Ideal Power Inc. (NASDAQ:IPWR) Q1 2019 Earnings Conference Call May 1, 2019 4:30 PM ET
Chris Tyson - Managing Director, MZ North America
Dr. Lon Bell - CEO
Dan Brdar - B-TRAN Chief Commercial Officer
Tim Burns - CFO
Conference Call Participants
Craig Irwin - ROTH Capital Partners
Good day, ladies and gentlemen, and welcome to the Ideal Power First Quarter 2019 Business Update and Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Chris Tyson, Managing Director of MZ North America. Please go ahead.
Thank you and good morning. I'd like to thank you all for taking time to join us for Ideal Power's first quarter 2019 business update and results conference call. Your hosts today are Dr. Lon Bell, Chief Executive Officer; Dan Brdar, BTRAN Chief Commercial Officer; as well as Tim Burns, the Company's Chief Financial Officer. A press release detailing these results crossed the wires this afternoon at 4:00 P.M. Eastern today and is available on the Company's website idealpower.com. Following Management's prepared comments, we will open the floor to questions for those of you who are dialing in for today's call.
Before we begin the formal presentation, 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, and we would also refer you to the Company's website for more supporting industry information.
At this time, I'd like to turn the call over to Ideal Power's Chief Executive Officer, Dr. Lon Bell. Lon, the floor is yours.
Dr. Lon Bell
Thank you, Chris, and welcome everyone to our first quarter 2019 business update and results conference call. Today's conference call will deviate slightly from our traditional call. I will start with an update on our new strategic focus that we announced in January 2019, and more importantly, the disposition of our power conversion systems division.
While we believe the long-term market opportunity for commercial and industrial energy storage is substantial, the standalone proprietary segment that was our focus has been slow to mature. That segment has not produced sufficient order flow to substantiate our recent level of investment in the power conversion systems business division. After evaluation of proposals from several suitors, we announced an agreement for the sale of our PCS division to PATHION Holdings Incorporated. At this time, closing conditions are being completed and we expect the sale to close shortly.
Let's quickly review the terms of our pending PCS division sale and what this does to our operating structure going forward. At closing, we will deliver to PATHION our PPSA assets including production tooling, laboratory equipment, and the associative liabilities involving warranty obligation, pent [ph] maintenance and prosecution fees. In exchange, we will receive 150,000 PATHION shares and $500,000 in cash. PATHION stock is expected to become a liquid asset upon completion of their planned IPO. As previously announced to facilitate the strategic shift and to reduce the company's cash burn rate, in early January 2019 we reduced our power conversion systems, PCS, division workforce and suspended further power conversion system development and sales. At that time, we estimated these actions would reduce annualized capital expenditures by approximately $2.5 million to $3 million.
As a result of the workforce reduction, Ideal Power incurred a onetime cash charge of $92,600 in connection with employee severance costs and termination benefits. Now that we're near closure on the sale of our PCS division, let me discuss our strategic shift to the commercialization of our proprietary and broadly patented B-TRAN technology.
In early January, we announced that the company will concentrate it's near-term activities and resources on five main areas of circuit. First, advanced development of our Bidirectional Bipolar Junction Transistor what we call B-TRAN solid state switch technology. Two, fabricate second-generation die's at a commercial domestic foundry. Three, provide packaged entering samples for potential customers and partners. Four, pursuit government funding for device development and specific B-TRAN based demonstration projects. And five, pursue strategic customer and partner relationship to support technology development, the fabrication of customer samples, and creating a market segment access. And finally, to accelerate commercialization.
As we become an asset-wide operating company, we believe the transition will allow us to efficiently use our capital to commercialize B-TRAN for the $12 billion power switch market. Many of you have asked why are we so excited about B-TRAN. First, let's review what B-TRAN is.
B-TRAN is the new widely patented architecture that has the potential to extend the performance of silicon-based powered semiconductor switches. The unique performance characteristics of B-TRAN compared to conventional silicon devices such as insulated-gate bipolar transistors or IGBTs are one. It is highly efficient offering a plus 50% reduction in conduction losses. Two, it is bidirectional, and enables the control of power in both directions within the same solid phase switch. And three, is switching speed which is comparable to and potentially faster than comparable fixed [ph] silicon power switches. B-TRAN's performance improvements are potentially an enabling technology with wide applicability and several fast growing markets such as electric and hybrid vehicle electronic controls, industrial motor drive, direct current based distribution and transmission switches and controls, our renewable energy and energy storage system powered converters.
One of the hottest markets that is showing no signs of flowing is the EV market. Even at their early stage of market entry, early electric vehicles are already the largest and fastest growing market segment for power semiconductors. According to a recent Toyota Motor technical publication, power semiconductors account for approximately 20% of the electrical office in the hybrid vehicle. The high efficiency and speed of B-TRAN could enable 7.5% or even greater improvement in fuel efficiency for hybrid and electric vehicles, which in turn would enable longer drive range or alternately smaller low cost battery packs. While the automotive sector takes time to develop, eventually it could become one of our largest markets.
Interestingly, commercial and industrial electric motors consume 25% of the world's electric energy. B-TRAN's bi-directionality and efficiency could enable the broader adoption of metrics converters for variable frequency drives, in these applications B-TRAN enables design simplification, part count reduction and lower costs. It's efficiency improvement leads to lower operating cost. By using B-TRAN's the size and energy loss associated with matrix converter motor drives could reduce system losses by plus 30%.
The steady growth of direct current based power generation technology such as wind and solar is driving the need for lower cost, direct current distribution and transmission systems. This DC distribution and transmission market is estimated to grow to $7 billion by 2024. Compared to traditional AC systems, DC distribution and transmission systems offer higher efficiency, lower loss, higher full tolerance and simplified integration of renewable energy. However, broad adoption has not occurred because of the limitations of conventional mechanical circuit breaker technology. The enabling technology for DC based distribution and transmission system is the creation of a low-loss fast-acting high and medium voltage DC circuit breaker. B-TRAN's high efficiency and fast switching speed could be ideally suited for such applications.
And finally, the power conversion efficiency of renewable energy and energy storage is limited by the switching and conduction losses of conventional power semiconductor switches. B-TRAN's high efficiency can reduce these losses by plus 50% thereby reducing the cost of electricity produced by renewable energy systems.
I will now turn our call over to Dan Brdar, our Chief Commercial Officer to review the progress made in 2018 and early 2019 on B-TRAN commercialization. Dan?
Thank you, Lon. Our B-TRAN division made progress highlighted by the testing and checkout of our second-generation prototyping driver. The new driver is a highly modular design to enable changes to specific daughter boards [ph] and functionality as we conduct our initial engineering prototype testing. This capability will also be useful in supporting our customer sampling efforts. The driver has the flexibility to accommodate a wide variety of operating characteristics and the user interface that will make it easier for technical teams to operate and evaluate B-TRAN's performance.
Also, at this early stage of development we expect our initial B-TRAN die to have part-to-part variability as the manufacturing processes are refined. The new driver has the flexibility to accommodate these early device characteristics as compared to a fixed driver design. In preparation for customer sampling, we would engage potential end-users and partners to gather their input on device requirements, prioritize device features, and identify early adopters versus those waiting for a more mature device. We've also been working with several major universities as we expect them to play a significant role in our commercialization plans.
For example; we use the semiconductor fabrication rooms at the University of Texas at Austin, and the University of California at Santa Barbara to fabricate early device designs and to develop and prototype changes to the fabrication processes used by our commercial fabrication partners. We also intend to partner with other universities with specific expertise in power semiconductors to conduct testing of our devices. Their testing will bring independent third-party results to those interested in collaborating with us on development or applications. Also, teaming with major universities is important to enable our small business to successfully secure government-funded R&D opportunities from organizations such as the National Science Foundation and the Department of Energy.
With our second-generation prototype driver now implemented in hardware, our sampling efforts will move forward based on the results of our characterization efforts in progress on our second generation die, packaging and prototype driver. Before I highlight the other notable achievements, let's review our disruptive solid-state technology, B-TRAN, at a little more detail than Lon's earlier comments.
B-TRAN is a unique semiconductor switch that offers bi-directional switching in one device and the potential for a greater than 50% reduction in conduction and switching losses. Our device fabrication efforts have been focused on working with our semiconductor fabrication partners to produce two versions of the device which we refer to as the standard B-TRAN and the full-featured B-TRAN. Our current manufacturing development efforts are focused on the standard B-TRAN which is a thicker double-sided die with pure features making it simpler to fabricate. As a thicker device, it allows us to avoid the more complex manufacturing process inherent in producing a thin double-sided wafer. This allows for fewer manufacturing process steps and a lower fabrication risk but offering the potential for more than 50% reduction in losses compared to conventional power switches. This level of performance was validated in our most recent testing.
The second version is the full featured B-TRAN which is thinner with more complex features and has the potential to further reduce switching and conduction losses. Both versions of B-TRAN that are being developed using conventional manufacturing and fabrication equipment and both designs have addressable markets based on their performance level. Using the performance data from the standard B-TRAN, we're partnering with universities and commercial entities to pursue government funding for further development and demonstrations of B-TRAN and critical applications to showcase it's performance.
In addition, we're pursuing funding opportunities for longer term development to explore the potential performance and manufacturing challenges associated with wide-band gap versions of B-TRAN. Our near-term manufacturing development efforts are focused on silicon versions of B-TRAN and extending their performance level possible with silicon power switches. However, as a switch architecture, B-TRAN can bring improved performance and bidirectional switching to silicon carbide devices as well; hence exploring the capability of silicon carbide B-TRAN is a long-term effort, it's well suited to the development objectives at federally funded R&D programs.
Now let's review our recent progress. Since our last call, the B-TRAN division accomplished and is in progress with the following initiatives. We completed the first build of our second-generation prototype driver and are proceeding with internal evaluation and preparation for customer standpoint. Two, we'll be using the new driver design to test our second-generation B-TRAN die currently in fabrication and for supply as part of the engineering prototype units for customer sampling. Three, we've increased our internal capabilities for device design, testing and characterization by bringing in device simulation capability in-house, installing away for pro-tester to test fabricated die in our engineering lab and adding the capability to design and program the device driver for various configurations of packaged B-TRANs.
Four, we've completed the packaging design for our second-generation die and vendor selection, validation and initial package builds for prototype device packaging. Five, as a result of delays of our present semiconductor fabricators, we've expanded our capability to develop and prototype manufacturing process steps to troubleshoot and resolve manufacturing challenges at our fabrication partners. And finally, we have and will continue to pursue grants from several government agencies for R&D funding. Our efforts at the government level include close collaboration with other companies and universities for research and development and demonstration projects, and applications where B-TRAN is an enabling technology, not practical or achievable with conventional power switches. These collaborations will likely form the basis for future partnering and market entry efforts if our R&D projects are successful.
With respect to our B-TRAN patent state, we now have 44 issued B-TRAN patents with 9 of those patents issued outside of the United States in China, Europe and Australia. Our pending patent portfolio includes more than 30 filings and will potentially provide coverage in Japan, Korea and India.
In summary, we continue to see significant commercialization potential in our proprietary B-TRAN technology. We expect to have laboratory engineering samples with which we will perform more comprehensive characterization and will begin sharing this information, we'll target customers and potential strategic partners.
I'll now turn the floor over to our CFO, Tim Burns, to discuss the financial results. Tim?
Thank you, Dan. I will run through the first quarter 2019 financial results. As Lon previously mentioned, in early January we announced a strategic shift to focus on the commercialization of our proprietary and broadly patented B-TRAN technology. To facilitate that strategic shift and reduce our cash burn rate, at that time we also announced a significant reduction in our power conversion systems or PCS division workforce, and suspended further PCS development in sales. As such, beginning with the reporting of our year-end 2018 financial results, we have presented our PCS division as a discontinued operation in our P&L and as an asset held-for-sale on our balance sheet. We believe this presentation provides shareholders and potential new investors with greater transparency into the historical results of our go-forward basis.
I'll focus my review of our financial results, primarily on our continuing operations as these operations will drive future changes in shareholder value. Research and development expenses from continuing operations increased 131% in the first quarter of 2019, to $218,000 from $95,000 in the first quarter of 2018. The increase in our research and development expenses was due to higher personnel cost as we now have two employees dedicated to managing and working with third-party resources, and the development of our B-TRAN technology. These internal resources supplement the third-party [indiscernible] we've utilized in the past and will continue to cost-effectively leverage in the future to allow our small company to benefit from specific semiconductor expertise here and abroad. We expect for research and development expenses to be modestly higher over the balance of the year.
General and administrative expenses include personnel costs, public company costs and other general business costs such as insurance, professional fees and infrastructure costs. General and administrative costs from continuing operations were $468,000 in the first quarter of 2019 as compared to $882,000 in the first quarter of last year. G&A was lower due to cost reduction activities including lower headcount and lower stock based compensation expense. We expect G&A to be flat to lower over the balance of the year. Our watch on continuing operations for the first quarter of 2019 totaled $694,000 compared to a loss of $975,000 in the first quarter of 2018. Our loss from continuing operations in the first quarter of 2019 was $0.05 per share, down from $0.07 per share in the first quarter of last year.
Overall, including discontinued operations, our net loss was $1 million in the first quarter of 2019 compared to a net loss of $2.1 million in the first quarter of 2018. Our net loss including discontinued operations was $0.07 per share in the first quarter of 2019, down from $0.15 per share in the first quarter of last year. We previously told investors that we estimated that the reduction in our power conversion systems division workforce and suspension of further power convertor system development in sales would reduce annualized cash expenditures by approximately $2.5 million to $3 million. That estimate is likely conservative as we currently expect our cash burn after the closing with sale of our PCS business to average roughly $600,000 to $700,000 per quarter at current headcount and spending levels. This estimate includes the positive impact of the pending sales of our PCS division and PPSA technology to PATHION. One of the benefits from the sale is, there will be sub-win [ph] in 80% of our Austin facility to PATHOIN thereby reducing our overhead.
On March 31st, our balance sheet included $2.2 million in cash and cash equivalents and excludes net proceeds from the pending sale of our PCS division to PATHION. Net proceeds from sale will be reflected in our June 30 balance sheet and second quarter cash flow statement. We have no outstanding debt.
In summary, we experienced our well-est [ph] quarterly cash burn rate since our IPO due to the strategic shift and exit from the power conversion systems business. Our first quarter 2019 cash burn was $1 million of which $620,000 were weighted to continuing operations. Cash used in operating activities for continuing operations for the quarter ended March 31, 2019 was $587,000 compared to $885,000 in the quarter ended March 31, 2018, a decrease of 34% year-over-year. Cash used in operating activities for discontinued operations for the quarter ended March 31, 2019 was $410,000 compares to $950,000 from the quarter ended March 31, 2018, a reduction of 56% year-over-year.
We believe that strong cash management, our lower cost structure, net proceeds from the sale of our PCS division and no debt will provide Ideal Power with a stable financial runway into 2020.
I will now turn the call over to Lon for closing remarks. Lon?
Dr. Lon Bell
Thank you, Tim. To conclude the B-TRAN division as progressing towards having prototype device available for customer sampling in the months to come which could develop into partnering and strategic collaboration for future R&D funding and commercialization efforts. With the pending closure of the PCS division, our cash runway will be extended and our cost structure will be vastly reduced. We believe these two events will strategically position Ideal Power to deliver new value to our devoted shareholders in 2019.
At this time, I would like to open the call to questions from our listeners. Operator?
[Operator Instructions] We'll take our first question from Craig Irwin with ROTH Capital Partners.
So with the streamlining and the disposal and the simplification around the B-TRAN business, can you maybe give us an idea roughly on the approximate timeline to seeing a little bit of revenue out of B-TRAN? I know it's a lot to ask given that this is a development stage product but is it possible we see revenue out of B-TRAN in 2019 or is this more likely to be 2020-2021 thing with licenses and other potential opportunities?
Dr. Lon Bell
Yes. I think that your last comment is very important. I think that the early revenue is more likely to come from partnering and government contracts as opposed to commercial sales because the product evolution is fairly time consuming and is something that requires for the commercial markets that we are looking at -- to be something where the device has to be proven out and the best way for us to prove it out is through partnerships, potentially joint ventures with early adopters, and through the product of government contracts and government research.
So maybe along the lines of government support, government contracts, can you maybe scope out for us the process mainly [ph] what you might have applied for? And the potential timelines for work there so we can [Technical Difficulty].
We're doing things at a variety of levels, some are small SBIR type opportunities for things that we think are important to start building, and we referred to some of it in our prepared remarks, looking at things like what is -- theoretically, what does the silicon carbide version of B-TRAN look like doing the analytical work to do the simulations for it, assess some of the challenges with a silicon carbide manufacturing process. And others are broader where they are actually partnering with other companies to actually demonstrate the B-TRAN in an application where the use of the B-TRAN and it's performance characteristics actually demonstrate something you can't do with conventional technology, those tend to be significantly larger kind of proposals in terms of the value that they would tie to a government grant.
Dr. Lon Bell
Let me make one further comment. We have B-TRAN as an architecture, so it is the way the semiconductor device is laid out; in some sense it is agnostic to the material system. Now it's performance will vary depending on the material system, certain materials will have some characteristics that differ from the construction out of other materials. The optionality for construction early on is silicon, and silicon is most appropriate as Dan mentioned because of availability of fabrications facilities, and a variety of potential suppliers. And secondly, with silicon the technology is more mature in the processing of a B-TRAN like device which uses, in general, quite conventional fabrication methodology. So we're not comparing B-TRAN with silicon carbide, we're comparing B-TRAN with other configurations out of either silicon carbide or silicon; that would be comparing B-TRAN then as I mentioned with IGBTs.
So I want to make that distinction so that it's easier silicon carbide or B-TRAN. B-TRAN will migrate to show us advantage in silicon carbide, as well as in silicon; however, that's a later date, that's a later step but it gives us added headroom for the evolution of the technology and growth in the market.
So last question if I may, cash burn; obviously it's nice to have the asset sale and the streamlining of the business. Cash burn was well under $1 million a quarter, is that sort of what we should think for the rest of this year?
Dr. Lon Bell
Yes. And the prepared materials, our current estimate is $600,000 to $700,000 a quarter.
Perfect, great. Congratulations on the streamlining there, keep swinging [ph].
[Operator Instructions] We'll go next to Eric [ph] with Craig-Hallum.
So I guess my question just -- as you think about the $12 billion opportunity, you mentioned electric vehicles; I mean, it -- maybe let's talk about some of the other applications where you see this maybe being top of mind for people. And then maybe -- I mean, is there a way to parse that -- I know $12 billion is kind of the overall opportunity but what do you view as a realistic addressable market for you?
You know, electric vehicles are attractive because it's such a large and growing market but it is longer term because the automobile industry takes longer to adapt new technology. We see things that are much nearer term where B-TRAN can become an enabling technology and looking at some of the comments that we've made earlier, an example is, with DC, distribution and transmission systems, they need a fast acting solid-state breaker, and then unfortunately using conventional IGBTs is really not a very good solution because there is a lot of energy that's lost because those devices are constantly conducting and generating heat that need to be cooled and correct issues [ph]. So things like DC breakers are nearer term market, renewable energy and energy storage -- I think about energy storage applications where you need bidirectionality to charge and discharge batteries and to use power switches to control their energy flow or certainly near-term markets.
And then we see things like motor drives where having a B-TRAN which is effectively an AC -- bidirectional AC switch enables you to make it type of convertor called a matrix convertor that actually substantially improves the performance of a variable frequency drive. You know, variable frequency drives are used on everything from your home appliances to large air conditioning systems in buildings. So there is a lot of markets that are all substantial in their own right that add upto that $12 billion market. Electric vehicle just happens to be one that it has a substantial impact on the performance of the vehicles because semiconductor losses make up such a big part of the energy loss in today's electric and hybrid vehicles.
And, I mean, obviously you've made a lot of progress -- I guess as a follow-up to the last question, it's hard to predict but I mean, doing the match on your burn where you're cash balance will be -- it does seem that you do expect some contribution whether it's -- I mean, in whatever form or government funding in 2019. I mean, is that fair?
Yes, we're aggressively going after opportunities that we think are a good strategic fit for what we're doing from a development standpoint for government funded activities. There are also industrial organizations that we're actually now starting to work with that are made up of network [ph] of those companies that are looking to further the advancement of power technology in general. And there is the opportunity for partnering where if people want to collaborate with us and to co-fund some development for things that are specific to their needs or applications, and as we did this customer sampling program that will open the door to some of those opportunities as well.
Got it, okay. I'll take the rest offline. Thanks.
[Operator Instructions] It appears that we have no further questions in the queue. I would like to turn the conference back to our speakers for any additional or closing remarks.
Dr. Lon Bell
Yes, I would like to make -- just a couple of closing remarks. Number one, as we look at this opportunity unfold, we are very grateful that we are very close to being able to focus on one technology, one business, and put all of our energies into that. It happens to be -- not by accident, but by intention, a rapidly growing field that has many verticals, we've discussed several of them, Dan has mentioned and reiterated on a couple of them. These verticals, some are mature where our product can be adopted early on by potential users, some along the range as we mentioned such as electric vehicles. The combination is very healthy and could -- and certainly should create long-term growth prospects for our business, and because the technology can migrate from silicon to silicon carbide overtime, there should be very long-term prospects for the technology going not only from near-term applications that we have discussed but to quite long-term applications as we see advancements in related areas, needs for energy for a power conversion, needs for more energy efficient systems, opportunities in vehicles of all types, opportunities related to electric power distribution and the new evolving uses of -- for electric power as world converts to more efficient systems and attempts to reduce the CO2 contribution into the atmosphere.
So, I think we are very well positioned and we do appreciate our shareholders loyalty and we believe that this is the best path for making significant contribution to not only energy efficiency but to the development in growth of a robust business at Ideal Power. And that ends the remarks. Thank you, all.
Ladies and gentlemen, this does conclude today's presentation. We appreciate your participation.