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IDEAL POWER INC

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IDEAL POWER : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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05/15/2019 | 04:08pm EDT

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 2018 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. Prior to 2019, we were primarily focused on the design, marketing and sale of 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 were designed to be used in both on-grid and off-grid applications with a focus on solar + storage, microgrid and stand-alone energy storage applications. The principal products of the Company were 30-kilowatt power conversion systems, including 2-port and multi-port products.

On April 16, 2018, we realigned into two operating divisions: Power Conversion Systems, to continue the commercialization of our PPSA™ technology, and B-TRAN, to develop our Bi-directional bi-polar junction TRANsistor (B-TRAN™) solid state switch technology.

On January 2, 2019, our Board of Directors approved a strategic shift to focus on the commercialization of our B-TRAN™ technology and a plan to suspend further power converter system, or PPSA™, development and sales while we located a buyer for our power conversion systems division and PPSA™ technology. We have classified our PPSA™ business as held for sale and now shows this business as a discontinued operation in our financial statements.

To date, operations have been funded primarily through the sale of common stock. Total revenue generated from inception to date as of March 31, 2019 amounted to $14.9 million with approximately $12.4 million of that revenue from discontinued operations and the remainder from grant revenue for bi-directional power switch development. We did not have revenue from continuing operations in the three months ended March 31, 2019 and 2018. We may pursue additional research and development grants, if and when available, to further develop and/or improve our technology.




Industry Background



A semiconductor material is a substance that, as its name suggests, is characterized for "conducting" electricity easily, while at the same time, working as an insulator to prevent the flow of electricity. By using semiconductors, it becomes possible to perform rectification for the one-directional flow of electricity, amplification for increasing electrical signals, and switching to open and close the flow of electricity.

Power semiconductors possess a structure that is different from regular semiconductors, enabling them to handle high voltages and large currents without damage. Failures may occur due to a rise in temperatures resulting from heat generated from handling large amounts of power. Therefore, methods have been developed to reduce the amount of power semiconductor loss, which is the cause of the heat generation, while also effectively releasing the generated heat to the outside.

Power semiconductors are mostly used in power conversion such as in changing voltages and frequencies, as well as changing DC to AC and AC to DC. Power semiconductors play an indispensable role in accurately driving motors from low to high speeds, controlling the voltage and flow of electricity in electric and hybrid vehicles, supplying power grids with power generated from solar cells with less power loss, and providing a stable source of electricity to various home appliances and electrical equipment. In recent years, there has been a greater demand for energy-savings and power consumption reductions, and as a result, the need for power semiconductors that minimize power loss has been increasing.

Power semiconductors are solid-state devices that act as a switch without any mechanical movement. Solid-state devices are completely made from a solid material, typically silicon, and their flow of charges is confined within this solid material. The term solid-state is often used to show a difference with the earlier technologies of vacuum and gas-discharge tube devices and also to exclude the conventional electro-mechanical devices such as relays, switches, hard drives and other devices with moving part. Solid-state switches are typically more efficient due to lower losses during power processing.



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The $12 billion global power semiconductor market may be categorized by component, material, end-use and geography. Based on component, the market includes power metal-oxide semiconductor field-effect transistors ("MOSFETs"), thyristors, rectifiers, bipolar junction transistors, insulated gate bipolar transistors ("IGBTs") and power diodes. With respect to material, the power semiconductor market is bifurcated into silicon/germanium, silicon carbide and gallium nitride.

The end-use market is classified into automotive, industrial, renewable energy, telecommunication, consumer electronics, aerospace & defense, healthcare and others. Among these, automotive electronics accounts for significant consumption of power semiconductors. The number of semiconductors in vehicles has surged with the rising adoption of electric vehicles, plug-in electric vehicles, and hybrid electric vehicles. Further, the advent of drive-by-wire or x-by-wire technologies have led to a rise in number of electric components in vehicles over mechanical vehicle parts. This rise helps reduce vehicle weight which is directly related to improved fuel efficiency and reduced vehicular emissions. The heavy consumption of power semiconductors across several end use markets such as industrial, automotive, consumer electronics and renewable energy is a key growth driver of the power semiconductor market.

The telecommunications market is also a significant end-user of power semiconductors. This segment displays demand for radio frequency ("RF") power amplifiers and IGBTs among others. With the launch of 5G, we believe the demand for power semiconductors is likely to increase.

Geographically, Asia Pacific accounts for the leading consumption of power semiconductors among other key regions. The region is also one of the leading exporters of power semiconductors in the world. The growth in the region is mainly attributed to China, which is the leading automotive and passenger vehicle market in the world. China is currently the leading consumer of power semiconductors. Furthermore, demand for power semiconductors is increasing from renewable energy sectors in the region.

Europe and North America are also leading consumers of power semiconductors among others in the global market.

Leading players in the global power semiconductor market include Infineon Technologies AG, Texas Instruments, ON Semiconductor, Fuji Electric Co. Ltd., ST Microelectronics N.V., Mitsubishi Electric Group, Semikron International GmbH, and Toshiba Corporation. While these companies are potential competitors, they are also potential licensees for our B-TRAN™ technology as there is not, to our knowledge, a high-efficiency bi-directional design available in the market.



Our Technology


To further improve the performance of our bi-directional PPSA™ technology and products, we identified the need for a true bi-directional power switch and applied for and, in 2012, received a grant from the U.S. Department of Energy's Advanced Research Projects Agency-Energy ("ARPA-E") to develop a bi-directional solid-state power switch. At the outset, our efforts under the ARPA-E grant were focused on the development of, including the manufacturing process development for, a bi-directional insulated gate bipolar transistor ("BD-IGBT"). Although work on BD-IGBTs had previously been done by others in research labs, it was a technology that had not yet been commercialized.

Our PPSA™-based products incorporate multiple 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 PPSA™ products to perform bi-directional power conversion, for each IGBT and diode used in our products, we were required to 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. To eliminate the need to utilize four devices and to improve the performance of bi-directional switching, a true bi-directional switch is necessary. While we initially focused on the development of a BD-IGBT under the ARPA-E grant, we shifted our focus under the grant to the development of a new, highly efficient power switch called a bi-directional bipolar transistor, or B-TRAN™, that we believe will allow us to substitute one B-TRAN™ for two pairs of IGBTs and diodes used in PPSA™ products but, more importantly, is a potential replacement for conventional power switches in the broader power semiconductor market. The B-TRAN™ leverages many of the same processing steps we had developed for the BD-IGBT while also providing us with certain key advantages including patentability and higher efficiency compared to a BD-IGBT.

Based on third-party device software simulations and initial prototype testing, we believe that the B-TRANs™ can significantly improve electrical efficiency in power converters and many other power conversion applications. The higher efficiency would substantially reduce the heat generated by the operation of products utilizing this technology. As a result, products incorporating B-TRANs™ will require less space for heat dissipation which would enable increased power density, or power per pound, and reduce material costs.



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In 2016, one of our semiconductor fabricators successfully fabricated single-sided B-TRAN™ silicon dies and test results on the single-sided B-TRAN™ die were consistent with third-party simulations that predict significant performance and efficiency improvements over conventional power switches such as silicon-controlled rectifiers ("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 a less complex to manufacture B-TRAN™ on an accelerated schedule for proof of concept and initial testing. In the first quarter of 2018, we successfully confirmed the proof of concept 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.

In the second quarter of 2018, a domestic semiconductor fabricator was qualified and engaged for development runs on the standard version of the B-TRAN™. As a result, we now have the next run of devices with two fabricators in process. These runs incorporate the results of prior runs and testing into the B-TRAN™ design and their manufacturing process. With the double-sided transistor behavior and low conduction losses confirmed and corrections and improvements in the manufacturing process implemented, the next goal is to complete the fabrication of prototype engineering samples for engineering evaluation by potential customers and partners. These samples will include a packaging design based on our previous work and a driver. We have completed the design, first build and functional check-out of a prototype driver. The coupling of device samples with a driver will form the basis of an intelligent module required for potential customer and partner evaluation.

Business Strategy & Target Markets

Once we have completed the fabrication of engineering samples for engineering evaluation by potential customers and partners, we intend to engage potential partners for our B-TRAN™ utilizing a licensing model.

Potential target markets for B-TRAN™ devices include, but are not limited to, electric and hybrid vehicles electronic controls, industrial motor drives, direct current-based distribution and transmission switches and controls and renewable energy and energy storage system power converters. We are currently in the process of fully developing our commercialization strategy for our B-TRAN™ technology.




Intellectual Property



We rely on a combination of patents, laws that protect intellectual property, confidentiality procedures, and contractual restrictions with our employees and others, to establish and protect our intellectual property rights. As of March 31, 2019, we had 33 US and 11 foreign issued patents on our B-TRAN™ technology as well as approximately 30 additional pending U.S. and international patent applications on our B-TRAN™ technology. We expect to continue to build our patent estate for our bi-directional switch technology and other technological developments that broaden the scope of our technology platform.

Critical Accounting Policies

There have been no significant changes during the three months ended March 31, 2019 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, 2018.



Results of Operations


Comparison of the three months ended March 31, 2019 to the three months ended March 31, 2018

Research and Development Expenses. Research and development expenses increased by $123,672, or 131%, to $218,216 in the three months ended March 31, 2019 from $94,544 in the three months ended March 31, 2018. The increase was due to higher personnel costs. We expect flat to higher research and development expenses for the balance of 2019.

General and Administrative Expenses. General and administrative expenses decreased by $413,709, or 47%, to $468,390 in the three months ended March 31, 2019 from $882,099 in the three months ended March 31, 2018. The decrease was due primarily to lower personnel costs of $182,418, lower stock compensation expense of $133,645, lower contract labor costs of $35,733 and lower legal fees of $34,485. General and administrative expenses were impacted by our cost reduction plan, inclusive of reduced headcount, and an absence of grants in recent years to tenured executives. We expect flat to lower general and administrative expenses for the balance of 2019 exclusive of the impact of any equity award grants.

Interest (Income) Expense, Net. Net interest expense was $7,118 for the three months ended March 31, 2019 compared to net interest income of $1,315 for the three months ended March 31, 2018.

Loss from Continuing Operations. Our loss from continuing operations for the three months ended March 31, 2019 was $693,724 or 29% lower than the $975,328 loss from continuing operations for the three months ended March 31, 2018.



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Loss from Discontinued Operations. Our loss from discontinued operations for the three months ended March 31, 2019 was $347,175, or 68% lower than the $1,080,834 loss from discontinued operations for the three months ended March 31, 2018. The loss from discontinued operations was significantly lower than the comparative prior year period as we suspended operations of our power conversion system division on January 4, 2019, including the implementation of a significant reduction-in-force. Loss from discontinued operations for the three months ended March 31, 2019 includes a $140,000 impairment of assets held for sale to write-down these assets to expected net proceeds from the anticipated sale.

Net Loss. Our net loss for the three months ended March 31, 2019 was $1,040,899, or 49% lower, as compared to a net loss of $2,056,162 for the three months ended March 31, 2018.

Liquidity and Capital Resources

We currently do not generate revenue. We have funded our operations through the sale of common stock.

At March 31, 2019, we had cash and cash equivalents of $2,228,664. Our net working capital and long-term debt at March 31, 2019 were $2,312,630 and $0, respectively.

Operating activities in the three months ended March 31, 2019 resulted in cash outflows of $996,896, which were due to the loss from continuing operations for the period of $693,724 and cash used in operating activities related to discontinued operations of $409,867 partly offset by non-cash items, including depreciation and amortization and stock-based compensation, of $54,216 and favorable balance sheet timing of $52,479. Operating activities in the three months ended March 31, 2018 resulted in cash outflows of $1,827,372, which were due to the loss from continuing operations for the period of $975,328, cash used in operating activities related to discontinued operations of $942,176 and unfavorable balance sheet timing of $107,801 partly offset by stock-based compensation of $143,356, depreciation and amortization of $43,704 and patent impairment charges of $10,873. We expect a significant reduction in cash outflows from operating activities for the balance of 2019 due to the elimination of cash flows from discontinued operations once a sale of these operations is completed.

Investing activities in the three months ended March 31, 2019 and 2018 resulted in cash outflows of $32,517 and $41,607, respectively, for the acquisition of fixed assets and intangible assets. In the three months ended March 31, 2018, cash outflows from investing activities included $8,046 in cash outflows related to discontinued operations.

Financing activities in the three months ended March 31, 2019 and 2018 resulted in no cash inflows or outflows.

As our technology is in the development stage and has not yet been commercialized, we will be required to obtain additional financing to continue our operations and execute our business plan. Even in the event we complete the planned sale of our power conversion systems division in the near term, we will still need to raise additional capital within the next twelve to months from the date of issuance of this report to fund our future operations. We may not be able to obtain such financing on commercially reasonable terms or at all. If we are unable to obtain such financing when needed, we will be required to reduce operating costs, which could jeopardize current and future strategic initiatives and business plans, or cease operations. Our independent registered public accounting firm, in its report on our 2018 financial statements, raised substantial doubt about our ability to continue as a going concern.

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 2018 Annual Report on Form 10-K.

© Edgar Online, source Glimpses

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