UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


(Mark One)

x
ýQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended SeptemberJune 30, 2016

2017

OR

¨
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to _______________

Commission File Number 001-36216

IDEAL POWER INC.

(Exact name of registrant as specified in its charter)

Delaware 14-1999058
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

4120 Freidrich Lane, Suite 100

Austin, Texas 78744

(Address of principal executive offices)

(Zip Code)

(512) 264-1542

(Registrant’s telephone number, including area code)

(Former

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period than the registrant was required to submit and post such files). Yesxý No¨

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

Large accelerated filer  ¨
 
Accelerated filer ¨
   
Non-accelerated filer  ¨
 
Smaller reporting company  x
(Do not check if a smaller reporting company)  
Emerging growth company  x

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

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


As of NovemberAugust 7, 2016,2017, the issuer had 9,557,74713,996,782 shares of common stock, par value $.001, issued and outstanding.



TABLE OF CONTENTS

PART I 
FINANCIAL INFORMATION
 3
     
Item 1. 
Condensed Financial Statements
 3
1
     
  Balance Sheets at SeptemberJune 30, 20162017 (Unaudited) and December 31, 20152016 3
1
  Statements of Operations for the three and ninesix months ended SeptemberJune 30, 2017 and 2016 and 2015 (Unaudited) 4
2
  Statements of Cash Flows for the ninesix months ended SeptemberJune 30, 2017 and 2016 and 2015 (Unaudited) 5
3
  
Notes to Unaudited Financial Statements
 6
4
     
Item 2. 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 12
11
     
Item 3. 
Quantitative and Qualitative Disclosures About Market Risk
 21
17
     
Item 4. 
Controls and Procedures
 21
17
     
PART II 
OTHER INFORMATION
 21
     
Item 1. 
Legal Proceedings
 21
18
     
Item 1A. 
Risk Factors
 21
18
     
Item 2. 
Unregistered Sales of Equity Securities and Use of Proceeds
 21
18
     
Item 3. 
Defaults Upon Senior Securities
 21
18
     
Item 4. 
Mine Safety Disclosures
 22
19
     
Item 5. 
Other Information
 22
19
     
Item 6. 
Exhibits
 22
19
     
SIGNATURES
 23

220





PART I-FINANCIALI - FINANCIAL INFORMATION


ITEM 1.CONDENSED FINANCIAL STATEMENTS

ITEM 1. CONDENSED FINANCIAL STATEMENTS
IDEAL POWER INC.

Balance Sheets

  September 30,  December 31, 
  2016  2015 
  (unaudited)    
ASSETS        
Current assets:        
Cash and cash equivalents $6,813,438  $15,022,286 
Accounts receivable, net  450,019   872,874 
Inventories, net  1,262,810   648,009 
Prepayments and other current assets  149,294   296,355 
Total current assets  8,675,561   16,839,524 
         
Property and equipment, net  1,005,459   925,899 
Intangible assets, net  1,908,531   1,466,811 
Other assets  17,920   17,920 
Total Assets $11,607,471  $19,250,154 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Current liabilities:        
Accounts payable $609,393  $1,338,828 
Accrued expenses  1,084,755   1,240,093 
Total current liabilities  1,694,148   2,578,921 
         
Long-term liabilities  263,636   - 
Total liabilities  1,957,784   2,578,921 
         
Commitments        
         
Stockholders’ equity:        
Common stock, $0.001 par value; 50,000,000 shares authorized; 9,557,747 and 9,549,544 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively  9,558   9,550 
Additional paid-in capital  51,927,950   50,757,414 
Treasury stock  (2,657)  (2,657)
Accumulated deficit  (42,285,164)  (34,093,074)
Total stockholders’ equity  9,649,687   16,671,233 
Total Liabilities and Stockholders’ Equity $11,607,471  $19,250,154 

  June 30, 2017 December 31, 2016
  (unaudited)  
ASSETS  
  
Current assets:  
  
Cash and cash equivalents $13,335,908
��$4,204,916
Accounts receivable, net 205,646
 378,658
Inventories, net 366,535
 1,245,147
Prepayments and other current assets 252,532
 312,593
Total current assets 14,160,621
 6,141,314
     
Property and equipment, net 751,138
 936,486
Intangible assets, net 2,099,182
 1,905,556
Other assets —
 17,920
Total Assets $17,010,941
 $9,001,276
     
LIABILITIES AND STOCKHOLDERS’ EQUITY  
  
Current liabilities:  
  
Accounts payable $212,984
 $346,767
Accrued expenses 1,180,282
 1,149,129
Total current liabilities 1,393,266
 1,495,896
     
Other long-term liabilities 489,941
 265,418
Total liabilities 1,883,207
 1,761,314
     
Commitments and contingencies (see Note 8) 

 

     
Stockholders’ equity:  
  
Preferred stock, $0.001 par value; 10,000,000 shares authorized; 1,518,430 shares issued and outstanding at June 30, 2017 1,518
 —
Common stock, $0.001 par value; 50,000,000 shares authorized; 13,998,465 shares issued and 13,996,782 shares outstanding at June 30, 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 66,471,006
 52,310,481
Treasury stock, at cost; 1,683 shares at June 30, 2017 and December 31, 2016 (5,915) (5,915)
Accumulated deficit (51,352,873) (45,074,165)
Total stockholders’ equity 15,127,734
 7,239,962
Total Liabilities and Stockholders’ Equity $17,010,941
 $9,001,276
The accompanying notes are an integral part of these condensed financial statements.

3



IDEAL POWER INC.

Statements of Operations

(unaudited)

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2016  2015  2016  2015 
             
Product revenue $439,270  $895,490  $1,258,030  $3,292,518 
Cost of product revenue  737,937   842,425   1,531,628   2,918,064 
Gross profit (loss)  (298,667)  53,065   (273,598)  374,454 
                 
Operating expenses:                
Research and development  1,231,024   1,716,782   3,914,188   3,809,362 
General and administrative  907,335   888,132   2,709,325   2,767,273 
Sales and marketing  496,794   378,378   1,321,757   1,222,558 
Total operating expenses  2,635,153   2,983,292   7,945,270   7,799,193 
                 
Loss from operations  (2,933,820)  (2,930,227)  (8,218,868)  (7,424,739)
                 
Interest income, net  11,554   12,028   26,778   21,152 
                 
Net loss $(2,922,266) $(2,918,199) $(8,192,090) $(7,403,587)
                 
Net loss per share – basic and fully diluted $(0.31) $(0.31) $(0.86) $(0.91)
                 
Weighted average number of shares outstanding – basic and fully diluted  9,549,011   9,356,195   9,547,580   8,180,137 

  Three Months Ended
June 30,		 Six Months Ended
June 30,
  2017 2016 2017 2016
Product revenue $253,370
 $322,116
 $529,040
 $818,760
Cost of product revenue 764,609
 298,937
 1,475,539
 793,691
Gross profit (loss) (511,239) 23,179
 (946,499) 25,069
         
Operating expenses:  
  
  
  
Research and development 1,108,368
 1,203,179
 2,298,537
 2,683,164
General and administrative 1,170,415
 881,659
 2,076,378
 1,801,990
Sales and marketing 427,336
 412,433
 968,869
 824,963
Total operating expenses 2,706,119
 2,497,271
 5,343,784
 5,310,117
         
Loss from operations (3,217,358) (2,474,092) (6,290,283) (5,285,048)
         
Interest income, net 7,034
 6,615
 11,575
 15,224
         
Net loss $(3,210,324) $(2,467,477) $(6,278,708) $(5,269,824)
         
Net loss per share – basic and fully diluted $(0.23) $(0.26) $(0.50) $(0.55)
         
Weighted average number of shares outstanding – basic and fully diluted 13,989,282
 9,547,747
 12,443,076
 9,546,864
The accompanying notes are an integral part of these condensed financial statements.

4




IDEAL POWER INC.

Statements of Cash Flows

(unaudited)

  Nine Months Ended 
  September 30, 
  2016  2015 
Cash flows from operating activities:        
Net loss $(8,192,090) $(7,403,587)
Adjustments to reconcile net loss to net cash used in operating activities:        
Allowance for doubtful accounts  85,375   54,791 
Write-down of inventory  73,521   (2,156)
Depreciation and amortization  290,474   144,834 
Write-off of capitalized patents  71,109   109,788 
Write-off of fixed assets  6,215   45,641 
Stock-based compensation  1,135,008   1,012,825 
Fair value of warrants issued for services  -   76,410 
Decrease (increase) in operating assets:        
Accounts receivable  337,480   (403,829)
Inventories  (689,854)  (348,677)
Prepayments and other current assets  147,061   96,971 
Increase (decrease) in operating liabilities:        
Accounts payable  (729,435)  592,218 
Accrued expenses  (151,178)  320,244 
Net cash used in operating activities  (7,616,314)  (5,704,527)
         
Cash flows from investing activities:        
Purchase of property and equipment  (328,930)  (636,741)
Acquisition of intangible assets  (299,140)  (402,445)
Net cash used in investing activities  (628,070)  (1,039,186)
         
Cash flows from financing activities:        
Net proceeds from issuance of common stock  -   15,924,405 
Exercise of options and warrants  35,536   233,885 
Net cash provided by financing activities  35,536   16,158,290 
         
Net increase (decrease) in cash and cash equivalents  (8,208,848)  9,414,577 
Cash and cash equivalents at beginning of period  15,022,286   7,912,011 
Cash and cash equivalents at end of period $6,813,438  $17,326,588 

  Six Months Ended
June 30,
  2017 2016
Cash flows from operating activities:  
  
Net loss $(6,278,708) $(5,269,824)
Adjustments to reconcile net loss to net cash used in operating activities:  
  
Allowance for doubtful accounts 273,727
 15,475
Write-down of inventory 712,083
 12,590
Depreciation and amortization 224,926
 184,279
Write-off of capitalized patents 202,343
 48,773
Write-off of fixed assets 15,036
 1,215
Stock-based compensation 498,006
 763,326
Decrease (increase) in operating assets:  
  
Accounts receivable (100,715) 446,261
Inventories 166,529
 (627,650)
Prepayments and other current assets 77,981
 60,427
Increase (decrease) in operating liabilities:  
  
Accounts payable (133,783) (234,486)
Accrued expenses (5,627) (405,761)
Net cash used in operating activities (4,348,202) (5,005,375)
     
Cash flows from investing activities:  
  
Purchase of property and equipment (18,146) (297,095)
Acquisition of intangible assets (171,134) (203,500)
Net cash used in investing activities (189,280) (500,595)
     
Cash flows from financing activities:  
  
Net proceeds from issuance of stock 13,657,331
 —
Exercise of options and warrants 11,143
 35,536
Net cash provided by financing activities 13,668,474
 35,536
     
Net increase (decrease) in cash and cash equivalents 9,130,992
 (5,470,434)
Cash and cash equivalents at beginning of period 4,204,916
 15,022,286
Cash and cash equivalents at end of period $13,335,908
 $9,551,852
The accompanying notes are an integral part of these condensed financial statements.

5




Ideal Power Inc.

Notes to Financial Statements

(unaudited)

Note 1 – Organization and Description of Business

Ideal Power Inc. (the “Company”) was incorporated in Texas on May 17, 2007 under the name Ideal Power Converters, Inc. The Company changed its name to Ideal Power Inc. on July 8, 2013 and re-incorporated in Delaware on July 15, 2013. With headquarters in Austin, Texas, it develops power conversion solutions with a current focus on solar + storage, microgrid applications and stand-alone commercial and industrial energy storage, combined solar and storage, and microgrid applications.storage. The principal products of the Company are power conversion systems, including 2-port and multi-port 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 through the sale of common stock and, prior to its initial public offering, the issuance of convertible debt. 

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for Form 10-Q. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The Balance Sheet at December 31, 20152016 has been derived from the Company’s audited financial statements.

In the opinion of management, these financial statements reflect all normal recurring, and other adjustments, necessary for a fair presentation. These financial statements should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.2016. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year or any other future periods.

Liquidity and Going Concern

As reflected in the accompanying condensed financial statements, the Company had a net loss of $8.2 million and used $7.6 million of cash in its operating activities for the nine months ended September 30, 2016. At September 30, 2016, the Company had net working capital of $7.0 million and the Company’s principal source of liquidity consisted of $6.8 million of cash and cash equivalents.

In order to meet the Company’s operating requirements, it will need to raise additional capital from third parties. There can be no assurance that the Company will be successful in obtaining third party financing. If external financing sources are not available or are inadequate to fund operations, or forecasted revenue growth does not materialize, the Company will be required to reduce operating costs, which could jeopardize future strategic initiatives and business plans.

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The ability of the Company to continue as a going concern is dependent on its ability to raise additional capital and to develop profitable operations through implementation of its current business initiatives, however, there can be no assurances that the Company will be able to do so. The accompanying condensed financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, (“FASB”)or FASB, issued Accounting Standards Update (“ASU”) 2014-09,Revenue from Contracts with Customers (Topic(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 has recently issued several amendments to the standard, including clarification on accounting for licenses of intellectual property and identifying performance obligations. The standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. The updated standard becomes effective for annual and interim periods beginning after December 15, 2017.2017 and early adoption is permitted. The adoption ofCompany will not early adopt and the standard is not expected to have a significant effect on the Company’s financial statements.

6


In February 2016, the FASB issued ASU 2016-02,Leases (Topic 842), a new standard related to leases 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. TheWhile the Company is currently evaluatingcontinuing to assess the potential impact of this standard, it expects its lease commitment will be subject to the updated standard on the Company’s financial statements.

and recognized as a lease liability and right-of-use asset upon adoption.


In MarchAugust 2016, the FASB issued ASU 2016-09,Improvements2016-15, Statement of Cash Flows (Topic 230), in order to Employee Share-Based Payment Accounting (Topic 718), a new standard that changesaddress eight specific cash flow issues with the accounting for certain aspectsobjective of share-based payments to employees.reducing the existing diversity in practice. The new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. In addition, cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows. The standard also allows the Company to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting, clarifies that all cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity on our cash flows statement, and provides an accounting policy election to account for forfeitures as they occur. The newupdated standard is effective for the Companyfinancial statements issued for annual periods beginning January 1,after December 15, 2017 and interim periods within those fiscal years with early adoption permitted. The Company elected early adoption of the ASU and made the policy election to account for forfeitures as they occur. The adoption of this standard didwill 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 71 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 Company is evaluating the impact of this ASU.

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

Note 3 – Accounts Receivable

Accounts receivable, net consisted of the following:

  September 30,  December 31, 
  2016  2015 
  (unaudited)    
Trade receivables $500,212  $803,599 
Other receivables  35,182   84,420 
   535,394   888,019 
Allowance for doubtful accounts  (85,375)  (15,145)
  $450,019  $872,874 

The Company had receivable balances from two customers that accounted

  June 30, 2017 December 31,
2016
  (unaudited)  
Trade receivables $392,686
 $430,278
Other receivables 102,147
 33,755
  494,833
 464,033
Allowance for doubtful accounts (289,187) (85,375)
  $205,646
 $378,658
At June 30, 2017, the allowance for 76% ofdoubtful accounts represents trade receivables at September 30, 2016. The Company had revenue from three customers which accounted for 36%, 19% and 14%were fully reserved as it was determined that the probability of net revenue forcollection is remote. During the threesix months ended SeptemberJune 30, 20162017, the Company collected $15,475 and revenue from two customers which accountedwrote-off $69,900 of its allowance for 40%doubtful accounts. These changes in the allowance for doubtful accounts are reflected within the sales and 17%marketing line item of net revenue for the nine months ended September 30, 2016.

statement of operations.

Note 4 – Inventories

Inventories, net consisted of the following:

  September 30,  December 31, 
  2016  2015 
  (unaudited)    
Raw materials $271,229  $124,498 
Finished goods  1,048,515   527,785 
   1,319,744   652,283 
Reserve for obsolescence  (56,934)  (4,274)
  $1,262,810  $648,009 

7

  June 30, 2017 December 31,
2016
  (unaudited)  
Raw materials $288,650
 $363,195
Finished goods 149,055
 941,921
  437,705
 1,305,116
Reserve for obsolescence (71,170) (59,969)
  $366,535
 $1,245,147
During the threesix months ended SeptemberJune 30, 2016,2017, the Company recorded a non-cash inventory charge of $328,537 for excess and obsolete inventory in connection with the end-of-life$712,083, of the Company’s IBC-30 battery converter. The cash chargewhich$708,204 is primarily related to excess finished goods inventory of its legacy 125kW battery converter and its end-of-life IBC-30 component inventory held by our contract manufacturer, which amounted to $294,519.

battery converter and is reflected within the cost of product revenue line item of the statement of operations.



Note 5 – Property and Equipment

Property and equipment, net consisted of the following:

  September 30,  December 31, 
  2016  2015 
  (unaudited)    
Machinery and equipment $892,024  $676,881 
Building leasehold improvements  395,335   362,300 
Furniture, fixtures, software and computers  226,249   195,497 
   1,513,608   1,234,678 
Accumulated depreciation and amortization  (508,149)  (308,779)
  $1,005,459  $925,899 
  June 30, 2017 December 31,
2016
  (unaudited)  
Machinery and equipment $890,264
 $894,228
Building leasehold improvements 395,335
 395,335
Furniture, fixtures, software and computers 215,993
 228,011
  1,501,592
 1,517,574
Accumulated depreciation and amortization (750,454) (581,088)
  $751,138
 $936,486

Note 6 – Intangible Assets

Intangible assets, net consisted of the following:

  September,  December 31, 
  2016  2015 
  (unaudited)    
Patents $1,541,299  $1,313,269 
Other intangible assets  470,870   211,394 
   2,012,169   1,524,663 
Accumulated amortization  (103,638)  (57,852)
  $1,908,531  $1,466,811 

In 2015,

  June 30, 2017 December 31,
2016
  (unaudited)  
Patents $1,524,994
 $1,556,204
Other intangible assets 732,175
 470,870
  2,257,169
 2,027,074
Accumulated amortization (157,987) (121,518)
  $2,099,182
 $1,905,556
At June 30, 2017 and December 31, 2016, the Company entered intohad capitalized $554,216 and $678,410, respectively, for costs related to patents that have not been awarded.

In June 2017, a U.S. patent was issued associated with licensing agreements which expire on February 7, 2033. The agreements provide the Company an exclusive royalty-free license associated with semiconductor power switches which enhances its intellectual property portfolio. In 2015, the Company recorded legal and acquisition costs of $211,394 associated with the licensing agreements as other intangible assets. In March 2016, the Company recorded an additional $259,476, associated with a patent issuance under the licensing agreements, as an other intangible asset. This amount representsasset and corresponding long-term liability for the estimated present value of all future payments associated with the issued patent.of $261,303. The Company is amortizing the capitalized costs over the 17-yearremaining term of the agreements. For further discussion of the licensing agreement,agreements, see FootnoteNote 8.


Amortization expense amounted to $16,720$18,594 and $7,648$36,469 for the three and six months ended SeptemberJune 30, 20162017, respectively, and 2015, respectively. Amortization expense amounted to $45,786$15,705 and $17,611$29,067 for the ninethree and six months ended SeptemberJune 30, 2016, and 2015, respectively. Amortization expense for the succeeding five years and thereafter is $17,246 (2016)approximately $45,000 (2017), $68,984 (2017-2020)$91,000 (2018-2021) and $904,953$1,136,000 (thereafter).

8


Note 7 – Accrued Expenses

Accrued expenses consisted of the following:

  September 30,  December 31, 
  2016  2015 
  (unaudited)    
Accrued compensation $534,538  $616,029 
Warranty reserve  270,304   358,296 
Other  279,913   265,768 
  $1,084,755  $1,240,093 

  June 30, 2017 December 31,
2016
  (unaudited)  
Accrued compensation $423,819
 $519,485
Warranty reserve 398,079
 335,893
Other 358,384
 293,751
  $1,180,282
 $1,149,129


Note 8 – Commitments

and Contingencies

Lease

The Company has entered into a lease for 14,782 square feet of office and laboratory space located in Austin, Texas. The triple net lease has a term of 48 months and commenced on June 1, 2014. The annual base rent in the first year of the lease was $154,324 and increases by $3,548 in each succeeding year of the lease. In addition, the Company is required to pay its proportionate share of operating costs for the building. The Company has a one-time option to terminate the lease on May 31,
At June 30, 2017, with a termination payment of approximately $99,000 if it elects to exercise this option. 

At September 30, 2016, the remaining annual base rent commitments under the lease assuming no early termination, are as follows:

Year Ended December 31, Amount 
2016 $40,355 
2017  163,489 
2018  68,736 
Total $272,580 

Year Ended December 31, Amount
2017 $82,484
2018 68,736
Total $151,220
The Company incurred rent expense of $56,492$59,418 and $54,552$117,074 for the three and six months ended SeptemberJune 30, 2017, respectively, and $55,719 and $111,324 for the three and six months ended June 30, 2016, and 2015, respectively. For the nine months ended September 30, 2016 and 2015, the Company incurred rent expense of $167,816 and $161,929, respectively.

License Agreement

In 2015, the Company entered into licensing agreements which expire on February 7, 2033. Per the agreements, the Company has an exclusive royalty-free license which enhances its intellectual property portfolio related to semiconductor power switches. The agreements include both fixed and variable payments. The variable payments are a function of the number of associated patent filings pending and patents issued under the agreements. The Company will pay $10,000 for each patent filing pending and $20,000 for each patent issued within 20 days of December 21, 2017 and each subsequent year of the agreement, up to a maximum of $100,000 per year (i.e. five issued patents).

In March 2016, oneJune 2017, a U.S. patent was issued associated with the agreements had been issued and the Company recorded an other intangible asset. At September 30, 2016, theasset and corresponding long-term liability for the estimated present value of future payments under the licensing agreement is $263,636. The Company is accruing interest for future payments related to the issued patent associated with the agreement.of $261,303. This long-term liability incurred in connection with the patent issuance is a non-cash investing activity with regard to the Company’s statements of cash flows.

At June 30, 2017, two patents associated with the agreements had been issued and the estimated present value of future payments under the licensing agreement is $529,941, of which $40,000 is due within 20 days of December 21, 2017 and is included in accrued expenses in the Company's balance sheet. The Company is accruing interest for future payments related to the issued patents associated with the agreement.


Litigation
On May 17, 2017, the Company provided its prior contract manufacturer (CM) notice that it was in breach of the Master Supply Agreement (MSA) between the parties. On May 19, 2017, the Company received notice from CM that the Company was allegedly in breach of the MSA. On June 23, 2017, the Company received a Notice of Arbitration from CM alleging claims against the Company and demanding recovery for alleged damages. On July 13, 2017, the Company responded to CM with a Notice of Defense and Counterclaim. On August 2, 2017, CM provided their response to the Company's Notice of Defense and Counterclaim. The parties are in the process of appointing an arbitrator. At this time, the Company is unable to estimate the possible loss, if any, associated with this proceeding.
Note 9 — Equity
On March 3, 2017, the Company closed on a definitive securities purchase agreement, or Private Placement, to sell the Company’s common stock and preferred stock together with warrants to purchase shares of common stock. 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 million. Net cash proceeds were $13,657,331 after offering fees and expenses, including the placement agent fee of approximately $1.1 million. The Company expects to utilize net proceeds from the offering for working capital and general corporate purposes.

In February 2017, the Company's Board of Directors authorized Series A Convertible Preferred Stock consisting of 3,000,000 shares. Each share of the preferred stock has a par value of $0.001 and a stated value of $2.535 and is convertible at any time at the option of the holder into one share of common stock. The holder cannot convert the preferred stock to the extent its beneficial ownership would exceed 4.99% of the Company's common stock outstanding, subject to adjustment as provided


in the Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock. The shares have no voting power, no liquidation preference or additional dividend entitlements. In the six months ended June 30, 2017, the Company issued 1,518,430 shares of the Company's Series A Convertible Preferred Stock.

Note 10 — Equity Incentive Plan

On May 17, 2013, the Company adopted the 2013 Equity Incentive Plan (the “Plan”) and reserved shares of common stock for issuance under the Plan. The Plan is administered by the Compensation Committee of the Company’s Board of Directors. At SeptemberJune 30, 2016, 659,6522017, 708,953 shares of common stock were available for issuance under the Plan.

During the ninesix months ended SeptemberJune 30, 2016,2017, the Company granted 37,93883,625 stock options to Board members and 50,10084,100 stock options to employees under the Plan. The estimated fair value of these stock options, calculated using the Black-Scholes option valuation model, was $271,418,$296,107, of which $117,661$84,368 was recognized during the ninesix months ended SeptemberJune 30, 2016.

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2017.


During the ninesix months ended SeptemberJune 30, 2016, the Company also granted employees 119,0002017, 96,000 performance stock units (“PSUs”) underwere forfeited by employees as the Plan, which are subjectcontinued service conditions were not achieved. The PSUs were initially granted in 2015 and, due to the satisfaction of certain market-based and continued service conditions. The market-based vesting criteria are separated into four tranches and require thatforfeiture, the Company achieve certain stock price targets ranging from $10 per share to $16 per share duringreversed $174,804 of stock-based compensation expense in the four-year period following the grant date. With certain limited exceptions, continued employment with the Company on the fourth anniversary of the grant date is required in order for the PSUs to vest. The grant-date fair value of the PSUs was $429,293, or $3.61 per unit, using a Monte Carlo Simulation with a four-year life, 55% volatility and a risk free interest rate of 1.5%. The fair value of these PSUs is being recognized over the vesting period and $80,492 was recognized during the ninethree months ended SeptemberJune 30, 2016.

2017.


During the ninesix months ended SeptemberJune 30, 2016, 4,6072017, 26,743 options to purchase shares of the Company’s common stock were exercised resulting in net proceeds of $23,035.

$11,143.

A summary of the Company’s stock option activity and related information is as follows:

  Stock
Options		  Weighted
Average
Exercise
Price		  Weighted
Average
Remaining
Life
(in years)		 
Outstanding at December 31, 2015  1,332,323  $6.94   8.4 
Granted  88,038  $6.01     
Exercised  (4,607) $5.00     
Forfeited/Expired/Exchanged  (35,075) $6.40     
Outstanding at September 30, 2016  1,380,679  $6.91   7.7 
Exercisable at September 30, 2016  826,695  $6.55   7.4 

  
Stock
Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Life
(in years)
Outstanding at December 31, 2016 1,385,204
 $6.89
 7.5
Granted 167,725
 $2.99
  
Exercised (26,743) $0.42
  
Forfeited/Expired/Exchanged (125,551) $7.39
  
Outstanding at June 30, 2017 1,400,635
 $6.50
 7.3
Exercisable at June 30, 2017 829,623
 $6.55
 6.9
At SeptemberJune 30, 2016,2017, there was $2,969,537$1,739,406 of unrecognized compensation cost related to non-vested equity awards granted under the Plan. That cost is expected to be recognized over a weighted average period of 2.51.8 years.



Note 1011 — Warrants

During

In connection with the nine months ended September 30, 2016, a warrant holder exercised 3,596Private Placement, investors received warrants and paid the exercise price in cash.to purchase 5,929,256 shares of common stock. The Company received $12,501 in net cash proceeds for the exercise of the warrants. At September 30, 2016, there were 1,404,406 warrants outstanding with a weighted averagehave an exercise price of $4.57.$2.41 per share, are non-exercisable for the first six months and will expire three years from the date of issuance. The placement agent also received 237,170 warrants to purchase shares underlyingof common stock as part of its placement agent fee. The placement agent warrant has an exercise price of $2.89 per share, is non-exercisable for 12 months and has a three-year term. The warrants contain a provision to protect investors from potential future dilutive events, or a down-round provision. The Company estimated the warrants have not been registered.

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fair value of the down-round provision by utilizing a Monte Carlo valuation model and determined the fair value associated with the down-round provision was immaterial.


A summary of the Company’s common stock warrant activity and related information is as follows:
  Warrants 
Weighted
Average
Exercise
Price
 Weighted
Average
Remaining
Life
(in years)
Outstanding at December 31, 2016 1,398,653
 $4.57
 2.5
Granted 6,166,426
 $2.43
  
Forfeited/Expired/Exchanged (84,000) $6.25
  
Outstanding at June 30, 2017 7,481,079
 $2.79
 2.6



SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION

CONTAINED IN THIS REPORT

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. You can find many (but not all) of these statements by looking for words such as “approximates,” “believes,” “hopes,” “expects,” “anticipates,” “estimates,” “projects,” “intends,” “plans,” “would,” “should,” “could,” “may,”"approximates," "believes," "expects," "anticipates," "estimates," "projects," "intends," "plans," "would," "should," "could," "may" or other similar expressions in this report. In particular, these include statements relating to future actions, prospective products, applications, customers, technologies, future performance or results of anticipated products, expenses, and financial results. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections.

These Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

our history of losses;
our ability to statements about:

●our ability to successfully market and sell our existing products;

●the size and growth of markets for our current and future products.

●our expectations regarding the growth and expansion of our customer base.

●regulatory developments that may affect our business.

●our ability to successfully develop new technologies, including our bi-directional bipolar junction transistor, or B-TRAN™.
●our expectations regarding the completion of testing of new products under development and the timing of the introduction of those new products.

●the expected performance of new products incorporating our B-TRAN™.

●the performance of third-party manufacturers who supply and manufacture our products.
●our ability to cost effectively manage product life cycles, inclusive of product launches and end of life situations.

●the rate and degree of market acceptance for our current and future products.
●our ability to successfully obtain certification for our products in new markets and the timing of the receipt of any necessary certifications.

●our ability to successfully license our technology.

●our ability to obtain, maintain, defend and enforce intellectual property rights protecting our current and future products.

●our expectations regarding future growth of the markets in which we operate.

●our expectations regarding the rates of adoption of alternative energy sources.

●our expectations regarding the decline in prices of battery energy storage systems.

achieve profitability;

our limited operating history;
our ability to successfully market and sell our products;
the size and growth of markets for our current and future products;
our expectations regarding the growth and expansion of our customer base;
regulatory developments that may affect our business;
our ability to successfully develop new technologies, including our bi-directional bipolar junction transistor, or B-TRAN™;
our expectations regarding the completion of testing of new products under development and the timing of the introduction of those new products;
the expected performance of new and existing products, including future products incorporating our B-TRAN™;
the performance of third-party manufacturers who supply and manufacture our products;
our expectations of the reliability of our products over the applicable warranty term and the future costs associated with warranty claims;
our ability to cost effectively manage product life cycles, inclusive of product launches and end of product life situations;
the rate and degree of market acceptance for our current and future products;
our ability to successfully obtain certification for our products, including in new markets, and the timing of the receipt of any necessary certifications;
our ability to successfully license our technology;
our ability to obtain, maintain, defend and enforce intellectual property rights protecting our current and future products;
our expectations regarding the decline in prices of battery energy storage systems;
general economic conditions and events and the impact they may have on us and our potential customers;
our ability to obtain adequate financing in the future, as and when we need it;
our success at managing the risks involved in the foregoing items; and
other factors discussed in this report.
The forward-looking statements are based upon management’s beliefs and assumptions and are made as of the date of this report. We undertake no obligation to publicly update or revise any forward-looking statements included in this report. You should not place undue reliance on these forward-looking statements.


Unless otherwise stated or the context otherwise requires, the terms “Ideal"Ideal Power,” “we,” “us,” “our”" "we," "us," "our" and the “Company”"Company" refer to Ideal Power Inc.

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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q as well as our audited 20152016 financial statements and related notes included in our Annual Report on Form 10-K. In addition to historical information, the discussion and analysis here and throughout this Form 10-Q contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited, to those set forth under “Risk Factors” in Part II, Item 1A of this report.

OVERVIEW

Ideal Power is located in Austin, Texas. We design, market and sell electrical power conversion products using our proprietary technology called Power Packet Switching Architecture™, or PPSA™. PPSA™ enables high efficiencyis a power conversion by eliminating many of the heavy, passive components used in conventionaltechnology that improves upon existing power conversion productstechnologies in key product metrics, such as size and replacing themweight while providing built-in isolation and bi-directional and multi-port capabilities. PPSA™ utilizes standardized hardware with a unique software-enabled topology.application specific embedded software. Our products are designed to be used in both on-grid and off-grid applications. Our products provide electrical isolation without the useadvanced technology is important to our business and we make significant investments in research and development and protection of a separate transformer at a similar size and weight profile to transformerless converters. We believe our products are the only transformerless power converters approved for use in on-grid energy storage applications without the use of a separate isolation transformer.intellectual property. Our PPSA™ technology isand bi-directional switch technologies are protected by a patent portfolio of 3158 US and six13 foreign patents. We own all of the rights to our PPSA™ technology.

issued patents at June 30, 2017.

We sell our products primarily to systemsystems integrators for installation as part of a larger turn-key system providing the end user with a complete solution for managing their electricity consumption. These customers sell systems thatwhich enable end users to manage their electricity consumption by reducing demand charges or time-of-use charges andfossil fuel consumption, integrating renewable energy sources. We also sell our products for integration into systems that enable the end users to reduce fossil fuel consumption and/or formsources and forming their own microgrid. Our products are made 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 equipment. Our existing products that connect to the power grid are certified for UL1741 conformance. As our products gain broader acceptanceestablish a foothold in thekey power conversion market,markets, we intendmay begin to licensefocus on licensing our proprietary PPSA™-based product designs to OEMs within our targetto reach more markets as well asand customers. We may seek to build a portfolio of relationships that generate license our technologiesfees and royalties from OEMs for other marketssales of their products which we do not plan to enter directly.

integrate PPSA™.

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. Total revenue generated from inception to date as of SeptemberJune 30, 20162017 amounted to $11,595,135$12,494,885 with approximately a quarter of that revenue coming from government grants. We may pursue additional research and development grants, if and when available, for the purpose of developing new products and improving current products. 

Our Technology

We believe PPSA™ is the only power conversion technology on the market that provides electrical isolation without the need for the transformer that conventional power conversion systems require to connect electrical devices such as energy storage systems to the grid. Electrical isolation is at the core of PPSA™.

PPSA™ uses indirect power flow in which power flows through input switches and is temporarily stored in our proprietary AC link inductor. Our proprietary fast switching algorithms enable the transfer of quantum packets of power between ports in our system. As the AC link becomes charged, it disconnects from its input switches, resonates without being connected to either the input or output switches, and then reconnects to its output switches when it reaches the correct voltage and frequency for the application,application. PPSA™ is a power conversion technology that differentiates itself from traditional power conversion technology in key product metrics, such as size and weight while providing true electricalbuilt-in isolation without the need for a transformer. 

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and bi-directional and multi-port capabilities. At June 30, 2017, we have been granted 36 US patents and seven foreign patents related to PPSA™.

Products

We have developed products commercializing PPSA™ and make these products available for sale both directly to customers and through distributors. We currently sell fiveseveral power conversion productssystems, or PCS, utilizing our patented PPSA™ technology. These products are described as follows:


The 30kW Battery Converter,SunDial™ and the 30kW SunDial™ Plus, which isare UL-1741 certified for UL1741 conformance and isare intended to be used for the commercial and industrial grid-tied distributed energysolar and solar + storage market. This battery converterThe SunDial™ is bi-directional, which means power can flow to or from batteries. This product is more efficient and approximately 1/4th to 1/8th the size and weight of similar transformer-based products. We currently expect to sell-through existing inventory and not manufacture additional units of this product.

30kW Grid-Resilient AC-DC Power Conversion System (“PCS”),a photovoltaic (PV) string inverter which is certified for UL1741 conformance. This product is capablefield upgradable through the addition of power conversiona drop-in second DC port to connect batteries to a solar PV array. The SunDial™ Plus includes the PV inverter and the second DC battery port in one package. The products operate in both 50Hz and 60Hz AC current environments and include a built-in 6 string PV combiner and DC disconnects and are grid-tied, AC export only.



The 30kW Stabiliti™ series has two product offerings, two-port (AC-DC) and multi-port (AC-DC-DC) models, which are both UL-1741 certified. These products are intended to be used in the stand-alone storage and microgrid markets. They are bi-directional and operate in both grid-tied and grid-forming modes with near seamless transfer between operating modes. Grid-forming mode provides customers the ability to form and manage a microgrid. This productmicrogrid which is intendedalso desirable for customers who need a 30kW battery converter for use overseas or who need the additional capability to form a microgrid. This product will replace our 30kW battery converter once we sell-through existing 30kW batter converter inventory.

30kW Grid-Resilient AC-DC-DC Multi-Port PCS with two DC ports enabling two DC inputs, such as photovoltaic (“PV”) and batteries, with one power converter. This product is certified for UL1741 conformance. This product is capable of power conversionsolar + storage market. The products operate in both 50Hz and 60Hz AC current environments, and also has the ability to form and manage a microgrid. The key feature of this multi-port PCS is that it effectively pairs energy storage with a distributed generation resource to support critical loads or allow a building to disconnect from the utility power grid. This product received the “Electrical Energy Storage Award” for product innovation in 2014 at InterSolar Germany, the world’s largest solar exhibition, and was recognized as one of the 2015 top inverter products by Solar Power World Magazine.

125kW Grid-Resilient AC-DC PCS, which is certified for UL1741 conformance. This 125kW system has over four times the power of the 30kW product and is also able to convert in both 50Hz and 60Hz AC current environments and form and manage a microgrid. This product is a larger version of our 30kW grid-resilient AC-DC PCS for use in higher power applications.

SunDial™ 30kW solar PV string inverter with an optional bi-directional 3rd port for direct integration of solar with energy storage. The SunDial™, announced in May 2016, will feature a newly designed AC link providing true galvanic isolation from the AC to the DC ports, enabling PV installations to be either grounded or true floating. This product was recently recognized as a top 20 energy storage disruptor by PV-Tech earlier this year. We intend to certify this product for UL1741 conformance during the fourth quarter 2016. We shipped our first uncertified SunDial™ units in September 2016.

Business Strategy

Our business strategy is to promote and expand the uses of PPSA™ initially through product development and product sales. To bring our products to market, we will seek out best-in-class partners who will distribute or white-label our products or integrate our innovative products into higher value systems resulting in multiple strategic sales channels for our PPSA™-based products and product designs. Although our primary market currently is the United States, we will increasingly target markets outside the United States. We expect to launch products in Australia and Germany in 2017. As our products gain broader acceptance in the power conversion market, we intend to license our proprietary PPSA™-based product designs to OEMs within our target markets, as well as license our technologies for other markets which we do not plan to enter directly. The basis for this approach is the belief that OEMs may achieve higher product margins and gain more market share by providing PPSA™-based products, which are differentiated from the traditional product offerings in the industry, to their customers. We believe such strategic relationships with key OEM licensees would enable us to reap the benefits of PPSA™ and gain market share more quickly than by strictly manufacturing and distributing our products. In May 2016, we executed our first licensing agreement with Flextronics, a Fortune Global 500 Company, for their subsidiary, NEXTracker, to utilize our newly launched SunDial™ product.

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environments.

Target Markets

Currently, our three primary markets are standalone storage, which represented a majority of our sales in the nine months ended September 30, 2016, PV + storage, and microgrids. Based on market studies and forecasts by Navigant Research and Zpryme Research & Consulting, these three markets combined are forecasted to grow to over $100 Billion by 2020. Assuming that power conversion systems represent approximately 10% to 15% of the system cost, a Company estimate, power conversion systems such as those made by Ideal Power are forecasted to account for approximately $10 billion to $15 billion of this market.

Stand-Alone Storage Market

The stand-alone storage market is served by a battery energy storage system (“BESS”). BESS are racks of batteries coupled with a power conversion system, such as those manufactured by us, and system controller to enable electric power to be captured, stored, and used in conjunction with electric power grids. These systems can be large, megawatt-scale systems operated by utilities to better manage their system resources, or smaller kilowatt-scale systems used by consumers or businesses and designed to enable these consumers or businesses to manage their power use, provide short term back up power and mitigate utility-imposed peak demand or time-of-use charges. Peak demand charges are charges utilities levy on their business customers for delivery of power at peak usage times of the day, such as mid-afternoons in the summer. The growth of peak demand charges has been substantial over the past decade and now can make up 50% or more of a commercial utility bill in certain markets. This is a trend that is likely to continue as more intermittent resources are added to the utility power grid causing grid instability. Utilities and aggregators of distributed generation resources are also expected to adopt BESS due to the proliferation of renewables and to take advantage of additional value streams such as energy arbitrage, frequency regulation and ancillary services, infrastructure upgrade deferral and locational capacity.

Currently, there are strong economic benefits available to commercial and industrial consumers in a limited number of US markets in the form of reduced demand charges for installing a BESS and reducing peak consumption. There is also strong regulatory support for such systems in certain markets. For example, California, the primary market for BESS today, has a Self-Generation Incentive Program, providing significant incentives for BESS projects, and has also issued a mandate for 1,825 megawatts of new energy storage to be installed by 2020. Our 30kW and 125kW power conversion systems enable these BESS to connect to the utility power grid and, when paired with batteries, offer these customers a substantial cost saving opportunity on their monthly electric bill. This market is still in its early years and, until battery prices decline significantly, largely dependent on government support and incentives, but we have established a strong brand and market position capturing many of the initial system integrators and distributors in the US commercial and industrial storage market. Based on market studies and forecasts by Navigant Research and Zpryme Research & Consulting, this market is forecasted to grow 40% annually over the next five years and we believe it offers the highest value proposition today for our products over the next few years.

We believe this market is poised to grow beyond pilot installations to higher volume installations driven by the underlying economics of BESS to commercial and industrial customers. A good indicator of this is the availability of third party financing for BESS. Several of our customers have recently signed or announced financing deals for their BESS products, including Gexpro whose PowerIQ product is being commercially financed by a subsidiary of NextEra Energy Resources (NYSE: NEE).

We expect the cost of commercial and industrial BESS to continue to decline due primarily to lower battery costs and, as a result, expect significant expansion in the addressable market for these systems. We also believe the combination of lower BESS costs, third-party financing, increases in utility demand and time-of-use charges, government policy and incentive programs and the continued entrance of large, established companies to the BESS space will all contribute to accelerating market growth for stand-alone storage.

PV + Storage Market

PV has one of the lowest levelized costs of energy for new electrical generation. We expect distributed PV to continue to be a high growth business as system costs have fallen dramatically over the past several years. As such, the economics of generating PV for local consumption is expected to remain strong for several more years, especially given the investment tax credit (“ITC”) extension passed by Congress in 2015 for solar energy production. One shortcoming of these distributed, behind-the-meter PV systems is that they require connection to the utility power grid in order to operate. For example, a business with PV on its roof will not, in most cases, benefit from the ability to generate power should the utility power grid go down. Another shortcoming of distributed PV systems is the instability they cause on the local power lines. Utility power grids were not designed to manage power inflow from the end of the lines. As such, distributed generation sources can lead to wide swings in line voltages when clouds pass and power output falls off, requiring the utility to ramp up its power generation to make up for the shortfall in solar.

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Our products help resolve these shortcomings. For example, when a distributed PV system is connected to a BESS that includes one of our multi-port PCS, the business will benefit from the ability to form and manage a local microgrid powered by the PV system and BESS even when the utility power grid is down. This capability is attractive to electricity consumers who need to power critical loads even in a blackout. Our grid-resilient PCS are also equipped to meet evolving utility requirements for low voltage ride through and other key operating parameters, enabling the PV and BESS it connects to the grid to help stabilize the utility power grid when voltage or frequency fluctuates due to imbalances in load and supply.

Commercial and industrial BESS are able to generate value far beyond peak demand reduction. We believe our products will become increasingly attractive to co-locate BESS with distributed PV. IHS, a global research firm with a strong renewable industry focus, forecasts that global installations of grid-tied commercial BESS coupled with PV will grow 111% annually from near obscurity in 2014 to over 600 MW PV + storage systems by 2018.

According to their research, IHS believes that systems will be deployed in two principle configurations. The present configuration is to have separate BESS and PV systems tied together through the AC wiring, which is supported by all of our current products. A second, emerging configuration will be to place the BESS and the PV system behind a single PCS with two DC inputs. This configuration is forecast to improve efficiency, reduce costs, and allow PV harvesting when operating without a utility power grid present in microgrid mode. Our grid-resilient 30kW multi-port PCS was designed specifically to enable this lower cost and more efficient second configuration.

Also according to IHS, the global PV industry is projected to grow from 45GW of annual installations in 2014 to 71GW in 2018. Providing a new generation of solutions with integrated energy storage will enable the PV industry to address new markets with high growth potential. These new PV + storage markets include providing backup power during blackouts, improving grid stability in high penetration PV areas and reducing fossil fuel consumption in remote and off-grid microgrids. In the event of a grid failure, grid-tied PV installations are not capable of operating independently. For example, during Superstorm Sandy many PV system owners were displeased to learn that their grid-tied PV installations would not power their home or business. Systems incorporating our multi-port PCS along with PV and a BESS will be capable of providing backup power during grid blackouts. We expect our multi-port PCS product to be attractive to existing customers as a low-cost system upgrade to improve integration of PV. We further expect our product to provide a competitive solution for these market requirements.

In May 2016, we announced our new SunDial™ solar PV string inverter which includes an optional bi-directional 3rd port for direct integration of solar with energy storage. According to IHS Technology, global solar PV inverter revenues were estimated at $6.9 billion globally in 2015. The new SunDial™ system directly addresses this large established market, giving commercial and industrial PV developers and installers a competitively-priced PV inverter product today with the flexibility to seamlessly integrate energy storage today or in the future. The integration of solar and storage is already economically attractive for customers addressing high retail electricity rates, high commercial demand charges, or those located on islands and areas where selling PV power back to the grid is not supported.

The initial SunDial™ product is a 30kW system based on our PPSA™ technology. It is the first in a planned family of field-upgradable SunDial™ PV string inverters. An important new feature of the SunDial™ system will be a newly designed AC link providing true galvanic isolation from the AC to the DC ports, enabling PV installations to be either grounded or true floating. The new SunDial™ inverter is comparable in size and cost to today's widely used transformerless PV string inverters, but is fully isolated and offers the additional value of an optional, upgradable bi-directional port for direct storage integration. The SunDial™ can be applied to both new PV installations and PV system retrofits where there is a desire to add energy storage to an existing array. We believe these features are the basis for Sundial™’s recognition as a top 20 energy storage disruptor by PV-Tech.

We plan to target commercial and industrial scale PV installations that want the optionality of adding energy storage or other DC sources at the time of installation or at any time in the future. We intend to have the 30kW product UL1741 listed as well as NEC 2014 compliant for behind-the-meter installations. We shipped our first uncertified SunDial™ units in September 2016.

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Microgrid Market

Over the next decade the greatest demand for new power generation capacity is likely to occur in regions such as Southeast Asia, Africa, the Middle East, and Central and South America. Remote communities and infrastructure in these regions are more likely to depend on expensive and polluting fossil fuel generation for their primary fuel supply and may not have a utility power grid in place to access high quality, reliable power.

In contrast to grid-tied BESS and PV applications that are likely to be North American installations, we believe off-grid BESS and PV opportunities will develop rapidly across these regions with the greatest demand for new power generation. IHS recently forecasted the off-grid and microgrid BESS installations with PV market to reach 400MW by 2018 with the majority of this growth coming from regions with less developed electricity infrastructure. We believe that our grid-resilient 30kW multi-port PCS offers a superior solution for these applications.

We believe that our award-winning multi-port power conversion architecture is a highly attractive solution for integrating BESS and renewables for both grid-tied and off-grid markets. Customer and industry forecasts indicate that these markets will grow dramatically in the coming years, and we expect to benefit from this growth. The benefits of our multi-port PCS in microgrid application is not limited to PV or renewable energy systems. Our products have been integrated into systems to manage a diesel generator and, in combination with batteries, to form and operate a microgrid using far less fuel, emitting far fewer pollutants, and providing better power quality than a diesel generator alone.

Other Markets

Although our technology may be suitable for other vertical markets within the global power conversion market landscape, we do not currently offer products for sale directly to other power conversion markets such as the VFD, uninterruptible power supply, rail, wind, or EV traction drive markets. We have provided PCS to multiple EV charging system integrators for fast electric vehicle charging applications but, to date, this market has not been a primary focus for us.

We will continue to monitor all power conversion markets for opportunities to create solutions for customers and unlock the broader value of our patented technology.

Future Innovations

Bi-Directional Switches

Our existing products incorporate multiple insulated gate bipolar transistors, (“IGBTs”),or IGBTs, which are power switches used in the process to convert power from one current form to another. IGBTs switch power in only one direction (DC to AC or AC to DC) and require the use of a blocking diode to prevent power from flowing back through the system. To enable our existing products to perform bi-directional power conversion, for each IGBT and diode used in our products, we must include a second IGBT and diode. These additional components have slight voltage drops that affect the electrical efficiency of our products and generate excess heat that must be dissipated. We have patented and are developing a new, highly efficient silicon switch called a bi-directional bipolar transistor, (“or B-TRAN™”), that we believe will allow us to substitute one B-TRAN™ for two pairs of IGBTs and diodes used in our current products and is also a potential replacement for conventional power switches in certain segments of the broader power semiconductor market.


Based on third party device software simulations, we believe that the B-TRANs™ canB-TRAN™ may significantly improve electrical efficiency in our power converters from approximately 96.5% to greater than 98.0%. Theand that higher efficiency would substantially reduce the heat generated by the operation of our products. As a result, products incorporating B-TRANs™ willour B-TRAN™ would require less space for heat dissipation which would allow us to increase power density, or power per pound, and reduce material costs.


In April 2016, we announced one of our semiconductor fabricators successfully tested single-sided B-TRAN™ silicon dies and the results were consistent with third party simulations that predict significant performance and efficiency improvements over conventional power switches such as SCRs, IGBTs and MOSFETs. In October 2016,Our current focus has shifted to de-risking the proof of concept phase of the B-TRAN development timeline, as this phase of development is taking longer than anticipated due to the complexity of manufacturing complicated, two-sided power semiconductor devices. To facilitate this, we announced onehave now engaged a second semiconductor fabricator, on a parallel path, to produce a simplified, easier to manufacture B-TRAN on an accelerated schedule for proof of our semiconductor fabricators successfully completedconcept and initial testing. The testing is intended to show key qualities of the fabrication of prototype B-TRAN™ devices.B-TRAN over IGBTs including reduced losses, both switching and conduction losses, and increased speed. The next major milestone towards commercializing the B-TRAN™commercialization will be to begincomplete, package and test prototype B-TRAN™ devices. The results of the testing a fully-packaged deviceand characterization of these prototype B-TRAN™ devices will be utilized to guide our further development and optimization efforts including potential changes in how the fourth quarter 2016.

devices are manufactured or driven in an actual circuit.


We plan to introducefirst utilize the B-TRAN™ in our own power conversion products and then introduce it into the rapidly growing power semiconductor market, estimated to be $17$19 billion in 20152017 according to research firm IHS Technology.Technology, or IHS, utilizing a licensing model. We believe our new B-TRANB-TRAN™ technology canmay potentially address a significant portion of the power semiconductor market that currently relies on power semiconductor devices such as technologies such as IGBTs. Potential addressable markets for B-TRAN™-based products include very low loss solid-state DC and AC contactors, electric vehicle drivetrains, variable frequency drives, solar PV inverters, bi-directional energy storage and microgrid power conversion systems, matrix converters and other power conversion products. At SeptemberJune 30, 2016,2017, we have 1822 US and foursix foreign issued patents covering the operation, control and manufacturing of the B-TRAN™ device.

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EV Fast Chargers

Electric vehicles, or EVs, are emerging as a fast growth area of the overall automotive sector in the US and abroad. As EVs become a more significant section of the automotive market, the infrastructure to support them will need to be developed. Our PPSA™ technology can be a natural power conversion choice for system integrators looking for a highly efficient and compact system for an DC EV fast charger. In 2018, we expect to begin the development of products based on our existing product family to directly target this fast-growing market segment.



Business Strategy

Our business strategy is to promote and expand the uses of PPSA™ initially through product development and product sales. To bring our products to market, we will seek out best-in-class partners who will distribute, white-label or integrate our innovative products into higher value systems resulting in multiple strategic sales channels for our PPSA™-based products and product designs. Although our primary market is the United States, we expect to begin targeting markets outside the United States as early as 2018. As our products gain broader acceptance in the power conversion market, we intend to license our proprietary PPSA™-based product designs to OEMs within our target markets, as well as license our technologies for other markets which we do not plan to enter directly. The basis for this approach is the belief that OEMs may achieve higher product margins and gain more market share by providing PPSA™-based products, which are differentiated from the traditional product offerings in the industry, to their customers. We believe such strategic relationships with key OEM licensees would enable us to reap the benefits of PPSA™ and gain market share more quickly than by strictly manufacturing and distributing our products.
Target Markets
Currently, our primary markets are solar + storage and, to a lesser extent, microgrids. We also intend to be opportunistic with regards to the stand-alone storage market. Until recently, our primary market was the stand-alone storage market but we have shifted our strategic focus to solar + storage as that market leverages the mature and global solar market and the stand-alone storage market has been slow to develop.

Solar + Storage and Microgrid Markets
Solar PV has one of the lowest levelized costs of energy for new electrical generation capacity and we expect this to remain true in the near term. We expect that our intellectual property rights willdistributed PV to continue to be a significant assethigh growth business as system costs have fallen dramatically over the past several years. As such, the economics of generating PV for local consumption is expected to usremain strong for several more years, especially given the investment tax credit, or ITC, extension passed by Congress and signed into law in 2015 for solar energy production. Our SunDial™ products were launched to directly address this market.

One shortcoming of distributed, behind-the-meter PV systems is that they require connection to the utility power grid in order to operate. For example, a business with PV on its roof will not, in most cases, benefit from the ability to generate power should the utility power grid go down. Another shortcoming of distributed PV systems is the instability they cause on the local power lines. Utility power grids were not designed to manage power inflow from the end of the lines. As such, distributed generation sources can lead to wide swings in line voltages when clouds pass and power output falls off, requiring the utility to ramp up its central power stations to make up for the shortfall in solar. We believe the proliferation of PV, its intermittency and the elimination of net metering in many states may drive growth in the solar + storage market.

Whether for emergency backup power or for baseload generation in remote locations with weak or no electric grids, microgrids are an emerging business case for solar paired with storage. A distributed PV system connected to a BESS that includes one of our strategyStabiliti™ multi-port PCS may enable a business to benefit from the ability to form and manage a local microgrid powered by the PV system and BESS even when the utility power grid is down. This capability is attractive to electricity consumers who need to power critical loads even in a blackout. Our Stabiliti™ PCS are also equipped to meet evolving utility requirements for low voltage ride-through and other key operating parameters, which may enable the PV and BESS it connects to the grid to help stabilize the utility power grid when voltage or frequency fluctuates due to imbalances in load and supply. In remote locations where there is no reliable electric grid, which may be as diverse as a military battlefield or remote tropical island resort, or in locations where local electric rates are high due to aging and inefficient generation technology, a trend towards self-generation microgrids is developing. These sites can use solar, batteries and other forms of generation all brought together by one or more of our Stabiliti™ PCS to form and manage a microgrid using maximum solar generation for lowest cost. As such, we believe our products may become increasingly attractive to co-locate BESS with distributed PV.
According to their research, IHS believes that systems will be deployed in two principal configurations. The present configuration is to actively pursue patent protection forhave separate BESS and PV systems tied together through the AC wiring, which is supported by all of our innovative technologiescurrent products. A second, emerging configuration will be to place the BESS and the PV system behind a single PCS with two DC inputs. Our Stabiliti™ and SunDial™ Plus were designed specifically to enable this configuration which we believe is the lower cost and more efficient configuration. A key unique feature of the SunDial™’s patented technology is its ability to be deployed first as a standard commercial PV inverter and later be upgraded in the US and other commercially important global markets. As of September 30, 2016, we have 49 US and 10 foreign issued patents. We have filed numerous additional pending US and foreign patent applications.

Variable Frequency Drives (“VFD”)

Variable frequency drives controlfield to bring storage into the speed of electric motors used in HVAC (heating, ventilating and air conditioning) compressors and blowers, conveyor motors, cranes, pumps, and a wide range of other products.PV system using the same inverter. We believe that a variable frequency drivethis is the only product based on our PPSA™ technology could be offered as a high-efficiency alternativein the market today to traditional VFDs which suffer from similar size, weight, and heat loss inefficiencies as those of traditional power conversion systems. A PPSA™-based VFD may offer mediumhave this unique field-upgrade capability for pairing solar with storage in one inverter.



Also according to large low-voltage motors a high quality drive that improves efficiency, costs less to manufacture and install, and reduces electrical noise and harmonics over traditional VFDs. Such a product could potentially open up new markets for VFDs where they may not be commercially viable today due to their size, efficiency, or power quality.

In first quarter of 2016, after undergoing months of testing by independent researchers at the University of Texas Center for Electromechanics (UT CEM) alongside a popular product from one of the world's leading VFD manufacturers, our PPSA™-based VFD demonstrated very low output distortion compared to existing technology, which results in quiet motor operation and preserves overall motor life. The high output distortion of a traditional VFD will degrade a motor's life when compared to the low output distortion of our PPSA™-based VFD.

We are currently developing a commercialization plan to addressIHS, the global VFD market whichcommercial PV industry is projected to reach $37 billiongrow to over 33GW annually by 2026, according2020. IHS further forecasts that these commercial systems will have a 2% storage attachment rate by 2020, providing for a nearly 700MW annual commercial solar + storage market. These new solar + storage markets include providing backup power during blackouts, improving grid stability in high penetration PV areas and reducing fossil fuel consumption in remote and off-grid microgrids.


Stand-Alone Storage Market

The stand-alone storage market is served by battery energy storage systems, or BESS. BESS are racks of batteries coupled with a system controller and a power conversion system, such as those manufactured by us, to Future Market Insights. enable electric power to be captured, stored, and used in conjunction with electric power grids. These systems can be large, megawatt-scale systems operated by utilities to better manage their system resources, or smaller kilowatt-scale systems used by businesses and designed to enable these businesses to manage their power use and mitigate utility imposed "peak demand charges", which are charges utilities levy on their business customers for delivery of power at peak usage times of the day, such as mid-afternoons in the summer. The growth of peak demand charges has been substantial over the past decade and now can make up 50% or more of a commercial utility bill in certain markets. This is a trend that may continue as more intermittent resources are added to the utility power grid causing grid instability. Utilities and aggregators of distributed generation resources are also expected to adopt BESS due to the proliferation of renewables and to take advantage of additional value streams such as energy arbitrage, frequency regulation and ancillary services, infrastructure upgrade deferral and locational capacity.
There are strong economic incentives available to commercial and industrial consumers in major US markets such as California and New York in the form of reduced demand charges for installing a BESS and reducing peak consumption. There is also strong regulatory support for such systems. For example, California has issued a mandate for over 1,800 megawatts of new energy storage to be installed by 2020. Although we believe the economic incentives and regulatory support are expected to accelerate growth in this market over coming years, to date the slow pace of realization of these economic incentives has actually hindered market growth.
We expect the cost of commercial and industrial BESS to continue to decline due primarily to lower battery costs and, as a result, expect significant expansion in the addressable market for these systems. We also believe the combination of lower BESS costs, third-party financing, increases in utility demand charges, and the entrance of large, established companies to the BESS space may contribute to accelerating market growth for the nascent stand-alone storage market.
Other Markets
Although our technology may be suitable for other vertical markets within the global power conversion market landscape, we do not currently offer products for sale directly to other power conversion markets such as the VFD, uninterruptible power supply, rail, wind or EV traction drive markets.
In addition to the markets discussed above, we may also have opportunities for market expansion into fast electric vehicle chargers in certain applications where our products’ compact size and multi-port capabilities can unlock value for the system integrator particularly in locations where battery storage is coupled with the charging system to eliminate demand charges or expand the charging systems response capabilities.
We plan to initially address this market through licensingcontinue to monitor all power conversion markets for opportunities to create solutions for customers and alliance partnerships.

unlock the broader value of our patented technology.


Critical Accounting Policies

There have been no significant changes during the three and ninesix months ended SeptemberJune 30, 20162017 to the critical accounting policies disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

17
2016.



Results of Operations

Comparison of the three months ended SeptemberJune 30, 20162017 to the three months ended SeptemberJune 30, 2015

2016

Revenues.   Revenues for the three months ended SeptemberJune 30, 20162017 of $439,270$253,370 were $456,220,$68,746, or 51%21%, lower than the $895,490$322,116 we earned in revenues for the three months ended SeptemberJune 30, 2015.2016. Our revenue has been negatively impacted by a lack of growth in our initial target market of stand-alone storage. We have shifted our focus primarily to solar + storage as we believe this market is already transacting and meaningful revenue growth is achievable for us in this market in the near term.
Cost of Revenues.   Cost of revenues increased for the three months ended June 30, 2017 to $764,609 compared to $298,937 for the three months ended June 30, 2016. The increase was primarily due to non-cash write-down of inventory of $358,988 and an unfavorable $98,457 adjustment to the Company's warranty accrual both related to our first generation products. By the end of the quarter, we had completed the transition from our legacy products, including both our first and second generation products, to our third generation SunDial™ and Stabiliti™ products.
Gross Profit (Loss).   Gross loss for the three months ended June 30, 2017 was $511,239 compared to a gross profit of $23,179 for the three months ended June 30, 2016.
Research and Development Expenses.   Research and development expenses decreased by $94,811, or 8%, to $1,108,368 in the three months ended June 30, 2017 from $1,203,179 in the three months ended June 30, 2016. The decrease was due primarily to the timing of costs associated with bi-directional power switch development. For the balance of the year, our PPSA™ research and development efforts will be focused on our SunDial™ and Stabilit™ products including firmware development for, and certification to, the new UL1741 SA (a new standard required in most US markets beginning in October 2017) and a further cost-reduced version of our SunDial™ and Stabiliti™ products with an improved form factor.
General and Administrative Expenses.   General and administrative expenses increased by $288,756, or 33%, to $1,170,415 in the three months ended June 30, 2017 from $881,659 in the three months ended June 30, 2016. The increase was primarily due to higher non-cash patent impairments of $177,764 as we abandoned certain patent filings to focus on filings with the highest strategic value, as well as higher legal and consulting fees of $63,637.
Sales and Marketing Expenses.   Sales and marketing expenses increased by $14,903, or 4%, to $427,336 in the three months ended June 30, 2017 from $412,433 in the three months ended June 30, 2016. Higher bad debt expense of $197,549 and placement costs of $63,116 were largely offset by lower stock-based compensation costs of $243,750 due to forfeitures. We have seen an increase in both our bad debt expense and days sales outstanding as many companies, including certain of our customers, are having difficulty securing financing or generating sufficient working capital due to the lack of growth in the stand-alone storage market.
Loss from Operations.   Our loss from operations for the three months ended June 30, 2017 was $3,217,358 compared to $2,474,092 loss from operations for the three months ended June 30, 2016.
Interest Income, net.    Net interest income was $7,034 for the three months ended June 30, 2017 compared to $6,615 for the three months ended June 30, 2016.
Net Loss.   Our net loss for the three months ended June 30, 2017 was $3,210,324 as compared to a net loss of $2,467,477 for the three months ended June 30, 2016. The increase is attributable to higher non-cash charges associated with inventory write-downs, patent impairments and bad debt expense.

Comparison of the six months ended June 30, 2017 to the six months ended June 30, 2016
Revenues.   Revenues for the six months ended June 30, 2017 of $529,040 were $289,720, or 35%, lower than the $818,760 we earned in revenues for the six months ended June 30, 2016. The decrease in revenue was driven by the timing of, and the variabilitya contraction in the early market for standalonestand-alone storage.

Cost of Revenues.   Cost of revenues decreasedincreased by $681,848, or 86%, to $1,475,539 for the threesix months ended SeptemberJune 30, 2016 to $737,9372017 compared to $842,425$793,691 for the threesix months ended SeptemberJune 30, 2015.2016. The decreaseincrease was due to lower unit sales volumesnon-cash write-down of inventory of $708,204 and production overhead,an unfavorable $115,000 adjustment to the Company's warranty accrual both related to legacy products, partially offset by a charge of $328,537 associated with excess and obsolete (“E&O”) inventory in connection with the end-of-life of our IBC-30 battery converter. We currently expect to sell-through existing inventory and not manufacture additional units of this product.

lower sales volumes.



Gross Profit (Loss).   Gross loss for the threesix months ended SeptemberJune 30, 20162017 was $298,667$946,499 compared to a gross profit of $53,065$25,069 for the threesix months ended SeptemberJune 30, 2015.2016.
Research and Development Expenses.   Research and development expenses decreased by $384,627, or 14%, to $2,298,537 in the six months ended June 30, 2017 from $2,683,164 in the six months ended June 30, 2016. The decrease was due primarily to the E&O charge.

Research and Development Expenses.   Research and development expenses decreased by $485,758, or 28%, to $1,231,024 in the three months ended September 30, 2016 from $1,716,782 in the three months ended September 30, 2015. The decrease was due primarily to lowertiming of costs associated with bi-directional power switch development of $521,647 and product certification of $124,098 and development costs of $76,509, both due to the timing of product development activities, partially offset by higher personnel costs of $229,340.

development.

General and Administrative Expenses.   General and administrative expenses increased by $19,203,$274,388, or 2%15%, to $907,335$2,076,378 in the threesix months ended SeptemberJune 30, 20162017 from $888,132$1,801,990 in the threesix months ended SeptemberJune 30, 2015.

2016. The increase was primarily due to higher non-cash patent impairments of $153,570 as we abandoned certain patent filings to focus on filings with the highest strategic value, as well as higher legal and consulting fees of $69,998.

Sales and Marketing Expenses.   Sales and marketing expenses increased by $118,416,$143,906, or 31%17%, to $496,794$968,869 in the threesix months ended SeptemberJune 30, 20162017 from $378,378$824,963 in the threesix months ended SeptemberJune 30, 2015.2016. The increase was due primarily to the higher bad debt expense of $69,900,$258,253, consulting costs of $69,640 and a $24,099 bad debt recovery in the three months ended September 30, 2015.

placement costs of $59,116, offset partially by lower stock-based compensation costs of $246,217 due to forfeitures.

Loss from Operations.   Our loss from operations for the threesix months ended SeptemberJune 30, 20162017 was $2,933,820$6,290,283 compared to $2,930,227$5,285,048 loss from operations for the threesix months ended SeptemberJune 30, 2015.

2016.

Interest Income, net.    Net interest income was $11,554$11,575 for the threesix months ended SeptemberJune 30, 20162017 compared to $12,028$15,224 for the threesix months ended SeptemberJune 30, 2015.

2016.

Net Loss.   Our net loss for the threesix months ended SeptemberJune 30, 20162017 was $2,922,226$6,278,708 as compared to a net loss of $2,918,199$5,269,824 for the threesix months ended SeptemberJune 30, 2015.

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Comparison of the nine months ended September 30, 20162016. The increase is attributable to the nine months ended September 30, 2015

Revenues.    Revenues for the nine months ended September 30, 2016 of $1,258,030 were $2,034,488, or 62%, lower than the $3,292,518 we earned in revenues for the nine months ended September 30, 2015. The decrease in revenue was driven by the timing of, and the variability in, the early market for standalone storage.

Cost of Revenues.    Cost of revenues decreased for the nine months ended September 30, 2016, to $1,531,628 compared to $2,918,064 for nine months ended September 30, 2015. The decrease was due to lower unit sales volumes and production overhead, partially offset by a charge of $328,537higher non-cash charges associated with E&O inventory in connection with the end-of-life of our IBC-30 battery converter. We currently expect to sell-through existing inventory and not manufacture additional units of this product.

Gross Profit (Loss).    Gross loss for the nine months ended September 30, 2016 was $273,598 compared to a gross profit of $374,454 for the nine months ended September 30, 2015. The decrease was due primarily to the impact of lower product sales and the E&O charge recognized in the three months ended September 30, 2016.

Research and Development Expenses.    Research and development expenses increased by $104,826, or 3%, to $3,914,188 in the nine months ended September 30, 2016 from $3,809,362 in the nine months ended September 30, 2015.

General and Administrative Expenses.    General and administrative expenses decreased by $57,948, or 2%, to $2,709,325 in the nine months ended September 30, 2016 from $2,767,273 in the nine months ended September 30, 2015.

Sales and Marketing Expenses.    Sales and marketing expenses increased by $99,199, or 8%, to $1,321,757 in the nine months ended September 30, 2016 from $1,222,558 in the nine months ended September 30, 2015. The increase was due to higher trade show costs of $39,777, travel costs of $31,702write-downs, patent impairments and bad debt expense of $54,683.

Loss from Operations.   Due primarily to the decrease in our gross profit, our loss from operations for the nine months ended September 30, 2016 was $8,218,868 or 11% higher than the $7,424,739 loss from operations for the nine months ended September 30, 2015.

Interest Income, net.    Net interest income was $26,778 for the nine months ended September 30, 2016 compared to $21,152 for the nine months ended September 30, 2015.

Net Loss.   As a result of a higher loss from operations, our net loss for the nine months ended September 30, 2016, was $8,192,090 as compared to a net loss of $7,403,587 for the nine months ended September 30, 2015.

expense.


Liquidity and Capital Resources

We do not currently generate enough revenue to sustain our operations. We have funded our operations through the sale of common stock and, prior to our initial public offering, the issuance of convertible debt.

At SeptemberJune 30, 2016,2017, we had cash and cash equivalents of $6,813,438.$13,335,908. Our net working capital and long-term debt at SeptemberJune 30, 20162017 were $6,981,413$12,767,355 and $0, respectively.

19

Operating activities in the ninesix months ended SeptemberJune 30, 20162017 resulted in cash outflows of $7,616,314,$4,348,202, which were due primarily to the net loss for the period of $8,192,090 and negative working capital changes of $1,085,926,$6,278,708, partly offset by non-cash items of $1,661,702,$1,926,121, related primarily to inventory write-downs of $712,083, stock-based compensation of $1,135,008 and$498,006, bad debt expense of $273,727, depreciation and amortization of $290,474. Negative working capital changes included a $520,730, or 99%, increase in finished goods inventory due to lower than expected product sales in the nine months ended September 30, 2016.$224,926 and patent impairments of $202,343. Operating activities in the ninesix months ended SeptemberJune 30, 20152016 resulted in cash outflows of $5,704,527,$5,005,375, which were due primarily to the net loss for the period of $7,403,587,$5,269,824 and negative working capital changes of $761,209, partly offset by non-cash items of $1,442,133,$1,025,658, related primarily to stock-based compensation of $1,012,825, write-off of capitalized software and patent costs of $155,429$763,326 and depreciation and amortization of $144,834, and positive working capital changes of $256,927. Due to our business model, we would generally expect positive working capital changes in periods of consistent and growing revenues and negative working capital changes in periods of declining revenues.

$184,279.

Investing activities in the ninesix months ended SeptemberJune 30, 20162017 and 20152016 resulted in cash outflows of $628,070$189,280 and $1,039,186,$500,595, respectively, for the acquisition of fixed assets and intangible assets.

In the three months ended June 30, 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 Stabilti™ products for the solar + storage and microgrid markets and eliminate 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. We believe these changes will result in a reduced cash burn in advance of our expected revenue growth.

Financing activities in the ninesix months ended SeptemberJune 30, 2017 resulted in cash inflows of $13,668,474 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


are after offering fees and expenses, including the placement agent fee of $1.1 million. Financing activities in the six months ended June 30, 2017 and 2016 resulted in cash inflows of $11,143 and $35,536, respectively, from the exercise of stock options and warrants. Financing activities in the nine months ended September 30, 2015 resulted in cash inflows of $16,158,290, related primarily to the issuance of 2,225,825 shares of common stock shares at a public offering price of $7.75. Net cash proceeds after offering-related expenses were $15,924,405. In addition, we received $233,885 in net proceeds from the exercise of stock options.

In order to meet our operating requirements, we will need to obtain additional financing from third parties. There can be no assurance that we will be successful in obtaining third party financing with commercially reasonable terms or at all. If we are unable to obtain such financing or it is inadequate to fund our operations, we will be required to reduce operating costs, which could jeopardize future strategic initiatives and business plans.


On December 1, 2014, we filed a Form S-3 shelf registration statement with the Securities and Exchange Commission. The registration statement allows us 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 us with the flexibility over three years to potentially raise additional equity in public or private offerings on commercial terms. AfterAt June 30, 2017, our May 2015 follow-on offering,availability under this registration statement is $58 million is available to us under the registration statement.

million.


Off-Balance Sheet Transactions

We do not have any off-balance sheet transactions.

Trends, Events and Uncertainties

Standalone Storage Market

The standalone energy storage market is an emerging market which may lead to variability in our operating results. The decline in our revenues for the three and nine months ended September 30, 2016 was primarily due to an unexpected slowdown in California’s standalone energy storage market. California is the leadingearly market for standalonestand-alone storage systemshas been, and sales of our products for use in standalone storage systemscontinues to be, deployed in California constituted a majority of our revenues for the three and nine months ended September 30, 2015. The slowdown inheavily dependent on California’s standalone energy market was due to a delay in awards under the state’s Self Generation Incentive Program, or SGIP, which provides economic incentives for energy storage projects. Awards underSGIP. The pace and deployment of the SGIP were delayed ashas been slow and, despite in excess of 800 projects being submitted in the California Public Utility Commission, or CPUC, examined and ultimately revised the award solicitation process and other aspects of SGIP. The revised SGIP was not finalized until July 1,first two program stages in 2016 which delayed the determination of project winners and the processingfirst quarter of 2017, few projects have reached the reservation stage where funding has been approved for the specific projects.

Historically, most of our backlog has related awards. These delaysto orders for the stand-alone storage market and this backlog has not translated into revenue at the pace we have expected due to the stagnation in stand-alone storage deployments in California. There is significant uncertainty around the pace and timing of growth in this market and we believe the customer representing a majority of our backlog over the last several quarters may have exited the system integration business for commercial and industrial stand-alone storage. This customer exit has had ana material adverse impact on orders fromour backlog and we are currently evaluating whether we have any recourse against this customer for unfulfilled orders.

In addition, funding has been difficult to secure for many system integration companies in the stand-alone storage market. We are monitoring the financial health and payment history of our customers with planned deployments in California, whichbut a bankruptcy or market exit by any one or more of our customers could further materially and adversely affectedimpact our revenues forbacklog and revenue in this market.

To address the threeuncertainty surrounding the stand-alone storage market, we have transitioned our focus to the solar + storage market. This market leverages the far larger, and nine months ended September 30, 2016. Althoughmore mature, global solar market and we believe our products solve key customer problems in this market such as demand management, backup power and critical load support that solar only solutions are not capable of addressing. In the delay in SGIP awards has been resolved,next several quarters we currently expect the impact of the delay to adversely affect our operating results in our current fiscal quarter ending December 31, 2016.

In September 2016, California enacted legislation that doubled the incentives for energy storage projects throughout the state for calendar years 2017- 2019, allocating an additional $187 million for energy storage projects under the state’s SGIP. We expect the fundingrevenue growth to be made available equally overdriven by growth in the three-year period. In addition,solar + storage market and, to a lesser extent, the microgrid market.


Other than as discussed above and elsewhere in this legislation increased the previously established target for energy storagereport, we are not aware of any trends, events or uncertainties that are likely to be implemented in California by 2020 from 1,325MW to 1,825MW and authorized the CPUC to create an objective, expedited dispute-resolution process for distributed, behind-the-meter energy resources attempting to establish an interconnection to an investor-owned utility (Edison, PG&E, or SDG&E) grid. This dispute resolution process is intended to reduce the time for approval and interconnection costs for energy storage and distributed generation projects connected to the grid.

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have a material effect on our financial condition.


ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4.CONTROLS AND PROCEDURES

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management, with the participation of our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial and accounting officer), has concluded that, as of SeptemberJune 30, 2016,2017, our disclosure controls and procedures are effective.



Changes in Internal Control over Financial Reporting

There have been no other material changes in our internal controls over financial reporting that occurred during the quarter ended SeptemberJune 30, 20162017 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Limitations on the Effectiveness of Controls

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

PART II-OTHERII - OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

Not applicable.

ITEM 1. LEGAL PROCEEDINGS
On May 17, 2017, we provided our prior contract manufacturer (CM) notice that it was in breach of the Master Supply Agreement (MSA) between the parties. On May 19, 2017, we received notice from CM that we were allegedly in breach of the MSA. On June 23, 2017, we received a Notice of Arbitration from CM alleging claims against us and demanding recovery for alleged damages. On July 13, 2017, we responded to CM with a Notice of Defense and Counterclaim. On August 2, 2017, CM provided their response to our Notice of Defense and Counterclaim. The parties are in the process of appointing an arbitrator. At this time, we are unable to estimate the possible loss, if any, associated with this proceeding.
ITEM 1A.RISK FACTORS

ITEM 1A. RISK FACTORS

There are no material changes from the risk factors disclosed in our 20152016 Annual Report on Form 10-K.

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On March 3, 2017, we closed on a definitive securities purchase agreement to sell to certain accredited investorsour common stock and preferred stock together with warrants to purchase shares of common stock, or the Private Placement. 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. 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 Commission which was declared effective on April 21, 2017.
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 purchase shares of common stock as part of its placement agent fee. The placement agent warrant has an exercise price of $2.89 per share, is non-exercisable for 12 months and has a three-year term. We expect to utilize net proceeds from the offering for working capital and general corporate purposes.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

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ITEM 4.MINE SAFETY DISCLOSURES

ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.

ITEM 5.OTHER INFORMATION

ITEM 5. OTHER INFORMATION
Not applicable.

ITEM 6. EXHIBITS

ITEM 6.EXHIBITS

Exhibit
Number
 Document
10.1*†Amendment No. 2 to Employment Agreement between the Company and R. Daniel Brdar dated June 5, 2017
10.2†Separation and Release Agreement, dated June 2, 2017, between the Company and Ryan O'Keefe (incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed with the Commission on June 6, 2017)
   
31.1 
Certification of Principal Executive Officer pursuant to Exchange Act Rule, 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
   
31.2 
Certification of Principal Financial Officer pursuant to Exchange Act Rule, 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
   
32.1 
Certification pursuant to 18 U.S.C. 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
   
101.INS XBRL Instant Document *
   
101.SCH XBRL Taxonomy Extension Schema Document *
   
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document *
   
101.DEF XBRL Taxonomy Extension Definition Linkbase Document *
   
10.LAB XBRL Taxonomy Extension Label Linkbase Document *
   
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document *

*Filed herewith
**Furnished herewith

†22Management contract or compensatory agreement







SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant, has duly, caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated November 14, 2016August 11, 2017IDEAL POWER INC.
  
 By:/s/ R. Daniel Brdar
  R. Daniel Brdar
  Chief Executive Officer
   
 By:/s/ Timothy W. Burns
  Timothy W. Burns
  Chief Financial Officer

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