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consistent with our expectations. Prototypes of emerging products are a material part of our business plan, and if they are not proven to be successful, our business and prospects could be harmed.

We have received grant funds from the United States for the development of a bidirectional insulated gate bipolar transistor (“BD-IGBT”).bi-directional switch. In certain instances, the United States may obtain title to inventions related to this effort. If we were to lose title to those inventions, we may have to pay to license them from the United States in order to manufacture the BD-IGBT.inventions. If we were unable to license those inventions from the United States, it could slow down our product development.

In conjunction with the Advanced Research Projects Agency-Energy, (“ARPA-E”)or ARPA-E, grant we received from the Department of Energy, we granted to the United States a non-exclusive, nontransferable, irrevocable, paid-up license to practice or have practiced for or on behalf of the United States inventions related to the BD-IGBTbi-directional switch and made within the scope of the grant. If we fail to disclose to the Department of Energy an invention made with grant funds that we disclose to patent counsel or for publication, or if we elect not to retain title to the invention, the United States may request that title to the subject invention be transferred to it.

We also granted “march-in-rights” to the United States in connection with any BD-IGBTbi-directional switch inventions in which we choose not to retain title, if those inventions are made under the ARPA-E grant. Pursuant to the march-in-rights, the United States has the right to require us, any person to whom we have assigned our rights, or any exclusive licensee to grant a non-exclusive, partially exclusive, or exclusive license in any field of use to a responsible applicant upon terms that are reasonable. If the license is not granted as requested, the United States has the right to grant the license if it determines that we have not achieved practical application of the invention in the field of use, the action is necessary to alleviate health or safety needs, the action is necessary to meet requirements for public use specified by Federal regulations and such requirements have not been satisfied, or the action is necessary because an agreement to manufacture the invention in the United States has not been obtained or waived or because any such agreement has been breached.

If we lost title to the United States as a result of any of these events, we would have to pay to license the inventions, if needed, from the United States to manufacture the BD-IGBT from the United States.bi-directional switch. If we were unable to license those inventions from the United States, it could slow down our product development.

We have entered into a Cooperative Research and Development Agreement with the National Renewable Energy Lab (“NREL”). Under that agreement, the United States Government and NREL will have licenses to inventions made under that contract.

We entered into a Cooperative Research and Development Agreement (“CRADA”) with NREL in May 2013. The CRADA provides that NREL and the Company will jointly develop and demonstrate a hybrid power converter system which includes bi-directional electric vehicle charging, photovoltaic generation, and stationary battery storage using our 3-port hybrid converter. Together with NREL, we will also jointly investigate synergies in tightly integrating these separate power conversion systems. This project was completed in mid-2014 except for final reporting which is expected to be completed in the near term.

The United States retains a nonexclusive, nontransferable, irrevocable, paid-up license to practice or to have practiced for or on behalf of the United States every invention made under this CRADA. The same licensing terms may apply to NREL’s operator, the Alliance for Sustainable Energy LLC.

This agreement also grants “march-in-rights” to the United States in connection with any inventions made under this contract in which we choose not to retain title, if those inventions are made under the CRADA contract. Pursuant to the march-in-rights, the United States has the right to require us, any person to whom we have assigned our rights, or any exclusive licensee to grant a non-exclusive, partially exclusive, or exclusive license in any field of use to a responsible applicant upon terms that are reasonable. If the license is not granted as requested, the United States has the right to grant the license if it determines that we have not achieved practical application of the invention in the field of use, the action is necessary to alleviate health or safety needs, the action is necessary to meet requirements for public use specified by Federal regulations and such requirements have not been satisfied, or the action is necessary because an agreement to manufacture the invention in the United States has not been obtained or waived or because any such agreement has been breached.

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There were no inventions under the CRADA.

As we continue to grow and to develop our intellectual property, we could attract threats from patent monetization firms or competitors alleging infringement. We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights.

As we continue to grow and to develop our intellectual property, we could attract threats from patent monetization firms or competitors alleging infringement of intellectual property rights. For example, on October 4, 2013 we received a letter from a competitor alleging that the system architecture that appears on our website “appears” to infringe on patents licensed to or held by the competitor. We have investigated this claim and we have determined that the allegation is without merit. No resolution regarding this assertion has been reached. In early 2014, we met with the competitor to discuss the issue. No subsequent discussions have been held with, and no further correspondence has been received from this competitor. If we cannot resolve this matter, the cost to us of any litigation or other proceeding relating to intellectual property rights, even if resolved in our favor, could be substantial, and the litigation would divert management’s attention from our day-to-day operations.

In addition, some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. If we do not prevail in this type of litigation, we may be required to: pay monetary damages; stop commercial activities relating to our product; obtain one or more licenses in order to secure the rights to continue manufacturing or marketing certain products; or attempt to compete in the market with substantially similar products. Uncertainties resulting from the initiation and continuation of any litigation could limit our ability to continue some of our operations.

We expect to license our technology in the future; however the terms of these agreements may not prove to be advantageous to us. If the license agreements we enter into do not prove to be advantageous to us, our business and results of operations will be adversely affected.

We

During 2016, we entered into our first licensing agreement and we expect to license the manufacture of our product designs for certain markets as well as license our technology for certain potential applications which we choose not to pursue directly through the sale of products.products in the future. However, we may not be able to secure license agreements with customers on terms that are advantageous to us. Furthermore, the timing and volume of revenue earned from license agreements is and will be outside of our control. If the license agreements we have, or enter into in the future, do not prove to be advantageous to us, our business and results of operations will be adversely affected.

Until recently, we have not devoted significant resources towards the marketing and sale of our products and we continue to rely on the marketing and sales efforts of third parties whom we do not control.

To date, we have sold low volumes of our battery converter and power conversion system products.

We expect that the marketing and sale of theseour products to end user customers will continue to be conducted primarily by a combination of independent manufacturers’ representatives,system integrators, third-party strategic partners, distributors, orand original equipment manufacturers, (“OEMs”).or OEMs. Consequently, commercial success of our products will depend, to a great extent, on the efforts of others. We intend to enter into strategic marketing and distribution agreements or other collaborative relationships to market and sell our products. However, we have entered into only a limited number of strategic marketing or material distribution agreements at this time. We have recently entered into one distribution agreement with a large electrical equipment distributor and obtained initial orders from this distributor but have not shipped any products through that distributor thus far. We may not be able to identify, maintain or establish additional and/or appropriate relationships in the near term or in the future. We can give no assurance that these distributors or OEMsthird parties will focus adequate resources on selling our products or will be successful in selling them. In addition, third-party distributors or OEMsthese third-parties have or may require us to provide volume price discounts and other allowances, customize our products or provide other concessions that could reduce the potential profitability of these relationships. Failure to develop sufficient customer, distribution and marketing relationships in our target markets will adversely affect our commercialization schedule and to the extent we have entered or enter into such relationships, the failure of our distributors and other third parties to assist us with the marketing and distribution of our products, or to meet their monetary obligations to us, may adversely affect our financial condition and results of operations.

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A material part of our success depends on our ability to manage our suppliers and contract manufacturers. Our failure to manage our suppliers and contract manufacturers could materially and adversely affect our results of operations and relations with our customers.

We rely upon suppliers to provide the components necessary to build our products and on contract manufacturers to produceprocure components and assemble our products. There can be no assurance that key suppliers and contract manufacturers will provide components or products in a timely and cost efficientcost-efficient manner, provide quality components or manufacturing and assembly services or otherwise meet our needs and expectations. Our ability to manage such relationships and timely replace suppliers and contract manufacturers, if necessary, is critical to our success. Our failure to timely replace our contract manufacturers and suppliers, should that become necessary, could materially and adversely affect our results of operations and relations with our customers.

Our business

We are currently in arbitration with our former contract manufacturer due, in part, to workmanship quality issues we have identified in the assembly of our legacy products by this contract manufacturer. The failure of our contract manufacturers to provide quality manufacturing and assembly services, as well as the resources that may be dependent uponrequired to address any such issues on products shipped to customers with any such quality issues, could materially and adversely affect our abilityreputation, results of operations and relations with our customers.

We may need additional financing to execute our business plan and fund operations, which additional financing may not be available on commercially reasonable terms or not at all.

We believe that our current cash and working capital resources will be sufficient to fund our operations for at least the next twelve months. If we are unable to generate sufficient cash flow from our operations to fund our future working capital needs, we will be required to obtain financing. If we do not obtain such financing, we may have to cease our activities.

There is no assurance that we will operate profitably or generate positive cash flows in the future. In the future, we may require additional financing in order to sell our then current products and to continue the researchour operations and development required to produceexecute our next generation of products. At that time, webusiness plan. We may not be able to obtain such financing on commercially reasonable terms or at all. If we do notare unable to obtain such financing when needed, our business could fail.

The macro-economic environment in the United States and abroad has adversely affected, and may in the future adversely affect, our ability to raise capital, which may potentially impact our ability to continue our operations.

As a company with limited revenues to date, we may need to relyhave relied on raising funds from investors to support our future research and development activities and our operations. Macro-economic conditions in the United States and abroad may result in a tightening of the credit markets and/or less capital available for small public companies, which may make it more difficult to raise capital. If we are unable to raise funds as and when we need them, we may be forced to curtail our operations or even cease operating altogether.

We are subject to credit risks.

Some of our customers may experience financial difficulties and/or may fail to meet their financial obligations to us. As a result, we may incur charges for bad debt provisions related to some trade receivables. In addition, in connection with the growth of the renewable energy market and other markets for our products, we are gaining new customers, some of which have relatively short histories of operations, are located outside the United States or are newly formed companies. As a result, it is difficult to ascertain financial information in order to appropriately extend credit to these customers. Further, the volatility in the renewable energy market may put additional pressure on our customers’ financial positions, as they may be required to respond to large swings in revenue. The renewable energy industry has also, from time to time, seen an increasing amount of bankruptcies and reorganizations as the availability of financing has diminished. Although none of our customers filed for bankruptcy in 2017, one customer filed for bankruptcy in 2016 and another customer filed for bankruptcy in 2015. In addition, we are currently pursuing legal action against KACO new energy, Inc. for its failure to pay us for product shipped in December 2016. On March 23, 2018, we received a judgment of garnishment to recover funds from KACO new energy, Inc. held by Chase Bank in the amount of $203,121.

If customers fail to meet their financial obligations to us, or if the assumptions underlying our recorded bad debt provisions with respect to receivables obligations do not accurately reflect our customers’ financial conditionscondition and payment levels, we could incur write-offs of receivables in excess of our provisions, which could have a material adverse effect on our cash flow and operating results.

We

If our products have component malfunctions or design defects, we may be exposed to lawsuits and/or other claims and we may not be able to control our warranty exposure, which could increase our expenses.

We currently offer, and expect to continue to offer, a warranty with respect to our products and we expect to offer a design warranty with each of our future product applications.respect to licensing agreements. Due to our limited long-term history of operating data, our warranty reserve is estimated based on engineering judgment and a third party assessmentthird-party assessments of our product reliability. If our products have component malfunctions or design defects, the accumulated cost of warranty claims could be significant. If the cost of warranty claims exceeds any reserves we may establish for such claims, our results of operations and financial condition could be adversely affected.

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We may be exposed In 2017, we recorded incremental charges of $283,457 to lawsuits and other claims if our products malfunction, which could increase our expenses, harm our reputationreserves for warranty claims and prevent us from growing our business.

Any liability for damages resulting from malfunctions of our products could be substantial, increase our expenses and prevent us from growing or continuing our business. Potential

In addition, potential customers may rely on our products for critical needs such as backup power. Aand a malfunction of our products could result in warranty claims or other product liability. In addition, aA well-publicized actual or perceived problem could adversely affect the market’s perception of our products. This could result in a decline in demand for our products, which would reduce revenue and harm our business. Further, since our products are used in devicessystems that are made by other manufacturers, we may be subject to product liability claims or negative market perception of our products even if our products do not malfunction.

We are highly dependent on the services of R. Daniel Brdar and William Alexander, as well as other key members of our executive management team. Our inability to retain these individuals could impede our business plan and growth strategies, which could have a negative impact on our business and the value of your investment.

Our ability to implement our business plan depends, to a critical extent, on the continued efforts and services of R. Daniel Brdar, our Chief Executive Officer and President, William Alexander, our founder and Chief Technology Officer, and otherkey members of our executive management team. If we lose the services of any of these persons during this important time in our development, the loss may result in a delay in the implementation of our business plan and plan of operations. We can give no assurance that we could find satisfactory replacements for these individuals on terms that would not be unduly expensive or burdensome to us. We do not currently carry a key-man life insurance policy that would assist us in recouping our costs in the event of the death or disability of any of these persons.

Any failure by management to properly manage our expected rapid growth could have a material adverse effect on our business, operating results and financial condition.

If our business develops as expected, we anticipate that we willmay grow rapidly in the near future. Our failure to properly manage our expectedany such rapid growth could have a material adverse effect on our ability to retain key personnel. Our expansion could also place significant demands on our management, supply chain, operations, systems, accounting, internal controls and financial resources. If we experience difficulties in any of these areas, we may not be able to expand our business successfully or effectively manage our growth. Any failure by management to manage growth and to respond to changes in our business could have a material adverse effect on our business, financial condition and results of operations.

Backlog may not result in revenue.

We define backlog as consisting of accepted orders from customers for which an expected product delivery schedule has been specified. The purchase orders comprising backlog are not cancelable in most cases and such orders generally do not provide price protection. Nevertheless, deliveries against received purchase orders may be rescheduled within negotiated parameters or canceled in certain limited instances and our backlog may, therefore, not be indicative of revenues in any given period. From time to time, our backlog is highly concentrated with a limited number of customers. If any of these customers change their strategy, exit our target markets and/or go out of business, our backlog would be materially adversely impacted.

In particular, there is significant uncertainty around the pace and timing of growth in both the solar + storage market and the stand-alone energy storage market. For the solar + storage market, a new market, companies are beginning to install their first systems or developing their product offerings. For the stand-alone energy storage market, the customer representing a majority of our backlog in 2015 and 2016 exited the system integration business for commercial and industrial stand-alone energy storage. This customer exit had a material adverse impact on our backlog and we are currently evaluating whether to pursue legal action against this customer for unfulfilled orders.

Risks Relating to the Industry

The electric power conversion industry is competitive, and has a number of well-financed incumbents. The Companyincumbents and may see a significant number of new market entrants. We cannot guarantee that itwe can compete successfully.

Ideal Power competes

We may compete against providers of power conversion systemsPCS that are well established and have substantially greater assets, including manufacturing, marketing, and financial assets. These incumbents also have strong market share and name brand recognition in the industry. CompetitorsPotential competitors include ABB, Ltd., Eaton Corporation plc, Huawei , SMA , and Schneider Electric.Electric SE. Pricing financing,and servicing, as well as the general quality, efficiency and reliability of products, are significant competitive criteria in this industry. The Company’sNew market entrants may offer competitive new technologies and products, and will contribute to significant price competition.

Our ability to successfully compete on each of these criteria is material to the acceptance of itsour products and itstheir future profitability. In addition, the industry may resist new technology and products from suppliers that are not well capitalized with long track records of performance. Our competitors use their balance sheet and brand recognition to their competitive advantage. Should Ideal Power’sour products become commercially successful, competitors may seek to drive their own innovation and adopt or copy ideas, designs and features to regain their competitive positions. CompetitorsIncumbent or new competitors may develop or offer technologies and products that may be more effective or popular than the Company’sour products and theythese competitors may be more successful in marketing their products than Ideal Power iswe are in marketing its ownour products.

Our ability to achieve our cost reduction goals now and in the future and maintain pricing at or near the level of our competitors is critical to our long-term success and the viability of our business as, over the long-term, price is a key competitive criteria in the power electronics industry. Additionally, price competition may result in lower than expected margins for our products.

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Ideal Power expects

We expect to compete on the basis of itsour products’ lower cost,technological innovation, flexibility, features and smaller footprint higher efficiency, and technological innovation.at a market competitive price. Unrelated technological advances in alternative energy products or other power conversion technologies may negatively impact the development of the Company’sour products or make the Company’sour products uncompetitive or obsolete at any time. Ideal PowerWe cannot guarantyguarantee that itwe will be able to compete successfully in the electric power conversion industry.

Our business is and we expect will continue to be substantially dependent on utility rate structures and government incentive programs that encourage the use of alternative energy sources. The reduction or elimination of government subsidies and economic incentives for energy-related technologies couldwould harm our business.

We

The current market for, and we believe that near-term growth of, energy-related technologies, including power conversion technology, relies partlyand will continue to rely on the availability and size of government and economic incentives and grants (including, but not limited to, the U.S. Investment Tax CreditITC and various state and local incentive programs). These incentive programs could be challenged by utility companies, or for other reasons found to be unconstitutional, and/or could be reduced or discontinued for other reasons. The reduction, elimination, or expiration of government subsidies and economic incentives could delay the development of our technology andwould harm our business.

A combination of utility rate structures and government subsidies that encourage the use of alternative energy sources is a primary driver of demand for our products. For example, public utilities are often allowed to collect demand charges on commercial and industrial customers in addition to traditional usage charges. In addition, the federal government and many states encourage the use of alternative energy sources through a combination of direct subsidies and tariff incentives such as net metering for users that use alternative energy sources such as solar power. California also encourages alternative energy technology through its SGIP which offers rebates for businesses and consumers who adopt certain new technologies. As a result of these incentives, we believe that a substantial portion of the products we have sold have been for use by end customers in California. Other states have similar incentives and mandates which encourage the adoption of alternative energy sources. Notwithstanding the adoption of other incentive programs, we expect that California will be the most significant market for the sale of our products in the near term for stand-alone energy storage applications. Should California or another state in which we derive a substantial portion of our product revenues in the future change its utility rate structure or delay, eliminate or significantly reduce its incentive programs, demand for our products could be substantially affected, which would adversely affect our business prospects, financial condition and operating results.

For example, in 2016, we experienced a material decline in revenues compared to 2015 as a result of delays in awards under California’s SGIP, which provides economic incentives for energy storage projects. Awards under the SGIP were delayed as the California Public Utility Commission, or CPUC, examined and ultimately revised the award solicitation process and other aspects of the SGIP. The revised SGIP was not finalized until July 2016, which delayed the determination of project winners and the processing of the related awards. These delays not only caused a temporary disruption in the market, as awarded projects are typically not commissioned and installed until many months after the award is granted, but also contributed to an overall stagnation in the California market for stand-alone storage that continued throughout 2017. Political changes, disruptions or gridlock, or reviews or revisions of previously announced incentive programs or procedures for making awards or administering such programs could have a material adverse impact on our financial results and future prospects.

Changes to the National Electrical Codes (“NEC”) could adversely affect our technology and products.

Our products are installed by system integrators that must meet the National Electrical Codes, or NEC, standards, including using equipment that meets industry standards such as UL1741.UL1741 SA. The NEC standards address the safety of these systems. The NEC standards, along with the UL1741 SA and IEEE1547 requirements, continue to evolve and are subject to change. If we respond to these changing standards and requirements more slowly than our competitors, or if we are unable to meet new standards and requirements, our products will be less competitive.

Some of the components of energy storage products pose potential safety risks which could create negative public perception regarding the energy storage markets.

Many energy storage products make use of lithium-ion batteries, which have been observed in certain applications, such as automotive applications, to catch fire or vent smoke and flame. Such events have raised concerns, and future events may lead to additional concerns, about the safety of lithium-ion batteries. Negative public perceptions regarding the suitability of lithium-ion batteries for energy storage applications or any future incident involving lithium-ion batteries, even if such incident does not involve our power conversion systems or relates to an application other than energy storage, could negatively impact the continued adoption of energy storage products and have a material adverse impact on our sales and our business.

Growth in our target markets largely depends on the continued decline in battery prices.

Our initial target markets of solar + storage and stand-alone energy storage and are early stage markets. Growth in these markets is highly dependent on a continued decline in battery prices as batteries represent the largest component of system cost. Any disruption in the supply of batteries resulting in higher than expected battery pricing or stagnation in the level of price declines for batteries could result in slower than expected growth in our target markets and, as a result, could have a material adverse effect on our sales and our business.

New technologies in the alternative energy industry may supplant our current products and technology in this market, which would harm our business and operations.

The alternative energy industry is subject to rapid technological change. Our future success will depend on the cutting edgecutting-edge relevance of our technology, and thereafter on our ability to appropriately respond to changing technologies and changes in function of products and quality. If new technologies supplant our power conversion technology, our business would be adversely affected and we will have to revise our plan of operation.

Businesses, consumers, and utilities might not adopt alternative energy solutions as a means for providing or obtaining their electricity and power needs.

On-site distributed power generation solutions that utilize our products provide an alternative means for obtaining electricity and are relatively new methods of obtaining electrical power. There is a risk that businesses, consumers, and utilities may not adopt these new methods at levels sufficient to grow our business. Traditional electricity distribution is based on the regulated industry model whereby businesses and consumers obtain their electricity from a government regulated utility. For alternative methods of distributed power to succeed, businesses, consumers and utilities must adopt new purchasing practices and must be willing to rely upon less traditional means of providing and purchasing electricity. As larger solar projects come online, utilities are becoming increasingly concerned with grid stability, power management and the predictable loading of such power onto the grid.

We cannot be certain that businesses, consumers, and utilities will choose to utilize on-site distributed power at levels sufficient to sustain our business. The development of a mass market for our products may be impacted by many factors which are out of our control, including:

If a mass market fails to develop or develops more slowly than we anticipate, we may be unable to recover the costs we will have incurred to develop these products.

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Our sales cycle is lengthy and variable, which makes it difficult for us to accurately forecast revenue and which may affect our quarterly results.

The industries in which we compete are subject to volatilesales cycle for our products is typically lengthy and unpredictable, cycles.

which makes it difficult for us to accurately forecast revenues in a given period, and may cause revenue and operating results to vary significantly from period to period. We currently sell our products primarily to system integrators that integrate our products into larger “turn-key” solutions for their customers. Before system integrators agree to specify our products in their systems, the integrators engage in a lengthy and time-consuming process of testing and evaluating our equipment. This process can take from a few months to as long as a year. Even if our products are approved for use by a system integrator, the system integrator may not place an order for our equipment until the system integrator has entered into a contract with the end user for the design and installation of the system. In many cases, the system integrator is required to respond to a detailed request for proposal or to submit a proposal before a contract for the system is executed. As a supplierresult, there may be a significant period of time between the time our products are approved for use by a particular system integrator and the time we record revenue from the sale of our products. As a result of potentially lengthy sales cycles, we may have difficulty in accurately predicting our operating results for any given period, and may experience significant unanticipated fluctuations in our revenues from period to period. Any failure to achieve anticipated revenues for a period could adversely affect our operating results and the grid energy storage, solar combined with storage, microgrid, EV charging infrastructure, wind, electric motormarket price of our common stock.

Our revenue and related industries, we are subject to business cycles. The timing, length, and volatility of these business cycles can be difficult to predict. These industries historically have been cyclical due to sudden changes in customers’ manufacturing capacity requirements and spending, which depend in partoperating results for any quarterly reporting period may fluctuate significantly depending on capacity utilization, demand for customers’ products, inventory levels relative to demand, and access to affordable capital. These changes have affected the timing of the delivery of our products.

Our revenue from product sales has resulted from the sale of a relatively low volume of units to a limited number of customers. As a result, a change in the expected delivery date for a particular customer order could have a significant impact on our quarterly revenues and amountsoperating results. Although we maintain a small finished goods inventory, in most cases products are produced for us by our contract manufacturer in response to a particular customer order. Because of customers’ purchasesour varying sales cycles, our manufacturing lead times and investmentsthe limited to moderate flexibility in technology, and affectrescheduling delivery dates we provide to our orders, net sales, operating expenses, and net income. In addition,customers, we may not be able to respond adequately or quicklyaccurately predict the timing of the delivery of a particular order. Significant unanticipated fluctuations in our revenues from period to period could adversely affect our operating results and the declines in demand by reducing our costs. We may be required to record significant reserves for excess and obsolete inventory as demandmarket price for our products changes.common stock.

To meet rapidly changing demand in each of the industries we serve, we must effectively manage our resources and production capacity. During periods of decreasing demand for our products, we must be able to appropriately align our cost structure with prevailing market conditions, effectively manage our supply chain, and motivate and retain key employees. During periods of increasing demand, we must have sufficient manufacturing capacity and inventory to fulfill customer orders, effectively manage our supply chain, and attract, retain, and motivate a sufficient number of qualified individuals. If we are not able to timely and appropriately adapt to changes in our business environment or to accurately assess where we are positioned within a business cycle, our business, financial condition, or results of operations may be materially and adversely affected.

Risks Related to Owning Our Common Stock

We are an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”) and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. At present, we intend to take advantage of the exemption from the requirement of holding a nonbinding advisory vote on executive compensation but do not intend to take advantage of any of the other exemptions, other than as they apply to all other “smaller reporting companies,” though we may do so at some point in the future. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

We will remain an “emerging growth company” for up to five years, although we will lose that status sooner if our revenues exceed $1 billion, if we issue more than $1 billion in non-convertible debt in a three year period, or if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30.

Our status as an “emerging growth company” under the JOBS Act may make it more difficult to raise capital as and when we need it.

Because of the exemptions from various reporting requirements provided to us as an “emerging growth company,” we may be less attractive to investors and it may be difficult for us to raise additional capital as and when we need it. Investors may be unable to compare our business with other companies in our industry if they believe that our reporting is not as transparent as other companies in our industry. If we are unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially and adversely affected.

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The public market for our common stock may be volatile. This may affect the ability of our investors to sell their shares as well as the price at which they sell their shares.

The market price for the shares may be significantly affected by factors such as variations in the volume of trading activity, quarterly and yearly operating results, general trends in the alternative energy industry or other markets we serve, and changes in state or federal regulations affecting us and our industry. Furthermore, in recent years the stock market has experienced extreme price and volume fluctuations that are unrelated or disproportionate to the operating performance of the affected companies. Such broad market fluctuations may adversely affect the market price of our common stock.

We have the right to issue, and have in the past issued, shares of preferred stock. If we were to issue additional preferred stock, it is likely tomay have rights, preferences and privileges that may adversely affect the common stock.

We are authorized to issue 10,000,000 shares of “blank check” preferred stock, with such rights, preferences and privileges as may be determined from time-to-time by our board of directors. Our board of directors is empowered, without stockholder approval, to issue preferred stock in one or more series, and to fix for any series the dividend rights, dissolution or liquidation preferences, redemption prices, conversion rights, voting rights, and other rights, preferences and privileges for the preferred stock. No shares of preferred stock are presently issued and outstanding and we have no plans to issue shares of preferred stock. The issuance of shares of preferred stock, depending on the rights, preferences and privileges attributable to the preferred stock, could reduce the voting rights and powers of the common stock and the portion of the Company’sour assets allocated for distribution to common stockholders in a liquidation event, and could also result in dilution in the book value per share of the common stock we are offering. The preferred stock could also be utilized, under certain circumstances, as a method for raising additional capital or discouraging, delaying or preventing a change in control of the Company, to the detriment of the investors in the common stock offered hereby. We cannot assure you that we will not, under certain circumstances, issue shares of our preferred stock. At December 31, 2017, we had 1,518,430 shares of non-voting preferred stock outstanding inclusive of 708,430 non-voting shares of preferred stock sold to certain investors pursuant to a private placement of common stock, preferred stock and warrants to purchase common stock completed in March 2017.

We have not paid dividends in the past and have no immediate plans to pay dividends.

We plan to reinvest all of our earnings, to the extent we have earnings, in order to market our products and to cover operating costs and to otherwise become and remain competitive. We do not plan to pay any cash dividends with respect to our securities in the foreseeable future. We cannot assure you that we would, at any time, generate sufficient surplus cash that would be available for distribution to the holders of our common stock as a dividend. Therefore, you should not expect to receive cash dividends on our common stock.

Management of our Company is within the control of the board of directors and the officers. You should not purchase our common stock unless you are willing to entrust management of our Company to these individuals.

All decisions with respect to the management of the Company will be made by our board of directors and our officers, who beneficially own 11.8% of our common stock, as calculated in accordance with Rule 13d-3 promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”). Therefore, management will retain significant influence in electing a majority of the board of directors who shall, in turn, have the power to appoint the officers of the Company and to determine, in accordance with their fiduciary duties and the business judgment rule, the direction, objectives and policies of the Company including, without limitation, the purchase of businesses or assets; the sale of all or a substantial portion of the assets of the Company; the merger or consolidation of the Company with another corporation; raising additional capital through financing and/or equity sources; the retention of cash reserves for future product development, expansion of our business and/or acquisitions; the filing of registration statements with the Securities and Exchange Commission for offerings of our capital stock; and transactions that may cause or prevent a change in control of the Company or its winding up and dissolution. Accordingly, no investor should purchase our common stock unless such investor is willing to entrust all aspects of the management of the Company to such individuals.

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We have incurredincur significant increased costs as a result of becomingbeing a public company that reports to the Securities and Exchange Commission and our management is required to devote substantial time to meet compliance obligations.

As a public company reporting to the Securities and Exchange Commission, or the SEC. we incur significant legal, accounting and other expenses that we did not incur as a private company.expenses. We are subject to reporting requirements of the Exchange Act and the Sarbanes-Oxley Act, as well as rules subsequently implemented by the Securities and Exchange CommissionSEC that impose significant requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. In addition, there are significant corporate governance and executive compensation-related provisions in the Dodd-Frank Act that are expected to increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and may also place undue strain on our personnel, systems and resources. Our management and other personnel are required to devote a substantial amount of time to these and other new compliance initiatives. In addition, we believe these rules and regulations may make it more difficult and have made it more expensivecostly for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage in the future. As a result, it may be more difficult for us to attract and retain qualified people to serve on our board of directors, on our board committees or as executive officers.

Failure to build our finance infrastructure and improve our accounting systems and controls could impair our ability to comply with the financial reporting and internal controls requirements for publicly traded companies.

As a public company, we operate in an increasingly demanding regulatory environment, which requires us to comply with applicable provisions of the Sarbanes-Oxley Act, and the related rules and regulations of the Securities and Exchange Commission, expanded disclosure requirements, accelerated reporting requirements and more complex accounting rules. Company responsibilities required by the Sarbanes-Oxley Act include establishing corporate oversight and adequate internal control over financial reporting and disclosure controls and procedures. Effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent financial fraud. We will need to hire or outsource additional finance personnel and further build our financial infrastructure as a public company, including complying with the applicable requirements of Section 404 of the Sarbanes-Oxley Act. We may be unable to do so on a timely basis. Until we are able to expand our finance and administrative capabilities and establish additional financial reporting infrastructure, we may not be able to prepare and disclose, in a timely manner, our financial statements and other required disclosures or comply with the applicable provisions of the Sarbanes-Oxley Act or existing or new reporting requirements. If we cannot provide reliable financial reports or prevent fraud, our business and results of operations could be harmed and investors could lose confidence in our reported financial information.

Shares eligible for future sale may adversely affect the market for our common stock.

Sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could cause the market price of our common stock to decline. These sales could also make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.

As of

At December 31, 2014,2017, we had 7,048,23513,996,121 shares of common stock outstanding and 1,518,430 shares of preferred stock outstanding. Shares beneficially owned by our affiliates and employees are subject to volume and other restrictions under Rules 144 and 701 under the Securities Act, of 1933, as amended, or the Securities Act, various vesting agreements, our insider trading policy andand/or any applicable 10b5-1 trading plan. Shares that are not beneficially owned by our affiliates and employees generally can be freely sold in the public market, subject in some cases to restrictions under Rule 144.

As of

At December 31, 2014,2017, we also had outstanding options and warrants for the purchase of 1,368,0478,837,315 potentially dilutive shares and 1,564,108 shares, respectively, of our common stockoutstanding and we may grant additional options, stock-based awards and/or warrants in the future. If our stock price rises, the holders of vested options, stock-based awards or warrants may

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exercise their options, stock-based awards and/or warrants and sell a large number of shares. Any sale of a substantial number of shares of our common stock may have a material adverse effect on the market price of our common stock.

Our charter documents and Delaware law may inhibit a takeover that stockholders consider favorable.

Our Certificate of Incorporation, (“Certificate”)or Certificate, and bylaws and applicable provisions of Delaware law may delay or discourage transactions involving an actual or potential change in control or change in our management, including transactions in which stockholders might otherwise receive a premium for their shares, or transactions that our stockholders might otherwise deem to be in their best interests. The provisions in our Certificate and bylaws:

In addition, Section 203 of the Delaware General Corporation Law may limit our ability to engage in any business combination with a person who beneficially owns 15% or more of our outstanding voting stock unless certain conditions are satisfied. This restriction lasts for a period of three years following the share acquisition. These provisions may have the effect of entrenching our management team and may deprive you of the opportunity to sell your shares to potential acquirers at a premium over prevailing prices. This potential inability to obtain a control premium could reduce the price of our common stock. See “Anti-Takeover Effects of Certain Provisions of Delaware Law and Our Charter Documents” for additional information.

If securities or industry analysts do not publish or do not continue to publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our stock, our stock price and trading volume could decline.

The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us or our business. Presently, twoCurrently, a number of securities analysts publish reports on us on a regular basis. If any of the analysts who cover us now or in the future issue an adverse opinion regarding our stock, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

None.

Our principal office is located at 4120 Freidrich Lane, Suite 100, Austin, Texas 78744. We lease 14,782 square feet of office and laboratory space under a triple net lease. The lease commenced on June 1, 2014 and has a term of 48 months.

We are not

On May 17, 2017, the Company provided Libra Industries, Inc. (Libra), its prior contract manufacturer, notice that it was in breach of the Master Supply Agreement (MSA) between the parties. On May 19, 2017, the Company received notice from Libra that the Company was allegedly in breach of the MSA. On June 23, 2017, the Company received a partyNotice of Arbitration from Libra alleging claims against the Company and demanding recovery for alleged damages. On July 13, 2017, the Company responded to Libra with a Notice of Defense and Counterclaim. The arbitration is governed in accordance with the CPR International Institute for Conflict Prevention and Resolution Rules for Non-Administered Arbitration by a sole arbitrator, and the parties agreed on an arbitrator in August 2017. On January 11, 2018, the Company deposed representatives of Libra. On March 7, 2018 and March 8, 2018, Libra deposed representatives of the Company. The arbitration hearing is scheduled for April 23, 2018 to April 25, 2018 in Travis County, Texas. At this time, the Company is unable to estimate the possible loss, if any, pending legal proceedings.associated with this proceeding. At December 31,2017, the Company recorded a $100,000 accrual based on a settlement offer made by the Company to Libra. This charge is reflected within the general and administrative line item of the statement of operations.

Not applicable.

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PART II

Our common stock is quoted under the symbol IPWR on the NASDAQ Capital Market. Our common stock began trading on the NASDAQ Capital Market on November 22, 2013. The table below presents the range of high and low sales prices of our common stock since November 22, 2013.for the years ended December 31, 2017 and 2016.

High and low sales prices
		High				Low				High				Low
Fiscal year ended December 31, 2014
Fiscal year ended December 31, 2017
First quarter		$	12.59			$	5.25			$	3.86			$	2.00
Second quarter		$	9.60			$	7.00			$	3.25			$	2.03
Third quarter		$	9.40			$	6.51			$	3.29			$	1.91
Fourth quarter		$	8.00			$	5.82			$	2.85			$	1.10
Fiscal year ended December 31, 2013
Fiscal year ended December 31, 2016
First quarter		$	N/A			$	N/A			$	8.13			$	3.90
Second quarter		$	N/A			$	N/A			$	6.63			$	3.73
Third quarter		$	N/A			$	N/A			$	5.60			$	4.48
Fourth quarter		$	7.77			$	5.15			$	5.60			$	2.97

As of March 23, 20152018 we had approximately 50157 shareholders of record. The name, address and telephone number of our stock transfer agent is Corporate Stock Transfer, Inc., 3200 Cherry Creek South Drive, Suite 430, Denver, Colorado 80209, (303) 282-4800.

Dividends

We have not paid any cash dividends on our common stock since our inception and do not anticipate paying any cash dividends in the foreseeable future. We plan to retain our earnings, if any, to provide funds for the expansion of our business.

Securities Authorized for Issuance under Equity Compensation Plans

The table below provides information, as of December 31, 2014, regarding our 2013 Equity Incentive Plan (the “Plan”) under which our equity securities are authorized for issuance to officers, directors, employees, consultants, independent contractors and advisors.

2013 Equity Incentive Plan

Plan category		Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)				Weighted-average exercise price of outstanding options, warrants and rights (b)				Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders			627,800			$	6.28				173,280	(1)

Recent Issuances of Unregistered Securities

On August 6, 2013 we filed a registration statement, number 333-190414, with the Securities and Exchange Commission to register an offeringUse of 3,000,000 shares of our common stock, with an option granted to the underwriter to sell an additional 450,000 shares of our common stock (the “overallotment”). MDB Capital Group LLC served as Managing Underwriter and Northland Capital Markets served as the Co-Managing Underwriter. The registration statement was declared effective on November 21, 2013.

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The offering closed on November 27, 2013 and the offering of the overallotment closed on December 5, 2013. The common stock was offered to the public at a price of $5 per share. All of the shares of common stock, including the overallotment, were sold. We raised a total of $17,250,000 in gross proceeds in the offering and received $15,015,985 in net cash proceeds after expenses.

Through December 31, 2014, we used approximately $7.2 million of the net cash proceeds from the offering. These funds were used as follows: $516,000 for protection of our intellectual property, $350,000 for purchase of equipment and software and the remainder for our operations, including research and development and general and working capital purposes. None of the proceeds were used for construction of plant, building and facilities, the purchase of real estate or the acquisition of any business.

On January 2, 2014, the Company27, 2017, we issued 36,09226,743 shares of common stock to the Entrepreneurs Foundation of Central Texasan option holder in connection with the cashless exercise of a warrant for the purchase of 36,098 shares of the Company’s common stock.stock options. The per share exercise price was $0.0009524. The Company relied on Section 3(a)(9) of the Securities Act of 1933 to issue the common stock.

For information concerning the Non-Qualified Stock Option Award Agreement issued to R. Daniel Brdar, our Chief Executive Officer, please see the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 8, 2014.

On January 10, 2014, the Company issued a total of 25,333 shares of common stock to its three independent Board members as compensation for the services they rendered from November 29, 2012 through December 31, 2013 as to two directors and from August 20, 2013 through December 31, 2013 as to the remaining director. The value of the stock at the date of grant was determined to be $5.00 per share. The Company relied on Section 4(a)(2) of the Securities Act of 1933 to issue the common stock inasmuch as the as members of the Board are in the possession of the information registration would otherwise provide and there was no form of general solicitation or general advertising relating to the offer.

On January 16, 2014, the Company issued 10,374 shares of common stock to a consultant in connection with the cashless exercise of an option to purchase 10,500 shares of common stock. The per share exercise price was $0.09524. The Company relied on Section 3(a)(9) of the Securities Act of 1933 to issue the common stock.

On March 21, 2014, the Company issued 7,192 shares of common stock to a former Board member as compensation for his service prior to his resignation in August 2013. The value of the stock at the date of grant was determined to be $3.47626 per share. The Company$0.416675. We relied on the exemption provided by Section 4(a)(2) of the Securities Act of 1933 to issue the common stock inasmuch as the former director was an accredited investor and there was no form of general solicitation or general advertising relating to the offer.stock.

On May 29, 2014, the Company issued 1,438March 3, 2017, we closed on a definitive securities purchase agreement to sell to certain accredited investors our common stock and preferred stock together with warrants to purchase shares of common stock, toor the Private Placement. In the Private Placement, each share of common stock or preferred stock was sold together with a warrant holderto purchase one share of common stock at a collective price of $2.535. Investors purchased an aggregate of 5,220,826 shares of common stock and 708,430 shares of preferred stock together with warrants to purchase 5,929,256 shares of common stock in connectionthe Private Placement for aggregate gross proceeds of $15.0 million. The warrants have an exercise price of $2.41 per share, are non-exercisable for the first six months and will expire three years from the date of issuance. We filed a Registration Statement on Form S-3 covering the resale of the registrable securities on March 31, 2017 with the exercise of a warrant. The per share exercise priceSEC which was $3.47626 and the Company received $5,000. The Companydeclared effective on April 21, 2017. We relied on the exemption provided by Section 4(a)(2) of the Securities Act and the safe harbor under Rule 506(b) of 1933the Securities Act.

Net cash proceeds were $13.7 million after offering fees and expenses, including the placement agent fee of $1.1 million. The placement agent also received 237,170 warrants to issue the common stock inasmuch as the warrant holder was an accredited investor and there was no form of general solicitation or general advertising relating to the offer.

On July 8, 2014, the Company issued 2,946purchase shares of common stock to aas part of its placement agent fee. The placement agent warrant holder in connection with thehas an exercise price of a warrant. The$2.89 per share, exercise price was $3.47626is non-exercisable for 12 months and has a three-year term. We have been utilizing, and expect to continue to utilize, the warrant was exercised on a cashless basis. The Company relied onnet proceeds from the exemption provided by Section 3(a)(9) of the Securities Act of 1933 to issue the common stock.offering for working capital and general corporate purposes.

On September 29, 2014, the Company issued 6,378 shares of its common stock to a consultant. The Company relied on the exemption provided by Section 4(a)(2) of the Securities Act of 1933 to issue the common stock inasmuch as the warrant holder was an accredited investor and there was no form of general solicitation or general advertising relating to the offer.

On October 24, 2014, the Company issued 26,514 shares of common stock to a warrant holder in connection with the exercise of warrants. The per share exercise price was $3.47626 as to warrants to purchase 41,634 shares and $4.34533 as to warrants to purchase 11,634 shares and the warrants were

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exercised on a cashless basis. The Company relied on the exemption provided by Section 3(a)(9) of the Securities Act of 1933 to issue the common stock.

As a smaller reporting company we are not required to provide this information.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the audited financial statements and related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical information, this discussion and analysis here and throughout this Form 10-K contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements.

Overview

Ideal Power is located in Austin, Texas. Ideal Power was formed to developWe design, market and commercialize its patentedsell electrical power conversion products using our proprietary technology called Power Packet Switching Architecture (“PPSA”)Architecture™, or PPSA™. PPSA™ is a power conversion technology which isthat improves upon existing power conversion technologies in key product metrics, such as size and weight while providing built-in isolation and bi-directional and multi-port capabilities. PPSA™ utilizes standardized hardware with application specific embedded software. Our products are designed to improve the performance, size, weight, reliability, flexibilitybe used in both on-grid and costoff-grid applications. Our advanced technology is important to our business and we make significant investments in research and development and protection of electronic power conversion systems. The electronic power conversion industry’s vertical marketsour intellectual property. Our PPSA™ and bi-directional switch technologies are largeprotected by a patent portfolio of 66 US and include power conversion12 foreign issued patents at December 31, 2017.

We sell our products primarily to systems for residential, commercial, and utility-scale renewable energy systems, battery energy storage systems (“BESS”), microgrids, electric vehicle chargers, variable frequency drives (“VFDs”) for motors, and on-board power converters for electric vehicles. The Company believes it can, dueintegrators as part of a larger turn-key system which enable end users to the design advantages inherent in its PPSA technology, provide solutions that are both efficient and economically advantageous to many of these markets.

Ideal Power’s initial product focus provides solutions for high-growth markets such as battery energy storage systems, integrated renewable energy and storage, and microgrid applications. The Company has designed its products to target commercial and industrial applications, which it believes have the highest economic value and fastest growth potential in these vertical markets. Within its product family, the company offers value-enhancing solutions formanage their electricity consumption, by reducing demand charges or fossil fuel consumption, integrating renewable energy with storage systems as well as microgrid capabilities for grid resiliencysources and off-grid power.

Currently, the Company’sforming their own microgrid. Our products are designed by Ideal Power, manufacturedmade by contract manufacturers to our specifications, enabling us to scale production to meet demand on a cost-effective basis without requiring significant expenditures on manufacturing facilities and sold by Ideal Power both directlyequipment. As our products establish a foothold in key power conversion markets, we may begin to its customersfocus on licensing our proprietary PPSA™-based product designs to OEMs to reach more markets and through a distribution channel partner. The Companycustomers. We may consider additional go-to-market strategies in the future including but not limited to product licensing arrangements with leading global electronics companies. Such agreements could allow for regional manufacturersseek to build the Company’sa portfolio of relationships that generate license fees and royalties from OEMs for sales of their products under license for specific markets or specific applications.which integrate PPSA™.

The Company was

We were founded on May 17, 2007. To date, operations have been funded primarily through the sale of common stock and, prior to our initial public offering, the issuance of convertible debt, as well as through U.S. Department of Energy grants.debt. Total revenue generated from inception to date as of December 31, 2014 is $6,077,196,2017 amounted to $13.2 million with the majorityapproximately 20% of that revenue coming from government grants and product sales. The Company has applied these revenues to research and product development, thereby reducing its capital requirements. The Company willgrants. We may continue to pursue research and development grants, if and when available, for the purpose of developing new products and improving current products. The Company can make no assurances that additional grants will be available in the future.

Plan of Operation

Ideal Power has completed development, UL Certification, and commercialization for its first two products and has launched four additional products that are actively being developed with plans to obtain UL Certification for three of these products in 2015. All four of these new products have firm customer orders behind them. The Company’s 30kW battery converter is being ordered and deployed by market-leading customers at increasing volumes for commercial and industrial applications. The Company expects to continue to build order backlog for its products and begin realizing increasing revenues in the first quarter of 2015 as we begin to fulfill volume orders.

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With the introduction of our new grid-resilient 30kW 2-port and multi-port conversion systems as well as our grid-resilient 125kW 2-port and multi-port power conversion systems, the Company now offers a family of fully compatible products for broad and rapidly growing power conversion markets. Ideal Power products are well suited for commercial and industrial scale energy storage systems, systems combining PV and storage, and for on-grid and off-grid microgrid applications integrating the Company’s power conversion systems with batteries, photovoltaics, diesel, wind and other types of distributed generation in a flexible, modular approach. By using multiple 125kW products in parallel, customers can cost effectively deploy systems to up to many megawatts in scale.

Ideal Power is further developing its technology to allow it to launch additional products, enhance its competitive advantages and enter other large vertical markets. The Company’s goal is to establish PPSA as the leading technology for electronic power conversion for several large markets through both product sales and potentially licensing in selected geographies and markets. The Company’s objectives are to continue to commercialize its technology through the development of a variety of power conversion products, expand its channels to target markets, and may eventually license the manufacture of its products to original equipment manufacturers (“OEMs”) and, in certain markets, directly to large customers.

We expect to continue to use the net proceeds received from the initial public offering of our common stock for new product research, new product and existing product development, the commercialization of our products, protection of our intellectual property, purchases of property and equipment and for working capital and other general corporate purposes. The net cash proceeds from the initial public offering of our common stock totaled approximately $15 million. Our actual and anticipated costs include employee salaries and benefits, compensation paid to consultants, capital costs for research and development lab and other equipment, costs associated with development activities including travel and administration, legal expenses, sales and marketing costs, general and administrative expenses, and other costs associated with an early stage, publicly-traded technology company. We added ten employees from our initial public offering through December 31, 2014 and anticipate increasing the number of employees of the Company by approximately 5 – 10 employees by the end of December 2015. However, this increase is highly dependent on the nature of our development efforts. We have added and anticipate adding employees in the areas of research and development and product engineering and, to a lesser extent, sales and marketing and general and administrative functions as required to support our efforts. We have and expect to incur consulting expenses related to technology development and other efforts as well as legal and related expenses to protect our intellectual property. We also have incurred and expect to incur capital expenditures for the purchase of testing and other lab equipment and leasehold improvements.

The amounts that we actually spend for any specific purpose may vary significantly and will depend on a number of factors including, but not limited to, the pace of progress of our commercialization and development efforts, actual needs with respect to product testing, development and research, market conditions and changes in or revisions to our marketing strategies. In addition, although we do not have any plans for acquisitions at this time, we may use a portion of the net proceeds to acquire complementary products, technologies or businesses.

We received an award of $2.5 million from ARPA-E. Through December 31, 2014, we have recognized revenue of $2.5 million, the full amount of the award under this grant. This award was used in the development of our BD-IGBT power switches and other related power semi-conductor technology. While we currently successfully use commodity silicon IGBT and diode components in our products, we are developing BD-IGBT devices that we believe could significantly improve the efficiency, weight and manufacturing costs of our products as well as have broader potential applications. We have run successful simulations on the BD-IGBT power switches and have begun initial runs of prototype switches at our semiconductor fabrication subcontractor.

Critical Accounting Policies

The following discussion and analysis of financial condition and results of operations is based upon our financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. Certain accounting policies and estimates are particularly important to the understanding of our financial position and results of operations and require the application of significant

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judgment by our management or can be materially affected by changes from period to period in economic factors or conditions that are outside of our control. As a result, they are subject to an inherent degree of uncertainty. In applying these policies, we use our management uses their judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on our historical operations, our future business plans and projected financial results, the terms of existing contracts, our observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. Please see NoteFootnote 2 to our financial statements for a more complete description of our significantcritical accounting policies.

Revenue Recognition.  Revenue from product sales is recognized when the risks of loss and title pass to the customer, as specified in (1) the respective sales agreements and (2) other revenue recognition criteria as prescribed by Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements”, as amended by SAB No. 104, “Revenue Recognition”. We generally sell our products free-on-board shipping and recognize revenue when products are shipped. Revenue from service contracts is recognized using the completed-performance or proportional-performance method depending on the terms of the service agreement. When there are acceptance provisions based on customer-specified subjective criteria, the completed-performance method is used. For contracts where the services performed in the last series of acts is very significant, in relation to the entire contract, performance is not deemed to have occurred until the final act is completed. Once customer acceptance has been received, or the last significant act is performed, revenue is recognized. We use the proportional-performance method when a service contract specifies a number of acts to be performed and we have the ability to determine the pattern and value in which service is provided to the customer.

The Company was awarded a grant from ARPA-E on January 30, 2012. The purpose of the grant is to perform research and development on components that may improve the efficiency of the Company’s technology. ARPA-E’s share of the research and development project is $2.5 million. We currently expect to exceed the originally estimated cost of the project of $2.8 million by approximately $0.5 to $1.0 million and the program has been extended to May 29, 2015. The incremental cost will be fully funded by the Company. The Company works with ARPA-E’s program manager to agree upon the specifications and work plans for the grant. The Company then directs all the work to be performed by ARPA-E approved subcontractors, which historically have been universities but are now commercial subcontractors. Upon completion of the work, the Company submits to ARPA-E for payment of 90% of the costs incurred by the Company. Historically, this has been done on a quarterly basis, but it may be as frequently as monthly. The Company bears responsibility for the remaining 10% of the total costs incurred by the Company under the agreed work plans, which amount is included (less any costs that the applicable subcontractor has agreed to share) in our cost of revenues. The Company is also responsible for any costs incurred under the program in excess of the program amount. Any such costs would be recorded in research and development costs rather than cost of revenues. All invoices are supported with copies of expenses and invoices that the Company has received from ARPA-E approved subcontractors. Notwithstanding the foregoing, the Company is the primary obligor of all the costs incurred under the work plans for the grant, except for any costs that the applicable subcontractor has agreed to share. The agreement with ARPA-E establishes “Go/No Go” milestones and deliverables. For each “Go/No Go” milestone and deliverable, the ARPA-E program director must review the Company’s work under the previously agreed work plan, confirm in writing that the Company has achieved the “Go/No Go” milestone and deliverable, and authorize the Company to commence work on the next milestone and deliverable under a corresponding next work plan. If the project were to stop due to an ARPA-E determination that a milestone or deliverable had not been met, then the Company would not submit to ARPA-E for payment any further invoices (except for costs incurred under the previously agreed work plan). As of December 31, 2014, the Company had fully utilized ARPA-E’s share of the research and development project.

The payment conditions of the $150,000 Phase I SBIR grant that we received were substantially similar to those of the ARPA-E grant, except that in the case of the SBIR grant, the Company receives payment from SBIR of one hundred percent of the costs incurred by the Company under the agreed work plans. Nevertheless, the Company is the primary obligor of all the costs incurred under the agreed work plans for the SBIR grant. The work related to the SBIR grant was completed in 2013.

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Revenues from government grants are recognized in accordance with the provisions of SAB No. 104 in the period during which the related costs are incurred, provided that the Company has incurred the costs in accordance with the specifications and work plans for the applicable grant. Expenses included in cost of revenues are directly related to research and development activities performed by our subcontractors in order to fulfill the specifications and work plans for the applicable grant. There are no contingencies or ongoing obligations of the Company related to these grant arrangements, other than the obligation of the Company to submit to the applicable government entity invoices for costs incurred by the Company under the agreed work plans for the applicable grant. Under no circumstances is the Company required to repay monies that it receives under any of its government grants, provided that the Company receives no more than the government’s agreed share of the total cost of the project and, with respect to the ARPA-E grant, provided that the Company meets its obligation to cover its share of costs as described above. Costs incurred related to the grants are recorded as grant research and development costs within cost of revenues. Costs incurred in excess of grant award amounts are recorded as research and development costs in operating expenses.

The Company believes that recognizing the government grants as revenues is a better reflection of the economics of the arrangements as (i) there are no contingencies or ongoing obligations of the Company associated with its receipt of or right to retain the funds that it receives under its grants, (ii) the Company is the primary obligor of all the costs incurred under the work plans for the grants, and (iii) the Company has full discretion on the use of the monies that it receives under the grants. In addition, the Company earns the grant funding through the performance of research and development activities, which is one of the Company’s primary business activities. The Company also believes that this presentation provides transparency to users of the Company’s financial statements of the business activities associated with these grants, specifically, grant revenues and grant costs.

Royalty income is recognized as earned based on the terms of the contractual agreements, and has no direct costs.

Research and Development.  Grant research and development are costs incurred solely related to grant revenues, and are classified as a line item under cost of revenues. Other researchResearch and development costs are presented as a line item under operating expenses and are expensed as incurred.

PatentsIntangible Assets..  The Company capitalizes  Our intangible assets are primarily related to patents. We capitalize legal costs and filing fees, if any, associated with obtaining patents on itsour new inventions.inventions or other intangible assets. Once the patents haveasset has been issued the Company amortizesor placed in service, we amortize these costs over the shorter of the legal life of the patent (generally a maximum of 20 years) or its estimated economic life using the straight-line method.

Income Taxes.  We account for income taxes using an asset and liability approach that 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 we are able to realize their benefits, or that future deductibility is uncertain. 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.

Stock-Based Compensation.  The Company appliesWe apply Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718, “Stock Compensation,” when recording stock based compensation. The fair value of each stock option award is estimated on the date of grant using the commonly used Black-Scholes option valuation model. The assumptions used in the Black-Scholes model are as follows:

Grant Price — The grant price of the issuances areis determined based on the estimated fair value of the shares at the date of grant prior to the Company’s IPO and the closing share price on the date of grant subsequent to the Company’s IPO.grant.

Risk-free interest rate — The risk freerisk-free interest rate for periods within the contractual life of the option is based on the U.S. treasuryimplied yield in effectavailable on US Treasury securities at the time of grant.grant with an equivalent term of the expected life of the award.

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Expected lives — As permitted by SAB No. 107, due to the Company’sour insufficient history of option activity, the management utilizeswe utilize the simplified approach to estimate the optionsoptions’ expected term, which representscalculated as the midpoint between the vesting period and the contractual life of time that options granted are expected to be outstanding.the award.

Expected volatility — Volatility is determinedestimated based on management’s estimate orthe historical volatilities of comparable companies.

Expected dividend yield — Dividend yield is based on current yield at the grant date or the average dividend yield over the historical period. The Company hasWe have never declared or paid dividends and hashave no plans to do so in the foreseeable future.

We use a Monte Carlo simulation pricing model to determine the fair value of performance stock units (“PSUs”). A typical Monte Carlo exercise simulates a distribution of stock prices to yield an expected distribution of stock prices during and at the end of the performance period. The Company accountssimulations are repeated many times in order to derive a probabilistic assessment of stock performance. The stock-paths are simulated using assumptions which include expected stock price volatility and risk-free interest rate.

We account for stock issued to non-employees in accordance with the provisions of FASB ASC 505-50 “Equity Based Payments to Non-Employees.” FASB ASC 505-50 states that equity instruments that are issued in exchange for the receipt of goods or services should be measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The measurement date occurs as of the earlier of (a) the date at which a performance commitment is reached or (b) absent a performance commitment, the date at which the performance necessary to earn the equity instruments is complete (that is, the vesting date).

Results of Operations

Comparison of the year ended December 31, 20142017 to the year ended December 31, 2013

Revenues.   Revenues for the year ended December 31, 20142017 of $1,794,094$1,212,270 were $98,330,$416,470, or 5%26%, lower than the $1,892,424$1,628,740 we earned in revenues for the year ended December 31, 2013.2016. The decrease was the result of lower sales into our initial target market of stand-alone energy storage. We have shifted our focus primarily to solar + storage as we believe this market is beginning to transact and meaningful revenue growth may be achievable for us in revenue was due to a $795,877 decreasethis market in grant revenues and a $100,000 decrease in royalty revenues partially offset by a $797,547 increase in product revenues.the future

Total grant revenues for the year ended December 31, 2014 were $579,079, all from the ARPA-E grant, compared to grant revenues for the year ended December 31, 2013 of $1,374,956, including $1,229,036 from the ARPA-E grant and $145,920 from a Department of Energy SBIR grant. Revenues related to the ARPA-E grant decreased due to the timing of spending and as the ARPA-E grant was fully funded by the end of 2014. Royalty revenue decreased from $100,000 to $0 as the royalty agreement with Lockheed Martin Corporation ended December 31, 2013.

In the year ended December 31, 2014, revenue from the sale of our products was $1,215,015, a 191% increase compared to the year ended December 31, 2013, and related to our 30kW battery converter and, to a much lesser extent, our new grid-resilient 30kW multi-port power conversion system. In the year ended December 31, 2013, revenue from the sale of products was $417,468 with approximately half of our product revenue from each of our 30kW battery converter and 30kW PV inverter. We elected not to sell our 30kW PV inverter in 2014 as the 30kW battery converter, based on the same hardware platform, provided a higher selling price and thus enhanced margins.

Cost of Revenues.   Cost of revenues increased by $301,970, or 16%, to $2,241,682 for the year ended December 31, 2014 of $2,270,850 were $123,877, or 6%, higher than the $2,146,973 cost of revenues2017 compared to $1,939,712 for the year ended December 31, 2013 as2016. The increase was due to $338,213 higher excess and obsolete, or E&O, charges, including inventory impairments, and $167,009 higher adjustments to the result of an $911,254 increase in product cost of revenueCompany's warranty accrual, both related to legacy products, partially offset by a $787,377 decrease in grant research and development costs.lower sales volumes.

In the year ended December 31, 2014, cost of revenues from the sale of products was $1,627,429. In the year ended December 31, 2013, the cost of revenues from the sale of products was $716,175. The increase in cost of revenues from the sale of products was due to higher unit sales, overhead, including personnel costs, and testing costs for our 30kW battery converter.

The decrease in grant research and development costs was due to the timing of spending under the ARPA-E grant, the full utilization of the ARPA-E grant funds prior to the end of 2014 and the completion of the SBIR grant in May 2013. During the years ended December 31, 2014 and 2013, we recognized $579,079 and $1,229,036, respectively, in grant revenue and $643,421 and $1,284,878, respectively, in grant research and development costs from our ARPA-E grant. We had a cost-sharing arrangement with ARPA-E whereby we contributed ten percent of the total costs of the project (less any costs that our subcontractors have agreed to

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share), which resulted in our costs exceeding our revenue. During the year ended December 31, 2013, we also recognized $145,920 in grant revenues and $145,920 in grant research and development costs from our SBIR grant.

As the ARPA-E grant was fully utilized in 2014, we do not expect any grant revenue or grant research and development costs for this program in 2015. Any spending in 2015 related to the ARPA-E grant or related technology development will be fully funded by us and recorded as research and development expenses within operating expenses.

Gross Loss.(Loss).  Gross loss for the years ended December 31, 2014 and 2013 was $476,756 and $254,549, respectively.   Gross loss for the year ended December 31, 20142017 was $222,207$1,029,412 compared to a gross loss of $310,972 for the year ended December 31, 2016 due to lower revenues and higher thanE&O charges and warranty accrual adjustments .

Research and Development Expenses.   Research and development expenses decreased by $1,040,087, or 20%, to $4,184,905 in the year ended December 31, 2013 primarily due to increased engineering personnel costs, as we added resources to support our existing products, and higher testing costs related to our 30kW battery converter. We recognized $151,229 in higher personnel costs and $134,266 in higher testing costs within cost of revenues2017 from $5,224,992 in the year ended December 31, 2014 as compared2016. The decrease was due primarily to the year ended December 31, 2013. In addition, royalty revenue was $100,000 lower in the year ended December 31, 2014 as compared to the year ended December 31, 2013. Higher contributions from increased unit sales of our 30kW battery converter partially offset the higher personnel and testing costs associated with bi-directional power switch development and lower royalty revenue.personnel costs in connection with a cost reduction plan initiated in April 2017.

The decreases in grant revenue and grant research and development costs had an insignificant impact on gross loss in comparing the years ended December 31, 2014 and 2013 as grant costs exceeded revenues by $64,342 in the year ended December 31, 2014 compared to $55,842 for the year ended December 31, 2013.

General and Administrative Expenses.    General and administrative expenses increased by $854,095,$45,912, or 40%1%, to $2,993,131$3,789,852 in the year ended December 31, 20142017 from $2,139,036$3,743,940 in the year ended December 31, 2013.2016. The increase was due primarily to higher stock compensation expense of $291,379, inclusive of $143,037 in higher stock compensation paid to consultants, D&O insurance costs of $166,621, personnel costs of $158,622, legalpatent impairments and a litigation accrual partially offset by lower executive bonuses and professional fees of $121,816 and board fees of $112,500 as the Board elected not to receive cash compensation until we completed our initial public offering in the fourth quarter of 2013.fees.

Research and Development Expenses.  Research and development expenses increased by $1,046,171, or 86%, to $2,258,469 in the year ended December 31, 2014 from $1,212,298 in the year ended December 31, 2013. The increase was due primarily to higher personnel costs of $521,821 and contract labor costs of $321,028 as we added both firmware and hardware engineering resources, and costs related to advanced power switch development of $73,198 as we funded these efforts after fully utilizing the ARPA-E grant program funding.

Sales and Marketing Expenses.    Sales and marketing expenses increaseddecreased by $742,286,$288,716, or 162%17%, to $1,199,578$1,448,517 in the year ended December 31, 20142017 from $457,292$1,737,233 in the year ended December 31, 2013.2016. The increasedecrease was due primarily to higher personnel costs of $405,214,lower stock compensation expense of $154,731, travel costs of $40,796 and marketing costs of $40,059.legal expenses, partially offset by higher bad debt expense.

Loss from Operations.   Due to the increasedecrease in our operating expenses, and gross loss, our loss from operations for the year ended December 31, 20142017 was $6,927,934$10,452,686 or 71% higher5% lower than the $4,063,175$11,017,137 loss from operations for year ended December 31, 2013.2016.

Interest (Income) Expense, Net.Income.  Interest (income) expense, net improved from expense of $5,488,523income decreased to $17,588 for the year ended December 31, 20132017 compared to income of $27,715$36,046 for the year ended December 31, 2014, an improvement of $5,516,238. For the year ended December 31, 2014, interest income related to interest earned on our money market account. For the year ended December 31, 2013, interest expense was due to the amortization of debt discount relating to the fair value of warrants and beneficial conversion feature in promissory notes issued in 2010 through 2013 as well as the write-off of the remaining unamortized debt discount upon conversion of these notes into common stock at the time of our initial public offering.2016.

Net Loss.Loss  As a result of the decrease in interest expense, partly offset by the increase in our loss from operations, our net loss for the year ended December 31, 2014,2017, was $6,900,219$10,435,098 as compared to a net loss of $9,551,698$10,981,091 for the year ended December 31, 2013, a decrease of $2,651,479.2016.

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Liquidity and Capital Resources

We currently do not generate enough revenue to sustain our operations. Our revenues are derived from sales of our products and, to a lesser extent beginning in the year ended December 31, 2014, from grants we have received for the development of our technology. We have funded our operations through the sale of our common stock including proceeds fromand, prior to our initial public offering, preferred stock (later converted to common stock) and debt securities.the issuance of convertible debt.

As of December 31, 20142017 and 2013,2016, we had cash and cash equivalents of $7,912,011$10,022,247 and $14,137,097,$4,204,916, respectively. Our net working capital decreased to $7,658,720 as ofand long-term debt at December 31, 2014 from $14,140,317 as of December 31, 2013 due primarily to the cash outflow to fund our operations.2017 were $9,247,272 and $0, respectively.

Operating activities in the year ended December 31, 20142017 resulted in cash outflows of $5,469,550,$7,415,539, which were primarily due to the net loss for the period of $6,900,219,$10,435,098 offset by stock-based compensation of $944,102, stock compensation paid for services$1,108,359, inventory impairment charges of $180,183,$760,785, depreciation and amortization of $451,547 and other non-cash items of $526,936 as well as favorable balance sheet timing of $150,965 and other non-cash items of $155,419.$171,932. Operating activities in the year ended December 31, 20132016 resulted in cash outflows of $3,240,792,$10,098,653, which were due primarily to the net loss for the period of $9,551,698,$10,981,091 and unfavorable balance sheet timing of $1,364,473, offset by amortization of debt discount of $5,318,257, stock-based compensation of $458,983$1,517,545, depreciation and amortization of $406,639 and other non-cash items of $527,871.$322,727.

Investing activities in the year ended December 31, 2017 and 2016 resulted in cash outflows of $434,030 and $750,992, respectively, for the acquisition of fixed assets and intangible assets.

In the second quarter of 2017, we implemented a cost reduction plan with the goal of reducing our cash outflows for operating and investing activities. This plan included the simplification of our product roadmap for the balance of 2017 to focus on our 30kW SunDial™ and Stabiliti™ products for the solar + storage and microgrid markets and the elimination of activities that did not present significant near-term revenue opportunities. In addition, we discontinued our legacy products, including our 125kW product, and postponed our development and certification efforts related to international markets and electric vehicle fast charging. These changes have resulted, and we believe will continue to result, in a reduced cash burn in advance of our expected revenue growth.

Financing activities in the year ended December 31, 2017 resulted in cash inflows of $13,666,900 related primarily to our Private Placement net proceeds of $13,657,331. In the Private Placement, each share of common stock or preferred stock was sold together with a warrant to purchase one share of common stock at a collective price of $2.535. Investors purchased an aggregate of 5,220,826 shares of common stock and 708,430 shares of preferred stock together with warrants to purchase 5,929,256 shares of common stock in the Private Placement for aggregate gross proceeds of $15.0 million. Net cash proceeds were $13.7 million after offering fees and expenses, including the placement agent fee of $1.1 million. Other financing activities in the years ended December 31, 20142017 and 20132016 resulted in cash outflowsinflows of $760,502$9,569 and $221,649, respectively. Cash outflows for the development of patents in the years ended December 31, 2014 and 2013 were $418,255 and $142,708,$32,275, respectively, and cash outflows for the acquisition of fixed assets in the years ended December 31, 2014 and 2013 were $342,247 and $78,941, respectively. Cash outflows for the development of patents increased as we expanded and broadened our patent portfolio while cash outflows for the acquisition of fixed assets increased as we purchased equipment for our development labrelating primarily to support current and future products.

In the year ended December 31, 2014, we received $4,966 in net proceeds from the exercise of stock options and warrants. In the year ended December 31, 2013, we raised $17,250,000 in gross proceeds ($15,015,985 net of costs) from our initial public offering and $750,000 in gross proceeds ($611,256 net of costs) from the sale of convertible promissory notes, later converted into common stock at the completion of our initial public offering.

Our long-term debt balance, including current portion, was $0 at December 31, 2014 and 2013 due to the conversion of our convertible promissory notes to shares of our common stock following the closing of our initial public offering and the cancellation of our promissory note with the State of Texas in December 2013 upon its exercise of its rights under the Investment Unit issued on October 1, 2010, as amended.

On December 1, 2014, the Companywe filed a Form S-3 shelf registration statement with the Securities and Exchange Commission.SEC. The registration statement became effective on April 27, 2015 and expires on April 27, 2018. The shelf registration statement allows the Companyus to offer up to an aggregate $75 million of common stock, preferred stock, warrants to purchase common stock or preferred stock or any combination thereof and provides the Companyus with the flexibility over three years to potentially raise additional equity in a public or private offering on commercial terms. At December 31, 2017, our availability under this registration statement was $58 million.

Inflation

We do not believe that inflation has had a material impact on our business and operating results during the periods presented, and we do not expect it to have a material impact in the near future, although there can be no assurances that our business will not be affected by inflation in the future.

Off-Balance Sheet Transactions

We do not have any off-balance sheet transactions.

Trends, Events and Uncertainties

Research and development of new technologies is, by its nature, unpredictable. Although we will undertake development efforts with commercially reasonable diligence, there can be no assurance that the net proceeds from the initial public offeringour working capital of our common stock$9,247,272 as of December 31, 2017 will be sufficient to enable us to develop our technology to the extent needed to create future sales to sustain operations as contemplated herein. If the net proceeds from the initial public offering of our common stock areworking capital is insufficient for this purpose, we will consider other options to continue our path to commercialization, including, but not limited to, additional financing through follow-on stock offerings, debt financing, co-development agreements, curtailment of operations, suspension of operations, sale or licensing of developed intellectual or other property, or other alternatives.

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We cannot assure you that our technology will be adopted, that we will ever earn revenues sufficient to support our operations, or that we will ever be profitable. Furthermore, since we have no committed source of financing, we cannot assure you that we will be able to raise money as and when we need it to continue our operations. If we cannot raise funds as and when we need them, we may be required to severely curtail, or even to cease, our operations.

Other than as discussed above and elsewhere in this report, we are not aware of any trends, events or uncertainties that are likely to have a material effect on our financial condition.

As a smaller reporting company we are not required to provide this information.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
of Ideal Power Inc.

Opinion on the Financial Statements

We have audited the accompanying balance sheets of Ideal Power, Inc. (the “Company”"Company") as of December 31, 20142017 and 2013,2016, and the related statements of operations, stockholders’ equity and cash flows, for each of the two years in the two-year period ended December 31, 2014. The Company’s management is responsible2017, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for theseeach of the two years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements.statements are the responsibility of the Company's management. Our responsibility is to express an opinion on thesethe Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. OurAs part of our audits, included considerationwe are required to obtain an understanding of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of

Liquidity

Since its inception, the Company as of December 31, 2014 and 2013, andhas generated limited revenues from the resultssale of its products and has incurred significant losses from its operations. The Company has financed its operations andprimarily through the sale of its cash flows for eachcommon stock. The Company’s continued operations are dependent upon its ability to obtain adequate sources of funding through future sales, follow-on stock offerings, debt financing, co-development agreements, sale or licensing of developed intellectual property or alternatives. There can be no assurances that the yearsCompany will be successful in the two-year period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.achieving its long-term plans.

/s/ Gumbiner Savett Inc.

We have served as the Company's auditor since 2013.

March 25, 2015
30, 2018

Santa Monica, California

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IDEAL POWER INC.

Balance Sheets

		December 31,								December 31,
		2014				2013				2017				2016
ASSETS
Current assets:
Cash and cash equivalents		$	7,912,011			$	14,137,097			$	10,022,247			$	4,204,916
Accounts receivable, net			446,521				252,406				221,084				378,658
Inventories, net			251,338				519,657				251,363				1,245,147
Prepayments and other current assets			263,605				231,495				283,208				312,593
Total current assets			8,873,475				15,140,655				10,777,902				6,141,314
Property and equipment, net			374,376				85,718				669,571				936,486
Patents, net			1,012,964				608,913
Intangible assets, net											2,082,014				1,905,556
Other assets			17,920				—				37,500				17,920
Total Assets		$	10,278,735			$	15,835,286
Total assets										$	13,566,987			$	9,001,276
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	441,636			$	539,145			$	449,475			$	346,767
Accrued expenses			773,119				461,193				1,081,155				1,149,129
Total current liabilities			1,214,755				1,000,338				1,530,630				1,495,896
Commitments
Long-term liabilities											456,234				265,418
Total liabilities											1,986,864				1,761,314
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.001 par value; 50,000,000 shares authorized; 7,048,235 and 6,931,968 shares issued and outstanding at December 31, 2014 and 2013, respectively			7,048				6,932
Common stock to be issued			—				151,665
Preferred stock, $0.001 par value; 10,000,000 shares authorized; 1,518,430 shares issued and outstanding at December 31, 2017											1,518				--
Common stock, $0.001 par value; 50,000,000 shares authorized; 13,998,465 shares issued and 13,996,121 shares outstanding at December 31, 2017 and 9,560,896 shares issued and 9,559,213 shares outstanding at December 31, 2016, respectively											13,998				9,561
Additional paid-in capital			32,712,020				31,431,220				67,081,359				52,310,481
Treasury stock			(2,657	)			(2,657	)
Treasury stock, at cost; 2,344 shares at December 31, 2017 and 1,683 shares at December 31, 2016, respectively											(7,489	)			(5,915	)
Accumulated deficit			(23,652,431	)			(16,752,212	)			(55,509,263	)			(45,074,165	)
Total stockholders’ equity			9,063,980				14,834,948				11,580,123				7,239,962
Total Liabilities and Stockholders’ Equity		$	10,278,735			$	15,835,286
Total liabilities and stockholders’ equity										$	13,566,987			$	9,001,276

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

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IDEAL POWER INC.

Statements of Operations

										For the Year Ended December 31,
		For the Year Ended December 31,								2017				2016
		2014				2013
Revenues:
Products		$	1,215,015			$	417,468
Royalties			—				100,000
Grants			579,079				1,374,956
Total revenue			1,794,094				1,892,424
Cost of revenues:
Products			1,627,429				716,175
Grant research and development costs			643,421				1,430,798
Total cost of revenue			2,270,850				2,146,973
Product revenue										$	1,212,270			$	1,628,740
Cost of product revenue											2,241,682				1,939,712
Gross loss			(476,756	)			(254,549	)			(1,029,412	)			(310,972	)
Operating expenses:
Research and development											4,184,905				5,224,992
General and administrative			2,993,131				2,139,036				3,789,852				3,743,940
Research and development			2,258,469				1,212,298
Sales and marketing			1,199,578				457,292				1,448,517				1,737,233
Total operating expenses			6,451,178				3,808,626				9,423,274				10,706,165
Loss from operations			(6,927,934	)			(4,063,175	)			(10,452,686	)			(11,017,137	)
Interest (income) expense, net (including amortization of debt discount of $5,318,257 for the year ended December 31, 2013)			(27,715	)			5,488,523
Interest income											17,588				36,046
Net loss		$	(6,900,219	)		$	(9,551,698	)		$	(10,435,098	)		$	(10,981,091	)
Net loss per share – basic and fully diluted		$	(0.98	)		$	(4.90	)		$	(0.79	)		$	(1.15	)
Weighted average number of shares outstanding – basic and fully diluted			7,016,872				1,950,171				13,223,229				9,548,381

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

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IDEAL POWER INC.

Statement of Stockholders’ Equity

For the Years Ended December 31, 20142017 and 2013

		Common Stock								Common Stock Issuable								Additional Paid-In Capital				Treasury Stock				Accumulated Deficit				Total Stockholders’ Equity (Deficit)
		Shares				Amount				Shares				Amount
Balances at December 31, 2012			1,480,262			$	1,480				—			$	—			$	7,100,297			$	(2,657	)		$	(7,200,514	)		$	(101,394	)
Shares issued in initial public offering			3,450,000				3,450				—				—				17,246,550				—				—				17,250,000
Issuance costs of initial public offering			—				—				—				—				(3,916,892	)			—				—				(3,916,892	)
Fair value of warrants issued in connection with initial public offering			—				—				—				—				1,682,877				—				—				1,682,877
Conversion of promissory notes			1,700,493				1,701				—				—				6,266,668				—				—				6,268,369
Contribution on cancellation of promissory note			—				—				—				—				1,205,096				—				—				1,205,096
Fair value of warrants issued in connection with promissory notes			—				—				—				—				655,800				—				—				655,800
Beneficial conversion feature – convertible promissory notes			—				—				—				—				674,066				—				—				674,066
Common stock issuable for services			—				—				32,525				151,665				—				—				—				151,665
Warrants issued for consulting services			—				—				—				—				37,145				—				—				37,145
Modification of warrants issued in connection with promissory notes			—				—				—				—				20,935				—				—				20,935
Cashless exercise of warrants			301,213				301				—				—				(305	)			—				—				(4	)
Stock-based compensation			—				—				—				—				458,983				—				—				458,983
Net loss for the year ended December 31, 2013			—				—				—				—				—				—				(9,551,698	)			(9,551,698	)
Balances at December 31, 2013			6,931,968				6,932				32,525				151,665				31,431,220				(2,657	)			(16,752,212	)			14,834,948
Common stock issued for services			38,903				39				(32,525	)			(151,665	)			201,630				—				—				50,004
Warrants issued for consulting services			—				—				—				—				130,179				—				—				130,179
Exercise of options and warrants			77,364				77				—				—				4,889				—				—				4,966
Stock-based compensation			—				—				—				—				944,102				—				—				944,102
Net loss for the year ended December 31, 2014			—				—				—				—				—				—				(6,900,219	)			(6,900,219	)
Balances at December 31, 2014			7,048,235			$	7,048				—			$	—			$	32,712,020			$	(2,657	)		$	(23,652,431	)		$	9,063,980

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

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IDEAL POWER INC.

Statements of Cash Flows

		For the Year Ended December 31,								For the Year Ended December 31,
		2014				2013				2017				2016
Cash flows from operating activities:
Net loss		$	(6,900,219	)		$	(9,551,698	)		$	(10,435,098	)		$	(10,981,091	)
Adjustments to reconcile net loss to net cash used in operating activities:
Allowance for doubtful accounts											192,693				85,375
Write-down of inventory											760,785				72,823
Depreciation and amortization			67,793				29,711				451,547				406,639
Write-down of inventory			62,851				23,651
Allowance for doubtful accounts			24,775				—
Write-off of fixed assets											54,261				47,560
Write-off of capitalized patents											279,982				116,969
Stock-based compensation			944,102				458,983				1,108,359				1,517,545
Common stock issued and to be issued for services			50,004				151,665
Amortization of debt discount			—				5,318,257
Issuance of note payable in connection with services			—				213,293
Fair value of warrants issued for consulting services			130,179				37,145
Accrued interest – promissory note			—				72,406
Decrease (increase) in operating assets:
Accounts receivable			(218,890	)			233,268				(35,119	)			408,841
Inventories			205,468				(325,441	)			232,999				(679,993	)
Prepaid expenses and other assets			(50,030	)			(203,027	)			9,805				(16,238	)
Increase (decrease) in operating liabilities:
Accounts payable			(97,509	)			(145,413	)			102,708				(992,061	)
Accrued expenses			311,926				446,408				(138,461	)			(85,022	)
Net cash used in operating activities			(5,469,550	)			(3,240,792	)			(7,415,539	)			(10,098,653	)
Cash flows from investing activities:
Purchase of property and equipment			(342,247	)			(78,941	)			(155,613	)			(391,088	)
Acquisition of patents			(418,255	)			(142,708	)
Acquisition of intangible assets											(278,417	)			(359,904	)
Net cash used in investing activities			(760,502	)			(221,649	)			(434,030	)			(750,992	)
Cash flows from financing activities:
Borrowings on notes payable, net of debt raising costs			—				611,256
Net proceeds from issuance of common stock			—				15,015,985				13,657,331				—
Exercise of options and warrants			4,966				(4	)			11,143				35,533
Payment of taxes related to restricted stock vesting											(1,574	)			(3,258	)
Net cash provided by financing activities			4,966				15,627,237				13,666,900				32,275
Net (decrease) increase in cash and cash equivalents			(6,225,086	)			12,164,796
Net increase (decrease) in cash and cash equivalents											5,817,331				(10,817,370	)
Cash and cash equivalents at beginning of year			14,137,097				1,972,301				4,204,916				15,022,286
Cash and cash equivalents at end of year		$	7,912,011			$	14,137,097			$	10,022,247			$	4,204,916
							(Continued)

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

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IDEAL POWER INC.

Statements of Cash Flows (Continued)

Non cash activities for the year ended December 31, 2013:

The Company issued 256,849 warrants valued at $251,800 in connection with notes payable.

The Company recorded $404,000 for a change in estimate related to warrants issued in connection with a promissory note.

The Company recorded a debt discount of $674,066 for the intrinsic value of the embedded conversion feature associated with notes payable.

The Company recorded a contribution of capital of $1,205,096 in connection with the cancellation of a promissory note.

The Company recorded $1,701 of common stock and $6,266,668 of additional paid-in capital in connection with the conversion of notes payable to equity.

The Company recorded $1,682,877 for the fair value of warrants issued in connection with its initial public offering and for issuance costs of its initial public offering as offsetting amounts within additional paid-in capital.

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

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Ideal Power Inc.

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 develops power conversion solutions with an initiala focus on solar + storage, microgrid and stand-alone commercial and industrial gridenergy storage combined solar and storage, and microgrid applications. The principal products of the Company are 30-kilowatt power conversion systems, including dual-port2-port and multi-port battery converters.products.

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, prior to its initial public offering, the issuance of convertible debt. The Company’s continued operations are dependent upon its ability to obtain adequate sources of funding through future revenues, follow-on stock offerings, debt governmental grants and proceeds from its initial public offering.financing, co-development agreements, sale or licensing of developed intellectual property or other alternatives.

Note 2 — Summary of Significant Accounting Policies

Basis of Presentation

On November 21, 2013, the Company effected a 1-for-2.381 reverse stock split of its issued common stock. All applicable share data, per share amounts and related information in the financial statements and notes thereto have been adjusted retroactively to give effect to the 1-for-2.381 reverse stock split.

Use of Estimates

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.

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. The Company performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral from its customers.condition. In limited instances, the Company may require an upfront deposit and, in most cases, the Company does chargecharges interest on past due amounts. 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 how recently payments have been received.any other customer-specific information that may impact the evaluation of the specific customer’s credit. Accounts are considered for write-off when they become past due and when it is determined that the probability of collection is remote. The allowance for doubtful accounts was $24,775$178,399 and $85,375 at December 31, 2014. There was no allowance for doubtful accounts at December 31, 2013.2017 and 2016, respectively.

Inventories

Inventories are stated at the lower of cost (first in, first out method) or market value. Inventory quantities on hand are reviewed regularly and a write-down for excess and obsolete inventory is recorded based primarily on an estimated forecast of product demand, market conditions and anticipated production requirements in the near future. There was a $40,703$120,443 and $59,969 reserve for excess and obsolete inventory at December 31, 20142017 and 2016, respectively, related to component parts not anticipated to be used in production. There was no reserve for excess and obsolete inventory at December 31, 2013.have a future use.

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Ideal Power Inc.

Notes to Financial Statements

Note 2 — Summary of Significant Accounting Policies – (continued)

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 thetheir 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			4 years	Shorter of lease term or useful life
Machinery and equipment			5 years
Furniture, fixtures and computers			3 – 5 years

PatentsIntangible Assets

Patents

The Company’s intangible assets are primarily composed of patents, which are recorded at cost. The Company capitalizes third party legal costs and filing fees, if any, associated with obtaining patents on its new discoveries.or other intangible assets. Once the patents haveintangible asset has been issued,placed in service, the Company amortizes these costs over the shorter of the asset’s legal life, of the patentgenerally 20 years, or its estimated economic life generally 20 years, using the straight-line method.

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. Management has determined that there was noan impairment in the value of long-lived assets in the amount of $334,243 and $164,529 during the years ended December 31, 20142017 and 2013.2016, respectively.

Fair Value of Financial Instruments

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:

The Company’s financial instruments primarily consist of cash and cash equivalents, accounts receivable, accounts payable and accounts payable.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 maturitiesshort-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, 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 Footnote 7 and Footnote 13 for more details regarding the licensing agreement. The Company did not identify any other non-recurring assets and liabilities that are required to be presented in the balance sheets at fair value.

Revenue Recognition

Revenue from product sales is recognized when the risks of loss and title pass to the customer, as specified in (1) the respective sales agreements and (2) other revenue recognition criteria as prescribed by Staff Accounting Bulletin (“SAB”) No. 101 (SAB 101), “Revenue Recognition in Financial Statements,” as amended by SAB No. 104, “Revenue Recognition”. The Company generally sells its products FOB shipping and recognizes revenue when products are shipped. Revenue from service contracts is recognized using the completed-performance or proportional-performance method depending on the terms of the service agreement. When there are acceptance provisions based on customer-specified subjective criteria, the completed-performance method is used. For contracts where the services performed in the last series of acts is very significant, in relation to the entire contract, performance is not deemed to have occurred until the final act is completed. Once customer acceptance has been received, or the last significant act is performed, revenue is recognized. The Company uses the proportional-performance method when a service contract

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Ideal Power Inc.

Notes to Financial Statements

Note 2 — Summary of Significant Accounting Policies – (continued)

specifies a number of acts to be performed and the Company has the ability to determine the pattern and related value in which service is provided to the customer.

The Company receives payments from government entities in the form of government grants. Government grants are agreements that generally provide the Company with cost reimbursement for certain type of research and development activities over a contractually defined period. Revenues from government grants are 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. Costs incurred related to the grants are recorded as grant research and development costs. Government grant revenue amounted to $579,079 and $1,374,956 for the years ended December 31, 2014 and 2013, respectively. At December 31, 2014 and 2013, grants receivable amounted to $132,227 and $211,063, respectively, and were included in accounts receivable.

Royalty income is recognized as earned based on the terms of the contractual agreements and has no direct costs.

Product Warranties

The Company generally provides a ten year manufacturer’sten-year limited warranty coveringon its products except for its product defects.for the solar + storage market for which the Company provides a five-year limited warranty. Accruals for product warranties are estimated based upon limited historical warranty experience, engineering experience and judgment, and a third party assessmentthird-party assessments of the reliability of the Company’s 30kW products. Accruals for product warranties are recorded in cost of revenuesproduct revenue at the time revenue is recognized in order to match revenues with related expenses. The Company assesses the adequacy of its estimated warranty liability quarterly and adjusts the reserve, included in accrued expenses, as necessary. Although any suchThe Company recorded warranty accrual adjustments were not material inof $283,457 and $116,448 for the years ended December 31, 20142017 and 2013, any such2016, respectively. Warranty adjustments could be material in the future if estimates differ significantly from longer termactual warranty experience.

Research and Development

Grant research and development are costs incurred solely related to grant revenues, and are classified as a line item under cost of revenues.

Other research

Research and development costs are presented as a line item under operating expenses and are expensed as incurred. Total research and development costs incurred during the years ended December 31, 2014 and 2013 amounted to $2,901,890 and $2,643,096, respectively, of which $643,421 and $1,430,798, respectively, was included in cost of revenues.

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, 20142017 and 2013,2016, 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.

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Ideal Power Inc.

Notes to Financial Statements

Note 2 — Summary of Significant Accounting Policies – (continued)

Net Loss Per Share

The Company applies FASB ASCFinancial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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 stock optionsequity awards and warrants using the treasury stock method, except formethod. In periods for whichwith a net loss, no common share equivalents are included because their effect would be anti-dilutive. At December 31, 20142017 and 2013,2016, potentially dilutive shares outstanding amounted to 2,932,1558,837,315 and 2,145,495,3,006,357, respectively.

Stock Based Compensation

The Company applies FASB ASC 718, “Stock Compensation,” when recording stock based compensation. The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option valuation model.

The assumptions used inCompany uses a Monte Carlo simulation pricing model to determine the Black-Scholes valuation model are as follows:

Grant Price — The grant price of the issuances are determined based on the estimated fair value of the sharesperformance stock units (“PSUs”). A typical Monte Carlo exercise simulates a distribution of stock prices to yield an expected distribution of stock prices during and at the date of grant prior to the Company’s IPO and the closing share price on the date of grant subsequent to the Company’s IPO.

Risk-free interest rate — The risk free interest rate for periods within the contractual lifeend of the option is based on the U.S. treasury yield in effect at the time of grant.

Expected lives — As permitted by SAB 107, due to the Company’s insufficient history of option activity, the management utilizes the simplified approach to estimate the options expected term, which represents the period of time that options granted are expected to be outstanding.

Expected volatility — is determined based on management’s estimate or historical volatilities of comparable companies.

Expected dividend yield — is based on current yield at the grant date or the average dividend yield over the historicalperformance period. The Company has never declared or paid dividendssimulations are repeated many times in order to derive a probabilistic assessment of stock performance. The stock-paths are simulated using assumptions which include expected stock price volatility and has no plans to do so in the foreseeable future.risk-free interest rate.

The Company accounts for stock issued to non-employees in accordance with the provisions of FASB ASC 505-50 “Equity Based Payments to Non-Employees.” FASB ASC 505-50 states that equity instruments that are issued in exchange for the receipt of goods or services should be measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The measurement date occurs as of the earlier of (a) the date at which a performance commitment is reached or (b) absent a performance commitment, the date at which the performance necessary to earn the equity instruments is complete (that is, the vesting date).

The Company issues common stock upon exercise of equity awards and warrants.

Presentation of Sales Taxes

Certain states impose a sales tax on the Company’s sales to nonexempt customers. The Company collects that sales tax from customers and remits the entire amount to the states. The Company’s accounting policy is to exclude the tax collected and remitted to the states from revenues and cost of revenues.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash accounts receivableand cash equivalents and accounts payable.receivable. 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 any significant credit risk onregarding its cash and cash equivalents.

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Ideal Power Inc.

Notes to Financial Statements

Note 2 — Summary of Significant Accounting Policies – (continued)

The Company encounters a certain amount of risk as a result of a concentration of revenue from a few significant customers. Credit is extended to customers based on an evaluation of their financial condition. The Company generally does not require collateral or other security to support accounts receivable. In limited instances, the Company may require an upfront deposit and, in most cases, the Company does charge interest on past due amounts.deposit. The Company performs ongoing credit evaluations of its customers and records an allowance for potential bad debts based on available information.

The Company had revenue from a government entity and three customersone customer that accounted for 76%15% of netproduct revenue for the year ended December 31, 2014,2017, and revenue from a government entitytwo customers that accounted for 65%44% of netproduct revenue for the year ended December 31, 2013.2016. The Company had an accounts receivable balance from a government entity, twothree customers and a vendor that accounted for 80%60% and two customers that accounted for 78% of total accounts receivabletrade receivables at December 31, 2014,2017 and from2016, respectively.

Recently Adopted Standard

In July 2017, the FASB issued ASU 2017-11, Accounting for Certain Financial Instruments with Down Round Features and Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a government entity thatScope Exception. Part I of this ASU addresses the complexity of accounting for certain financial instruments with down round features. Per the ASU, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for 84%as a derivative liability at fair value as a result of total accounts receivable atthe existence of a down round feature. The ASU is effective for public entities for fiscal years beginning after December 31, 2013.

Reclassifications

Certain items in prior financial statements have been reclassified15, 2018 and early adoption is permitted. The Company has elected to conform to current year presentation.early adopt the ASU and will recognize the value of the effect of the down round provision, if and/or when triggered. The provision is associated with stock warrants issued as part of the Company's 2017 definitive securities purchase agreement, or the Private Placement. For more details regarding the 2017 Private Placement, see Notes 9 and 11.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The FASB issued several amendments to the standard, including clarification on accounting for licenses of intellectual property and identifying performance obligations. The standard replaced most existing revenue recognition guidance in U.S. GAAP when it became effective on January 1,2018 and permits the use of either the retrospective or cumulative effect transition method. The Company believes the standard will not have a material effect on the Company’s financial statements, nor require an adjustment to the opening balance of retained earnings at January 1, 2018, the date of initial adoption.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet. Most prominent among the amendments is the recognition of assets and liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. Under the new standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The new standard will be effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. While the Company is continuing to assess the potential impact of this standard, it expects its lease commitment will be subject to the updated standard and recognized as a lease liability and right-of-use asset upon adoption.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), in order to address eight specific cash flow issues with the objective of reducing the existing diversity in practice. The updated standard is effective for financial statements issued for annual periods beginning after December 15, 2017 and interim periods within those fiscal years with early adoption permitted. The adoption of the standard will not have a significant effect on the Company’s financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718 to a change to the terms or conditions of a share-based payment award. The amendments in this ASU are effective for public entities for fiscal years and interim periods beginning after December 15, 2017, with early adoption permitted. The ASU should be applied prospectively on and after the effective date. The standard is not expected to have a material effect on the Company’s financial statements.

Management does not believe that any other recently issued, but not yet effective, accounting standards, if adopted, willwould have a material effectimpact on the Company’s financial statements.

Note 3 — Accounts Receivable

Accounts receivable, net consisted of the following: