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, the Company is solely
focused on the further development and commercialization of its Bi-directional bi-polar junction TRANsistor (B-TRAN™) solid state
switch technology.
Since its inception, the Company 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, 2020 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 26, 2021.
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, 2020. Operating results for interim periods are not necessarily indicative of operating results for an entire
fiscal year or any other future periods.
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, for the three months ended March 31, 2021 and 2020, the Company has included pre-funded warrants to purchase 253,828 and
868,443 shares of common stock, respectively, which were issued in November 2019 with an exercise price of $0.001, in its computation
of earnings per share.
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 – Intangible Assets
Intangible assets, net consisted of the following:
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
|
|
(unaudited)
|
|
|
|
|
Patents
|
|
$
|
970,976
|
|
|
$
|
941,701
|
|
Other intangible assets
|
|
|
1,391,479
|
|
|
|
964,542
|
|
|
|
|
2,362,455
|
|
|
|
1,906,243
|
|
Accumulated amortization
|
|
|
(361,038
|
)
|
|
|
(337,340
|
)
|
|
|
$
|
2,001,417
|
|
|
$
|
1,568,903
|
|
Amortization expense amounted to $23,698 and $22,298
for the three months ended March 31, 2021 and 2020, respectively. Amortization expense for the succeeding five years and thereafter
is $100,732 (2021), $134,310 (2022-2025) and $1,118,267 (thereafter).
At March 31, 2021 and December 31, 2020,
the Company had capitalized $245,178 and $270,000, respectively, for costs related to patents that have not been awarded.
Note 4 – 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 (“SBA”). 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 August 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. See Note 10.
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 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.
For purposes of calculating the right of use asset
and lease liability included in the Company’s financial statements, the Company estimated its incremental borrowing rate at 8% per
annum.
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 three months ended March 31,
2021, CE+T Energy made payments of $53,293 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
|
|
2021
|
|
|
33,259
|
|
|
|
(24,944
|
)
|
|
|
8,315
|
|
Less: imputed interest
|
|
|
(110
|
)
|
|
|
|
|
|
|
|
|
Total lease liability
|
|
$
|
33,149
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2021
and 2020, operating cash flows for lease payments totaled $49,889 and $48,041, respectively. For both the three months ended March 31,
2021 and 2020, operating lease cost, recognized on a straight-line basis, totaled $48,488. At March 31, 2021, the remaining lease
term was 2 months.
In March 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 actual 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. The Company will recognize a right of use asset and lease liability for this lease upon lease commencement.
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
annually with one-half the annual payment due within 20 days of December 21st of each year and one-half annual the payment
due within 20 days of June 21st of each year of the agreements, up to a maximum of $100,000 per year (i.e. five issued
patents).
In March 2021, two patents associated with
these agreements were issued and the Company recorded, as a non-cash activity, an intangible asset and a corresponding other long-term
liability of $426,937, representing the estimated present value of future payments under the licensing agreements for these two issued
patents. Through March 31, 2021, all five patents associated with the agreements were issued. At March 31, 2021 and December 31,
2020, the other long-term liability for the estimated present value of future payments under the licensing agreements was $944,026 and
$552,031, respectively. The Company is accruing interest for future payments related to the issued patents associated with these agreements.
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.
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.
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
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 and efficacy 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 7 — Common Stock
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.
Stock Issuance
In February 2021, the Company issued 4,000
unregistered shares of common stock, valued at $68,680 at the time of issuance, to a third-party vendor as compensation for services performed.
Note 8 — Equity Incentive Plan
On May 17, 2013, the Company adopted the
2013 Equity Incentive Plan (as amended, the “Plan”) and reserved shares of common stock for issuance under the Plan. The Plan
is administered by the Compensation Committee of the Company’s Board of Directors.
At March 31, 2021, 92,140 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, 2020
|
|
|
391,650
|
|
|
$
|
5.70
|
|
|
|
8.1
|
|
Granted
|
|
|
56,821
|
|
|
$
|
12.09
|
|
|
|
|
|
Exercised
|
|
|
(17,534
|
)
|
|
$
|
3.79
|
|
|
|
|
|
Outstanding at March 31, 2021
|
|
|
430,937
|
|
|
$
|
6.62
|
|
|
|
8.0
|
|
Exercisable at March 31, 2021
|
|
|
355,739
|
|
|
$
|
6.05
|
|
|
|
7.7
|
|
During the three months ended March 31, 2021,
the Company granted 31,821 stock options to Board members and 25,000 stock options to employees under the Plan. The estimated fair value
of these stock options, calculated using the Black-Scholes option valuation model, was $497,461, $55,708 of which was recognized during
the three months ended March 31, 2021.
At March 31, 2021, there was $482,900 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 1.1 years.
Note 9 — Warrants
The Company had 1,040,248 warrants outstanding
at March 31, 2021 with a weighted average exercise price of $3.92 per share, down from 2,273,369 warrants outstanding at December 31,
2020.
At March 31, 2021, 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 4.99% (or, at the investor’s
election, 9.99%) of the outstanding shares of the Company’s common stock.
Note 10 —
Subsequent Events
In May 2021, the SBA
approved forgiveness of the Company’s PPP Loan in the principal amount $91,407, including accrued interest.
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:
|
•
|
our ability to generate revenue;
|
|
•
|
our limited operating history;
|
|
•
|
the size and growth of markets for our technology;
|
|
•
|
regulatory developments that may affect our business;
|
|
•
|
our ability to successfully develop new technologies, particularly our bi-directional bipolar junction transistor, or B-TRAN™;
|
|
•
|
our expectations regarding the timing of prototype and commercial fabrication of B-TRAN™ devices;
|
|
•
|
our expectations regarding the performance of our B-TRAN™ and the consistency of that performance with both internal and third-party simulations;
|
|
•
|
the expected performance of future products incorporating our B-TRAN™;
|
|
•
|
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;
|
|
•
|
the rate and degree of market acceptance for our B-TRAN™;
|
|
|
|
|
•
|
the time required for third parties to redesign, test and certify their products incorporating our B-TRAN™;
|
|
•
|
our ability to successfully commercialize our B-TRAN™ technology;
|
|
•
|
our ability to secure strategic partnerships with semiconductor fabricators and others related to our B-TRAN™ technology;
|
|
•
|
our ability to obtain, maintain, defend and enforce intellectual property rights protecting our technology;
|
|
•
|
the success of our efforts to manage cash spending, particularly prior to the commercialization of our B-TRAN™ technology;
|
|
•
|
general economic conditions and events and the impact they may have on us and our potential partners and licensees;
|
|
•
|
our ability to obtain adequate financing in the future, if and when we need it;
|
|
|
|
|
•
|
the impact of the novel coronavirus (COVID-19) on our business, financial condition and results of operations;
|
|
•
|
our success at managing the risks involved in the foregoing items; and
|
|
•
|
other factors discussed in this report.
|
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.
Unless otherwise stated or the context otherwise
requires, the terms “Ideal Power,” “we,” “us,” “our” and the “Company” refer
to Ideal Power Inc.