Ideal Power Inc. (NASDAQ:IPWR) Q3 2023 Earnings Call Transcript

Ideal Power Inc. (NASDAQ:IPWR) Q3 2023 Earnings Call Transcript November 14, 2023

Operator: Good morning, ladies and gentlemen. And welcome to the Ideal Power Third Quarter 2023 Results Call. At this time, all participants are in a listen-only mode. At the end of management’s remarks, there will be a question-and-answer session [Operator Instructions]. As a reminder, this event is being recorded. I would now like to turn the conference over to Jeff Christensen. Please go ahead.

Jeff Christensen: 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 Web site 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 maybe subject to a number of risk 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?

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Dan Brdar: 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 most 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 markets 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, bidirectional switches for high power applications are made using pairs of IGBTs and diodes. The downside in conventional semiconductors are that you need four devices to make a bidirectional switch, which doubles the conduction losses of the individual IGBTs. B-TRAN enables bidirectional switching in a single device. And most importantly, B-TRAN does it with 5 times lower conduction losses, which translates to more useful energy for the end user application versus the conventional approach. So that means more usable kilowatt hours out of an energy storage installation or a solar plus storage installation.

It means greater range for electric vehicle. It can mean 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 in 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 and 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. And then right behind that, in a matter of a few months, will be our SymCool IQ intelligent power module. That product 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.

Then behind that, our next revenue will come from automotive manufacturers. It generally takes three to five years to get through the automaker’s process, a process we started with a top 10 global automaker last year. So the industrial markets will drive our initial revenue ramp as we ramp the business up, and continuing right behind that will be the automakers that we’re engaged with that will be buying in high volume to support their EV platforms. We utilized an asset light business model and are leveraging the large investment that’s already been made in the silicon wafer processing infrastructure, for a core technology team with a testing lab here in Austin and a small but growing outward facing business development team focused on commercializing our technology.

And in terms of fabrication of wafers and packaging, all that is outsourced, leveraging the existing huge industry investment in silicon wafer processing and packaging. As we continue to execute on our aggressive B-TRAN commercialization roadmap, our near term priorities are; 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, this is an embedded process in our sales and marketing and a source of input for our next generation products; continue multiple wafer runs with our first high volume wafer foundry to support our SymCool and SymCool product builds, automotive certification testing and test and evaluation partners; 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, and 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. The design cycles for industrial applications, such as solid state circuit breakers vary, but they typically take 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 SymCool product and their result in solid state circuit breaker product designs.

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 also selected by the automaker. This custom B-TRAN based module is targeted for use in electric vehicle drivetrain inverters and the automaker’s next generation electric vehicle platform. This represents our second engagement with the world’s leading automotive manufacturers 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 to the automaker in Phase 1 outperformed the device performance specifications provided to them at the beginning of the program. The successful completion of Phase 1 was customer validation of the performance of B-TRAN and its potential impact on improving EV range and cost. We leveraged our success with this customer to attract and engage with Tier 1 auto supplier and expect 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. That’s the customer’s stated goal for the program. We successfully completed all Phase 1 deliverables of this multi-year development program, including completing a wafer run, shipment of devices and test boards to both the automaker and the packaging company they selected and providing technical support and testing on B-TRAN, its performance and drive circuitry.

Phase 2 built on the completion of all Phase 1 deliverables. In Phase 2, we’re continuing to collaborate with the automaker and the automakers 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 be extensive testing of the custom module incorporating B-TRAN devices to meet automotive certification standards, enabling B-TRAN to be the core of the powertrain inverter for the automaker’s next generation electric vehicles. Three of the five deliverables in Phase 2 of the program have already been completed and the fourth deliverable 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 expected to start testing for automotive qualification in advance of completing phase three.

Turning to our test and evaluation program. B-TRAN customer shipments to program participants included multiple package B-TRAN devices, a device driver and a power test board housed in a safety enclosure to facilitate and accelerate evaluation process. B-TRAN shipments to date to program participants 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 managed solutions and several others with additional kits to follow for current and new program participants. These shipments and subsequent customer evaluations have already led to requests from some of the multibillion dollar companies in our test and evaluation program for multiyear, high volume quotations for use in their own internal product planning.

The conversion of a single opportunity could potentially have a significant impact on the trajectory of 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 through the B-TRAN test and evaluation program roster. The company will evaluate B-TRAN initially 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 for their customers. This global supplier presents multiple opportunities for us as they address three of our target markets, UPS systems for data centers, renewable energy and energy storage.

Shifting to our second product, we added the SymCool IQ through our product — 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 such as solar and wind coupled with energy storage, stand alone energy storage, UPS, 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 ensures we’ll 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 the need for significant capital investment and excellent device performance, clearing the last and by far the biggest technical risk for B-TRAN development and commercialization. This successful fabrication run was accomplished in the wafer foundry’s existing silicon wafer fabrication line without the need for any special equipment for capital investment to produce high quality wafers fabricated on both sides. This was a pivotable accomplishment and a prerequisite for commercialization. Wafer and device testing results displayed high yield, minimal die-to-die variability and outperformed our expectations.

We conducted switching tests on discrete packaged devices and demonstrated the robust nature of our device design. Our discrete package devices, which are rated at 50 amps, were successfully tested up to 150 amps or 3 times the rating shown on our data sheet. As a result of this testing, the 100 amp rating of our multi-die SymCool power module was increased to 160 amps. The results exceeded our expectations and validated the strength of our device design and the full process flow for B-TRAN that we developed over several years working with development fabrication partners. As you might imagine, engineers at our target customers are excited to see that our technology performs well beyond its advertised specifications. We have multiple wafer runs ongoing with this high volume wafer foundry.

These runs will provide ample devices for additional 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 both the performance and overall quality of wafer fabrication and the technical capability of the wafer foundry’s manufacturing team. This wafer foundry is also already certified to automobile standards, making it a qualified supplier for the automotive programs and reflecting the high standards, capabilities and quality of their wafer fabrication. Also, as I mentioned last quarter, we are working with a second high volume wafer foundry in Europe. The foundry completed a feasibility study and engineering short loops for key process steps and started a qualification run.

Based on the successful short loops and the wafer foundry’s experience and expertise in manufacturing bipolar devices, such as IGBTs, we are confident that we will be able to complete qualification of this foundry in the second quarter of next year. With these two wafer foundry partners on board, we’ll have dual sourcing for wafer fabrication in different parts of the world with no exposure to China. This dual sourcing will provide us with sufficient capacity for the large customers we’re engaging. Both wafer foundries have world class experience, facilities and capabilities and are eager to be engaged in a new high performance technology, such as B-TRAN. Overall, our dual sourcing strategy will allow us to proactively secure not only the necessary production capacity but also the ability to source components and services from partners in discrete geographies as part of our strategy 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 B-TRAN patents with 33 of those issued outside of the United States. Our current geographic coverage for our patents includes North America, China, Japan, South Korea, India and Europe with pending coverage in Taiwan, all representing high priority patent coverage geographies. As part of our product development and introductions, we’re expanding our patent efforts to include improvements in the architecture itself in what we believe to be high value patents on our driver and packaging designs, as both are unique to the bidirectional nature of our technology.

As a result of our continued innovation, our list of pending B-TRAN patents is now at 36. In addition, we treat our double sided wafer fabrication process as a trade secret. So even studying our patents, somebody wouldn’t have the knowhow to be able to fabricate the device. There is an enormous amount of learning that’s gone into the fabrication process flow to make 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 executing the plan, having already met all of our milestones for the first nine months of the year and remain on track to meet the key milestones and objectives I outlined 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?

Tim Burns: 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 and reflected 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 and other development activities and hiring, as well as the potential impact 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 the impact of inflation on the cost of services. Sales and marketing spending is expected to continue to increase modestly in coming quarters due to hiring and costs associated with commercialization efforts, including new product launches. 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 and aggressively. 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 full year 2023 cash burn of $7.8 million to $8 million. Cash and cash equivalents totaled $10.8 million in September 30, 2023. We have no debt in a clean capital structure. Our business model, as Dan mentioned, is very asset light. We have a core technical team that works in the technology and a small front end team for business development. Even if we are wildly successful, we will still have a small team of tens of people because we’re outsourcing the manufacturing and the packaging, really leveraging the existing industry investment in silicon.

Our cash burn was $6.8 million in 2022 and will be $7.8 million in 2023. We’ll probably have 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’ll potentially see several potential sources of funds, including product sales, development agreements, other commercial agreements with upfront payments and government funded programs where we see opportunities to collaborate with some of our partners. We are also exploring potential strategic relationships with our well capitalized partners. As a public company, we also have access to the capital markets if necessary. To date, 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 and 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 in September 30th. At this time, I’d like to open up the call for questions. Operator?

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Q&A Session

Operator: [Operator Instructions] Your first question is coming from David Williams with The Benchmark Company.

David Williams: 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?

Dan Brdar: So we have some very large companies in that program. So these are multibillion dollar companies. We’ve already started getting requests for multi-year high volume quotes. And while they initially had — a lot of these companies had initial interest in specific application, they’ve really expanded to start thinking about different ways they could use the technology, different applications in their product portfolio, they could take advantage of the benefits of B-TRAN. So it’s really become some pretty good commercial discussions on not only the initial opportunity that they were looking at but also expanding into other areas.

David Williams: 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 for it to use B-TRAN versus maybe just a standardized MOSFET or IGBT or other technology?

Dan Brdar: Well, for any new semiconductor, if it brings some significant change in performance, you’re going to want to do a redesign of your OEM product to get all the benefits out of it. So for example, if you got half the losses your thermal management system is going to look very different. So the plug and play route really would leave an awful lot of advantages on the table. And what we’re finding really is it’s really more just an education, getting them up to speed on the technology, getting them to understand how it operates, so that they can think about how they extract the full value of the performance potential for their OEM products.

David Williams: And then maybe just lastly for me on the — if you kind of think about your bill 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 kind of curious what your total BOM — potentially be there?

Dan Brdar: What we understand from going through the Navy project and working with some of the folks that are actually doing circuit breaker — solid state circuit breaker designs, the semiconductor portion of it, it’s about 30% of the BOM cost of the circuit breaker. So it’s fairly substantial.

Tim Burns: For some perspective there, the market itself for solid state switching market is over $9 billion annual market, so it’s pretty large market.

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

Jeff Grampp: 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 [inbounds] that you might have?

Dan Brdar: Yes, it is a balancing act. Part of what we’re doing is we’re kind of prioritizing the companies that come into that program. You can spend as much time on four guys working out of the garage as you do with a multibillion dollar company bringing into a new technology. So we’re really prioritizing first where there’s opportunities for higher volume. It drives us to create a lot of really good material, technical material for those customers that then we can reuse. So as part of why we focused on getting a couple in each segment and as we work with them and develop the material they need for training, for support, for doing circuit analysis and so forth, it creates a lot of material that we can use over and over again, and we’ll add a couple of people to that upfront team as we go here.

In fact, we’re looking for a couple of people right now as more and more people come into the program. But getting through those first couple of customers in each of those segments really helps us create a lot of material that we’ll get a lot of reuse out of.

Jeff Grampp: 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, another one you think is pretty close. Can you shed a little bit more light on what kind of the remaining hurdles are to get through Phase 2, is it too simple to think of those kind of linearly in terms of three to five and four to five or some of these maybe shorter or longer milestones to get through?

Dan Brdar: I think we’ve got pretty clear line of sight to get through the milestones here. But the one we’ve got coming up here in a couple of weeks, we’ve got really all the material that’s just about ready to send off to them as part of what we want to provide for that milestone, some of them are things like we had to submit our auto certification testing plan. It’s a rather detailed plan of all the that we’re going to have done at a third party to meet automotive qualification. Now we have to wait to get feedback. The initial feedback is that it looks pretty thorough but there might be some comments that might drive some little changes. So for us, it’s really been pretty straightforward with the things that we need to deliver. We don’t see any hurdles there in terms of getting through the last couple of them.

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

Brian Dobson: Do you think you could give us a little bit of color on what you’re hearing from key industrial contacts as far as adoption rates and timetables there, you’d mentioned that industrial would lead the first wave of adoption?

Dan Brdar: So for us, the most immediate opportunity is solid state circuit breakers, that’s because of the timing of the launch of our SymCool product and the interest that that product had garnered because of our program with the Navy. So as we look at that opportunity, I would say that is furthest along and that could — we should here in the near term, have initial sales and then again ramping in the second half of 2024. Right behind that is that SymCool IQ product, the intelligent power module that’s really targeting more renewables, energy storage, UPS applications, et cetera. Those conversations, I would say, are just probably a few months behind, just as the product is, the SymCool product, just because of the timing of the launch of that product. But we expect similar traction as we get a little bit further along with the companies in our test evaluation program that are focused in those areas.