# Ideal Power Inc.: Form 10-Q for the period ended Mar 31, 2018

- Company: [Ideal Power Inc.](/companies/ipwr.md) (CIK 1507957)
- Form: 10-Q
- Filed: 2018-05-15
- Accepted by EDGAR: May 15, 2018, 16:06 ET
- Period: 2018-03-31
- Accession: 0001144204-18-028867
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1507957/000114420418028867/tv493901_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1507957/000114420418028867/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2018-01-01 to 2018-03-31 | $181.5k | us-gaap:Revenues |
| Cost of revenue | 3 months, 2018-01-01 to 2018-03-31 | $335.0k | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2018-01-01 to 2018-03-31 | −$153.5k | us-gaap:GrossProfit |
| Research and development | 3 months, 2018-01-01 to 2018-03-31 | $757.8k | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2018-01-01 to 2018-03-31 | −$2.1m | us-gaap:OperatingIncomeLoss |
| Net income | 3 months, 2018-01-01 to 2018-03-31 | −$2.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-01-01 to 2018-03-31 | −$0.15 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 3 months, 2018-01-01 to 2018-03-31 | −$1.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2018-01-01 to 2018-03-31 | $0 | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2018-03-31 | $8.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-03-31 | $8.8m | us-gaap:AssetsCurrent |
| Total assets | at 2018-03-31 | $11.5m | us-gaap:Assets |
| Current liabilities | at 2018-03-31 | $1.3m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2018-03-31 | $1.8m | us-gaap:Liabilities |
| Shareholders' equity | at 2018-03-31 | $9.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 24,687 characters.

*The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q as well as our audited 2017 financial statements and related notes included in our Annual Report on Form 10-K. In addition to historical information, the discussion and analysis here and throughout this Form 10-Q contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited, to those set forth under “Risk Factors” in Part II, Item 1A of this report.*

### OVERVIEW

Ideal Power is located in Austin, Texas. We design, market and sell electrical power conversion products using our proprietary technology called Power Packet Switching Architecture™, or PPSA™. PPSA™ is a power conversion technology that improves upon existing power conversion technologies in key product metrics, such as size and weight while providing built-in isolation and bi-directional and multi-port capabilities. PPSA™ utilizes standardized hardware with application specific embedded software. Our products are designed to be used in both on-grid and off-grid applications.

We sell our products primarily to systems integrators as part of a larger turn-key systems which enable end users to manage their electricity consumption by reducing demand charges or fossil fuel consumption, integrating renewable energy sources and forming their own microgrid. Our products are made by contract manufacturers to our specifications, enabling us to scale production to meet demand on a cost-effective basis without requiring significant expenditures on manufacturing facilities and equipment. As our products establish a foothold in key power conversion markets, we may begin to focus on licensing our proprietary PPSA™-based product designs to OEMs to reach more markets and customers. We may seek to build a portfolio of relationships that generate license fees and royalties from OEMs for sales of their products which integrate PPSA™.

On April 16, 2018, the Company realigned into two separate operating divisions: Power Conversion Systems to focus on its PPSA™ and B-TRAN to develop its bi-directional bi-polar junction transistor (B-TRAN™) solid state switch technology.

We were founded on May 17, 2007. To date, operations have been funded primarily through the sale of common stock and, prior to our initial public offering, the issuance of convertible debt. Total revenue generated from inception to date as of March 31, 2018 amounted to $13.4 million with approximately 20% of that revenue coming from government grants. We may pursue additional research and development grants, if and when available, for the purpose of developing new products and improving current products.

### Power Conversion Systems Division

### Our Technology

PPSA™ uses indirect power flow in which power flows through input switches and is temporarily stored in our proprietary AC link inductor. Our proprietary fast switching algorithms enable the transfer of quantum packets of power between ports in our system. As the AC link becomes charged, it disconnects from its input switches, resonates without being connected to either the input or output switches, and then reconnects to its output switches when it reaches the correct voltage and frequency for the application. PPSA™ is a power conversion technology that differentiates itself from traditional power conversion technology in key product metrics, such as size and weight while providing built-in isolation and bi-directional and multi-port capabilities. At March 31, 2018, we had been granted 38 US patents and five foreign patents related to PPSA™.

### Products

We currently sell several power conversion systems, or PCS, utilizing our patented PPSA™ technology. These products are described as follows:

- The 30kW Stabiliti™ series has two product offerings, two-port (AC-DC) and multi-port (AC-DC-DC) models, which are both UL1741 Supplement A, or UL1741 SA, certified. These products are intended to be used for the commercial and industrial stand-alone energy storage and microgrid markets, including solar plus storage microgrids. They are bi-directional and operate in both grid-tied and grid-forming modes with near seamless transfer between operating modes. Grid-forming mode provides customers the ability to form and manage a microgrid. The products operate in both 50Hz and 60Hz environments.
- The 30kW SunDial™ and the 30kW SunDial Plus™, which are also UL1741 SA certified, are intended to be used for the commercial and industrial grid-tied solar and solar plus storage markets. The SunDial™ is a PV string inverter which is field upgradable through the addition of a drop-in second DC port to connect batteries to a solar PV array. The SunDial Plus™ includes the PV inverter and the second DC battery port in one package. These products both include a built-in 6 string PV combiner and DC disconnects and are grid-tied, AC export only. The products operate in both 50Hz and 60Hz environments.

### Business Strategy

Our business strategy is to promote and expand the uses of PPSA™ initially through product development and product sales. To bring our products to market, we plan to seek out best-in-class partners who will distribute, white-label or integrate our innovative products into higher value systems resulting in multiple strategic sales channels for our PPSA™-based products and product designs. Although our primary market is the United States, we intend to increasingly target markets outside the United States beginning in 2018. As our products gain broader acceptance in the power conversion market, we intend to license our proprietary PPSA™-based product designs to OEMs within our target markets, as well as license our technologies for other markets which we do not plan to enter directly. The basis for this approach is the belief that OEMs may achieve higher product margins and gain more market share by providing PPSA™-based products, which are differentiated from the traditional product offerings in the industry, to their customers. We believe such strategic relationships with key OEM licensees would enable us to reap the benefits of PPSA™ and gain market share more quickly than by strictly manufacturing and distributing our products.

### Target Markets

Currently, our primary markets are solar + storage and, to a lesser extent, microgrids. We also intend to be opportunistic with regard to the stand-alone energy storage market.

#### Solar + Storage and Microgrid Markets

Solar PV has one of the lowest levelized costs of energy for new electrical generation capacity and we expect this to remain true in the near term. We expect distributed PV to continue to be a high growth business as system costs have fallen dramatically over the past several years. Accordingly, we expect the economics of generating PV for local consumption to remain strong for several more years, especially given the investment tax credit, or ITC, extension passed by Congress and signed into law in 2015 for solar energy production. Our SunDial™ products were launched to directly address this market. One shortcoming of distributed, behind-the-meter PV systems is that they require connection to the utility power grid in order to operate. For example, a business with PV on its roof will not, in most cases, benefit from the ability to generate power should the utility power grid go down. Another shortcoming of distributed PV systems is the instability they cause on the local power lines. Utility power grids were not designed to manage power inflow from the end of the lines. As a result, distributed generation sources can lead to wide swings in line voltages when clouds pass and power output falls off, requiring the utility to ramp up its power generation to make up for the shortfall in solar. We believe the proliferation of PV, its intermittency and the elimination of net metering in many states may drive growth in the solar + storage market.

Whether for emergency backup power or for baseload generation in remote locations with weak or no electric grids, microgrids are an emerging business case for solar paired with energy storage. A distributed PV system connected to a battery energy storage system, or BESS that includes one of our Stabiliti™ multi-port PCS enable a business to benefit from the ability to form and manage a local microgrid powered by the PV system and BESS even when the utility power grid is down. This capability is attractive to electricity consumers who need to power critical loads even in a blackout. Our Stabiliti™ PCS are also equipped to meet evolving utility requirements for low voltage ride-through and other key operating parameters, which may enable the PV and BESS it connects to the grid to help stabilize the utility power grid when voltage or frequency fluctuates due to imbalances in load and supply. In remote locations where there is no reliable electric grid or a dependence on diesel generators, which may be as diverse as a military battlefield or remote tropical island resort, or in locations where local electric rates are high due to aging and inefficient generation technology, a trend towards self-generation microgrids is developing. These sites can use solar, batteries and other forms of generation all brought together by one or more of our Stabiliti™ PCS to form and manage a microgrid using maximum solar generation for lowest cost. As such, we believe our products may become increasingly attractive to co-locate BESS with distributed PV.

According to its research, IHS Markit Technology believes that systems will be deployed in two principal configurations. One configuration is to have separate BESS and PV systems tied together through the AC wiring, which is supported by our legacy products. A second, emerging configuration is to place the BESS and the PV system behind a single PCS with two DC inputs. Our Stabiliti™ and SunDial™ Plus were designed specifically to enable this configuration which we believe is the lower cost and more efficient configuration. By tying the solar and batteries together as a DC-coupled system, the batteries become eligible for ITC and accelerated depreciation further enhancing the project economics. A key unique feature of the SunDial™’s patented technology is its ability to be deployed first as a standard commercial PV inverter and later be upgraded in the field to bring energy storage into the PV system using the same inverter. We believe this is the only product in the market today to have this unique field-upgrade capability for pairing solar with energy storage in one inverter.

#### Stand-Alone Storage Market

The stand-alone energy storage market is served by BESS. BESS are racks of batteries coupled with a system controller and a power conversion system, such as those manufactured by us, to enable electric power to be captured, stored, and used in conjunction with electric power grids. These systems can be large, megawatt-scale systems operated by utilities to better manage their system resources, or smaller kilowatt-scale systems used by businesses and designed to enable these businesses to manage their power use and mitigate utility imposed "peak demand charges", which are charges utilities levy on their business customers for delivery of power at peak usage times of the day, such as mid-afternoons in the summer. The growth of peak demand charges has been substantial over the past decade and now can make up 50% or more of a commercial utility bill in certain markets. This is a trend that is likely to continue as more intermittent resources are added to the utility power grid causing grid instability. Utilities and aggregators of distributed generation resources are also expected to adopt BESS due to the proliferation of renewables and to take advantage of additional value streams such as energy arbitrage, frequency regulation and ancillary services, infrastructure upgrade deferral and locational capacity.

There are strong economic incentives available to commercial and industrial consumers in major US markets such as California and New York in the form of reduced time-of-use and/or demand charges for installing a BESS and managing when power is drawn from the grid or reducing peak consumption. There is also strong regulatory support for such systems. For example, California has issued a mandate for over 1,800 megawatts of new energy storage to be installed by 2020. Other states, including New York and Massachusetts, have also recently issued mandates for energy storage and we expect this trend to continue.

We expect the cost of commercial and industrial BESS to continue to decline due primarily to lower battery costs and, as a result, expect significant expansion in the addressable market for these systems. We also believe the combination of lower BESS costs, third-party financing, increases in utility demand charges, and the entrance of large, established companies to the BESS space may contribute to accelerating market growth for stand-alone energy storage.

### Other Markets

Although our technology may be suitable for other vertical markets within the global power conversion market landscape, we do not currently offer products for sale directly to other power conversion markets such as the variable-frequency drive, uninterruptible power supply, rail, wind or electric vehicle, or EV, traction drive markets.

In addition to the markets discussed above, we may also have opportunities for market expansion into fast EV chargers in certain applications where our products’ compact size and multi-port capabilities can unlock value for the system integrator particularly in locations where battery storage is coupled with the charging system to eliminate demand charges or expand the charging systems response capabilities.

We plan to continue to monitor all power conversion markets for opportunities to create solutions for customers and unlock the broader value of our patented technology.

### Future Innovations

Our existing products incorporate multiple insulated gate bipolar transistors, or IGBTs, which are power switches used in the process to convert power from one current form to another. IGBTs switch power in only one direction (DC to AC or AC to DC) and require the use of a blocking diode to prevent power from flowing back through the system. To enable our existing products to perform bi-directional power conversion, for each IGBT and diode used in our products, we must include a second IGBT and diode. These additional components have slight voltage drops that affect the electrical efficiency of our products and generate heat that must be dissipated. We have patented and are developing a new, highly efficient power switch called a B-TRAN™ that we believe will allow us to substitute one B-TRAN™ for two pairs of IGBTs and diodes used in our current products. Based on third party device software simulations and initial prototype testing, we believe that the B-TRANs™ can significantly improve electrical efficiency in our power converters. The higher efficiency would substantially reduce the heat generated by the operation of our products. As a result, products incorporating B-TRANs™ will require less space for heat dissipation which would allow us to increase power density, or power per pound, and reduce material costs.

### B-TRAN Division

### Our Technology

In 2016, one of our semiconductor fabricators successfully tested single-sided B-TRAN™ silicon dies and the results were consistent with third party simulations that predict significant performance and efficiency improvements over conventional power switches such as SCRs, IGBTs and MOSFETs. In the second half of 2017, we shifted our focus to de-risking the proof of concept phase of the B-TRAN™ development timeline, as this phase of development was taking longer than anticipated due to the complexity of manufacturing complicated, two-sided power semiconductor devices. To facilitate this, we engaged a second semiconductor fabricator, on a parallel path, to produce, on an accelerated schedule, a B-TRAN™ that is less complex to manufacture for proof of concept and initial testing. In the first quarter of 2018, we successfully completed proof of concept testing of double-sided B-TRAN™ prototypes, validating the ability to make B-TRAN™ semiconductor power switches using conventional silicon semiconductor fabrication equipment and processes. Test results on the standard double-sided prototypes measured B-TRAN™ electrical losses at less than 40% that of conventional power switches such as silicon IGBTs. The results of this testing will be incorporated into the B-TRAN™ design and their manufacturing process. With the double-sided transistor behavior and low conduction losses confirmed, the next step is to incorporate planned corrections and improvements in the manufacturing process followed by the fabrication of prototype engineering samples for potential customers and partners.

At March 31, 2018, we have 31 US and eight foreign issued patents covering the operation, control and manufacturing of the B-TRAN™ device.

### Products

As our B-TRAN™ technology is currently under development, we do not yet offer commercial B-TRAN™ products.

### Business Strategy and Target Markets

We plan to first utilize the B-TRAN™ in our own power conversion products and then introduce it into the multi-billion dollar power semiconductor market utilizing a licensing model. We believe our new B-TRAN™ technology can potentially address a significant portion of the power semiconductor market that currently relies on power semiconductor devices such as IGBTs. Potential addressable markets for B-TRAN™-based products include solar photovoltaic inverters, microgrid power conversion systems, electric vehicle drivetrains, bi-directional energy storage, solid-state DC and AC contactors and breakers, variable frequency drives and other power conversion and control applications that could benefit from B-TRAN™’s enhanced switching performance.

### Critical Accounting Policies

There have been no significant changes during the three months ended March 31, 2018 to the critical accounting policies disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

### Results of Operations

### Comparison of the three months ended March 31, 2018 to the three months ended March 31, 2017

*Revenues.* Revenues for the three months ended March 31, 2018 of $181,500 were $94,170, or 34%, lower than the $275,670 we earned in revenues for the three months ended March 31, 2017. The decrease was the result of lower sales into the stand-alone energy storage market. We have shifted our focus primarily to solar + storage as, based on our backlog for the second quarter, we believe this market is beginning to transact and meaningful revenue growth may be achievable for us in this market in the future.

*Cost of Revenues.* Cost of revenues decreased for the three months ended March 31, 2018 to $334,963 compared to $710,930 for the three months ended March 31, 2017. The decrease was due primarily to lower non-cash charges in the three months ended March 31, 2018 compared to the three months ended March 31, 2017. In the three months ended March 31, 2017, we recorded a non-cash write-down of inventory of $349,216 primarily associated with our 125kW battery converter and a $15,000 adjustment to the Company's warranty accrual related to its end-of-life IBC-30 battery converter. In the three months ended March 31, 2018, we recorded a $150,000 adjustment to the Company’s warranty accrual related primarily to the IBC-30 battery converters. Our cost of revenues was also impacted by lower sales volumes in the three months ended March 31, 2018 and one-time costs in the three months ended March 31, 2017 related to the initial launch of our third generation 30kW power conversion systems.

*Gross Profit (Loss).* Gross loss for the three months ended March 31, 2018 was $153,463 compared to a gross loss of $435,260 for the three months ended March 31, 2017 due primarily to the non-cash write-down of 125kW battery converter inventory in the three months ended March 31, 2017.

*Research and Development Expenses.* Research and development expenses decreased by $432,386, or 36%, to $757,783 in the three months ended March 31, 2018 from $1,190,169 in the three months ended March 31, 2017. The decrease was due primarily to lower personnel and other costs in connection with a cost reduction plan initiated in April 2017.

*General and Administrative Expenses.* General and administrative expenses decreased by $13,975, or 2%, to $891,988 in the three months ended March 31, 2018 from $905,963 in the three months ended March 31, 2017. The decrease was due primarily to lower stock compensation costs partially offset by higher legal expenses due to the ongoing arbitration with our former contract manufacturer.

*Sales and Marketing Expenses.* Sales and marketing expenses decreased by $287,290, or 53%, to $254,243 in the three months ended March 31, 2018 from $541,533 in the three months ended March 31, 2017. The decrease was due primarily to lower professional services cost of $143,343, lower personnel costs, including lower stock compensation costs, of $78,435, and lower bad debt expense of $42,468.

*Loss from Operations.* Due to the decrease in cost of revenue and operating expenses, our loss from operations for the three months ended March 31, 2018 was $2,057,477 compared to a $3,072,925 loss from operations for the three months ended March 31, 2017.

*Interest Income, net.* Net interest income was $1,315 for the three months ended March 31, 2018 compared to $4,541 for the three months ended March 31, 2017.

*Net Loss.* Our net loss for the three months ended March 31, 2018 was $2,056,162 as compared to a net loss of $3,068,384 for the three months ended March 31, 2017.

### Liquidity and Capital Resources

We do not currently generate enough revenue to sustain our operations. We have funded our operations through the sale of common stock and, prior to our initial public offering, the issuance of convertible debt.

At March 31, 2018, we had cash and cash equivalents of $8,153,268. Our net working capital and long-term debt at March 31, 2018 were $7,476,256 and $0, respectively.

Operating activities in the three months ended March 31, 2018 resulted in cash outflows of $1,827,373, which were due primarily to the net loss for the period of $2,056,162 and negative working capital changes of $112,333, partly offset by non-cash items of $341,122, related primarily to stock-based compensation of $192,033 and depreciation and amortization of $113,808. Operating activities in the three months ended March 31, 2017 resulted in cash outflows of $2,445,721, which were due primarily to the net loss for the period of $3,068,384 and negative working capital changes of $295,323, partly offset by non-cash items of $917,986, related primarily to stock-based compensation, write-down of inventory, depreciation and amortization and allowance for doubtful accounts.

Investing activities in the three months ended March 31, 2018 and 2017 resulted in cash outflows of $41,606 and $76,754, respectively, for the acquisition of fixed assets and intangible assets.

Financing activities in the three months ended March 31, 2018 resulted in no cash inflows or outflows. Financing activities in the three months ended March 31, 2017 resulted in cash inflows of $13,668,474 related primarily to our Private Placement net proceeds of $13,657,331. In the Private Placement, each share of common stock or preferred stock was sold together with a warrant to purchase one share of common stock at a collective price of $2.535. Investors purchased an aggregate of 5,220,826 shares of common stock and 708,430 shares of preferred stock together with warrants to purchase 5,929,256 shares of common stock in the Private Placement for aggregate gross proceeds of $15.0 million. Net cash proceeds are after offering fees and expenses, including the placement agent fee of $1.1 million.

### Off-Balance Sheet Transactions

We do not have any off-balance sheet transactions.

### Trends, Events and Uncertainties

There are no material changes from trends, events or uncertainties disclosed in our 2017 Annual Report on Form 10-K.

## Controls and procedures

As filed, 2,469 characters.

### Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management, with the participation of our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial and accounting officer), has concluded that, as of March 31, 2018, our disclosure controls and procedures are effective.

### Changes in Internal Control over Financial Reporting

There have been no material changes in our internal controls over financial reporting that occurred during the quarter ended March 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

### Limitations on the Effectiveness of Controls

Control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems’ objectives are being met. Further, the design of any system of controls must reflect the fact that there are resource constraints, and the benefits of all controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of error or mistake. Control systems can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

## Risk factors

As filed, 1,260 characters.

There are no material changes from the risk factors disclosed in our 2017 Annual Report on Form 10-K except as follows:

***Our actions to separate our business into two divisions may result in additional costs.***

As discussed above in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview,” we realigned our business into two separate operating divisions. Our Power Conversion Systems division focuses on our PPSA™ technology, while our B-TRAN division focuses on our B-TRAN™ solid state switch technology. We took several corporate actions in connection with the creation of these two operating divisions, including reassigning our former president and chief executive officer, R. Daniel Brdar, to the position of B-TRAN Chief Commercial Officer and hiring Dr. Lon E. Bell as our president and chief executive officer in addition to his role as chairman of our board of directors. This separation may result in additional costs and expenses and may cause logistical and operational complexities that will divert management’s attention both during and after separation. We cannot assure you that the separation of our business into two divisions will not have a material adverse impact on our results of operations.

Filed May 15, 2018.
Source: SEC EDGAR, the filing index for accession 0001144204-18-028867. Last ingested by Listed: Nov 5, 2026, 19:31 ET. No prices; not investment advice.