Notes to Financial Statements
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.
The Company show 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 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 preparation of financial statements
in conformity with US GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain items in prior period financial
statements have been reclassified to conform to current year presentation. Such reclassifications did not impact the Company’s
reported net loss or financial position.
Liquidity and Going Concern
The Company has incurred net losses and
negative operating cash flows since inception, including a net loss of $7.8 million and cash used in operating activities of $3.0
million for the year ended December 31, 2020. At December 31, 2020, the Company had net working capital of $2.8 million
and the Company’s principal source of liquidity consisted of $3.2 million of cash and cash equivalents.
In February 2021, the Company completed
the February 2021 Public Offering (as defined below). See Note 16. The Company raised net proceeds of $21.2 million in the
February 2021 Public Offering, thereby alleviating the substantial doubt about the Company’s ability to continue as
a going concern.
The accompanying 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 develop
profitable operations through implementation of its current business initiatives and/or raise additional capital, however, there
can be no assurances that the Company will be able to do so.
Cash and Cash Equivalents
The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be cash equivalents.
Accounts Receivable
Trade accounts receivable are stated net of an allowance
for doubtful accounts. Management estimates the allowance for doubtful accounts based on review and analysis of specific customer balances
that may not be collectible, customer payment history and any other customer-specific information that may impact the evaluation of the
specific customer’s credit. Trade accounts receivable at December 31, 2020 relate 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. At December 31, 2020, unbilled grant receivables, which are included in accounts receivable, net, were $48,939 and the
allowance for doubtful accounts was $0.
Property and Equipment
Property and equipment are stated at historical
cost less accumulated depreciation and amortization. Major additions and improvements are capitalized while maintenance and repairs
that do not improve or extend the useful life of the respective asset are expensed. Depreciation and amortization of property and
equipment is computed using the straight-line method over their estimated useful lives. Leasehold improvements are amortized over
the shorter of the life of the asset or the related leases. Estimated useful lives of the principal classes of assets are as follows:
Leasehold improvements
|
|
Shorter of lease term or useful life
|
Machinery and equipment
|
|
5 years
|
Furniture, fixtures and IT equipment
|
|
3 – 5 years
|
Intangible Assets
The Company’s intangible assets are
composed of patents, which are recorded at cost, and other intangible assets, which are recorded at cost plus the estimated present
value of all future payments associated with the other intangible assets. The Company capitalizes third-party legal costs and filing
fees, if any, associated with obtaining patents or other intangible assets. Once the patent asset has been placed in service, the
Company amortizes these costs over the shorter of the asset’s legal life, generally 20 years, or its estimated economic life
using the straight-line method. For the other intangible assets, the Company amortizes the asset over the 17-year term of the underlying
agreements.
Impairment of Long-Lived Assets
The long-lived assets, consisting of property
and equipment and intangible assets, held and used by the Company are reviewed for impairment no less frequently than annually
or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In the event
that facts and circumstances indicate that the cost of any long-lived assets may be impaired, an evaluation of recoverability is
performed. For continuing operations, management has determined that there was an impairment in the value of long-lived assets
in the amount of $20,660 and $14,707 during the years ended December 31, 2020 and 2019, respectively.
Fair Value
Fair value is the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Assets and liabilities measured at fair value are categorized based on whether or not the inputs are observable in the market and
the degree that the inputs are observable. The categorization of financial assets and liabilities within the valuation hierarchy
is based upon the lowest level of input that is significant to the fair value measurement. The three levels of inputs used to establish
fair value are the following:
|
•
|
Level 1 — Quoted prices in active markets for identical assets or liabilities;
|
|
•
|
Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
|
|
•
|
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities
|
The Company’s financial instruments
primarily consist of cash and cash equivalents, accounts payable and long-term liabilities. As of the balance sheet dates, the
estimated fair values of the financial instruments were not materially different from their carrying values as presented on the
balance sheets. This is primarily attributed to the short-term nature of these instruments.
In 2016, the Company recorded a long-term
liability for the estimated present value of future payments under a licensing agreement. In 2017 and 2019, the Company recorded
an adjustment to increase the long-term liability due to an increase in the future payments due under this licensing agreement.
The Company determined the discount rate to estimate the present value of the future payments based on the applicable treasury
rates. The Company's long-term liability is classified within Level 3. See Note 6 and Note 13 for more details regarding the licensing
agreement. The Company did not identify any other assets and liabilities that are required to be presented in the balance sheets
at fair value.
Revenue Recognition
The Company recognizes revenue and related
cost of revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 606, “Revenue from Contracts with Customers” 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 year ended December 31, 2020,
the Company recognized $428,129 of grant revenue and cost of grant revenue. The grant revenue relates to a $1.2 million subcontract
with DTI, signed in June 2020, to supply B-TRAN™ devices as part of a two-year
contract awarded to DTI by 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 year ended December 31, 2019.
Research and Development
Research and development costs are presented
as a line item under operating expenses and are expensed as incurred.
Income Taxes
The Company accounts for income taxes using
an asset and liability approach which allows for the recognition and measurement of deferred tax assets based upon the likelihood
of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net
tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not
these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.
At December 31, 2020 and 2019, the Company has established a full reserve against all deferred tax assets.
Tax benefits from an uncertain tax position
are recognized only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities
based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are
measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate resolution.
Earnings Per Share
The Company applies FASB ASC 260, “Earnings
per Share.” Basic earnings (loss) per share is computed by dividing earnings (loss) available to common stockholders by the
weighted-average number of common shares outstanding. Diluted earnings (loss) per share is computed similar to basic earnings (loss)
per share except that the denominator is increased to include additional common shares available upon exercise of equity awards
and warrants using the treasury stock method. In periods with a net loss, no common share equivalents are included because their
effect would be anti-dilutive.
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 and warrants shares held in abeyance in
its computation of earnings per share. The pre-funded warrants were issued in the Private Placement (as defined below) with an
exercise price of $0.001. See Note 8. The warrant shares held in abeyance were a result of the Early Warrant Exercise Transaction
(as defined below). See Note 10.
At December 31, 2020 and 2019, potentially
dilutive shares outstanding amounted to 1,541,518 shares and 2,633,043 shares, respectively, and exclude pre-funded warrants to
purchase shares of common stock and excess warrant shares held in abeyance.
Stock Based Compensation
The Company applies FASB ASC 718, “Stock
Compensation,” when recording stock-based compensation. Grants to non-employees are also accounted for under ASC 718. The
fair value of each stock option award is estimated on the date of grant using the Black-Scholes option valuation model.
The Company issues common stock upon exercise
of equity awards and warrants.
Concentration of Credit Risk
Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains its
cash with a major financial institution located in the United States. Balances are insured by the Federal Deposit Insurance Corporation
up to $250,000. The Company maintains balances in excess of federally insured limits. The Company has not experienced losses in
such accounts and believes it is not exposed to significant credit risk regarding its cash and cash equivalents.
Recent Accounting Pronouncements
Management does not believe that any recently
issued, but not yet effective, accounting standards, 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 conversion 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.
In September 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, received at closing, and 50 shares of CE+T Energy’s common stock, issued in
December 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 was not a market for such shares and the Company did 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. In
December 2020, the Company and CE+T Energy entered into an agreement whereby CE+T Energy would repurchase the Company’s
shares of CE+T Energy’s common stock for $25,000.
As a result of the sale, the Balance Sheets
at December 31, 2020 and 2019 do not include assets held for sale.
The following is a detail of the major
classes of line items constituting loss on discontinued operations shown in the Statement of Operations:
|
|
December 31,
|
|
|
|
2019
|
|
Product revenue
|
|
$
|
115,000
|
|
Cost of product revenue
|
|
|
141,647
|
|
Research and development
|
|
|
228,641
|
|
General and administrative
|
|
|
79,306
|
|
Sales and marketing
|
|
|
59,431
|
|
Impairment (1)
|
|
|
405,000
|
|
Loss on discontinued operations
|
|
$
|
(799,025
|
)
|
|
(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. For the year ended December 31, 2019, the Company recorded a loss on the sale of discontinued operations of $9,107.
|
Note 4 — Prepayments and Other Current
Assets
Prepayments and other current assets consisted
of the following:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Prepaid insurance
|
|
$
|
18,477
|
|
|
$
|
169,832
|
|
Prepaid software
|
|
|
4,814
|
|
|
|
39,475
|
|
Prepaid rent
|
|
|
23,686
|
|
|
|
22,769
|
|
Deposits
|
|
|
23,769
|
|
|
|
7,414
|
|
Other
|
|
|
48,137
|
|
|
|
8,658
|
|
|
|
$
|
118,883
|
|
|
$
|
248,148
|
|
Note 5 — Property and Equipment
Property and equipment, net consisted of
the following:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Machinery and equipment
|
|
$
|
89,559
|
|
|
$
|
89,559
|
|
Building leasehold improvements
|
|
|
25,090
|
|
|
|
25,090
|
|
Furniture, fixtures, software and IT equipment
|
|
|
45,517
|
|
|
|
114,880
|
|
|
|
|
160,166
|
|
|
|
229,529
|
|
Accumulated depreciation and amortization
|
|
|
(123,041
|
)
|
|
|
(182,227
|
)
|
|
|
$
|
37,125
|
|
|
$
|
47,302
|
|
Note 6 — Intangible Assets
Intangible assets, net consisted of the
following:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Patents
|
|
$
|
941,701
|
|
|
$
|
909,142
|
|
Other intangible assets
|
|
|
964,542
|
|
|
|
964,542
|
|
|
|
|
1,906,243
|
|
|
|
1,873,684
|
|
Accumulated amortization
|
|
|
(337,340
|
)
|
|
|
(239,306
|
)
|
|
|
$
|
1,568,903
|
|
|
$
|
1,634,378
|
|
At December 31, 2020 and 2019, the
Company had capitalized approximately $270,000 and $335,224, respectively, for costs related to patents that have not been awarded.
During the years ended December 31, 2020 and 2019, the Company wrote-off $20,660 and $14,707, respectively, in previously
capitalized patent costs.
Amortization expense amounted to $98,035
and $79,536 for the years ended December 31, 2020 and 2019, respectively. Amortization expense for the succeeding five years
and thereafter is $94,532 (2021-2025) and $826,244 (thereafter).
Note 7 — Accrued Expenses
Accrued expenses consisted of the following:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Accrued professional fees
|
|
$
|
32,500
|
|
|
$
|
44,500
|
|
Accrued compensation
|
|
|
191,556
|
|
|
|
42,659
|
|
Accrued licensing fees
|
|
|
60,000
|
|
|
|
60,000
|
|
Accrued Board fees
|
|
|
45,000
|
|
|
|
30,000
|
|
Accrued taxes
|
|
|
—
|
|
|
|
54,160
|
|
Accrued semiconductor fabrication costs
|
|
|
92,600
|
|
|
|
55,000
|
|
Accrued certification costs
|
|
|
—
|
|
|
|
30,978
|
|
Other
|
|
|
53,831
|
|
|
|
1,838
|
|
|
|
$
|
475,487
|
|
|
$
|
319,135
|
|
Note 8 — Equity
All shares of common stock have a par value
of $0.001. Each holder of common stock is entitled to one vote per share outstanding.
Private Placement
In November 2019, the Company entered
into a securities purchase agreement with certain institutional and accredited investors, including Dr. Lon E. Bell, former
Chief Executive Officer and Chairman of the Board, for a private placement of the Company’s common stock and warrants to
purchase common stock for net proceeds of $3.1 million (the “Private Placement”).
The Private Placement closed in November 2019. In the Private Placement, the Company issued an aggregate of (i) 544,950
shares of common stock at $2.4763 per share and (ii) pre-funded warrants to purchase 868,443 shares of common stock that were
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 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 were immediately exercisable and will expire five years from the issuance date. As compensation
to the placement agent in the Private Placement, 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 Private Placement.
Preferred Stock
In February 2017, the Board authorized
Series A Convertible Preferred Stock consisting of 3,000,000 shares. Each share of the preferred stock has a par value of
$0.001 and is convertible at any time at the option of the holder into one-tenth shares of common stock. The holder cannot convert
the preferred stock to the extent its beneficial ownership would exceed 4.99% of the Company's common stock outstanding, subject
to adjustment as provided in the Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible
Preferred Stock. The shares have no voting power, no liquidation preference or additional dividend entitlements.
In February 2019, a shareholder converted
708,430 shares of preferred stock to 70,843 shares of common stock. In December 2019, a shareholder converted 810,000 shares
of preferred stock to 81,000 shares of common stock. At December 31, 2020 and 2019, there was no preferred stock outstanding.
Stock Issuance
In April 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 9 — Equity Incentive Plan
In May 2013, the Company adopted the
2013 Equity Incentive Plan (as amended and restated, the “Plan”) and reserved shares of common stock for issuance under
the Plan, which was amended in June 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 in June 2030, unless sooner terminated or extended by
the Board. The Plan is administered by the Compensation Committee of the Board. At December 31, 2020, there were 148,961 shares
of common stock available for issuance under the Plan.
During the year ended December 31,
2020, the Company granted 52,791 stock options to Board members, 168,400 stock options to executives and 5,500 stock options to
employees under the Plan. The estimated fair value of these stock options, calculated using the Black-Scholes option valuation
model, was $758,214, of which $754,369 was recognized during the year ended December 31, 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 year ended December 31,
2020, the Company recognized $79,444 of expense related to this grant subsequent to the modification.
During the year ended December 31,
2019, the Company granted 23,400 stock options to Board members, 94,000 stock options to executives and 1,000 stock options to
an employee under the Plan. The estimated fair value of these stock options, calculated using the Black-Scholes option valuation
model, was $253,074, of which $76,808 was recognized during the year ended December 31, 2019.
As permitted by SAB 107, management utilizes
the simplified approach to estimate the expected term of stock options, which represents the period of time that options granted
are expected to be outstanding. The risk-free interest rate for periods within the contractual life of the option is based on the
U.S. treasury yield in effect at the time of grant. The volatility is estimated based on the historical volatilities of comparable
companies. The Company has never declared or paid dividends and has no plans to do so in the foreseeable future.
The assumptions used in the Black-Scholes
model are as follows:
|
|
For
the year ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Average risk-free interest rate
|
|
|
0.83
|
%
|
|
|
2.12
|
%
|
Expected dividend yield
|
|
|
—
|
%
|
|
|
—
|
%
|
Expected life
|
|
|
5.00 to 6.25 years
|
|
|
|
5.16 to 6.25 years
|
|
Expected volatility
|
|
|
90
|
%
|
|
|
80
|
%
|
A summary of the Company’s stock
option activity and related information is as follows:
|
|
2020
|
|
|
2019
|
|
|
|
Stock
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Life
(in years)
|
|
|
Stock
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Life
(in years)
|
|
Outstanding at January 1
|
|
|
169,980
|
|
|
$
|
8.13
|
|
|
|
9.1
|
|
|
|
147,054
|
|
|
$
|
50.79
|
|
|
|
6.8
|
|
Granted
|
|
|
226,691
|
|
|
$
|
4.84
|
|
|
|
|
|
|
|
118,400
|
|
|
$
|
3.14
|
|
|
|
|
|
Forfeited / Expired
|
|
|
(5,021
|
)
|
|
$
|
49.39
|
|
|
|
|
|
|
|
(95,474
|
)
|
|
$
|
67.64
|
|
|
|
|
|
Outstanding at December 31
|
|
|
391,650
|
|
|
$
|
5.70
|
|
|
|
8.1
|
|
|
|
169,980
|
|
|
$
|
8.13
|
|
|
|
9.1
|
|
Exercisable at December 31
|
|
|
364,567
|
|
|
$
|
5.91
|
|
|
|
8.0
|
|
|
|
74,980
|
|
|
$
|
14.81
|
|
|
|
8.1
|
|
The following table sets forth additional
information about stock options outstanding at December 31, 2020:
Range of Exercise Prices
|
|
Options
Outstanding
|
|
|
Weighted
Average
Remaining
Life
(in years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Options
Exercisable
|
|
$1.99 – $2.85
|
|
|
206,791
|
|
|
|
7.7
|
|
|
$
|
2.49
|
|
|
|
180,458
|
|
$4.25 – $7.59
|
|
|
138,300
|
|
|
|
9.5
|
|
|
$
|
6.90
|
|
|
|
137,550
|
|
$12.20 – $15.60
|
|
|
42,206
|
|
|
|
5.2
|
|
|
$
|
13.08
|
|
|
|
42,206
|
|
$31.50 – $79.40
|
|
|
4,353
|
|
|
|
5.6
|
|
|
$
|
48.50
|
|
|
|
4,353
|
|
|
|
|
391,650
|
|
|
|
|
|
|
|
|
|
|
|
364,567
|
|
Stock options granted under the Plan have
ten-year terms and generally vest immediately or annually over a three-year or four-year vesting period except for option grants
to independent directors that generally vest quarterly over a one-year vesting period.
The estimated aggregate pretax intrinsic
value (the difference between the Company’s stock price on the last day of the year ended December 31, 2020 and the
exercise prices, multiplied by the number of vested in-the-money options) is $1.2 million. This amount changes based on the fair
value of the Company’s stock.
As of December 31, 2020, there was
$47,372 of unrecognized compensation cost related to non-vested share-based compensation arrangements. That cost is expected to
be recognized over a weighted average period of 1 year.
Note 10 — Warrants
Early Warrant Exercise Transaction
In July 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 in
the Private Placement. The Series A Warrant Holders agreed to the early exercise of Series A warrants pursuant to the
letter agreements (the “Early Warrant Exercise Transaction”). The transaction closed in August 2020. The Company
raised net proceeds of $2.5 million in the Early Warrant Exercise 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. The
estimated fair value of the Series C warrants, calculated using the Black-Scholes model, was $3.7 million on the date of issuance
and was recognized as a non-cash warrant inducement expense within other expenses in the statement of operations. The assumptions
used in the Black Scholes model included a risk-free interest rate of 0.22%, a zero expected dividend yield, an expected life of
5 years and an expected volatility of 90%.
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 will 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.
During the year ended December 31,
2019 and in connection with the Private Placement, the Company issued pre-funded warrants to purchase 868,443 shares of common
stock that were immediately exercisable and have no expiration date. The pre-funded warrants were recorded as a component of stockholders’
equity within additional paid-in capital. Also in connection with the Private Placement, investors received warrants to purchase
1,766,751 shares of common stock at an exercise price of $2.32 per share that will expire five year from the date of issuance.
The placement agreement received 70,670 warrants to purchase shares of common stock as part of its placement agent fee. The placement
agent warrant has an exercise price of $2.9716 per share and expires five year from the date of issuance.
The warrants were sold with shares of common
stock or pre-funded warrants for $2.4763 per unit. The unit price was allocated to the warrants and common stock or pre-funded
warrants based upon the relative fair value of the securities, with the warrants valued using the Black-Scholes model. The allocated
fair value of the warrants was estimated to be $1.6 million on the date of issuance. In addition, the placement agent warrant was
valued at $98,592 on the date of issuance.
The assumptions used in the Black-Scholes
model for these warrants are as follows:
Average risk-free interest rate
|
|
|
1.69
|
%
|
Expected dividend yield
|
|
|
—
|
%
|
Expected life
|
|
|
5 years
|
|
Expected volatility
|
|
|
80
|
%
|
A summary of the Company’s warrant
activity and related information is as follows:
|
|
Warrants
|
|
|
Pre-Funded Warrants
|
|
|
|
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding at January 1, 2019
|
|
|
713,652
|
|
|
$
|
26.19
|
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
|
1,837,421
|
|
|
$
|
2.35
|
|
|
|
868,443
|
|
|
$
|
0.001
|
|
Expired
|
|
|
(88,010
|
)
|
|
$
|
38.70
|
|
|
|
—
|
|
|
$
|
—
|
|
Outstanding at December 31, 2019
|
|
|
2,463,063
|
|
|
$
|
7.96
|
|
|
|
868,443
|
|
|
$
|
0.001
|
|
Granted
|
|
|
705,688
|
|
|
$
|
8.90
|
|
|
|
—
|
|
|
$
|
—
|
|
Exercised
|
|
|
(589,941
|
)
|
|
$
|
2.39
|
|
|
|
(548,242
|
)
|
|
$
|
0.001
|
|
Held in abeyance
|
|
|
(803,300
|
)
|
|
$
|
2.32
|
|
|
|
—
|
|
|
$
|
—
|
|
Expired
|
|
|
(625,642
|
)
|
|
$
|
24.44
|
|
|
|
—
|
|
|
$
|
—
|
|
Outstanding at December 31, 2020
|
|
|
1,149,868
|
|
|
$
|
6.36
|
|
|
|
320,201
|
|
|
$
|
0.001
|
|
At December 31, 2020, 803,300 excess
warrant shares were held in abeyance.
All warrants were exercisable at December 31,
2020 although warrants may generally be exercised only to the extent that the total number of shares of common stock then beneficially
owned by these shareholders does not exceed 4.99% (or, at the investor’s election, 9.99%) of the outstanding shares of the
Company’s stock.
The weighted average remaining life, excluding
the 320,201 pre-funded warrants with no expiration date, of the outstanding warrants is 4.3 years.
The estimated aggregate pre-tax intrinsic
value (the difference between the Company’s stock price on the last day of the year ended December 31, 2020 and the
exercise prices, multiplied by the number of in-the-money warrants) is $11.8 million.
Note 11 — Income Taxes
Income taxes are disproportionate to income
due to net operating loss carryforwards, which are fully reserved. As of December 31, 2020, the Company has federal net operating
loss carryforwards of approximately $57 million. The federal net operating loss carryforward for years prior to 2018 expire from
2031 through 2038. Federal net operating loss carryforwards for year 2018 and thereafter do not expire.
Pursuant to Internal Revenue Code Sections
382 and 383, use of the Company’s net operating loss and credit carryforwards may be limited if a cumulative change in ownership
of more than 50% occurs within any three-year period since the last ownership change. The Company may have had one or more changes
in control under these Sections. However, the Company does not anticipate performing a complete analysis of the limitation on the
annual use of the net operating loss and tax credit carryforwards until the time that it projects it will be able to utilize these
tax attributes.
Management has concluded that it is more
likely than not that the Company will not have sufficient foreseeable taxable income within the carryforward period as applicable
and permitted by current law to allow for the utilization of certain of the deductible amounts generating the deferred tax assets;
therefore, a full valuation allowance has been established to reduce the net deferred tax assets to zero at December 31, 2020
and 2019.
The following is a summary of the significant
components of the Company’s net deferred income tax assets and liabilities as of December 31, 2020 and 2019:
|
|
For the Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Current deferred income tax assets:
|
|
|
|
|
|
|
|
|
Accrued compensation and other
|
|
|
11,000
|
|
|
|
9,000
|
|
Less: valuation allowance
|
|
|
(11,000
|
)
|
|
|
(9,000
|
)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Non-current deferred income tax assets and (liabilities):
|
|
|
|
|
|
|
|
|
Net operating loss
|
|
$
|
12,003,000
|
|
|
$
|
11,382,000
|
|
Research and development credit
|
|
|
18,000
|
|
|
|
18,000
|
|
Warrants issued for services
|
|
|
45,000
|
|
|
|
45,000
|
|
Depreciation and amortization
|
|
|
95,000
|
|
|
|
76,000
|
|
Exercise of options and warrants
|
|
|
(33,000
|
)
|
|
|
(33,000
|
)
|
Stock based compensation
|
|
|
957,000
|
|
|
|
775,000
|
|
Intangibles and other
|
|
|
(471,000
|
)
|
|
|
(425,000
|
)
|
Less: valuation allowance
|
|
|
(12,614,000
|
)
|
|
|
(11,838,000
|
)
|
Net non-current deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
The Company has applied the provisions
of FASB ASC 740, Income Tax, which clarifies the accounting for uncertainty in tax positions. FASB ASC 740 requires
the recognition of the impact of a tax position in the financial statements if that position is more likely than not of being sustained
on a tax return upon examination by the relevant taxing authority, based on the technical merits of the position. At December 31,
2020 and 2019, the Company had no unrecognized tax benefits.
The Company recognizes interest and penalties
related to income tax matters in interest expense and operating expenses, respectively. As of December 31, 2020, and 2019,
the Company has no accrued interest and penalties related to uncertain tax positions.
The Company is
subject to tax in the United States (“U.S.”) and files tax returns in the U.S. federal and certain state jurisdictions.
The Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before 2016.
The Company currently is not under examination by any tax authority.
The reconciliation
between the statutory income tax rate and the effective tax rate is as follows:
|
|
For the Year Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Statutory federal income tax rate
|
|
|
(21
|
)%
|
|
|
(21
|
)%
|
Stock based compensation
|
|
|
0
|
|
|
|
1
|
|
Warrant inducement
|
|
|
10
|
|
|
|
—
|
|
Valuation allowance
|
|
|
11
|
|
|
|
20
|
|
|
|
|
—
|
%
|
|
|
—
|
%
|
Note 12 — Lease
Lease
The Company leases 14,782 square feet of
office and laboratory space located in Austin, Texas. In April 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.
In September 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 in July 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 year ended December 31, 2020, CE+T Energy made payments of $207,000 to the Company related to the subleased
premises. The payments included CE+T Energy’s prorated share of rent as well as its prorated and 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:
|
|
Master Lease
|
|
|
Sublease Income
|
|
|
Net
|
|
2021
|
|
$
|
83,149
|
|
|
$
|
(62,362
|
)
|
|
$
|
20,787
|
|
Less: imputed interest
|
|
|
(1,094
|
)
|
|
|
|
|
|
|
|
|
Total lease liability
|
|
$
|
82,055
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2020,
operating cash outflows for lease payments totaled $196,477 and the operating lease cost, recognized on a straight-line basis,
totaled $193,950. At December 31, 2020, the remaining lease term was 5 months.
Note 13 — 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 each year of the agreements, up to a maximum of $100,000 each 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 asset and a corresponding liability of $232,367,
representing the estimated present value of future payments under the licensing agreements for this issued patent. Through December 31,
2020, a total of three patents associated with the agreements were issued. At December 31, 2020 and 2019, the corresponding
long-term liability for the estimated present value of future payments under the licensing agreement was $552,031 and $595,802,
respectively. The Company is accruing interest for future payments related to the issued patents associated with the agreement.
This long-term liability incurred in connection with these patent issuances is a non-cash investing activity with regard to the
Company’s statements of cash flows.
Legal Proceedings
The Company may be subject to 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, 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.
The employment agreements of Company executives
include an indemnification provision whereby the Company shall indemnify and defend, at the Company’s expense, its executives
so as long as an executive’s actions were taken in good faith and in furtherance of Company’s business and within the
scope of executive’s duties and authority.
COVID-19 Pandemic
As of the date of these financial
statements, the COVID-19 pandemic 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, the timing of vaccination efforts, additional governmental restrictions in response to
the COVID-19 pandemic, and the overall economy, all of which are highly uncertain and cannot be predicted. The COVID-19 pandemic has
already caused significant volatility in the global financial markets which may impact the Company’s ability to raise
additional capital if necessary, on acceptable terms or at all, though such risk has not materialized to date. If the financial
markets and/or the overall economy are negatively impacted for an extended period, the Company's operating results may be materially
and adversely affected.
Note 14 – Loans
In May 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 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 in May 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 first payment due date was originally in December 2020
but BBVA USA extended the first due date to May 2021 as the PPP Flexibility Act of 2020 extended the deferral period for payment
of principal and interest for all PPP borrowers.
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 8-week or 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 applied for forgiveness of the PPP Loan during the first quarter of 2021. There can
be no assurance that the Company will be granted forgiveness of the PPP Loan in whole or in part.
In April 2020, the Company also received
a $5,000 advance related to a U.S. Small Business Administration Economic Injury Disaster Loan. The Company expects to repay this
advance and has included it within accrued expenses.
Note 15 — Retirement Plan
The Company has a defined contribution
retirement plan covering all of its employees. Under the plan, Company contributions are discretionary. No discretionary contributions
were made by the Company in the years ended December 31, 2020 and 2019.
Note 16 — Subsequent Events
February 2021 Public Offering
In February 2021, the Company issued
and sold 1,352,975 shares of its common stock, including 176,475 additional shares of common stock pursuant to the exercise of
the underwriter’s option to purchase additional shares in full, in an underwritten public offering at a price of $17.00 per
share (the “February 2021 Offering”). The net proceeds to the Company from the February 2021 Offering were
$21.2 million. The Company intends to use the net proceeds from the February 2021 Offering to fund commercialization and development
of its B-TRAN™ technology and general corporate and working capital purposes.
Lease
On March 10, 2021, the Company entered
into a lease agreement for 4,070 square feet of office and laboratory space located in Austin, Texas. The commencement of the lease
is expected to occur on June 1, 2021 and the term of the lease is 63 months. The annual base rent in the first year of the
lease is $56,471 and is net of $18,824 in abated rent over the first three months of the lease term. The annual base rent in the
second year of the lease is $77,330 and increases by $2,035 in each succeeding year of the lease. In addition, the Company is required
to pay its proportionate share of operating costs for the building under this triple net lease. The lease contains a 5-year fair
market renewal option. It does not contain a termination option.
Warrant Exercises
Subsequent to December 31, 2020 and
through February 28, 2021, warrant holders exercised warrants to purchase 429,821 shares of our common stock. The Company
received $3.2 million in proceeds from the exercise of these warrants. In addition, the Company issued 803,300 excess warrant shares
that were held in abeyance. At February 28, 2021, no excess warrant shares were held in abeyance.