IPWR Ideal Power Inc

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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 For the quarterly period ended June 30, 2021

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For the transition period from ______________ to _______________

Commission File Number 001-36216

5508 Highway 290 West, Suite 120

Austin, Texas 78735

(Address of principal executive offices)

(Zip Code)

(512) 264-1542

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period than the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark whether the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the issuer is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ⌧

As of August 11, 2021, the issuer had 5,872,046 shares of common stock, par value $.001, outstanding.

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The accompanying notes are an integral part of these condensed financial statements.

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The accompanying notes are an integral part of these condensed financial statements.

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The accompanying notes are an integral part of these financial statements.

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Ideal Power Inc.

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Amortization expense amounted to $35,177 and $58,875 for the three and six months ended June 30, 2021, respectively, and $23,048 and $45,346 for the three and six months ended June 30, 2020, respectively. Amortization expense for the succeeding five years and thereafter is $72,605 (2021), $145,211 (2022-2025) and $1,136,734 (thereafter).

At June 30, 2021 and December 31, 2020, the Company had capitalized $258,354 and $270,000, respectively, for costs related to patents that have not been awarded.

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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 was scheduled to mature in May 2022 and had an interest rate of 1.00% per annum and was subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act.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.In May 2021, the SBA approved forgiveness of the Company’s PPP Loan in the principal amount of $91,407, including accrued interest. The $91,407 gain on forgiveness of the PPP Loan is shown in other (income) expenses in the statement of operations and represents a non-cash financing activity.

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Note 5 – Lease

The Company leased 14,782 square feet of office and laboratory space located in Austin, Texas. CE+T Energy Solutions, Inc. (“CE+T Energy”) subleased approximately seventy-five (75%) percent of this space from the Company. This lease and sublease expired concurrently on May 31, 2021.

During the three and six months ended June 30, 2021, CE+T Energy made payments of $35,529 and $88,822, 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.

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 occurred 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 recognized a right of use asset of $339,882 and a corresponding lease liability for this lease upon lease commencement.

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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 6% per annum.

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Future minimum payments under the lease are as follows:

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At June 30, 2021, the remaining lease term was 62 months.

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For the three months ended June 30, 2021 and 2020, operating cash flows for lease payments totaled $39,534 and $48,658, respectively, and for the six months ended June 30, 2021 and 2020, operating cash outflows for lease payments totaled $89,423 and $96,699, respectively. For the three months ended June 30, 2021 and 2020, operating lease cost, recognized on a straight-line basis, totaled $38,664 and $48,487, respectively, and for the six months ended June 30, 2021 and 2020, operating lease cost, recognized on a straight-line basis, totaled $87,152 and $96,975, respectively.

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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 21^st of each year and one-half annual the payment due within 20 days of June 21^st 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. As of March 2021, all five patents associated with the agreements have been issued. At June 30, 2021 and December 31, 2020, the other long-term liability for the estimated present value of future payments under the licensing agreements was $951,717 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

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

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developments, including, among other things, the duration and spread of COVID-19, including variants, the timing, scope 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.

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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.

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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, 2021. As a result of the amendment, the number of shares authorized for issuance under the Plan increased by 500,000 shares and the Plan will now terminate on June 16, 2031, 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, 2021, 567,140 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:

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During the six months ended June 30, 2021, the Company granted 31,821 stock options to Board members and 50,000 stock options to employees under the Plan. The estimated fair value of these stock options, calculated using the Black-Scholes option valuation model, was $691,728, $141,193 of which was recognized during the six months ended June 30, 2021.

At June 30, 2021, there was $585,457 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 1.2 years.

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Note 9 — Warrants

The Company had 1,040,248 warrants outstanding at June 30, 2021 with a weighted average exercise price of $3.92 per share, down from 2,273,369 warrants outstanding at December 31, 2020 due to the exercise of 1,233,121 warrants in the three months ended March 31, 2021. No warrants were exercised in the three months ended June 30, 2021.

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At June 30, 2021, all warrants are exercisable, although the warrants held by certain of the Company’s warrant holders may be exercised only to the extent that the total number of shares of common stock then beneficially owned by such warrant holder does not exceed 4.99% (or, at the investor’s election, 9.99%) of the outstanding shares of the Company’s common stock.

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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. These statements include, but are not limited to, statements regarding our future financial performance, business condition and results of operations and pursuing additional government funding. 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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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.

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Results of Operations

Comparison of the three months ended June 30, 2021 to the three months ended June 30, 2020

Grant Revenues. Grant revenues for the three months ended June 30, 2021 and 2020 were $84,705 and $6,515, respectively. The grant revenues relate to a $1.2 million subcontract with Diversified Technologies, Inc. (“DTI”) 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 program started in late June 2020. We expect the grant revenue related to the NAVSEA subcontract to continue over the next two to three quarters with minimal revenue recognized thereafter. We also expect to pursue additional government funding that may result in additional grant revenues in the future.

Cost of Grant Revenues. Cost of grant revenues for the three months ended June 30, 2021 and 2020 was $84,705 and $6,515, respectively. The cost of grant revenues relates to the subcontract with DTI discussed above and are equal to the associated grant revenues resulting in no gross profit. We expect no gross profit under the subcontract with DTI or from other grants that we are pursuing or may pursue in the remainder of 2021.

Research and Development Expenses. Research and development expenses increased by $244,368, or 77%, to $560,693 in the three months ended June 30, 2021 from $316,325 in the three months ended June 30, 2020. The increase was due to higher contract labor for driver development and the expansion of internal test capabilities of $110,117, semiconductor fabrication costs, as we are qualifying a second domestic semiconductor fabricator, of $95,063 and other B-TRAN™ development spending of $39,188. We expect higher quarterly research and development expenses, as compared to the three months ended June 30, 2021, for the remainder of 2021 as we accelerate development of our B-TRAN™ technology. Research and development expenses will be subject to quarterly variability due primarily to the timing of semiconductor fabrication costs.

General and Administrative Expenses. General and administrative expenses increased by $87,640, or 17%, to $603,518 in the three months ended June 30, 2021 from $515,878 in the three months ended June 30, 2020. The increase was due to a $111,347 higher investor relations spending, including costs associated with our annual shareholder meeting and investor outreach, and other costs of $34,740, partly offset by lower stock-based compensation expense of $58,447. We expect general and administrative expenses to be relatively flat to modestly down, as compared to the three months ended June 30, 2021, for the remaining quarters of 2021.

Sales and Marketing Expenses. Sales and marketing expenses were $112,033 in the three months ended June 30, 2021. We did not have sales and marketing expenses in the three months ended June 30, 2020. The increase was due primarily to the hiring of a Vice President of Business Development in the first quarter of 2021 and related expenses. We expect higher sales and marketing expenses, as compared to the three months ended June 30, 2021, for the remaining quarters of 2021 as we engage with prospective customers and thereby begin to commercialize our B-TRAN™ technology.

Loss from Operations. Our loss from operations for the three months ended June 30, 2021 was $1,276,244 or 53% higher than the $832,203 loss from operations for the three months ended June 30, 2020 for the reasons discussed above.

Other (Income) Expenses. Other income was $89,551 for the three months ended June 30, 2021 compared to other expenses of $1,055 for the three months ended June 30, 2020. The other income in the three months ended June 30, 2021 was due to a $91,407 gain on the forgiveness of our PPP Loan (as defined below) in May 2021.

Net Loss. Our net loss for the three months ended June 30, 2021 was $1,186,693, or 42% higher, as compared to a net loss of $833,258 for the three months ended June 30, 2020, for the reasons discussed above.

Comparison of the six months ended June 30, 2021 to the six months ended June 30, 2020

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Grant Revenues. Grant revenues for the six months ended June 30, 2021 and 2020 were $326,766 and $6,515, respectively. The grant revenues relate to a $1.2 million subcontract with DTI discussed above. We expect the grant revenue related to the NAVSEA subcontract to continue over the next two to three quarters 2021 with minimal revenue recognized thereafter. We also expect to pursue additional government funding that may result in additional grant revenues in the future.

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Cost of Grant Revenues. Cost of grant revenues for the six months ended June 30, 2021 and 2020 was $326,766 and $6,515, respectively. The cost of grant revenues relates to the subcontract with DTI discussed above and are equal to the associated grant revenues resulting in no gross profit. We expect no gross profit under the subcontract with DTI or from other grants that we are pursuing or may pursue in the remainder of 2021.

Research and Development Expenses. Research and development expenses increased by $154,584, or 23%, to $821,573 in the six months ended June 30, 2021 from $666,989 in the six months ended June 30, 2020. The increase was due to higher contract labor for driver development and the expansion of internal test capabilities of $125,899, an initial license fee of $50,000 for the right to certain semiconductor technology and higher other B-TRAN™ spending of $16,675, partly offset by lower stock-based compensation expense of $37,990. We expect higher quarterly research and development expenses, as compared to the three months ended June 30, 2021, for the remainder of 2021 as we accelerate development of our B-TRAN™ technology. Research and development expenses will be subject to quarterly variability due primarily to the timing of semiconductor fabrication costs.

General and Administrative Expenses. General and administrative expenses increased by $108,556, or 10%, to $1,204,204 in the six months ended June 30, 2021 from $1,095,648 in the six months ended June 30, 2020. The increase was due to higher investor relations spending of $153,320, a $110,117 higher bonus accrual, primarily related to bonuses approved by the Board for successful completion of the February 2021 Offering (as defined below), and professional services paid in stock of $68,680, partly offset by CEO search fees in the first six months of 2020 of $137,968, lower stock-based compensation expense of $71,699 and lower other costs of $13,894. We expect general and administrative expenses to be relatively flat to modestly down, as compared to the three months ended June 30, 2021, for the remaining quarters of 2021.

Sales and Marketing Expenses. Sales and marketing expenses were $174,611 in the six months ended June 30, 2021. We did not have sales and marketing expenses in the six months ended June 30, 2020. The increase was due primarily to the hiring of a Vice President of Business Development in the first quarter of 2021 and related expenses. We expect higher sales and marketing expenses, as compared to the three months ended June 30, 2021, for the remaining quarters of 2021 as we engage with prospective customers and thereby begin to commercialize our B-TRAN™ technology.

Loss from Operations. Our loss from operations for the six months ended June 30, 2021 was $2,200,388 or 25% higher than the $1,762,637 loss from operations for the six months ended June 30, 2020 for the reasons discussed above.

Other (Income) Expenses. Other income was $89,545 for the six months ended June 30, 2021 compared to other expenses of $1,122 for the six months ended June 30, 2020. The other income in the six months ended June 30, 2021 was due to a $91,407 gain on the forgiveness of our PPP Loan in May 2021.

Net Loss. Our net loss for the six months ended June 30, 2021 was $2,110,843, or 20% higher, as compared to a net loss of $1,763,759 for the six months ended June 30, 2020, for the reasons discussed above.

Liquidity and Capital Resources

We currently generate grant revenue only and expect grant revenue to be our only source of revenue for 2021. We have incurred losses since inception. We have funded our operations to date through the sale of common stock and warrants.

At June 30, 2021, we had cash and cash equivalents of $25,716,977. Our net working capital at June 30, 2021 was $25,242,612. We had no outstanding debt at June 30, 2021.

Operating activities in the six months ended June 30, 2021 resulted in cash outflows of $1,801,095, which were due primarily to the net loss for the period of $2,110,843 and a non-cash gain on loan forgiveness of $91,407, partly offset by stock-based compensation of $153,644, favorable balance sheet timing of $107,960, depreciation and amortization of $70,343 and stock issued for services of $68,680. Operating activities in the six months ended June 30, 2020 resulted in cash outflows of $1,497,357, which were due to the loss from continuing operations for the period of $1,763,759 and unfavorable balance sheet timing of $85,249 partly offset by stock-based compensation of $226,168, depreciation and amortization of $57,248, stock issued for services of $50,000 and patent impairment charges of $18,235. We expect a ramp up in cash outflows from operating activities for the remainder of 2021 as we accelerate development and commercialization of our B-TRAN™ technology.

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Investing activities in the six months ended June 30, 2021 and 2020 resulted in cash outflows of $145,019 and $33,966, respectively, for the acquisition of intangible assets and fixed assets.

Financing activities in the six months ended June 30, 2021 resulted in cash inflows of $21,204,609 from the net proceeds from our February 2021 Offering and $3,301,226 from the exercise of warrants and stock options. Financing activities in the six months ended June 30, 2020 resulted in cash inflows of $267,223 and included net proceeds from the exercise of warrants of $175,816 and proceeds from our PPP Loan of $91,407.

PPP Loan

In May 2020, we 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”). We received total proceeds of $91,407 from the unsecured PPP Loan. The PPP Loan was scheduled to mature in May 2022 and had an interest rate of 1.00% per annum and was subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. In accordance with the requirements of the CARES Act and the PPP, we used the proceeds from the PPP Loan primarily for payroll costs. We applied for forgiveness of the PPP Loan during the first quarter of 2021. In May 2021, the SBA approved forgiveness of our PPP Loan.

February 2021 Offering

In February 2021, we issued and sold 1,352,975 shares of our 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 net proceeds to us from the February 2021 Offering were $21.2 million. We intend to use the net proceeds from the February 2021 Offering to fund commercialization and development of our B-TRAN™ technology and general corporate and working capital purposes.

Critical Accounting Policies

There have been no significant changes during the six months ended June 30, 2021 to the critical accounting policies disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Off-Balance Sheet Transactions

As of June 30, 2021, we did not have any off-balance sheet transactions.

Trends, Events and Uncertainties

There are no material changes from trends, events or uncertainties disclosed in our 2020 Annual Report on Form 10-K.

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and with the participation of its Chief Executive Officer (principal executive officer) and its Chief Financial Officer (principal financial and accounting officer) of the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2021 and has concluded that, as of June 30, 2021, the Company’s disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There have been no material changes in our internal controls over financial reporting that occurred during the quarter ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Limitations on the Effectiveness of Controls

Control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems’ objectives are being met. Further, the design of any system of controls must reflect the fact that there are resource constraints, and the benefits of all controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of error or mistake. Control systems can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

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