Ideal Power - Firing On All Cylinders And Teaming Up With Another Top Ten Global Automaker

The below article was updated on 11/23

 

Summary

• Ideal Power has added multiple participants to its B-TRAN™ test and evaluation program. The recent engagement with one of the top ten global automakers further solidifies confidence in the company's technology.
• The company has successfully delivered the initial B-TRAN™ devices under the U.S. Naval Sea Systems Command (NAVSEA) program.
• IPWR also completed testing on its next-gen B-TRAN™ driver and is incorporating it into its test and evaluation program.
• With an annual operating cash burn of $6.5 million, zero debt, and a cash balance of $20 million, the company has a strong balance sheet to support its operations.
• Ideal Power remains focused on introducing its first commercial product by the current year’s end.

Disrupting the semiconductor power switches market, Ideal Power (IPWR) has developed Bi-directional, Bipolar Junction Transistor (B-TRAN™) semiconductor technology that enables fast and efficient solid-state circuit breakers (SSCBs). As a technology capable of fast switching, reduced conduction losses, bi-directional switching, reduced parts and weight, better heat management, and reduced costs, B-TRAN™ has the potential to benefit multiple emerging industries. 

The application for the company’s technology represents a multi-billion-dollar market, with electric vehicles / hybrid EVs and renewables being the two major segments of the total addressable market (TAM). B-TRAN™ provides a competitive advantage over a type of semiconductor device called an insulated-gate bipolar transistor (IGBT) due to B-TRAN™’s higher efficiency and inherent bi-directionality. Thus B-TRAN™ has the potential to replace IGBTs for power-switching applications across multiple industries. 

Leveraging the innovative technology and its partnership with NAVSEA, the Austin-based company has managed to gain the interest of leading EV manufacturers, global semiconductor manufacturers, and major government agencies, among others. In the past six months, the company has made major strides in the B-TRAN™ test and evaluation program. Ideal Power expects to introduce its first commercial product by the end of 2022.

Exhibit 1: IGBT Potential Market and Ideal Power’s Participant Rooster. Data Source: Investor Presentation 

Disruptive Tech in the Evaluation and Development Phase, Gearing Toward Commercialization

The company has been working on multiple fronts and has achieved multiple operational milestones since the beginning of the year, showing considerable progress toward commercializing its B-TRAN™ device. 

• The high visibility of the NAVSEA program has aided in increasing customer interest - Ideal Power recently announced the delivery of the initial B-TRAN™ devices to Diversified Technologies Incorporation (DTI) as part of the contract awarded byNAVSEA. The packaged B-TRAN™ will be incorporated into a full-scale 12kV medium-voltage direct current (MVDC) circuit breaker and is expected to demonstrate higher efficiency. 

“The packaged devices were tested prior to shipment and demonstrated very low conduction losses, as predicted based on prior internal and third-party simulations.” - Second Quarter Financial Results

The NAVSEA program has provided a key validation to the company’s development work. Thus, the results from the program will not only impact the long-term opportunity with the U.S. Navy (with a whole suite of products ranging from 2kV - 20/30 kV) but could also impact the technology’s applicability across other commercial markets. The company’s collaboration with a major government agency has yielded increased interest in its B-TRAN™ technology. 

During the second quarter, Ideal Power added four new participants to its B-TRAN™ test and evaluation program. Japan External Trade Organization (JETRO) also selected Ideal Power to present the B-TRAN™ technology at its carbon neutrality-themed event. Furthermore, the company recently announced a collaboration with one of the top 10 global automakers that entails the development of a customized B-TRAN™ power module and evaluate its application in electric vehicles. This is the second global automaker that has shown confidence in the company’s technology. 

Increased collaboration and interest validate the company’s development efforts and its B-TRAN™ technology. The test and evaluation program will remain ongoing even after commercialization, facilitating further development and innovation within its current technological capabilities. I expect additional partnerships from multiple players across the company’s target markets to evaluate the company/partner-specific application of the technology, potentially creating a portfolio of B-TRAN™-based modules.

• Qualification of fabrication and packaging partners - Focusing on its core capabilities, innovation, and technological advancement, the company has opted for a lean, fabless business model. Ideal Power has been engaging with proven and scalable wafer fabrication and packaging partners.

To migrate to a new packaging strategy for volume manufacturing, the company has finalized both its domestic and non-domestic packaging partner firms. The packaging partners utilize state-of-the-art packaging practices and have proven their ability to dice and package double-sided B-Tran devices. While continuing its operations with Teledyne (the fabrication partner for its government-funded project), Ideal Power has also finalized terms with a second domestic fabrication partner. In line with its long-term strategy to develop the silicon carbide B-TRAN™ device, Ideal Power’s second domestic partner brings both bipolar and silicon carbide fabrication experience. The company is also progressing toward finalizing a non-domestic fabrication partner.

• Strengthening the patent portfolio - Ideal Power has strengthened its intellectual property with 69 issued and 23 pending B-TRAN™ patents. Of the 69 patents issued, 30 were issued outside the United States and cover the major developed and emerging markets, including China, Japan, South Korea, India, and Europe.
• Development and testing of the next-gen B-TRAN™ driver - Further, the company has completed testing of the next-gen B-TRAN™ driver for incorporation into the test and evaluation program. Ideal Power has also hired a third-party company to evaluate the mechanical soundness of the design and test the long-term dependability of packaged B-TRAN™ devices. This arrangement provides Ideal Power with third-party validation of  B-TRAN™ reliability data and information to be presented to its prospective customers.

From expanding the participant roster, progressing on its $1.2 million NAVSEA contract, and finalizing its fabrication and packaging partners, management has laid a solid foundation for the launch of their first and subsequent commercial products. The company remains on track to introduce its first commercial product by the end of 2022, and a volume ramp-up can be expected going forward.

Exhibit 2: B-TRAN™ Technology Source: Investor Presentation

Major Catalysts to Watch for in the Coming Months

• Completion of deliveries under the NAVSEA program  - The rest of the B-TRAN™ devices are expected to be delivered by the end of the year for use in the demonstration of a 12-kV MVDC circuit breaker. The end goal of the NAVSEA program for Ideal Power is a long-term opportunity that introduces a family of B-TRAN™-enabled MVDC devices for military applications. We can expect a clearer picture on this front by the end of the year, and it remains one of the major catalysts affecting the company’s commercialization efforts.
• Updates on the test and evaluation program - Ideal Power has been working on multiple fronts with multiple partners under its test and evaluation program. The company and its partners continue to pursue additional government funding opportunities and have submitted several proposals to major government agencies, including the Department of Commerce, the Department of Energy, and the Department of Defense. Aside from pursuing government grants and funding opportunities, the company has also engaged with the leading automotive player and a Fortune 1000 global semiconductor manufacturer. Ideal Power has also engaged with a space application systems developer that’s evaluating the B-TRAN™ technology for use in SSCBs for its low losses and bi-directional capability. In their recent conference call, management remained optimistic about its test and evaluation program. I expect opportunities with certain partners to materialize in the next two or three quarters.

Financial Positioning and Valuation

The company’s sole source of revenue remains grants from government contracts. Ideal Power has recognized most of the $1.2 million grant revenue from the NAVSEA program and expects to recognize the remaining $64,671 in the coming quarters. The company has a strong financial position, concluding H1 2022 with a cash balance of $20 million and zero debt on its balance sheet. The strength of the balance sheet will support the company through its commercialization and operational activities. Ideal Power’s average operating cash burn in the past two quarters was $1.54 million. I expect this figure to average closer to  $2 million per quarter in the year's final two quarters. I do not expect any financing round or equity dilution in the short to medium term.

The business has advanced significantly and is preparing for commercialization. Material positive outcomes within the next six months are expected within its commercialization efforts and the test and evaluation program.

Current Market Price	$13.70
No. of Shares Outstanding (in mm)	5.90
Market Cap. (in mm)	$80.91
Enterprise Value (in mm)	$61.40
Median Street Estimates	$18.00

Exhibit 3: Key Statistics                                               

My previous valuation estimates were based on the size of the insulated-gate bipolar transistor (IGBT) market, which is expected to be worth $11 billion by 2026 and remains the company's immediate target market opportunity. Updating the same valuation methodology, I believe the company should be valued somewhere between $117.52 million and $143.63 million, or $19.92 to $24.34 per share.

Exhibit 4: Sensitivity Analysis (in $ mm)

Major Risks

• Two major risks remain: supply chain disruptions and the speed of the adoption cycle. Even though Ideal Power has been able to attract interest in its B-TRAN™ technology, delays in adoption/ incorporation of the B-TRAN™ technology or even failure to do so can negatively impact its commercialization strategy.  
• Emergence of a more efficient, safe, reliable, and cost-effective technology might affect the commercialization and adoption of B-TRAN™. 

Investment Thesis and Conclusion

• Ideal Power is fabless and has partnered with wafer fabricators and packaging firms, creating an asset-light business model with potentially high margins and profitability metrics.
• The company targets a multi-billion-dollar market, including but not limited to: EVs, EV charging, data centers, SSCBs, renewable energy, and growth in bi-directional applicability across multiple industry segments.
• B-TRAN™ has significant advantages over traditional power switch technology and is also protected by a broad and expanding set of patents.
• In the past six months, the company has captured significant interest from different market players to test, evaluate, and incorporate its B-TRAN™ technology within their offerings. 
• Earlier this year, the Biden administration signed the CHIPS and Science Act into effect, bolstering the U.S. semiconductor manufacturing and the R&D industry. The act aims to invest $280 billion over the next 10 years for scientific R&D, commercialization,  workforce development, and tax credits for chip production. The supportive regulatory environment will create long-term, industry-wide tailwinds that should benefit Ideal Power.
• The company carries a strong balance sheet with enough cash to support its operational and commercial milestones over the next 18 to 24 months.

Q3 Financial Results and Operational Update

Ideal Power made sizeable progress in its third-quarter operational activities, including:

• Entered into Development Agreement with Top 10 Global Automaker for B-TRAN™-based Electric Vehicle Power Module
• Expanding the participant roster in its B-TRANTM test and evaluation program
• Ongoing deliverables under the NAVSEA contract
• Working towards commercialization of its first product, a multi-die power module for the solid-state circuit breaker (SSCB) application, by the year-end

I believe that the progress is reflective of the growing interest and confidence of multiple stakeholders in Ideal Power’s B-TRANTM technology. The company also expanded its patent portfolio, growing to 71 issued and 22 pending patents. The recent major highlight remains the company’s initiation of a development program with one of the top 10 global automakers. Multiple other technologies were evaluated by the automaker before selecting B-TRANTM, based on its superior performance, bi-directional capability, lower cost, and its ability to offer the potential for new inverter topologies. The company will work with the automaker’s development team to develop a customized B-TRANTM power module to be incorporated into the electric vehicle (EV) drivetrain inverters. Ideal Power is expected to start a wafer fabrication run in the coming months with an eventual goal of delivering production-ready modules by 2025.

The company announced the Q3 financial results recognizing a grant revenue of $10,675 and concluded the quarter with a cash balance of $18.5 million. The combined operating and investing cash burn amounted to $1.57 million (compared to $1.70 million in the previous quarter). The balance sheet and financial strengths are evident, given the minimal cash burn compared to a comfortable cash balance accompanied by a zero long-term debt profile. I don’t foresee any significant equity dilution over the short to medium term and expect the current balance sheet strength to comfortably support the company’s commercialization activities in the coming months.

Ideal Power represents a high-risk/ high-reward bet with a favorable risk-reward proposition. I believe the company has progressed well in the past six months, while sluggish macroeconomic factors affect its stock price, suggesting a more advantageous opportunity for investors.

                        *Ideal Power is a client of Quantum Media Group, LLC.

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