Ideal Power Inc. (IPWR) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Ideal Power Second Quarter 2021 Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Carolyn Capaccio of LHA. Please go ahead.

Thanks, Keith, and good afternoon, everyone. Thank you for joining Ideal Power's Second 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 second quarter 2021 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 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'll turn the call over to Ideal Power's President and CEO, Dan Brdar. Dan?

Thank you, Carolyn. Good afternoon, everyone, and welcome to our second quarter 2021 financial results conference call. I'll begin by giving you an update on our progress and our achievements on our strategy to commercialize our B-TRAN semiconductor architecture technology, including progress on our objectives for 2021, which include the engagement of potential customers to test and evaluate B-TRAN and the completion of multiple fabrication runs for the NAVSEA program, leading to a full-scale circuit breaker demonstration in mid-2022. Then Tim Burns, our CFO, will take you through the numbers, and then we'll take your questions. We're on track with our road map to commercialize B-TRAN as a differentiated technology, addressing a large and growing market. And since the start of the second quarter, we achieved key milestones on this road map. Let's begin with the specifics of our progress toward commercialization, specifically our engagement with potential customers to test and evaluate B-TRAN in their applications. Early in the quarter, we released a B-TRAN information sheet, which you can find on the technology page of our website that provides detailed information on B-TRAN operating characteristics as well as information regarding the packaging and driver design and operation, but the technical community needs to begin evaluating our technology. Over the last few months, our team has done a great job of leveraging this information to engage with potential customers in our target end markets, vehicle electrification and EV charging, renewable energy, UPS systems for data centers and solid-state circuit breakers. And these conversations have progressed and yielded solid results. We're now engaged with several potential customers who are committing significant resources and technical expertise to thoroughly evaluate B-TRAN for use in their applications. A significant commitment is required on the part of our potential customers to fully evaluate a new power switch architecture as potential use within their target applications. What we're already finding is that the talented engineering teams that these early collaborating companies are identifying new design approaches and rethinking their applications and power management for both DC and AC implementations to the enabling low loss and bidirectional capabilities of B-TRAN. This is very exciting. Let's look at some of the applications for which B-TRAN is being evaluated. In the automotive sector, we're working with a top 10 global automaker whose advanced technology engineering team will test and evaluate B-TRAN and its driver for EV applications, including the EV drivetrain, DC-DC power conversion circuit protection and other uses within the EV ecosystem. Specifically, with this potential customer, B-TRAN is enabling new architectures and solutions to improve EV efficiency, range and performance, while lowering total system size, cost and component count. B-TRAN target applications include the EV traction inverter and charging circuits, which are inherently bidirectional, supporting vehicle-to-grid applications and emerging EV architectures and applications, such as the matrix converter and solid-state circuit breaker. The EV space is already the largest segment in the $6 billion power switch market, which overall is expected to nearly double by 2026. In EV charging, we're working with a provider of electric vehicle chargers who will test and evaluate packaged B-TRANs for their innovative portable and modular EV charging system that's currently under development. This solution combines a DC fast charger with a swappable battery system and a modular design to allow for scaling, targeting both on-demand fast charging and roadside assistance to eliminate charging anxiety. The advantages that B-TRAN can offer over conventional IGBT switches to EV charging greater efficiency, high directionality, smaller size and reduced thermal management are critically important to mobile EV charging systems with battery storage. This is the type of innovation and disruptive business model that can contribute to EV adoption and the build-out of the EV charging infrastructure with its need for smaller, lower operating cost solutions. EV charging companies could potentially be an early adopter of B-TRANs with the 2.1 million unit global EV charging station market expected to grow to an estimated 30.8 million units by the end of 2027. In power management for the data center market, we're working with a top 10 global provider of power conversion solutions to the solar industry that's expanding its portfolio to include a broad array of power conversion application solutions serving multiple sectors. This provider will test and evaluate B-TRAN for its compelling advantages in bidirectional circuits for various applications, starting with uninterruptible power supplies or UPS systems for data centers and expanding to include renewable energy, electric vehicles and other applications. There is intense pressure for data centers, given the secular trend towards cloud computing and data storage to reduce electricity costs and power losses. Electricity consumption is the largest operating cost for a data center and all the electricity entering the data center passes through a UPS system. Currently, UPS systems and their protection account for approximately 6% of data center total energy losses. Replacing conventional power semiconductors in these systems with B-TRANs is expected to result in the substantial annual cost savings for data centers through reduced energy consumption and the ability to migrate to lower-cost, less complex cooling systems. This will be a significant advancement for power switches and UPS systems, a market which was approximately $0.5 billion in 2020 and is forecasted to grow at an estimated 6% compound annual growth rate through 2026. We're in discussions for possible collaborations with additional companies in our target end market applications, who have expressed interest in assessing B-TRAN and we'll announce future collaborations as we're able. In the cases I just mentioned as well as other potential engagements, the customers will share their testing results and provide application-specific feedback on the design and operation of the packaged devices and driver, the feature set and priorities for individual applications and also enable us to determine common requirements across applications. We'll then incorporate this feature set into an intelligent power module for commercialization and potentially engage with certain of these customers for custom modules, primarily for EV and solid-state circuit breaker applications, where multiple devices may need to be combined into a single package. The next step to be completed in parallel with further discussions with potential participants is to complete the fabrication runs for dicing and packaging and to pair these packaged dies with the driver for delivery to these initial participants in our customer testing and evaluation program. While each participant in the evaluation program will be working to their own schedule, we anticipate feedback from these initial companies will provide meaningful input into the design of our intelligent power module that we intend to introduce for commercial sales in the second half of 2022. One of our target end markets for B-TRAN is solid-state circuit breakers, an important advancement in a very global -- large global circuit breaker market, which, in total, is projected to grow at a compound growth rate of about 6% to almost $26 billion by 2027. And as we have discussed with you over the last couple of quarters, we have and will continue to pursue opportunities for government funding. In the second quarter, Diversified Technologies, Inc. was awarded a second project submitted in collaboration with us, a Phase I Small Business Innovation Research grant funded by the U.S. Department of Energy. This grant is to develop a B-TRAN-based low-loss 13.8 kilovolt alternating current solid-state circuit breaker intended to be used in medium-voltage power distribution and renewable energy and microgrid applications connected to the utility power grid. We see this application as a significant opportunity to capitalize on the benefits of solid-state circuit breakers, which prevent damage to downstream equipment, upstream power generators and the grid itself by utilizing microsecond current interruption capability. We expect B-TRANs will make a solid-state circuit breaker significantly more efficient, smaller and less expensive. Under Phase I of the SBIR project, we will design, fabricate and test a module that can allow for multiple devices to be assembled in a parallel configuration for a high-voltage rating capability. The project will utilize our current die design, so we view this initial phase of the project as 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. The B-TRAN-based solid-state circuit breaker is expected to limit fault energy by orders of magnitude faster compared to conventional mechanical circuit breakers. Since this project does not have the strict confidentiality restrictions of our U.S. Navy program, we'll be able to provide more insight into the project as we complete the various milestones under the program. We'll also be able to leverage the knowledge we gain on combining multiple devices in a parallel program for other applications such as electric vehicles. We expect that B-TRANs will simplify the cooling systems, enabling smaller, lower cost, air cooling instead of complex liquid cooling systems due to its 50% lower conduction losses compared to conventional power semiconductor switches and reduce the component count due to B-TRAN's unique bidirectional capability requiring a smaller footprint. If Phase I is successful and we're awarded Phase II, the objective will be to build and demonstrate a 50-megawatt 13.8 kilovolt AC solid-state circuit breaker in collaboration with DTI. 13.8 kilovolts is a voltage level commonly found in utility distribution networks, so the resulting breaker design can be tied directly to the existing utility transmission and distribution systems as well as microgrids. Following the demonstration, DTI would have the ability to sell the breaker to utility, industrial and military customers and license the design to others for sale to end users. We would also expect to partner with other circuit breaker companies so they can design and bring their own B-TRAN based products to market. For additional context, while direct current or DC based systems are expected to grow rapidly due to the long-term growth of solar, wind and energy storage, the market today for circuit breakers is predominantly for alternating current or AC circuit breakers, which make up the majority of the expected $25 billion circuit breaker market. Also, of this large circuit breaker market, about 45% is for medium voltage breakers, which is B-TRAN's sweet spot. Medium-voltage circuit breakers are used in the aging utility distribution system that brings power from high-voltage transmission lines to the end user. This is also the segment that is in the most need of updating due to the age of the existing utility distribution system and the limitations in its capacity and its vulnerability to disruption. Also, as more distributed resources, like solar, are added to the grid and to accommodate EV charging and vehicle-to-grid applications, the distribution system is going to require a substantial investment in smarter bidirectional subsystems, like solid-state circuit breakers, will be needed. This is why we believe the medium voltage class of AC circuit breakers will be the fastest-growing segment of the circuit breaker market, and it's where B-TRAN can bring the most value due to its low conduction losses and fast switching times. The SBIR collaboration with DTI is a significant strategic opportunity, one that is incremental to our efforts with the U.S. Navy and also critical to electric grid development. So we're very excited about this project and look forward to generating promising results. Let's move now to our work with the U.S. Navy. As most of you are aware, Ideal Power is working with the Naval Sea Systems Command, or NAVSEA, in collaboration with DTI on the development and demonstration of a B-TRAN-enabled direct current medium-voltage circuit breaker as part of the U.S. Navy's strategic focus on ship electrification. This $1.2 million subcontract with DTI 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 12-kilovolt medium voltage direct current circuit breaker for the U.S. Navy with a subsequent objective of introducing a family of medium voltage DC circuit breaker products, incorporating B-TRANs for sale to military, industrial and utility markets. The major milestones under the program for us are the wafer fabrication runs conducted by Teledyne, our fabrication partner. This development process is iterative, so we're performing multiple wafer fabrication runs under the program to yield wafers and resultant die to test and assess the trade-offs between maximum theoretical device performance and manufacturability, incorporating our findings and adjustments into subsequent runs. During the second quarter, we had a commercial packaging vendor adapt the packaging design initially developed by the University of Texas at Austin's Semiconductor Power Electronics Center for high-volume production, in which the materials were fabricated and assembled in the trial packages to ensure a good mechanical fit and ease of assembly. Those trial assemblies went well, and the subsequently packaged die were tested and characterized internally at Ideal Power using our driver, also designed by UT Austin, and they generated switching and other data consistent with our expectations and simulations. We recently began our next wafer fabrication run under the NAVSEA program, the completion of which is the next major milestone in the NAVSEA program. In total, we planned 5 runs over the 2-year program aiming to deliver an optimized power switch for use in the full-scale demonstration of a 12-kilovolt MVDC breaker in mid-2022. We're very excited about this progress, which continues to benefit our overall validation and commercialization efforts. To support our next phase of development and optimization, we're utilizing our strong cash position and modestly invest in our team and capabilities. As you know, this year, we brought on board Jeff Knapp as Vice President of Business Development; and Dr. Jiankang Bu as Vice President of Engineering, both highly qualified and accomplished leaders in their respective disciplines and both are already making a significant positive impact on our development and commercialization efforts. In the coming months, we'll make a few other additions to our team to bring more capabilities in-house, particularly in applications, driver design and testing to support our commercialization efforts. We're also in the process of qualifying a second domestic semiconductor fabrication partner that has strong experience making bipolar devices to ensure sufficient supply capacity for future potential large customers and to mitigate supply chain risk. We currently have a qualifying semiconductor fabrication run in progress with this new partner. The second fabrication partner will also give us more flexibility to provide both packaged devices and data that are separated from and not subject to the restrictions and confidentiality requirements of our NAVSEA program. Looking at the B-TRAN patent estate, we currently have 65 issued B-TRAN patents, with 27 of those issued outside of the United States and another 23 pending patents. Our current geographic coverage includes North America, China, Japan, South Korea and Europe, with the potential to expand coverage into India. In the last 12 months, 9 B-TRAN patents have been issued with 7 of the 9 issued outside of the United States, including Ideal Power's first patent issuance in South Korea. In all, we continued our record of progress in the past 3 months from a development perspective. More notably, our recent announcements of test and evaluation collaborations with leaders in the electric vehicle, uninterruptible power supplies for data centers, and renewable energy markets is the beginning of our commercialization of B-TRAN. These customer engagements represent a crucial step forward in establishing B-TRAN as a differentiated semiconductor technology, addressing a large and growing market. Backed by our strong balance sheet and with the recent additions of highly qualified business development and engineering leaders, we're well positioned to support our B-TRAN commercialization plan. Our focus for 2021 is threefold. We continue to engage with prospective customers and to support existing customers in our test and evaluation program, to achieve our milestones under the NAVSEA 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 to achieve our initial objectives under the Phase I SBIR grant, which is to deliver a low-loss B-TRAN module suitable for subsequent incorporation into a 13.8 kilovolt alternating current solid-state circuit breaker, if we are awarded Phase II of the program. As we're able, we will apprise you of the companies we add to our customer test and evaluation program in the coming months. We'll also update you, as permitted, on the feedback that we receive from the program and how this data feeds into our common requirements across applications that can then be incorporated into an intelligent power module that we will introduce to the marketplace in the second half of 2022. Ideal Power is on the cusp of realizing the potential of B-TRAN's unique advantages bidirectional switching capability, lower switching and conduction losses, lower user costs and improved and more compact thermal management. B-TRAN has the ability to solve the immediate needs of many power electronics applications in both high-growth and high-demand market segments, while enabling new applications and market segments. We're making consistent progress on our strategy, moving along our intended trajectory with a differentiated patent technology that can substantially improve existing and enable new solutions for many of today's power needs. Now I'd like to hand the call over to our Chief Financial Officer, Tim Burns, for a review of our second quarter '21 financial results. Tim?

Thank you, Dan. I will review second quarter 2021 financial results. In the second quarter, we recorded approximately $85,000 in grant revenue with offsetting cost of grant revenue, as we continued our work on the Navy-funded NAVSEA demonstration under the DTI subcontract, which began in mid-2020. The amount of current revenue recognized each quarter will vary as this is a function of the timing of spending and scheduled milestones under the program. We expect almost all of the grant revenue for this program to be recognized by early 2022. Operating expenses were $1.3 million in the second quarter of 2021 compared to $0.8 million in the second quarter of 2020, as we invested in research and development, sales and marketing and other general corporate expenses. We expect research and development and sales and marketing spending to trend higher in the balance of 2021, as we accelerate development of the B-TRAN technology, including qualifying a second domestic semiconductor fabrication partner and now that we've begun to commercialize B-TRAN as evidenced by recent announcements. We do expect some quarter-to-quarter variability in our research and development spending due to the timing of semiconductor fabrication runs and other development activities. Net loss in the second quarter of 2021 was $1.2 million compared to $0.8 million in the second quarter of 2020. Second quarter 2021 net loss includes a gain on forgiveness of long-term debt of $91,000 relating to a Payroll Protection Program loan received in the second quarter of 2020 and forgiven by the SBA in May 2021. As a result of the loan forgiveness, we had no long-term debt outstanding at June 30, 2021. Second quarter 2021 cash used in operating and investing activities was $1.1 million compared to $0.7 million in the second quarter of 2020. Our second quarter cash burn was consistent with the expectation we provided on our first quarter call. We continue to expect our cash burn to increase in the second half of the year as we invest in both sales and marketing and research and development. We expect a cash burn of approximately $1.2 million to $1.3 million in the third quarter of 2021 and continue to expect a full year cash burn of approximately $4.5 million. Cash and cash equivalents totaled $25.7 million at June 30, 2021. Our strong balance sheet, since our February public offering, has enabled and will continue to enable us to support and be more attractive partner to the larger corporations that are participating and that we expect to participate in our customer test and evaluation program, modestly build out our internal research and development capability, and our product design team bringing driver design expertise, in an area we are now relying on third parties, in house, to modestly build out our commercial team and front-end talent, including applications engineering expertise to support our customer test and evaluation program and B-TRAN commercialization, and complete the qualification of a second domestic semiconductor fabrication partner now that we're engaging with large companies and our customer test and evaluation program, and to support our working capital needs. As of June 30, we had 5,872,046 shares outstanding and 1,040,248 warrants outstanding. Including 455,937 stock options outstanding, our diluted shares outstanding at June 30 was 7.4 million shares. Our balance sheet gives us ample liquidity, particularly given our planned continued modest cash burn to fund multiple years of operations, and we are a well-capitalized partner for the larger companies that are participating, and we expect to participate in the testing and evaluation of our B-TRAN technology. At this time, I'd like to open up the call for questions. Operator?

Thank you. [Operator Instructions] We'll take our first question from Shawn Severson with WTR.

Just trying to figure out, do you have any more automotive EV companies in the pipeline in those that are going through pilot programs or going to pilot?

We do. We view things that are going on in the EV space, renewable, EV charging, all the target applications. We want to continue to bring companies into that pipeline, because we'd like to have 2 or 3 at least in each of those targeted segments, because they're each going to have different ideas and different approaches. So we have some that we hope to get over the finish line, but they're names that people will recognize if we're able to get them actually in the program. But so far, we think we've got a pretty robust pipeline based on the relationships that Jeff Knapp and his experience working in the EV space is bringing to the company.

And when you look at all of those applications in various markets that are coming in the pipeline, which ones do you think would go to commercialization the fastest? I assume there's some difference depending on the application and what it is, but which one on priority do you think gets to the fastest?

I think we'll see the circuit breaker and EV charging probably go first. Circuit breaker will certainly be helped by the fact that we'll be doing full-scale demonstrations of a design that incorporates the technology. EV charging, because there's such a press to build out that infrastructure and they're looking for innovative solutions. So we're seeing shorter design cycles there. And then after that I think will come some things in the renewable space, particularly renewables coupled with energy storage. And the automobile folks would probably be last, but we think based on what we're seeing, they will be significantly faster than what you would typically see in the EV sector, simply because most of the large OEMs that are the traditional car companies really seem to have a lot of pressure to catch up to things that have been driven by some of the new companies like Tesla that have come along.

And my last question is when you get into an automotive or an EV platform, is there a lot of redesign that has to take place between different models in that platform? Or like you get into an OEM and you're in one vehicle, it's very easy to get into sort of one model into 10, let's say, for example, if you understand what I mean.

Yes, I do. What we're finding is what the automobile companies are really trying to do is get to a common platform with much commonality as parts as possible, because they don't want to have all these different designs and parts and supply chain challenges that come with it. So part of what we're seeing is some innovation of just taking clean sheets of paper and saying, okay, this is the drivetrain that we are going to use for an entire class of vehicle. So we think if we can get to the point where there's a module that incorporates what they're looking for from a packaging standpoint, we'll see it used across a whole variety of models for a given manufacturer.

We'll take our next question from David Williams with The Benchmark Group -- The Benchmark Company.

Appreciate you taking the time. Let me ask a question here. First, I wanted to ask maybe if you kind of think about your -- the customers you have and the evaluation and testing phase now, how do you -- have you received feedback yet in terms of maybe how they're thinking about using the product and maybe their design cycles? Just anything -- any color around just any of the testing and evaluation that you have ongoing today?

Well, we don't have parts in their hands yet, but what we have been learning about is they have learned about the technology, where our technical teams have had a whole series of meetings with most of these customers. We are learning about how they're thinking about using the technology and how they're thinking about changing their approach to drivetrains and how they're changing the approach of some of the other technologies that go into the car, because of the fact that B-TRAN is enabling them to do different approaches. And the example that I'll use is a matrix converter -- matrix converters are technologies that have been around for a long time, but the challenge has always been there's not a good bidirectional AC switch out there, so you don't see them very often. Well, it's a different story now. So we see automotive manufacturers looking at matrix converters as an approach where previously they haven't. So part of why we end up being under NDAs is we learn a lot about their application and what they're thinking about as well as them learning about our device. So I think we're going to see some pretty innovative approaches come to market as some of the more established automobile manufacturers take the work that's already been done in the space and look at new ways to do it.

And then maybe from the automotive side, if we think about kind of the qualification cycle there and the certification for those parts, that's a fairly elongated cycle and kind of it's a thing that we hear a lot from other semis, especially in the power space. How do you think about your certification and qualification as you get into producing these products that typically have 2 to 3-year design cycles? Do you think you can accelerate that just kind of given your discussions with customers today? Or do you think that we're still some time away from that, as you had mentioned, maybe being the last to really take off?

Well, maybe the last segment, but we think it is going to be accelerated for 2 reasons. One is, typically, the OEMs rely on their Tier 1 suppliers to do a lot of new work on new subsystems and bring new technology to the OEM. That's changed. What we're seeing is most of the major OEMs have actually created their own internal teams to look at new technology and to look at how to bring it to their products, because they're trying to shorten that cycle. So they're taking the lead and saying, “Here's what we're going to use from a technology perspective. Here's our platform and you are a Tier 1 supplier, this is how you'll do it.” So they are actually changing their process to accelerate the ability to get models into the marketplace. The other thing that we're seeing that is really -- it was a bit of a surprise to us as we talk to them about, for example, how they want devices packaged. What they've said is we will introduce you, we'll take the lead and introduce you to the packaging firms that know our requirements, what we want, and you can work directly with them knowing that you're on a mandate from us. So we don't necessarily have to learn a lot of this with a packaging company ourselves. They're going to leverage the relationships and expertise and the qualified suppliers they already have and connect us to them. So we think that will also certainly accelerate that cycle.

And then maybe if you can just talk about any hurdles that you see between now and commercialization. What are the biggest challenges, I guess, between here and there? Is it really just the adoption and the sampling, getting into the hands of the customers? Or are there other hurdles maybe in terms of the technology or the capability that have to be overcome?

Well, we know that the technology certainly works. We know it performs as we have simulated. So I think for us, the challenge is really raising the visibility, raising the awareness, getting those potential end users through that learning curve, that adoption cycle, particularly as a small company. Now we're fortunate that we've got folks like Jeff that have established relationships. But without that, it would be tough to get to some of the right people in these organizations to really start that process. So I think it's -- for us, it's going to be really more of that educational process that will be the pacing item for really large-scale adoption.