Ideal Power Inc. Q3 FY2023 Earnings Call

Good morning, everyone. Welcome to the Ideal Power Third Quarter 2023 Results Call. All participants are currently in listen-only mode. After the management's remarks, there will be a question-and-answer session. This event is being recorded. I will now hand the call over to Jeff Christensen. Please proceed.

Thank you, operator, and good morning, everyone. Thank you for joining Ideal Power's third quarter 2023 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 2023 financial results 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 webcasts, including those regarding future financial results and industry perspectives, 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'll turn the call over to Ideal Power’s President and CEO, Dan Brdar. Dan?

Thank you, Jeff. Good morning, everyone. And welcome to our third quarter 2023 financial results conference call. I'll update you on our progress since the start of the third quarter, including the successful completion of all of our 2023 milestones to date, as well as our priorities for the balance of the year to commercialize our B-TRAN semiconductor technology. Then Tim Burns, our CFO, will take you through the numbers after which we'll take your questions. The third quarter and all of 2023 showed continued excellent progress and continued execution against our published milestones focused on our transition from a technology development company to a commercial company. We're stacking sequential quarters of some of the most significant accomplishments in the company's history. This quarter, we accomplished several key advances that underscored the technical and commercial progress of our B-TRAN commercialization roadmap. We're thrilled about our momentum and recent success in six major areas. First, we successfully completed Phase 1 and secured Phase 2 of our development program with a top 10 global automaker. Second, we added the SymCool IQ Intelligent Power module, our second commercial product to our commercial product offerings. Third, we completed shipments to all the large companies in our customer test and evaluation program, and recently added a global power conversion supplier to the program. Fourth, in response to customer requests, we're providing volume quotes through large test and evaluation program participants. Participants in the program have expanded their plans for B-TRAN to include additional applications. Fifth, we delivered hundreds of tested and packaged B-TRAN devices with diversified technologies to complete our work under the NAVSEA solid-state circuit breaker program. And sixth, we began discussions with potential distributors for our SymCool and SymCool IQ power modules. We're actively engaged with multiple customers in each of our key markets, and I'm pleased and excited about our progress and the feedback we're receiving from our growing customer engagements. The introduction of our technology comes at a time when there are significant macro trends in the adoption of renewables and electric vehicles, key market segments we expect to act as a driver of our revenue growth in the coming years. The increased electrification of our society and the growing adoption of batteries for a wide range of applications is driving an increased need for more efficient semiconductors for bidirectional power control. Utilizing conventional technologies for bidirectional switches for high power applications requires pairs of IGBTs and diodes, leading to higher conduction losses. B-TRAN enables bidirectional switching in a single device, with 5 times lower conduction losses, translating to more useful energy for end-user applications versus the conventional approach. This means more usable kilowatt hours out of an energy storage installation or a solar plus storage installation. It means greater range for electric vehicles and faster charging for charging solutions. It's all about dramatically reducing the losses from the semiconductors that are the core of many modern products. Our B-TRAN is moving into commercialization at a great time when renewables, energy storage, electric vehicles, and electric vehicle charging are at the early stages of their adoption. These market segments still have the largest part of their growth curve ahead of them. The inherent bidirectionality and lower losses of B-TRAN are well suited to renewables coupled with energy storage, making renewable energy a dispatchable resource and improving the usable kilowatt hours from these systems. Automotive manufacturers are finding with B-TRAN there's a path to reduce power semiconductor costs, the second-largest production cost in electric vehicles while simultaneously improving vehicle range to mitigate driver range anxiety. We're participating in a large rapidly growing market for high power semiconductor devices. That market is projected to reach $11 billion by 2026 and will be driven for many years by the adoption of renewable energy, energy storage, electric vehicles, and EV charging infrastructure. We expect industrial markets and, in particular, solid-state circuit breakers served by our SymCool power module to be the earliest source of our product sales. Following that, in a matter of a few months, will be our SymCool IQ intelligent power module, which applies to the renewables market, particularly renewables coupled with energy storage, EV charging, and other industrial markets. These applications have a relatively short design cycle of about one year. Our next revenue will come from automotive manufacturers, which typically take three to five years to get through the automaker's process. We started that process with a top 10 global automaker last year. Our asset-light business model leverages the significant investment already made in silicon wafer processing infrastructure, with a core technology team and a small but growing business development team focused on commercializing our technology. Fabrication of wafers and packaging is outsourced, leveraging existing industry investments. As we continue to execute on our aggressive B-TRAN commercialization roadmap, our near-term priorities are to begin initial sales of our SymCool power module; complete Phase 2 of our development program with a top 10 global automaker in the first quarter of 2024; continue providing sales quotes to large test and evaluation program participants; continue shipments to test and evaluation program participants; and qualify our second high-volume wafer foundry, including completion of a wafer run at their production facility. The full flow engineering run with this wafer fab is progressing well and is expected to be completed early in the second quarter of 2024. We're confident we'll have ample capacity to ship devices for the expected demand over the next few years. I’ll discuss the highlights of some of those third quarter accomplishments and our priorities along with other key developments. SymCool power modules are in fabrication at both of our packaging partners, with design cycles for industrial applications, such as solid state circuit breakers typically taking about a year. Revenue for SymCool is expected to begin ramping in the second half of 2024 as initial customers complete their evaluation of the product. Moving on, we entered into a development agreement late last year with a global top 10 automotive OEM. We're partnering with this automaker's advanced technology development team to develop a custom B-TRAN power module in collaboration with an innovative packaging company selected by the automaker. This custom B-TRAN-based module targets use in electric vehicle drivetrain inverters and the automaker's next generation electric vehicle platform. This represents our second engagement with a leading automotive manufacturer as another top 10 global automaker is already in our test and evaluation program. We’re thrilled with the success of Phase 1 and the advancement into Phase 2 of our development program with this automaker. The B-TRAN devices delivered in Phase 1 outperformed the device performance specifications provided at the beginning of the program. The successful completion of Phase 1 validated B-TRAN’s performance and potential to improve EV range and cost. We leveraged our success with this customer to attract and engage with a Tier 1 auto supplier, expecting it will also lead to engagement with other automobile OEMs and Tier 1 suppliers. This program is on an accelerated timeline to get the custom module production ready by 2025. We've completed all Phase 1 deliverables, including a wafer run, shipment of devices and test boards to both the automaker and the packaging company they selected, as well as providing technical support and testing on B-TRAN, its performance and drive circuitry. Phase 2 builds on the completion of all Phase 1 deliverables. In Phase 2, we continue to collaborate with the automaker and the packaging company supplying B-TRAN devices for integration into the custom power module design and finalizing the test plan for Phase 3. Phase 3 will involve extensive testing of the custom module incorporating B-TRAN devices to meet automotive certification standards, enabling B-TRAN to become the core of the powertrain inverter for the automaker's next generation electric vehicles. Three of the five deliverables in Phase 2 have already been completed and the fourth should be completed in the next couple of weeks, well ahead of schedule. We're already discussing the scope of Phase 3 with the top 10 automaker and expect to start testing for automotive qualification soon. In our test and evaluation program, B-TRAN customer shipments include multiple packaged B-TRAN devices, a device driver, and a power test board housed in a safety enclosure to facilitate and accelerate the evaluation process. Shipments to date include a top 10 global automaker, a global Tier 1 automotive supplier, a leading provider in the solar industry, two Forbes Global 500 power management companies, and a global provider of backup power and energy management solutions, among others. These shipments and customer evaluations have led to requests from multibillion-dollar companies in our program for multi-year, high-volume quotations for use in their internal product planning. The conversion of a single opportunity could significantly impact our pending revenue ramp. As previously announced this quarter, we added a European-based global power conversion and energy storage supplier with over $500 million in annual sales to the B-TRAN test and evaluation program. This company will evaluate B-TRAN for use in its static switches in data center UPS systems, solar inverters, and energy storage products. They focus on improving energy efficiency in these products to reduce operating costs. Shifting to our second product, we added the SymCool IQ through our commercial product offerings. It's built on the multi-die packaging design of SymCool and adds an intelligent driver optimized for bidirectional operation. This product targets renewables, particularly renewables coupled with energy storage, standalone energy storage, UPS systems, data centers, EV charging, and other industrial end markets. Similar to the solid state circuit breaker market, these markets typically have design cycles closer to a year. Revenue for the intelligent power module will start next year and ramp up as OEM product designs are completed. Let's turn to the supply chain that will support our sales ramp beginning in the second half of 2024. Earlier this year, we qualified an Asian wafer fabrication supplier with high volume capability. Test results from the first full flow engineering run with this wafer fabricator demonstrated the manufacturability of B-TRAN with high yield without significant capital investment, clearing the last and largest technical risk for B-TRAN development and commercialization. This successful fabrication run was achieved with the existing silicon wafer fabrication line, making it a pivotal accomplishment and prerequisite for commercialization. Wafer and device testing results displayed high yield, minimal die-to-die variability, and exceeded our expectations. We conducted switching tests on discrete packaged devices and demonstrated the robust nature of our device design, successfully testing discrete package devices rated at 50 amps up to 150 amps, or 3 times the rating shown. As a result, the 100 amp rating of our multi-die SymCool power module was increased to 160 amps. These results validated our device design and the process flow for B-TRAN, developed over several years with fabrication partners. Our target customers’ engineers are excited to see that our technology performs well beyond its specifications. We have multiple wafer runs ongoing with this high-volume wafer foundry, providing ample devices for 2023 deliveries under our test and evaluation program, SymCool production, and to support our development program for the top 10 global automaker. We're pleased with the performance and overall quality of wafer fabrication and the technical capabilities of the wafer foundry's manufacturing team, which is already certified to automobile standards. Furthermore, we are working with a second high-volume wafer foundry in Europe, which completed a feasibility study and engineering short loops for key process steps, along with a qualification run. Based on the successful short loops and the wafer foundry's experience and expertise, we expect successful qualification in the second quarter of next year. With these two wafer foundry partners, we will have dual sourcing for wafer fabrication in different parts of the world with no exposure to China. This strategy will ensure sufficient capacity for our large customers. Both foundries have world-class facilities and capabilities, eager to engage in a new high-performance technology like B-TRAN. Our dual sourcing strategy will allow us to secure both the necessary production capacity as well as the ability to source components from discrete geographies to mitigate supply chain risk. We are not aware of any competing inherently bidirectional technologies, and our technology is heavily protected through patents and trade secrets. Looking at our expanding B-TRAN patent state, we have 77 issued patents with 33 issued outside the United States. Our current geographic coverage includes North America, China, Japan, South Korea, India, and Europe, with pending coverage in Taiwan. As part of our product development, we're expanding our patent efforts to include innovations in architecture and our unique driver and packaging designs, which are specific to the bidirectional nature of our technology. Our list of pending B-TRAN patents is now at 36. We also treat our double-sided wafer fabrication process as a trade secret. So studying our patents alone would not provide the necessary know-how to fabricate the device. There is substantial learning involved in the fabrication process to produce high-quality, high-performing double-sided devices for commercial sale. In summary, market interest is strong, and we remain focused on executing our B-TRAN commercialization roadmap. We’re thrilled that we are successfully meeting all milestones for the first nine months of the year and remain on track to meet key milestones and objectives for the remainder of the year. We expect B-TRAN to displace conventional power semiconductor solutions in many applications within the electric vehicle, renewable energy, energy storage, solid-state circuit breaker, and motor drive markets. Now I would like to hand the call over to our Chief Financial Officer, Tim Burns, to review our third quarter financial results. Tim?

Thank you, Dan. I will review the third quarter 2023 financial results. We recorded minimal development revenue for the third quarter. Development revenue in the fourth quarter is expected from the Phase 2 work under our development agreement with a top 10 global automaker. Operating expenses were $2.8 million in the third quarter of 2023 compared to $1.8 million in the third quarter of 2022, driven primarily by higher research and development expenses. We completed our work with our development foundry partners in the third quarter and started several wafer runs with our qualified high-volume production foundry. We also started our qualification run with a second high-volume production foundry. Operating expenses were also impacted by higher personnel costs as we added headcount over the last year, reflecting higher stock-based compensation expense on performance stock units and new hire grants. We continue to expect some quarter-to-quarter variability in operating expenses, particularly our research and development spending due to the timing of semiconductor fabrication runs, other development activities, hiring, and potential impacts of future government funding. We expect to keep general and administrative expenses relatively flat in the fourth quarter, excluding the impact of stock-based compensation expense, despite inflation on service costs. Sales and marketing spending is expected to continue increasing modestly in coming quarters due to hiring and costs associated with commercialization efforts, including new product launches. The net loss in the third quarter of 2023 was $2.7 million compared to $1.7 million in the third quarter of 2022. Third quarter 2023 cash burn was $1.9 million on the lower end of our guidance of $1.9 million to $2.1 million as we continue to manage expenses prudently. Cash burn in the first nine months of 2023 was $5.6 million compared to $4.7 million in the same period in 2022. We expect fourth quarter 2023 cash burn of approximately $2.2 million to $2.4 million and a full year 2023 cash burn of $7.8 million to $8 million. Cash and cash equivalents totaled $10.8 million as of September 30, 2023. We have no debt and a clean capital structure. Our business model, as Dan mentioned, is asset-light. We have a core technical team focused on technology and a small front-end team for business development. Even if we achieve significant success, we will maintain a small team of tens of people because we're outsourcing manufacturing and packaging, leveraging existing industry investment in silicon. Our cash burn was $6.8 million in 2022 and is projected to be $7.8 million in 2023. We anticipate a similar increase next year, and we’ll provide more definitive guidance on our year-end call. Given our planned cash burn, which remains modest, we have ample liquidity on our balance sheet to fund operations through 2024. We could see several potential sources of funds, including product sales, development agreements, and government-funded programs, where opportunities for collaboration exist. We are also exploring potential strategic relationships with well-capitalized partners. As a public company, we have access to the capital markets if necessary. Our balance sheet has not been a significant topic for discussion with partners as they recognize the commercial potential of our technology. At September 30th, we had 5,945,347 shares outstanding, up slightly from the end of June, with 1,040,248 warrants outstanding, unchanged from the end of June. Including 842,697 stock options, restricted stock units, and performance stock units outstanding, we had 7,828,292 diluted shares outstanding as of September 30th. At this time, I'd like to open up the call for questions. Operator?

Your first question is coming from David Williams with The Benchmark Company.

Just congrats on the progress here. You've made tremendous strides and continue to put forth a lot of really nice progress. And so, I guess, my first question is just around the test and evaluation program participants, and you talked about some of the high volume quotes and expanding their plans for B-TRAN. Just any additional commentary there that help maybe give us a little more color on what that could mean and maybe the magnitude of what they're talking about?

So we have some very large companies in that program. These are multibillion-dollar companies. We've already started getting requests for multi-year high-volume quotes. While these companies initially had interest in specific applications, they've expanded to consider different ways they could utilize the technology across their product portfolio. So it's developed into some valuable commercial discussions not only around the initial opportunity they were exploring but also into other areas.

And just kind of thinking about from a design perspective. What are you finding—maybe are there challenges or hurdles and can this be a socket-for-socket replacement against other competing technologies? Or is there a pretty heavy lift in terms of the design that's required in order to use B-TRAN versus maybe just a standardized MOSFET or IGBT or other technology?

Well, for any new semiconductor that brings significant change in performance, a redesign of the OEM product is generally needed to harness the full benefits. For example, if you reduce losses, your thermal management system would drastically change. The plug and play approach would leave numerous advantages untapped. The challenge is more about education—getting them up to speed on the technology and understanding how it operates—to extract the full value from the performance potential for their OEM products.

And then maybe just lastly for me on the—if you kind of think about your bill of material content in the circuit breaker or maybe even the auto inverter. Can you give us kind of a size of what you think that could be once we go into the market? Just curious what your total BOM potentially could be there.

What we understand from our work with the Navy project and discussions with those designing solid state circuit breakers indicates that the semiconductor portion is about 30% of the BOM cost of the circuit breaker, which is fairly substantial.

For some perspective there, the market itself for solid state switching is over a $9 billion annual market, which is significant.

Your next question is coming from Jeff Grampp with Alliance Global Partners.

I'm curious to—if you guys could touch on your ability to handle additional companies in the test and evaluation program. It sounds like there's a lot of applications, a lot of demand. Obviously, it takes some internal resources to manage that. So just kind of wondering how full your plate is right now and then how you guys are thinking about, I guess, properly resourcing that team to handle the inflow that you might have?

Yes, it is a balancing act. We prioritize companies entering the program, focusing on those with higher volume potential. This helps us create substantial technical material for those customers that we can reuse. Our approach aims to manage resources effectively as we expand the program. We're also looking to hire additional staff to support this growth.

And my follow-up is regarding the Phase 2 kind of timeline and milestones. You mentioned, Dan, I think you said three of the five milestones are completed, and another seems close. Can you shed a little more light on what kind of remaining hurdles are present to move through Phase 2?

We have a clear line of sight to progress through the remaining milestones. We are preparing to submit our auto certification testing plan, and the initial feedback we received looks thorough. We do not foresee any hurdles in delivering the remaining milestones.

Your next question is coming from Brian Dobson with Chardan Capital Markets.

Do you think you could give us a little color on what you're hearing from key industrial contacts regarding adoption rates and timetables? You've mentioned that industrial would lead the first wave of adoption?

For us, the most immediate opportunity is solid-state circuit breakers due to the timing of our SymCool product launch and the interest it has generated. We expect initial sales to occur soon and ramp up in the second half of 2024. Following that, the SymCool IQ product targeting renewables and energy storage will likely gain traction several months later.

As you expand beyond industrial and into automotive, do you anticipate the margin on your product will remain roughly the same or will it vary by segment and volume? How do you see that playing out going forward?

Yes, we expect customer opportunities to vary significantly in terms of margin. However, our business model targets approximately 50% gross margins from product sales. For automotive, companies may seek a second source for manufacturing. We might consider licensing to larger semiconductor companies to secure a second source, which could yield near 100% gross margin for that licensing revenue.

I will now turn this call back to Jeff Christensen to read the questions submitted through the webcast.

Thank you, Kelly. Our first question for the team is, you recently released a press release stating that B-TRAN outperformed the specs you previously provided. How would you compare B-TRAN to competitors, including silicon and silicon carbide solutions?

By comparison, traditional silicon-based bidirectional switches typically drop 2.5 to 3 volts, while we achieve drops of less than half a volt, showcasing significant improvements in efficiency. While silicon carbide solutions excel in temperature tolerance and faster switching, they occupy a small market share due to the cost versus performance ratio. We view our technology as a game changer, offering exceptional performance without the high costs associated with exotic materials.

Based on recent articles in EE Power and Electronics Weekly, it appears that SymCool has distinct advantages with high demand. How are you positioning the company to manage that demand and ensure customer satisfaction?

We’re qualifying a second wafer fabricator to ensure sufficient capacity as we move into 2024. Scaling up the fabrication process takes time, so we pursued arrangements with a second foundry early on to enhance our ability to manage supply and demand effectively. Our technology is versatile, enabling us to supply across various applications without needing distinct wafers for each.

You mentioned expecting commercial product revenue in the back half of 2023. Can you elaborate on the ramp timing and the industries or markets as you approach revenue generation?

In terms of revenue, we will see development revenue from Phase 2 work with a top 10 automaker in Q4. We anticipate devices for the SymCool product to be available before year-end for commercial sales. Initial sales will be modest, ramping significantly in the second half of 2024. For the SymCool IQ product, we project initial sales around mid-2025.

How many B-TRAN devices have been shipped to evaluation partners? Can you provide additional commentary regarding pricing, margins, and how we should consider them?

Several hundred tested B-TRAN devices have been shipped to potential customers. We won't disclose specific quantities shipped each quarter but have additional wafer runs to provide hundreds of devices for test evaluations. Regarding pricing, B-TRAN's cost is competitive, and we expect to maintain significant margin potential at high volume. Each opportunity is unique, so pricing will vary depending on the specifics of each deal. The semiconductor portion of costs accounts for tens of dollars, while larger power modules could range between $200-$300. Margins target around 50% at volume, with opportunities for additional licensing revenue that could supplement this, potentially exceeding our base margin target. No further comments. I want to thank everyone for joining our call today. We've made great progress on our path to commercialize our technology, and our talented team is on track for a very successful 2023 and 2024. We look forward to sharing further commercial announcements before our next update call, and we'll continue to engage with the investment community.

Certainly. Thank you. This concludes today's conference. All parties may disconnect at this time. Have a great day.