The accompanying notes
are an integral part of these condensed financial statements.
The accompanying notes
are an integral part of these condensed financial statements.
The accompanying notes
are an integral part of these condensed financial statements.
Notes to Financial Statements
(unaudited)
Note 1 – Organization and Description
of Business
Ideal Power Inc. (the “Company”)
was incorporated in Texas on May 17, 2007 under the name Ideal Power Converters, Inc. The Company changed its name to Ideal Power
Inc. on July 8, 2013 and re-incorporated in Delaware on July 15, 2013. With headquarters in Austin, Texas, it developed power
conversion solutions 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.
In April 2018, the Company realigned into
two operating divisions: Power Conversion Systems, to continue the commercialization of its PPSA™ technology, and B-TRAN,
to develop its Bi-directional bi-polar junction TRANsistor (B-TRAN™) solid state switch technology.
In January 2019, the Board of Directors of
the Company (the “Board”) approved a strategic shift to focus on the commercialization of its B-TRAN™ technology
and a plan to suspend further power converter system development and sales while the Company located a buyer for its power conversion
systems division and PPSA™ technology. In September 2019, the Company closed on the sale of the power conversion systems
division and the Company is now solely focused on the further development and commercialization of its B-TRAN™ technology.
Prior to the sale of the Company’s PPSA™ business and technology in September 2019, the Company classified the power
conversion system division as held for sale. The Company shows this division as a discontinued operation in these financial statements.
Since its inception, the Company has generated
limited revenues from the sale of products and has financed its research and development efforts and operations primarily through
the sale of common stock and warrants. The Company’s continued operations are dependent upon, among other things, its ability
to obtain adequate sources of funding through future revenues, follow-on stock offerings, issuances of warrants, debt financing,
co-development agreements, government grants, sale or licensing of developed intellectual property or other alternatives.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited financial statements
have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”)
for Form 10-Q. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations.
The Balance Sheet at December 31, 2019 has been derived from the Company’s audited financial statements included in
its Annual Report on Form 10-K filed with the SEC on March 31, 2020.
In the opinion of management, these financial
statements reflect all normal recurring, and other adjustments, necessary for a fair presentation. These financial statements should
be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2019. Operating results for interim periods are not necessarily indicative of operating results for
an entire fiscal year or any other future periods.
Reverse Stock Split
On August 15, 2019, the Company effected
a reverse stock split of the outstanding shares of its common stock by a ratio of one-for-ten, and its common stock began trading
on the Nasdaq Capital Market on a split-adjusted basis on August 20, 2019. The par value of the Company’s common stock remained
unchanged at $0.001 per share after the reverse stock split. All share amounts, per share data, share prices, exercise prices and
conversion rates set forth in these notes and the accompanying financial statements have, where applicable, been adjusted retroactively
to reflect the reverse stock split.
Liquidity and Going Concern
As reflected in the accompanying
condensed financial statements, the Company had a net loss of $1.8 million and used $1.5 million of cash in operating
activities for the six months ended June 30, 2020. At June 30, 2020, the Company had net working capital of $1.5 million and
the Company’s principal source of liquidity consisted of $1.8 million of cash and cash equivalents. The Company’s
cash and cash equivalent balance at June 30, 2020 relative to its estimate of future operating cash requirements led to
substantial doubt about the ability of the Company to continue as a going concern. The Company’s independent registered
public accounting firm, in its report on the Company’s 2019 financial statements, raised substantial doubt about the
Company’s ability to continue as a going concern. On August 5, 2020 the Company completed an early warrant exercise
transaction pursuant to which certain of the Company’s Series A warrant holders agreed to the early exercise of their
Series A warrants in exchange for new Series C warrants to purchase shares of the Company’s common stock, through a
private placement. The transaction raised aggregate gross proceeds of $2.7 million and estimated net proceeds of $2.5
million, thereby alleviating the substantial doubt about the Company’s ability to continue as a going concern for at
least the next twelve months from the date of issuance of these financial statements. See Note 11.
The accompanying condensed financial statements
have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and
commitments in the normal course of business. The ability of the Company to continue as a going concern is dependent on its ability
to raise additional capital and to develop profitable operations through implementation of its current business initiatives, however,
there can be no assurances that the Company will be able to do so. Additionally, the outbreak of the novel coronavirus (COVID-19)
has caused significant disruptions to the global financial markets which could further impact the Company’s ability to raise
additional capital. If external financing sources are not available or are inadequate to fund operations, or the technology under
development is not capable of generating sustainable revenues in the future, the Company will be required to reduce operating costs,
which could jeopardize future strategic initiatives and business plans, or cease operations. The accompanying condensed financial
statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Revenue Recognition
The Company recognizes revenue and related
cost of revenue in accordance with FASB ASC 606, Revenue from Contracts with Customers (ASC 606) and, as applicable, with
the guidance issued by the FASB in June 2018 for the recipients of grants.
Currently, the Company recognizes grant
revenue and cost of grant revenue only. Government contracts, including grants, are agreements that generally provide the Company
with cost reimbursement for certain types of development activities over a contractually defined period. Grant revenue is recognized
in the period during which the Company incurs the related costs, provided that the Company has incurred the cost in accordance
with the specifications and work plans determined between the Company and the government entity.
For the six months ended June 30, 2020,
the Company recognized $6,515 of grant revenue and cost of grant revenue. The grant revenue relates to a $1.2 million subcontract
with Diversified Technologies, Inc. (DTI), signed in June 2020, to supply B-TRAN™ devices as part of a two-year contract awarded to DTI by the United States Naval Sea Systems Command (NAVSEA) for the development and demonstration of a B-TRAN™
enabled high efficiency direct current circuit breaker. The Company accounts for this subcontract as an exchange transaction under
applicable guidance. No grant revenue was recognized in the six months ended June 30, 2019. Unbilled grant receivables were $6,515
at June 30, 2020 and were included in prepayments and other current assets.
Earnings Per Share
In accordance with ASC 260, shares issuable
for little or no cash consideration are considered outstanding common shares and included in the computation of basic earnings
per share. As such, the Company includes pre-funded warrants to purchase shares of common stock in its computation of earnings
per share. The pre-funded warrants were issued in November 2019 with an exercise price of $0.001. See Note 7 for additional information.
Recent Accounting Pronouncements
Management does not believe that any recently
issued, but not yet effective, accounting standard, if adopted, would have a material impact on the Company’s financial statements.
Note 3 – Discontinued Operations
In January 2019, the Board approved a strategic
shift to focus on the commercialization of the Company’s B-TRAN™ technology and a plan to suspend further power converter
system development and sales while the Company located a buyer for its power conversion systems division. In addition, in January
2019, the Company implemented a reduction-in-force in connection with this exit activity and recognized an expense of $92,600 in
involuntary termination benefits.
The Company’s power conversion
system division, a component supplier to energy storage system integrators, had not achieved the necessary scale to generate
positive cash flows. As the division was dependent on the ability of its customers to scale in the small commercial and
industrial segment of the storage market and based on the sales forecasts and commitments provided by these customers, the
Company did not expect its power conversion systems division to scale sufficiently in the short term, requiring an inflow of
additional capital for the business. As such, the decision was made to exit the power conversion systems business and sell
the division and the Company’s PPSA™ technology and focus on the Company’s B-TRAN™ technology.
As a result, the assets held for sale and
discontinued operations criteria were met and the Company’s financial statements are presented in accordance with ASC 205.
Under ASC 205-20-45-10, during the period in which a component meets the assets held for sale and discontinued operations criteria,
an entity must present the assets and liabilities of the discontinued operation separately in the asset and liability sections
of the balance sheet for the comparative reporting periods. The prior period balance sheet should be reclassified for the held
for sale items. For income statements, the current and prior periods should report the results of operations of the component in
discontinued operations when comparative income statements are presented.
On September 19, 2019, the Company closed
on the sale of its power conversion systems division to CE+T Energy Solutions, Inc. (“CE+T Energy”). The consideration
consisted of $200,000 in cash and 50 shares of CE+T Energy’s common stock, issued on December 11, 2019, which represented
a 5% ownership interest in CE+T Energy as of the closing date. The Company did not record any value of the equity consideration
obtained in the sale as there is not currently a market for such shares and the Company does not have access to current financial
information and future financial projections of CE+T Energy. CE+T Energy also assumed certain liabilities of the power conversion
systems division in connection with the sale. The net cash proceeds from the sale were $23,587.
As a result of the sale, the Balance Sheets
at June 30, 2020 and December 31, 2019 do not include assets held for sale.
The following is a reconciliation of the
major classes of line items constituting loss on discontinued operations to loss on discontinued operations shown in the Statement
of Operations:
|
|
Three Months
Ended June 30,
2019
|
|
|
Six Months
Ended June 30,
2019
|
|
|
|
(unaudited)
|
|
Revenue
|
|
$
|
1,500
|
|
|
$
|
115,000
|
|
Cost of revenue
|
|
|
41,542
|
|
|
|
140,310
|
|
Research and development
|
|
|
24,766
|
|
|
|
185,050
|
|
General and administrative
|
|
|
13,468
|
|
|
|
38,974
|
|
Sales and marketing
|
|
|
(1,200
|
)
|
|
|
34,917
|
|
Impairment (1)
|
|
|
265,000
|
|
|
|
405,000
|
|
Loss from discontinued operations
|
|
$
|
(342,076
|
)
|
|
$
|
(689,251
|
)
|
|
(1)
|
Impairment charge was calculated as the net book value of assets held for sale prior to the impairment less the expected net proceeds from the planned sale. The expected net proceeds were based on the estimated fair value of the net assets held for sale less the estimated cost to sell the net assets held for sale.
|
Note 4 – Intangible Assets
Intangible assets, net consisted of the
following:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
|
(unaudited)
|
|
|
|
|
Patents
|
|
$
|
914,195
|
|
|
$
|
909,142
|
|
Other intangible assets
|
|
|
964,542
|
|
|
|
964,542
|
|
|
|
|
1,878,737
|
|
|
|
1,873,684
|
|
Accumulated amortization
|
|
|
(284,652
|
)
|
|
|
(239,306
|
)
|
|
|
$
|
1,594,085
|
|
|
$
|
1,634,378
|
|
Amortization expense amounted to $23,048
and $45,346 for the three and six months ended June 30, 2020, respectively, and $19,540 and $36,009 for the three and six months
ended June 30, 3019, respectively. Amortization expense for the succeeding five years and thereafter is $46,153 (2020), $92,306
(2021-2024) and $928,047 (thereafter).
At June 30, 2020 and December 31,
2019, the Company had capitalized $250,661 and $335,224, respectively, for costs related to patents that have not been awarded.
Note 5 – Lease
The Company leases 14,782 square feet of
office and laboratory space located in Austin, Texas. On April 20, 2018, the Company entered into an amendment to its existing
operating lease which extended the lease term from May 31, 2018 to May 31, 2021. The annual base rent in the first year of the
lease extension was $184,775 and increases by $7,391 in each succeeding year of the lease extension. In addition, the Company is
required to pay its proportionate share of operating costs for the building under this triple net lease. The lease does not
contain renewal or termination options.
On January 1, 2019, the Company adopted
ASC 842 utilizing a modified retrospective approach with a date of initial application at the beginning of the period of adoption.
At adoption, the Company recognized a right of use asset of $422,819 and lease liability of $427,131. As the discount rate implicit
in the lease was not readily determinable and the Company did not have any outstanding indebtedness, the Company utilized market
data, giving consideration to remaining term of the lease, to estimate its incremental borrowing rate at 8% per annum for purposes
of calculating the right of use asset and lease liability.
On September 19, 2019, the Company
entered into a sublease with CE+T Energy pursuant to which the Company subleases approximately seventy-five (75%) percent of its
Austin, Texas facility to CE+T Energy. Under the sublease, CE+T Energy is obligated to make monthly payments equal to 75% of all
sums due under the master lease and 100% of any maintenance and repair costs related to the subleased premises. The sublease replaced
a temporary agreement between the Company and CE+T Energy, effective July 22, 2019, that contained similar payment obligations
by CE+T Energy for utilization of the subleased premises. Consistent with the master lease, the sublease terminates on May 31,
2021. During the three and six months ended June 30, 2020, CE+T Energy made payments of $51,693 and $102,924, respectively, to
the Company related to the subleased premises. The payments included CE+T Energy’s share of rent as well as its proportionate
share of operating costs for the building under the master lease. The Company recognized these payments as a reduction in general
and administrative expenses.
Future minimum payments under the lease,
as amended, are as follows:
For the Year Ended December 31,
|
|
Master Lease
|
|
|
Sublease Income
|
|
|
Net
|
|
2020
|
|
|
99,778
|
|
|
|
(74,833
|
)
|
|
|
24,945
|
|
2021
|
|
|
83,149
|
|
|
|
(62,362
|
)
|
|
|
20,787
|
|
Total future undiscounted minimum lease payments
|
|
$
|
182,927
|
|
|
$
|
(137,195
|
)
|
|
$
|
45,732
|
|
Less: imputed interest
|
|
|
(5,938
|
)
|
|
|
|
|
|
|
|
|
Total lease liability
|
|
$
|
176,989
|
|
|
|
|
|
|
|
|
|
For the three and six months ended June
30, 2020, operating cash flows for lease payments totaled $48,658 and $96,699, respectively. For the three and six months ended
June 30, 2019, operating cash flows for lease payments totaled $46,809 and $93,003, respectively. For both the three and six months
ended June 30, 2020 and 2019, operating lease cost, recognized on a straight-line basis, totaled $48,487 and $96,975, respectively.
At June 30, 2020, the remaining lease term was 11 months.
Note 6 – Commitments and Contingencies
License Agreement
In 2015, the Company entered into licensing
agreements which expire in February 2033. Per the agreements, the Company has an exclusive royalty-free license associated with
semiconductor power switches which enhances its intellectual property portfolio. The agreements include both fixed payments, all
of which were paid prior to 2017, and ongoing variable payments. The variable payments are a function of the number of associated
patent filings pending and patents issued under the agreements. The Company will pay $10,000 for each patent filing pending and
$20,000 for each patent issued within 20 days of December 21st of each year of the agreements, up to a maximum of $100,000
per year (i.e. five issued patents).
In April 2019, a patent associated with
these agreements was issued and the Company recorded, as a non-cash activity, an intangible asset and a corresponding other long-term
liability of $232,367, representing the estimated present value of future payments under the licensing agreements for this issued
patent. Through June 30, 2020, three patents associated with the agreements were issued. At June 30, 2020 and December 31, 2019,
the other long-term liability for the estimated present value of future payments under the licensing agreements was $603,917 and
$595,802, respectively. The Company is accruing interest for future payments related to the issued patents associated with these
agreements.
Legal Proceedings
On April 11, 2019, the Company entered
into an asset purchase agreement (the “APA”) with Pathion Holdings, Inc., a Delaware corporation, and Pathion, Inc.,
a Delaware corporation, (together, “Pathion”) to sell certain assets (the “PPSA Assets”) related to the
Company’s PPSA™ / Power Conversion Systems business (“PPSA Business”). The purchase price consisted of
$500,000 in cash and 150,000 shares of the common stock of Pathion Holdings, Inc. Pursuant to the APA, Pathion would also assume
certain liabilities relating to the PPSA Business.
On June 13, 2019, the Company filed a petition
in the district court of the 250th Judicial District in Travis County (the “Court”), naming Pathion and
certain Pathion officers as defendants. The petition asserts breach of the APA and the related sublease agreement for failure by
Pathion to pay any cash amounts due thereunder, and fraudulent inducement by Pathion and the individual defendants for misrepresenting
Pathion’s financial position and its stock value. The petition also requested a declaratory judgment that Pathion has no
rights to the PPSA Assets.
On July 15, 2019, Pathion filed a general
denial to the Company’s petition.
On July 22, 2019, the Company filed a motion
for partial summary judgment on its declaratory judgment action and for severance. Pathion responded to the motion for summary
judgment on August 6, 2019. That same day, Pathion filed a counterclaim, and requested injunctive relief and a declaratory judgment.
On August 13, 2019, the Court conducted
a hearing on the Company’s motion for summary judgment. On August 23, 2019, the Court issued an order granting the Company’s
motion for summary judgment and fees and severing judgment from remaining claims. Under this order, the Court declared and decreed
that Pathion has no rights to the PPSA Assets and awarded the Company $24,800 in legal fees plus interest. On October 15, 2019,
the Court issued a writ of garnishment against Pathion’s bank to enable collection of these legal fees.
On October 14, 2019, the Court granted
Pathion’s counsel’s motion to withdraw. Ten days later, a new lawyer appeared for Pathion, and the next day, October
25, 2019, the Court issued a scheduling order requiring Pathion to produce documents and appear for deposition in December 2019
and set trial to begin on August 31, 2020. On December 12, 2019, after Pathion filed an emergency order to delay depositions, the
Court set a new deposition date of January 7, 2020. The deposition occurred on January 7, 2020. On February 20, 2020, Pathion filed
a request for the Company to produce documents within 30 days. The Company responded to this request on March 23, 2020.
On April 17, 2020, the Company and Pathion,
including the individual Pathion defendants, entered into an Agreement and General Release and, on April 22, 2020 jointly filed
a Mutual Notice of Nonsuit with the Court. As a result, the parties were released from any agreements previously signed by the
parties and the legal proceeding was dismissed. In connection with this settlement for no cash consideration, the parties signed
a Rule 11 Agreement whereby the Company would still receive the $25,442 of legal fees plus interest that it was awarded by the
Court in August 2019 and garnished in October 2019. These funds were received by the Company on April 23, 2020.
The Company may be subject to other litigation
from time to time in the ordinary course of business. The Company is not currently party to any legal proceedings that it believes
would reasonably have a material adverse impact on its business, financial results and cash flows.
Indemnification Obligations
In connection with the sale of its power
conversion systems division in September 2019, the Company entered into an Asset Purchase Agreement with CE+T Energy that contains
mutual indemnification obligations for breaches of representations, warranties and covenants and for certain other matters, including
indemnification by the Company for assets and liabilities excluded from the sale and by CE+T Energy for liabilities assumed in
the sale.
COVID-19 Pandemic
In March 2020, the World Health Organization
declared the outbreak of COVID-19 as a pandemic, which continues to spread throughout the United States and the rest of the world.
The ultimate extent of the impact of COVID-19 on the financial performance of the Company will depend
on future developments, including, among other things, the duration and spread of COVID-19, and the overall economy, all of which
are highly uncertain and cannot be predicted. The outbreak of COVID-19 has already caused significant disruptions to
the global financial markets which may impact the Company’s ability to raise additional capital, on acceptable terms or at
all. If the financial markets and/or the overall economy are impacted for an extended period, the
Company's operating results may be materially and adversely affected.
Note 7 — Common and Preferred Stock
Private Placement
On November 7, 2019, the Company
entered into a securities purchase agreement with certain institutional and accredited investors, including Dr. Lon E. Bell,
former Chairman of the Board and Chief Executive Officer, for a private placement of the Company’s common stock and
warrants to purchase common stock for aggregate gross proceeds of $3.5 million and net proceeds of $3.1 million (the
“Offering”). The Offering closed on November 13, 2019. In the Offering, the Company issued an aggregate of (i)
544,950 shares of common stock at $2.4763 per share and (ii) pre-funded Series B warrants to purchase 868,443 shares of
common stock that are immediately exercisable and have no expiration date, at a price of $2.4763 less a nominal exercise
price of $0.001 per pre-funded warrant. The Company also issued to the investors Series A warrants to purchase up to an
aggregate of 1,766,751 shares of common stock at an exercise price of $2.32 per share that are immediately exercisable and
will expire five years from the issuance date. As compensation to the placement agent in the Offering, in addition to a cash
fee for its services, the Company also issued to the placement agent a warrant to purchase up to 70,670 shares of common
stock, with an exercise price of $2.9716 per share. The other terms of the placement agent warrant are substantially the same
as the investor warrants. For his investment of $500,000, Dr. Bell received 201,914 shares of common stock and 252,393
warrants in the Offering. Pursuant to a registration rights agreement, the Company filed a registration statement with the
SEC (which was declared effective on December 20, 2019) to register the resale of the shares of common stock and the shares
of common stock issuable upon exercise of the warrants issued in the Offering. See Note 11.
Preferred Stock
The Company is authorized to issue 10,000,000
shares of preferred stock.
On February 21, 2019, a shareholder converted
708,430 shares of preferred stock to 70,843 shares of common stock. On December 12, 2019, a shareholder converted 810,000 shares
of preferred stock to 81,000 shares of common stock. At June 30, 2020 and December 31, 2019, there was no preferred stock outstanding.
Stock Issuance
On April 29, 2020, the Company issued 26,316
unregistered shares of common stock, valued at $50,000 at the time of issuance, to a third-party vendor as compensation for services
performed.
Note 8 — Equity Incentive Plan
In May 2013, the Company adopted the 2013
Equity Incentive Plan (the “Plan”) and reserved shares of common stock for issuance under the Plan, which was amended
effective June 16, 2020. As a result of the amendment, the number of shares authorized for issuance under the Plan increased by
350,000 shares and the Plan will now terminate on June 16, 2030, unless sooner terminated or extended by the Board. The Plan is
administered by the Compensation Committee of the Company’s Board of Directors. At June 30, 2020, 262,861 shares of common
stock were available for issuance under the Plan.
A summary of the Company’s stock
option activity and related information is as follows:
|
|
Stock
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Life
(in years)
|
|
Outstanding at December 31, 2019
|
|
|
169,980
|
|
|
$
|
8.13
|
|
|
|
9.1
|
|
Granted
|
|
|
112,791
|
|
|
$
|
2.18
|
|
|
|
|
|
Expired
|
|
|
(2,989
|
)
|
|
$
|
62.76
|
|
|
|
|
|
Outstanding at June 30, 2020
|
|
|
279,782
|
|
|
$
|
5.15
|
|
|
|
8.8
|
|
Exercisable at June 30, 2020
|
|
|
214,638
|
|
|
$
|
5.91
|
|
|
|
8.6
|
|
During the six months ended June 30, 2020,
the Company granted 52,791 stock options to Board members, 57,000 stock options to executives and 3,000 stock options to employees
under the Plan. The estimated fair value of these stock options, calculated using the Black-Scholes option valuation model, was
$173,184, of which $123,725 was recognized during the six months ended June 30, 2020.
In April 2020, the Board approved a modification
of a stock option grant to Dr. Lon E. Bell in connection with his retirement as Chief Executive Officer and President. The modification
accelerated the vesting of Dr. Bell’s October 2019 stock option grant with full vesting effective immediately prior to the
end of Dr. Bell’s term on the Board in June 2020. During the three months ended June 30, 2020, the Company recognized $79,444
of expense related to this grant subsequent to the modification.
At June 30, 2020, there was $104,822 of
unrecognized compensation cost related to non-vested equity awards granted under the Plan. That cost is expected to be recognized
over a weighted average period of 0.8 years.
Note 9 — Warrants
A summary of the Company’s warrant
activity and related information is as follows:
|
|
Warrants
|
|
|
Pre-Funded Warrants
|
|
|
|
Activity
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Activity
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding at December 31, 2019
|
|
|
2,463,063
|
|
|
$
|
7.96
|
|
|
|
868,443
|
|
|
$
|
0.001
|
|
Exercised
|
|
|
(75,718
|
)
|
|
$
|
2.32
|
|
|
|
(150,000
|
)
|
|
$
|
0.001
|
|
Expired
|
|
|
(616,648
|
)
|
|
$
|
24.28
|
|
|
|
—
|
|
|
$
|
—
|
|
Outstanding at June 30, 2020
|
|
|
1,770,697
|
|
|
$
|
2.51
|
|
|
|
718,443
|
|
|
$
|
0.001
|
|
During the six months ended June
30, 2020, warrant holders exercised 75,718 Series A warrants and 150,000 Series B pre-funded warrants for proceeds to the Company
of $175,816.
At June 30, 2020, all warrants are exercisable,
although the warrants held by each of the Company’s four largest beneficial owners may be exercised only to the extent that
the total number of shares of common stock then beneficially owned by such shareholder does not exceed 9.99% of the outstanding
shares of the Company’s common stock. See Note 11.
Note 10 — Loans
On May 4, 2020, the Company entered into
a Loan Agreement and Promissory Note (collectively the “PPP Loan”) with BBVA USA pursuant to the Paycheck Protection
Program (the “PPP”) under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)
administered by the U.S. Small Business Administration. The Company received total proceeds of $91,407 from the unsecured PPP Loan.
The PPP Loan is scheduled to mature on May 4, 2022 and has an interest rate of 1.00% per annum and is subject to the terms and
conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. The PPP Loan may be
prepaid by the Company at any time prior to its maturity with no prepayment penalties.
The PPP Loan contains customary events
of default relating to, among other things, payment defaults and breaches of representations and warranties. Subject to certain
conditions, the PPP Loan may be forgiven in whole or in part by applying for forgiveness pursuant to the CARES Act and the PPP.
The amount of loan proceeds eligible for forgiveness is based on a formula based on a number of factors, including the amount of
loan proceeds used by the Company during the 24-week period after the loan origination for certain purposes, including payroll
costs, rent payments on certain leases and certain qualified utility payments, provided that, among other things, at least 60%
of the loan amount is used for eligible payroll costs, the employer maintaining or rehiring employees and maintaining salaries
at certain level. In accordance with the requirements of the CARES Act and the PPP, the Company used the proceeds from the PPP
Loan primarily for payroll costs. The Company intends to apply for forgiveness of the PPP Loan during the third quarter of 2020.
There can be no assurance that the Company will be granted forgiveness of the PPP Loan in whole or in part.
On April 27, 2020, the Company also received
a $5,000 advance related to a U.S. Small Business Administration Economic Injury Disaster Loan.
Note 11 — Subsequent Events
On July 31, 2020, the Company entered into
letter agreements with certain of the Company’s Series A warrant holders (the “Series A Warrant Holders”), who
were previously issued warrants (the “Original Warrants”) to purchase shares of common stock of the Company pursuant
to a securities purchase agreement with certain institutional and accredited investors dated as of November 7, 2019. See Note 7.
The Series A Warrant Holders agreed to the early exercise of Series A warrants pursuant to the letter agreements (the “Transaction”).
The transaction closed on August 5, 2020. The Company raised estimated net proceeds of approximately $2.5 million in the Transaction.
Pursuant to the letter agreements and in
consideration of the Series A Warrant Holders exercising Series A warrants to purchase an aggregate of 1,176,137 shares of common
stock, the Company issued to the Series A Warrant Holders new Series C warrants to purchase up to an aggregate of 705,688 shares
of Common Stock with an exercise price of $8.90 per share and an expiration date of August 4, 2025.
To the extent that a Series A Warrant Holder’s
exercise of Original Warrants would result in such holder exceeding beneficial ownership of 9.99% of the outstanding common stock
of the Company, such excess warrant shares shall be held in abeyance for the benefit of such Series A Warrant Holder until such
time as its right thereto would not result in the holder exceeding this limitation. The term of the abeyance shall extend no later
than May 12, 2025.
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS AND OTHER INFORMATION CONTAINED IN THIS REPORT
This report contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities
Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange
Act. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements
by the fact that they do not relate strictly to historical or current facts. You can find many (but not all) of these statements
by looking for words such as "approximates," "believes," "hopes," "expects," "anticipates,"
"estimates," "projects," "intends," "plans," "would," "should," "could,"
"may" or other similar expressions in this report. In particular, these include statements relating to future actions,
prospective products, applications, customers, technologies, future performance or results of anticipated products, expenses, and
financial results. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results
to differ materially from our historical experience and our present expectations or projections. Factors that could cause actual
results to differ from those discussed in the forward-looking statements include, but are not limited to:
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our ability to generate revenue;
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our limited operating history;
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the size and growth of markets for our technology;
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regulatory developments that may affect our business;
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our ability to successfully develop new technologies, particularly our bi-directional bipolar junction transistor, or B-TRAN™;
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our expectations regarding the timing of prototype and commercial fabrication of B-TRAN™ devices;
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our expectations regarding the performance of our B-TRAN™ and the consistency of that performance with both internal and third-party simulations;
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the expected performance of future products incorporating our B-TRAN™;
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the performance of third-party consultants and service providers whom we have and will continue to rely on to assist us in development of our B-TRAN™ and related drive circuitry;
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the rate and degree of market acceptance for our B-TRAN™;
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the time required for third parties to redesign, test and certify their products incorporating our B-TRAN™;
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our ability to successfully commercialize our B-TRAN™ technology;
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our ability to secure strategic partnerships with semiconductor fabricators and others related to our B-TRAN™ technology;
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our ability to obtain, maintain, defend and enforce intellectual property rights protecting our technology;
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the success of our efforts to manage cash spending, particularly prior to the commercialization of our B-TRAN™ technology;
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general economic conditions and events and the impact they may have on us and our potential partners and licensees;
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our ability to obtain adequate financing in the future, as and when we need it;
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our ability to maintain listing of our common stock on the Nasdaq Capital Market;
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the impact of the novel coronavirus (COVID-19) on our business, financial condition and results of operations;
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our success at managing the risks involved in the foregoing items; and
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other factors discussed in this report, our most recent Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and other filings with the Securities and Exchange Commission (the “SEC”)..
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The forward-looking statements are based
upon management’s beliefs and assumptions and are made as of the date of this report. We undertake no obligation to publicly
update or revise any forward-looking statements included in this report. You should not place undue reliance on these forward-looking
statements.
REVERSE STOCK SPLIT
On August 15, 2019, we effected a reverse
stock split of the outstanding shares of our common stock by a ratio of one-for-ten, and our common stock began trading on the
Nasdaq Capital Market on a split-adjusted basis on August 20, 2019. The par value of our common stock remained unchanged at $0.001
per share after the reverse stock split. All share amounts, per share data, share prices, exercise prices and conversion rates
have, where applicable, been adjusted retroactively to reflect the reverse stock split.
Unless otherwise stated or the context
otherwise requires, the terms “Ideal Power,” “we,” “us,” “our” and the “Company”
refer to Ideal Power Inc.