from Don Slowinski with Winslow Asset Group.

Good afternoon, gentlemen. Thanks for taking my questions. Can you hear me, okay? Dan, could you please clarify a couple of issues around total addressable markets? Because there were some presentations by Ideal Power that talked about the IGBT market growing to $11 billion. And then you talk about the circuit breaker market growing to $26 billion. So I assume that's the overall circuit breaker market? Do you have a breakdown of what the solid state circuit breaker market looks like? And what that component in the IGBT segment is? Can you just give us a little more color on that, total addressable market?

Yes, you're correct. That $26 billion is the total circuit breaker market. About 40% of that market is really where B-TRAN is sort of in the sweet spot. If you think about circuit breakers, there are a lot of really small circuit breakers that are low voltage for things like your home and so forth, and some that are very, very high voltage that would use a different technology altogether. So about 40% of that market, let's call it $10 billion, is the section that applies to B-TRAN. What portion of that $10 billion will be the cost of the B-TRANs is too early to tell. I think, as we get through, certainly through this demonstration that we're doing with DTI for the Navy, we'll have a pretty good feel of what the percentage of the circuit breaker cost is related to B-TRAN. And we'll be able to give a little bit more information at that point in time.

Okay. So it looks like $10 billion addressable market for B-TRAN within solid state circuit breakers, and then outside of that segment, are there additional use cases for B-TRAN? Where's that? Yes. And when you talk about components in electric vehicles or electric vehicle charging stations, are those solid state circuit breakers within those applications or are those completely different applications? Is that another additional addressable market?

The studies that I have looked at so far for circuit breakers really don't account for the circuit protection, like protection relays and the circuit breakers that are part of the EV space. They tend to do more straight-line projections of what the market has been for the past year. So I think in terms of the actual size of the circuit breaker market, I think it's probably being underestimated. The fact that they only show it expected to grow at 6% a year when the EV portion of power switches is growing at 15% a year seems a little modest in terms of their projections. So I think it will actually be bigger than what the expert studies share.

Yes, that makes sense. Just one more question for you. When you talk about bringing in a third-party lab, which I think is a great idea. Can you give us some idea on timing on that? When you think you'll identify someone and then how long it'll take them to actually take B-TRAN devices and come back with performance and validation results?

We're going through that selection process as we speak. There were actually calls earlier today just evaluating the various companies that our team is familiar with, to ensure that there's nothing that they can't do in terms of some of the things that we want to have done for our data sheets and data information. We're going to make that selection this quarter, and we hope to do so by the end of the month if we can. Then we'll have a better feel on how long it will take them, once we see their formal quotes and they lay out their timeframe because what we're finding is that, depending on who you talk to, they have a different backlog of work of when they can actually get started. But I would expect that we're going to have the information sometime in Q1 that will be able to go into our public data sheet.

That's fantastic. Okay. I appreciate you taking the questions.

Sure. Thanks.

Thank you. The next we will take Kelly Thurman.

Hey, Dan. Thanks for taking my question.

Sure.

Once the sampling program is over, and the next stage takes over where you guys will be developing the product for and moving it along. Will you guys be earning any type of revenue once you're past that sampling program?

Yes, in fact, some of the folks that we're talking to, the reason I brought up, for example, custom modules that some of the customers have talked to us about, they would actually be paying us for that. So there would be paid work for that. We hope to have some additional R&D funds from the grants. But also, for customers that want more than a handful of devices to sample, the automobile companies typically require larger quantities, and those customers are willing to pay for those parts, because we're not going to make hundreds and hundreds of parts for them to evaluate at our cost.

Okay, and then the next question and final question, who do you guys feel you're farthest along with taking a company sampling right now from a prospect to a customer? And are you having success cross-selling B-TRAN into multiple product lines, even though they're only sampling one product? Are you having any success cross-selling B-TRAN into multiple product lines?

Yes. Part of why we have targeted some of the bigger companies that we have, like the power management company that we announced and the solar power converter company we announced, is because they do multiple things. We've had multiple discussions with those folks where they say here's the application we want to start with and they would also see using it for applications B and C as well. So I think now that we're leveraging those larger companies, it's going to be quite helpful in terms of being able to proliferate B-TRAN into other products beyond just the initial one that we might be using as the basis for our discussions with them. We actually have multiple companies now that are literally ready, they have budgets approved, they're basically just waiting for us to hand them devices. So we have three companies that are definitely in that mode right now, and a couple others that are going through their budget approval process.

When do you think we'll hear some company names? Will that not be until next year?

I'm hoping it will be next year. I think it's going to be a function of what happens with a couple of opportunities for code development. If they end up being substantial programs, I think we're going to have to have discussions with the companies about our obligations to disclose things that will be considered material to our investment community. I'm hoping that even before we get too far into the sampling program itself, we've got a couple of other activities that we'll be able to start naming some people.

All right. Thank you for taking my question.

The main thing to confirm about the discussion is that most people just don't want their competitors to know what they're doing. But at some point, I think the sensitivity of that goes down as we start to work with more and more companies that are out there.

All right. Thanks for taking my question.

Thank you. And this will conclude today's question-and-answer session. I would now like to turn the conference back over to Dan Brdar for closing remarks.

Well, thanks everyone for joining our call today. For the remainder of the year, we'll be presenting at the Benchmark Companies technology one-on-one conference, the Benchmark company discovery one-on-one investor conference, and also with the Sidoti December Microcap conference. Wish everybody a happy and safe rest of 2021. I look forward to giving you another update on our fourth-quarter call. Have a great day.

Thank you. And that does conclude today’s teleconference. We do appreciate your participation. You may now disconnect.