Dan Brdar - President, Chief Executive Officer Tim Burns - Chief Financial Officer Carolyn Capaccio - LHA

Good day! And welcome to the Ideal Power, Fourth Quarter 2021 Results Conference Call. Today’s conference is being recorded. At this time, I’d now like to turn the conference over to Carolyn Capaccio of LHA. Please go ahead.

Thank you, operator, and good afternoon everyone. Thank you for joining Ideal Power's fourth quarter 2021 conference call. With me on the call are Dan Brdar, President and Chief Executive Officer; and Tim Burns, Chief Financial Officer. Ideal Power’s fourth quarter and full year 2021 financial results and press release is available on the company’s recently designed website at idealpower.com. Before we begin, I’d like to remind everyone that statements made on the call and webcast, including those regarding future financial results and industry prospects are forward-looking, and maybe subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the call. Please refer to the company’s SEC filings for a list of associated risks. We would also refer you to the company’s website for more supporting industry information. Now, I will turn the call over to Ideal Power’s President and CEO, Dan Brdar. Dan?

Thank you, Carolyn. Good afternoon everyone and welcome to our fourth quarter 2021 financial results conference call. I'll begin by giving you an update on our progress and achievements on our strategy to commercialize our B-TRAN semiconductor technology, including our test and evaluation program, and the work we're doing under projects with the U.S. Navy and the Department of Energy. Then I'll walk you through our plans and key priorities for 2022 for B-TRAN commercialization, and Tim Burns our CFO will take you through the numbers after which we’ll take your questions. Let's get started. Fourth quarter 2021 capped off the year of strong progress on our B-TRAN commercialization roadmap. During the year we achieved the goals we set for ourselves a year ago, significantly advanced our B-TRAN commercialization test and evaluation program, adding leading companies in each of our target markets, electric vehicles, EV charging, renewable energy, UPS Systems for Data Centers, solid state circuit breakers, as well as smaller innovative companies and research universities. We completed several wafer fabrication runs under our program funded by the U.S. Navy to optimize our B-TRAN for incorporation into the demonstration of a 12 kilovolt, medium voltage, direct current, solid state circuit breaker in 2022 and in collaboration with diversified technologies or DTI, secured additional government funding with a Phase I SBIR grant to deliver a low loss, B-TRAN multi di-module conceptual suitable for subsequent incorporation into a 13.8 kilovolt alternating current, solid state circuit breaker before awarded Phase 2 of the program. These 2021 objectives help catalyze our commercial development at B-TRAN as a differentiated technology addressing a large and growing market. Our collaboration with DTI and our work on direct current circuit breakers for NAVSEA were used in ship electrification contribute to our further collaboration in the award of a…

Thank you, Dan. I will review fourth quarter and full year 2021 financial results. In the fourth quarter we recorded $129,000 in grant revenue, totaling $576,000 of grant revenue for the year, offsetting cost of grant revenue as we continued our work on the navy funded, NAVSEA demonstration under the DTI subcontract, which began in mid-2020 and commenced work under the DOE funded SBIR Phase I grant in late 2021. As we’ve noted on previous calls, the amount of grant revenue recognized each quarter will vary, as it is a function of the timing of spending and scheduled milestones under the program. We continue to expect almost all the remaining grant revenue for these programs to be recognized in the first half of this year. Operating expenses were $1.4 million in the fourth quarter of 2021, compared to $1.1 million in the fourth quarter of 2020. As expected, sales and marketing expenses trended higher as we added business development talent to the team, including personnel to support our test and evaluation program. General and administrative expenses were also higher in the quarter on higher Investor Relations spending. Full year 2021 operating expenses were $4.8 million compared to $4.1 million in full year 2020. The full year increase in operating expenses related primarily to higher sales and marketing in research and development spending as we added personnel and invested in B-TRAN driver development and the expansion of internal test capabilities. We continue to expect research and development and sales and marketing spending to trend higher throughout 2022 as we accelerate development and commercialization of our B-TRAN Technology, including additional wafer fabrication runs, including a qualifying run with a high volume production wafer fabricator, third party testing of the B-TRAN, adding more engineering and front end talent, supporting our test and evaluation…

Thank you. [Operator Instructions] And our first question will come from David Williams with Benchmark.

Hey! Good afternoon! Thanks for letting me ask the question and congrats on the progress.

Thank you.

I just wanted to see if maybe you could give a little color. You talked about the test and evaluation partners and really gaining some momentum there. But just kind of curious if you could maybe walk us through that life cycle; when you expect some of the feedback and maybe just how that cycle will complete?

Yeah, we actually are getting feedback already. As part of the discussions, when our teams get together and we take them through the device design and the physics and how it operates and they share with us their applications and how they are thinking about using it, there's already an interchange that happens between the teams, because part of it, we want to understand what are their requirements in terms of the device designed how it's laid out, how it's packaged, things they are looking for in terms of the driver. If they are interested in going with their own driver, which some of them are, we want to make sure that they understand enough to be able to really think through that process, and then as a result of this we've been really putting together that early feedback to identify what's the first commercial product going to look like. So I think we've got a pretty good handle on that at this point in time. And then as we actually shipped the devices and the drivers out to these teams, their cycle to physically do the evaluation varies a lot by company. Some of them that are really in the morning industrial products, you know its a few months to take them in the lab, go through a test program, get some feedback from us on some of the results and others like specifically some of the automobile companies are actually looking at some longer multi-year programs. It would take a lot of devices and may have some custom packaging that we would be involved with or they would introduce us to packaging firms they like to work with, to come up with a custom configuration for their application. So they vary a lot, that's why we view this as sort of an ongoing program. As we bring others in, we will get their feedback and what may be a new iteration of a module design, it may be a new version of an intelligent power module, so it will be an ongoing cycle that will drive the product offerings that we’ll have over the next couple of years.

Okay, thanks. And then may be just, what are the boxes that need to be checked before being awarded the Phase II. I know you said you're applying for that. What do you think the odds of you getting to Phase II will look like or are? And then, when do you think that would begin?

I think our odds are reasonably good. It's just a function of how many proposals are in, because it's always a limitation of what's the budget that's available and how many awards can they afford to make based on the size of the proposal. So you really don't know how good your odds are, typically you know in government funded programs. You win maybe one out of 10 proposals. When you get to a Phase II of a program I think those odds get certainly significantly better, but we don't really have visibility to it and no one does when you're submitting these things, because it’s so much a function of what’s the actual budget that's available. The plan is to submit the proposals in April and the selections and ultimate award would be targeted for the November – I'm sorry, the September-October time frame.

And then if by chance, if you are not selected there, how do you proceed? Does this work continue maybe at a slower pace or is there additional funding may be needed. Just how do you think about the program continuing forward if you didn't win the Phase II?

Well, we actually see other opportunities. In fact we've actually already, we are submitting another proposal for solid state circuit breaker to a different government agency with different partners. So we think there's – because there's so much interest in moving to solid state circuit breakers, even if we don't do it through Phase II of this program, we think there are going to be other opportunities. Plus one of the large industrial players that is in our test and evaluation program is specifically interested in coming up with their own version of a solid state circuit breaker based on B-TRAN. So we think there is multiple shots on goals to get a B-TRAN base solid state circuit breaker out in the marketplace.

Fantastic! Exactly what we wanted to hear. And then maybe lastly form me, is maybe if you could talk a little bit about the importance of moving from the government sector to now having some of the private sector companies working with. How is – maybe just speak to the importance there and what do you think that means for the company overall?

Well, you know the government I think plays a really important role in really early stage technology before things are really commercial. They play a role in bridging that gap in terms of providing funding, providing opportunity to do demonstrations of the technology. It’s typically received as higher risk and maybe what industry is willing to bear. Once you get engaged with the commercial entities, I think it says a lot about how much further along the technology is in terms of its readiness for commercialization, plus larger companies, the auto companies excluded, but most larger companies have the ability to work a lot faster than the government when it comes time to actually decide something and build it. So I think it really helps accelerate the pace of what we can do once we start to really engage here with the commercial sector.

Fantastic! Well, thanks again for the time and best luck on the quarter and Tim, we’ll ask some questions to you next time, [inaudible].

No problem.

Thanks Dave.

Thank you guys.

And our next question will come from Kelly Thurman [ph] a Private Investor.

Hey guys! Thanks for taking my question. On the last call you had said that three companies had budgeted and there were two more in the process. So I wonder if all five companies have budgeted now, and if that is for actually the final design of a product or it's just for further development at this point.

Typically it's for further development, because for these companies to do their evaluation they actually have to sign some fairly significant resources. They have to put an engineering team together; they have to potentially put some equipment into their lab and they typically create a program where they’ve laid out what's the testing that's going to be done? Who's going to be in that program? And then what that feedback looks like in terms of its reporting and collaboration with us.

Okay. When do you see the initial spend of those budgets, at what point this year?

We think that's going to happen with the commercial entities right after we complete our deliveries here to DTI. We've kept all of them warm, so that they understand that we've got to meet the obligations under the Navy Program first, since the Navy wants a pretty high volume of devices. So I would expect the middle this year we’ll start to see that spent.

Now, once that spent comes in, since its material, will you have to talk about the names of the companies at that point?

It will depend on the program. If it's just them spending their own dollars for their own resources, no. If they are funding us to do some work; for example some of automobile guys want to fund some development work, the argument we would make is that’s material and we have to disclose it.

Okay, and then finally would you say that B-TRAN has met or exceeded the expectations of your samplers so far?

I think it's too early to say. Based on the discussions we’ve had so far, they are all positive. Nobody has decided to go a different direction. So I think it's really more a case of the early exchanges that we're having are consistent with how people are thinking about using it, and the performance that they are seeing so far is attracted to them to continue.

Is this going to move fast enough to wear on day one of manufacturing? You think one of these samplers will be a customer at that point.

Well, I think particularly for some of the automobile guys, they are talking about a large volume of devices. So I think they are going to want to see hundreds if not thousands of devices for their own programs and evaluations that we want to come from a production level fab, because of all the benefits it brings to work at the production level versus the development level fab.

Okay. Thanks a lot guys.

Okay, thank you.

Thank you. [Operator Instructions]. And our next question will come from Taylor Fredericks with Arrowhead Securities Group. Please go ahead.

Yes, it’s great to speak with everybody. Dan and Tim, just a real quick question. You said your objective for 2022 remains to introduce our first project for commercial sale. How soon will that take place; Q2, Q3, Q4? And at the same time if you wouldn't mind answering, what is the cost of production in your eyes, and what can you sell this for?

Our expectation is it's going to be in the – probably in Q4 based on the things that we want to incorporate into that first product. The cost of production, you know we really don't want to be disclosing, because of the fact we were engaging with these customers, we don't want them to know what our cost basis looks like. Our expectation is that a B-TRAN module would have about 25% premium to an IGBT module when it has some volume, because it's really replacing what would be done with multiple modules to use the conventional IGBTs. So it should actually have a cost savings for the end user in terms of the up-front cost, plus the efficiency savings, plus the reduced thermal management. So it should be a compelling, cost equation, so that even though we're making them in relatively small volume compared to IGBTs, it should be attractive for them, and still allow us to move into some attractive margins.

Dan I appreciate that. If you will, you know obviously time over nature speaks on itself where you guys are showing these demonstrated models to Department of Energy, to top 10 tier EV companies. What is your stance on potential, you know competitive companies coming in or either buying you out, either way. But most importantly, demonstrating your model to top 10 tier companies on the EV market, at some point and I know you addressed this in your speech. There is lot of investors that understand, over the last year nobody has been able to say who these people are, because you know IPWR is engaged with these companies. At some point with this absolute amazing technology, somebody else is going to be able to figure this out. So what is IPWR doing to protect itself from say the long game of getting cut out?

Sure, if you look at our technology, there's a couple of things to keep in mind. One is, when we are engaging with these customers they are under non-disclosures. So not only can we not share their information, but we're not going to sign that if it’s not mutual. So we don't want our technology finding its way to other potential suppliers they might want to work with. And they are all deep pocket targets, so they tend to be pretty respectful of non-disclosure obligations of the suppliers they work with. What we are doing as a technology company is we've got a pretty broad patent portfolio that covers even the basic architecture of the device, but on top of that what we have done is, the - a lot of the warning that has gone on over the last two to three years has been learning how to make a double sided device. Because double sided wafer fabrication is not common in the semiconductor industry and that whole process of how do you make the double sided device, you won't find in our patents, we treat it as a trade secret. So even if somebody were to try and do some reverse engineering, the would have a long development process to go through, to figure out all the things that we have learned under our confidential collaboration with folks like Paladin and others that we use as our wafer fabricator. It would take a lot of effort to try and back engineer that, because it’s just not documented in a form that anybody in the customer base or in the public literature or in our patents would be able to find.

Well, thank you so much for your answer. I am firm believer in the technology this firm holds. Thank you. Wish you the best.

Thanks Taylor.

Thank you. And that does conclude the question-and-answer session. Mr. Brdar, I will now turn the conference back over to you.

I just want to thank everybody for joining our call today. We wish everybody a happy and safe 2022 and we look forward to giving you another update on our first quarter call. Thanks everyone.

Thank you. And that does conclude today’s conference. We do thank you for your participation. Have an excellent day!