SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the quarterly period ended September 30, 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 name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Common Stock, par value $0.001 per share | IPWR | The Nasdaq Capital Market |
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, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer ¨ | ||
Non-accelerated filer x | Smaller reporting company x | ||
| Emerging growth company ¨ |
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. ¨ý
Indicate by check mark whether the issuerregistrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of November 6, 2017,13, 2019, the issuer had 13,996,1212,018,951 shares of common stock, par value $.001,$0.001, outstanding.
TABLE OF CONTENTS
| September 30, 2017 | December 31, 2016 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 11,681,887 | $ | 4,204,916 | ||||
| Accounts receivable, net | 387,081 | 378,658 | ||||||
| Inventories, net | 327,461 | 1,245,147 | ||||||
| Prepayments and other current assets | 171,147 | 312,593 | ||||||
| Total current assets | 12,567,576 | 6,141,314 | ||||||
| Property and equipment, net | 647,657 | 936,486 | ||||||
| Intangible assets, net | 2,059,645 | 1,905,556 | ||||||
| Other assets | — | 17,920 | ||||||
| Total Assets | $ | 15,274,878 | $ | 9,001,276 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 287,114 | $ | 346,767 | ||||
| Accrued expenses | 1,250,484 | 1,149,129 | ||||||
| Total current liabilities | 1,537,598 | 1,495,896 | ||||||
| Other long-term liabilities | 493,088 | 265,418 | ||||||
| Total liabilities | 2,030,686 | 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 September 30, 2017 | 1,518 | — | ||||||
| Common stock, $0.001 par value; 50,000,000 shares authorized; 13,998,465 shares issued and 13,996,121 shares outstanding at September 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 | 66,806,637 | 52,310,481 | ||||||
| Treasury stock, at cost; 2,344 shares at September 30, 2017 and 1,683 shares at December 31, 2016, respectively | (7,489 | ) | (5,915 | ) | ||||
| Accumulated deficit | (53,570,472 | ) | (45,074,165 | ) | ||||
| Total stockholders’ equity | 13,244,192 | 7,239,962 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 15,274,878 | $ | 9,001,276 | ||||
| September 30, 2019 | December 31, 2018 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 769,833 | $ | 3,258,077 | ||||
| Prepayments and other current assets | 129,347 | 333,877 | ||||||
| Current assets of discontinued operations held for sale | – | 1,096,323 | ||||||
| Total current assets | 899,180 | 4,688,277 | ||||||
| Property and equipment, net | 52,879 | 63,214 | ||||||
| Intangible assets, net | 1,645,555 | 1,396,409 | ||||||
| Right of use asset | 303,246 | – | ||||||
| Other assets | 17,920 | 17,920 | ||||||
| Total assets | $ | 2,918,780 | $ | 6,165,820 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 195,540 | $ | 94,203 | ||||
| Accrued expenses | 178,720 | 167,755 | ||||||
| Current portion of lease liability | 177,669 | – | ||||||
| Current liabilities of discontinued operations held for sale | – | 877,755 | ||||||
| Total current liabilities | 551,929 | 1,139,713 | ||||||
| Long-term lease liability | 129,995 | – | ||||||
| Other long-term liabilities | 651,483 | 428,163 | ||||||
| Total liabilities | 1,333,407 | 1,567,876 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $0.001 par value; 10,000,000 shares authorized; 810,000 shares issued and outstanding at September 30, 2019 and 1,518,430 shares issued and outstanding at December 31, 2018, respectively | 810 | 1,518 | ||||||
| Common stock, $0.001 par value; 50,000,000 shares authorized; 1,475,322 shares issued and 1,474,001 shares outstanding at September 30, 2019 and 1,404,479 shares issued and 1,403,158 shares outstanding at December 31, 2018, respectively | 1,475 | 1,404 | ||||||
| Additional paid-in capital | 68,115,842 | 68,022,484 | ||||||
| Treasury stock, at cost, 1,321 shares at September 30, 2019 and December 31, 2018, respectively | (13,210 | ) | (13,210 | ) | ||||
| Accumulated deficit | (66,519,544 | ) | (63,414,252 | ) | ||||
| Total stockholders’ equity | 1,585,373 | 4,597,944 | ||||||
| Total liabilities and stockholders’ equity | $ | 2,918,780 | $ | 6,165,820 | ||||
The accompanying notes are an integral part of these condensed financial statements.
| 1 |
IDEAL POWER INC.
(unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Product revenue | $ | 444,640 | $ | 439,270 | $ | 973,680 | $ | 1,258,030 | ||||||||
| Cost of product revenue | 418,529 | 737,937 | 1,894,068 | 1,531,628 | ||||||||||||
| Gross profit (loss) | 26,111 | (298,667 | ) | (920,388 | ) | (273,598 | ) | |||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | 1,075,849 | 1,231,024 | 3,374,386 | 3,914,188 | ||||||||||||
| General and administrative | 899,882 | 907,335 | 2,976,260 | 2,709,325 | ||||||||||||
| Sales and marketing | 271,844 | 496,794 | 1,240,713 | 1,321,757 | ||||||||||||
| Total operating expenses | 2,247,575 | 2,635,153 | 7,591,359 | 7,945,270 | ||||||||||||
| Loss from operations | (2,221,464 | ) | (2,933,820 | ) | (8,511,747 | ) | (8,218,868 | ) | ||||||||
| Interest income, net | 3,865 | 11,554 | 15,440 | 26,778 | ||||||||||||
| Net loss | $ | (2,217,599 | ) | $ | (2,922,266 | ) | $ | (8,496,307 | ) | $ | (8,192,090 | ) | ||||
| Net loss per share – basic and fully diluted | $ | (0.16 | ) | $ | (0.31 | ) | $ | (0.66 | ) | $ | (0.86 | ) | ||||
| Weighted average number of shares outstanding – basic and fully diluted | 13,990,202 | 9,549,011 | 12,964,452 | 9,547,580 | ||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Product revenue | $ | – | $ | – | $ | – | $ | – | ||||||||
| Cost of product revenue | – | – | – | – | ||||||||||||
| Gross profit | – | – | – | – | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | 250,773 | 326,733 | 804,741 | 743,495 | ||||||||||||
| General and administrative | 471,272 | 911,763 | 1,520,325 | 2,597,174 | ||||||||||||
| Total operating expenses | 722,045 | 1,238,496 | 2,325,066 | 3,340,669 | ||||||||||||
| Loss from continuing operations before interest | (722,045 | ) | (1,238,496 | ) | (2,325,066 | ) | (3,340,669 | ) | ||||||||
| Interest (income) expense, net | 2,763 | 112 | 3,072 | (36,817 | ) | |||||||||||
| Loss from continuing operations | (724,808 | ) | (1,238,608 | ) | (2,328,138 | ) | (3,303,852 | ) | ||||||||
| Loss from discontinued operations | (78,796 | ) | (1,011,315 | ) | (768,047 | ) | (2,724,679 | ) | ||||||||
| Loss on sale of discontinued operations | (9,107 | ) | – | (9,107 | ) | – | ||||||||||
| Net loss | $ | (812,711 | ) | $ | (2,249,923 | ) | $ | (3,105,292 | ) | $ | (6,028,531 | ) | ||||
| Loss from continuing operations per share – basic and fully diluted | $ | (0.49 | ) | $ | (0.88 | ) | $ | (1.60 | ) | $ | (2.36 | ) | ||||
| Loss from discontinued operations per share – basic and fully diluted | (0.06 | ) | (0.73 | ) | (0.53 | ) | (1.94 | ) | ||||||||
| Net loss per share – basic and fully diluted | $ | (0.55 | ) | $ | (1.61 | ) | $ | (2.13 | ) | $ | (4.30 | ) | ||||
| Weighted average number of shares outstanding – basic and fully diluted | 1,474,001 | 1,401,348 | 1,460,507 | 1,401,060 | ||||||||||||
The accompanying notes are an integral part of these condensed financial statements.
| 2 |
IDEAL POWER INC.
(unaudited)
| Nine Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (8,496,307 | ) | $ | (8,192,090 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Allowance for doubtful accounts | 226,557 | 85,375 | ||||||
| Write-down of inventory | 703,220 | 73,521 | ||||||
| Depreciation and amortization | 339,493 | 290,474 | ||||||
| Write-off of capitalized patents | 268,789 | 71,109 | ||||||
| Write-off of fixed assets | 53,445 | 6,215 | ||||||
| Stock-based compensation | 833,637 | 1,135,008 | ||||||
| Decrease (increase) in operating assets: | ||||||||
| Accounts receivable | (234,980 | ) | 337,480 | |||||
| Inventories | 214,466 | (689,854 | ) | |||||
| Prepayments and other current assets | 159,366 | 147,061 | ||||||
| Increase (decrease) in operating liabilities: | ||||||||
| Accounts payable | (59,653 | ) | (729,435 | ) | ||||
| Accrued expenses | 67,722 | (151,178 | ) | |||||
| Net cash used in operating activities | (5,924,245 | ) | (7,616,314 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | (44,819 | ) | (328,930 | ) | ||||
| Acquisition of intangible assets | (220,865 | ) | (299,140 | ) | ||||
| Net cash used in investing activities | (265,684 | ) | (628,070 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Net proceeds from issuance of stock | 13,657,331 | — | ||||||
| Exercise of options and warrants | 11,143 | 35,536 | ||||||
| Payment of taxes related to restricted stock vesting | (1,574 | ) | — | |||||
| Net cash provided by financing activities | 13,666,900 | 35,536 | ||||||
| Net increase (decrease) in cash and cash equivalents | 7,476,971 | (8,208,848 | ) | |||||
| Cash and cash equivalents at beginning of period | 4,204,916 | 15,022,286 | ||||||
| Cash and cash equivalents at end of period | $ | 11,681,887 | $ | 6,813,438 | ||||
| Nine Months Ended September 30, | ||||||||
| 2019 | 2018 | |||||||
| Cash flows from operating activities: | ||||||||
| Loss from continuing operations | $ | (2,328,138 | ) | $ | (3,303,852 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 82,913 | 109,845 | ||||||
| Write-off of capitalized patents | – | 10,873 | ||||||
| Stock-based compensation | 156,882 | 645,349 | ||||||
| Decrease in operating assets: | ||||||||
| Prepayments and other current assets | 204,530 | 186,764 | ||||||
| Increase (decrease) in operating liabilities: | ||||||||
| Accounts payable | 1,337 | 192,352 | ||||||
| Accrued expenses | 6,336 | (108,489 | ) | |||||
| Net cash used in operating activities | (1,876,140 | ) | (2,267,158 | ) | ||||
| Net cash used in operating activities – discontinued operations | (557,096 | ) | (2,076,842 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | (4,253 | ) | (1,088 | ) | ||||
| Acquisition of intangible assets | (74,342 | ) | (85,913 | ) | ||||
| Net cash used in investing activities | (78,595 | ) | (87,001 | ) | ||||
| Net cash provided by (used in) investing activities – discontinued operations | 23,587 | (49,865 | ) | |||||
| Cash flows from financing activities: | ||||||||
| Payment of taxes related to restricted stock vesting | – | (2,616 | ) | |||||
| Net cash used in financing activities | – | (2,616 | ) | |||||
| Net decrease in cash and cash equivalents – continuing operations | (1,954,735 | ) | (2,356,775 | ) | ||||
| Net decrease in cash and cash equivalents – discontinued operations | (533,509 | ) | (2,126,707 | ) | ||||
| Cash and cash equivalents at beginning of period | 3,258,077 | 10,022,247 | ||||||
| Cash and cash equivalents at end of period | $ | 769,833 | $ | 5,538,765 | ||||
The accompanying notes are an integral part of these condensed financial statements.
| 3 |
IDEAL POWER INC.
Statement of Stockholders’ Equity
For the Three-Month Periods during the Nine Months Ended September 30, 2019 and 2018
(unaudited)
| Common Stock | Preferred Stock | Additional Paid-In | Treasury Stock | Accumulated | Total Stockholders’ | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Shares | Amount | Deficit | Equity | ||||||||||||||||||||||||||||
| Balances at December 31, 2017 | 1,401,566 | $ | 1,402 | 1,518,430 | $ | 1,518 | $ | 67,093,955 | 236 | $ | (7,489 | ) | $ | (55,509,263 | ) | $ | 11,580,123 | |||||||||||||||||||
| Stock-based compensation | — | — | — | — | 192,033 | — | — | — | 192,033 | |||||||||||||||||||||||||||
| Net loss for the three months ended March 31, 2018 | — | — | — | — | — | — | — | (2,056,162 | ) | (2,056,162 | ) | |||||||||||||||||||||||||
| Balances at March 31, 2018 | 1,401,566 | 1,402 | 1,518,430 | 1,518 | 67,285,988 | 236 | (7,489 | ) | (57,565,425 | ) | 9,715,994 | |||||||||||||||||||||||||
| Vesting of performance stock | 600 | — | — | — | — | 178 | (2,188 | ) | — | (2,188 | ) | |||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 438,273 | — | — | — | 438,273 | |||||||||||||||||||||||||||
| Net loss for the three months ended June 30, 2018 | — | — | — | — | — | — | — | (1,722,446 | ) | (1,722,446 | ) | |||||||||||||||||||||||||
| Balances at June 30, 2018 | 1,402,166 | 1,402 | 1,518,430 | 1,518 | 67,724,261 | 414 | (9,677 | ) | (59,287,871 | ) | 8,429,633 | |||||||||||||||||||||||||
| Vesting of restricted stock | — | — | — | — | — | 59 | (428 | ) | — | (428 | ) | |||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 207,504 | — | — | — | 207,504 | |||||||||||||||||||||||||||
| Net loss for the three months ended September 30, 2018 | — | — | — | — | — | — | — | (2,249,923 | ) | (2,249,923 | ) | |||||||||||||||||||||||||
| Balances at September 30, 2018 | 1,402,166 | $ | 1,402 | 1,518,430 | $ | 1,518 | $ | 67,931,765 | 473 | $ | (10,105 | ) | $ | (61,537,794 | ) | $ | 6,386,786 | |||||||||||||||||||
| Balances at December 31, 2018 | 1,404,479 | $ | 1,404 | 1,518,430 | $ | 1,518 | $ | 68,022,484 | 1,321 | $ | (13,210 | ) | $ | (63,414,252 | ) | $ | 4,597,944 | |||||||||||||||||||
| Conversion of preferred stock to common stock | 70,843 | 71 | (708,430 | ) | (708 | ) | 637 | — | — | — | — | |||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | (25,814 | ) | — | — | — | (25,814 | ) | |||||||||||||||||||||||||
| Net loss for the three months ended March 31, 2019 | — | — | — | — | — | — | — | (1,040,899 | ) | (1,040,899 | ) | |||||||||||||||||||||||||
| Balances at March 31, 2019 | 1,475,322 | 1,475 | 810,000 | 810 | 67,997,307 | 1,321 | (13,210 | ) | (64,455,151 | ) | 3,531,231 | |||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 101,843 | — | — | — | 101,843 | |||||||||||||||||||||||||||
| Net loss for the three months ended June 30, 2019 | — | — | — | — | — | — | — | (1,251,682 | ) | (1,251,682 | ) | |||||||||||||||||||||||||
| Balances at June 30, 2019 | 1,475,322 | 1,475 | 810,000 | 810 | $ | 68,099,150 | 1,321 | (13,210 | ) | (65,706,833 | ) | 2,381,392 | ||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 16,692 | — | — | — | 16,692 | |||||||||||||||||||||||||||
| Net loss for the three months ended September 30, 2019 | — | — | — | — | — | — | — | (812,711 | ) | (812,711 | ) | |||||||||||||||||||||||||
| Balances at September 30, 2019 | 1,475,322 | $ | 1,475 | 810,000 | $ | 810 | $ | 68,115,842 | 1,321 | $ | (13,210 | ) | $ | (66,519,544 | ) | $ | 1,585,373 | |||||||||||||||||||
The accompanying notes are an integral part of these condensed financial statements.
| 4 |
Ideal Power Inc.
(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 headquartersThe Company is located in Austin, Texas, it developsTexas. Prior to 2019, the Company developed power conversion solutions with a focus on solar +and storage, microgrid and stand-alone energy storage applications. The principal products of the Company arewere 30-kilowatt power conversion systems, including 2-port and multi-port products.
On April 16, 2018, the Company realigned into two operating divisions: Power Conversion Systems, to continue the commercialization of its PPSA™ technology, and B-TRAN, to develop its Bi-directional bi-polar junction TRANsistor (B-TRAN™) solid state switch technology. On January 2, 2019, the Board of Directors of the Company (the “Board”) approved a strategic shift to focus on the further development and commercialization of its B-TRAN™ technology and a plan to suspend further power converter system development and sales while the Company located a buyer for its power conversion systems division. On September 19, 2019, the Company closed on the sale of its power conversion systems division and is now solely focused on the further development and commercialization of its B-TRAN™ technology. See Note 3.
Since its inception, the Company has generated limited revenues from the sale of products and has financed its research and development efforts and operations primarily through the sale of common stockstock. The Company’s continued operations are dependent upon its ability to obtain adequate sources of funding through future revenues, equity and prior to its initial public offering, the issuancedebt financing, co-development agreements, government grants, sale or licensing 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 (the “SEC”) for Form 10-Q. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the U.S. (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. The balance sheetBalance Sheet at December 31, 20162018 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, 2016.2018. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year or any other future periods.
Reverse Stock Split
On August 15, 2019, the Company effected a reverse stock split of the outstanding shares of its common stock by a ratio of one-for-ten, and its common stock began trading on the Nasdaq Capital Market on a split-adjusted basis on August 20, 2019. The par value of the Company’s common stock remained unchanged at $0.001 per share after the reverse stock split. All share amounts, per share data, share prices, exercise prices and conversion rates set forth in these notes and the accompanying unaudited condensed financial statements have, where applicable, been adjusted retroactively to reflect the reverse stock split. See Note 7.
Liquidity and Going Concern
The Company had a net loss of $3.1 million and used $2.4 million of cash in operating activities for the nine months ended September 30, 2019. At September 30, 2019, the Company had net working capital of $0.4 million and the Company’s principal source of liquidity consisted of $0.8 million of cash and cash equivalents. The Company’s cash and cash equivalent balance at September 30, 2019 relative to its estimate of future operating cash requirements led to substantial doubt about the ability of the Company to continue as a going concern. The Company’s independent registered public accounting firm, in its report on the Company’s 2018 financial statements, raised substantial doubt about the Company’s ability to continue as a going concern. On November 13, 2019, the Company completed a private placement of the Company’s common stock and warrants to purchase common stock for aggregate gross proceeds of $3.5 million and estimated net proceeds of $3.1 million, thereby alleviating the substantial doubt about the Company’s ability to continue as a going concern for at least the next twelve months from the date of issuance of these financial statements. See Note 11.
The accompanying condensed 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 raise additional capital on favorable terms, or at all, or develop profitable operations. 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.
| 5 |
Recently Adopted Standards
In May 2014,February 2016, the Financial Accounting Standards Board or FASB, issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The FASB 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. The updated standard becomes effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted. The Company will not early adopt and the standard is not expected to have a material effect on the Company’s financial statements.
Recent Accounting Pronouncements
Management does not believe that any other recently issued, but not yet effective, accounting standards,standard, if adopted, would have a material impact on the Company’s financial statements.
Note 3 – Accounts Receivable
On January 2, 2019, the Board approved a strategic shift to focus on the commercialization of its B-TRAN™ technology and a plan to suspend further power converter system development and sales while the Company located a buyer for its power conversion systems division. On January 4, 2019, the Company implemented a reduction-in-force in connection with this exit activity and recognized an expense of $92,600 in involuntary termination benefits.
The Company’s power conversion system division, a component supplier to energy storage system integrators, had not achieved the necessary scale to generate positive cash flows. As the division was dependent on the ability of its customers to scale in the small commercial and industrial segment of the energy storage market and based on the sales forecasts and commitments provided by these customers, the Company did not expect its power conversion systems division to scale sufficiently in the short term, requiring an inflow of additional capital for the business. As such, the decision was made to exit the power conversion systems business and sell the division and the Company’s PPSA™ technology and focus on the Company’s B-TRAN™ technology.
As a result, the assets held for sale and discontinued operations criteria were met and the Company’s financial statements are presented in accordance with ASC 205. Under ASC 205-20-45-10, during the period in which a component meets the assets held for sale and discontinued operations criteria, an entity must present the assets and liabilities of the discontinued operation separately in the asset and liability sections of the balance sheet for the comparative reporting periods. The prior period balance sheet should be reclassified for the held for sale items. For income statements, the current and prior periods should report the results of operations of the component in discontinued operations when comparative income statements are presented.
On September 19, 2019, the Company closed on the sale of its power conversion systems division to CE+T Energy Solutions, Inc. (“CE+T Energy”) The consideration consisted of $200,000 in cash, received at closing, and 50 shares of CE+T Energy’s common stock, to be issued within 90 days of closing, which represented a 5% ownership interest in CE+T Energy as of the following:
| September 30, 2017 | December 31, 2016 | |||||||
| (unaudited) | ||||||||
| Trade receivables | $ | 510,562 | $ | 430,278 | ||||
| Other receivables | 89,586 | 33,755 | ||||||
| 600,148 | 464,033 | |||||||
| Allowance for doubtful accounts | (213,067 | ) | (85,375 | ) | ||||
| $ | 387,081 | $ | 378,658 | |||||
As a result of the probability of collection is remote. Duringsale, the nine monthsfinancial statements for the period ended September 30, 2017,2019 do not include assets held for sale.
The following is a reconciliation of the Company collected $62,645carrying amounts of its previously reserved receivablesmajor classes of assets and wrote-off $98,850liabilities of its allowancethe discontinued operations to assets and liabilities held for doubtful accounts. These changessale:
| December 31, | ||||
| 2018 | ||||
| Accounts receivable, net | $ | 270,768 | ||
| Inventories, net | 131,342 | |||
| Prepayments and other current assets | 22,322 | |||
| Property and equipment, net | 329,738 | |||
| Intangible assets, net | 342,153 | |||
| Current assets held for sale (1) | $ | 1,096,323 | ||
| Accounts payable | $ | 356,113 | ||
| Accrued expenses | 521,642 | |||
| Current liabilities held for sale | $ | 877,755 | ||
| (1) | The assets of the discontinued operations classified as held for sale are classified as current on the December 31, 2018 balance sheet as it was deemed probable that the sale would occur and proceeds would be collected within one year. |
| 6 |
The following is a reconciliation of the major classes of line items constituting loss from discontinued operations to loss from discontinued operations shown in the allowance for doubtful accounts are reflected within the sales and marketing line itemStatement of the statement of operations.
| September 30, 2017 | December 31, 2016 | |||||||
| (unaudited) | ||||||||
| Raw materials | $ | 251,892 | $ | 363,195 | ||||
| Finished goods | 138,446 | 941,921 | ||||||
| 390,338 | 1,305,116 | |||||||
| Reserve for obsolescence | (62,877 | ) | (59,969 | ) | ||||
| $ | 327,461 | $ | 1,245,147 | |||||
| September 30, 2017 | December 31, 2016 | |||||||
| (unaudited) | ||||||||
| Machinery and equipment | $ | 905,072 | $ | 894,228 | ||||
| Building leasehold improvements | 395,335 | 395,335 | ||||||
| Furniture, fixtures, software and computers | 216,653 | 228,011 | ||||||
| 1,517,060 | 1,517,574 | |||||||
| Accumulated depreciation and amortization | (869,403 | ) | (581,088 | ) | ||||
| $ | 647,657 | $ | 936,486 | |||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Revenue | $ | — | $ | 342,661 | $ | 115,000 | $ | 1,144,103 | ||||||||
| Cost of revenue | 1,337 | 552,127 | 141,647 | 1,471,890 | ||||||||||||
| Research and development | 12,613 | 527,631 | 197,663 | 1,774,193 | ||||||||||||
| General and administrative | 40,332 | 9,513 | 79,306 | 33,762 | ||||||||||||
| Sales and marketing | 24,514 | 264,705 | 59,431 | 588,937 | ||||||||||||
| Impairment (1) | — | — | 405,000 | — | ||||||||||||
| Loss from discontinued operations | $ | (78,796 | ) | $ | (1,011,315 | ) | $ | (768,047 | ) | $ | (2,724,679 | ) | ||||
| (1) | Impairment charge was calculated as the net book value of assets held for sale prior to the impairment less the expected net proceeds from the planned sale. The expected net proceeds were based on the estimated fair value of the net assets held for sale less the estimated cost to sell the net assets held for sale. For the three and nine months ended September 30, 2019, the Company recorded a loss on the sale of discontinued operations of $9,107. |
Note 64 – Intangible Assets
Intangible assets, net consisted of the following:
| September 30, 2017 | December 31, 2016 | |||||||
| (unaudited) | ||||||||
| Patents | $ | 1,507,910 | $ | 1,556,204 | ||||
| Other intangible assets | 732,175 | 470,870 | ||||||
| 2,240,085 | 2,027,074 | |||||||
| Accumulated amortization | (180,440 | ) | (121,518 | ) | ||||
| $ | 2,059,645 | $ | 1,905,556 | |||||
| September 30, 2019 | December 31, 2018 | |||||||
| (unaudited) | ||||||||
| Patents | $ | 898,346 | $ | 824,004 | ||||
| Other intangible assets | 964,542 | 732,175 | ||||||
| 1,862,888 | 1,556,179 | |||||||
| Accumulated amortization | (217,333 | ) | (159,770 | ) | ||||
| $ | 1,645,555 | $ | 1,396,409 | |||||
Amortization expense amounted to $21,554 and $57,563 for the three and nine months ended September 30, 2019, respectively, and $16,323 and $48,534 for the three and nine months ended September 30, 2018, respectively. Amortization expense for the succeeding five years and thereafter is $21,771 (2019), $87,084 (2020-2023) and $936,428 (thereafter).
At September 30, 20172019 and December 31, 2016,2018, the Company had capitalized $514,524$339,020 and $678,410,$354,427, respectively, for costs related to patents that have not been awarded.
Note 5 – Lease
The Company leases 14,782 square feet of office and laboratory space located in Austin, Texas. On April 20, 2018, the Company entered into an amendment to its existing operating lease which extended the lease term from May 31, 2018 to May 31, 2021. The annual base rent in the first year of the lease extension was $184,775 and increases by $7,391 in each succeeding year of the lease extension. In June 2017,addition, the Company is required to pay its proportionate share of operating costs for the building under this triple net lease. The lease does not contain renewal or termination options.
On January 1, 2019, the Company adopted ASC 842 utilizing a U.S. patentmodified retrospective approach with a date of initial application at the beginning of the period of adoption. At adoption, the Company recognized a right of use asset of $422,819 and lease liability of $427,131. As the discount rate implicit in the lease was issued associated with licensing agreementsnot readily determinable and the Company recorded an intangible asset and corresponding long-term liability fordid not have any outstanding indebtedness, the estimated present value of future payments of $261,303. The Company is amortizing the capitalized costs over theutilized market data, giving consideration to remaining term of the agreements. For further discussionlease, to estimate its incremental borrowing rate at 8% per annum for purposes of calculating the licensing agreements, see Note 8.right of use asset and lease liability.
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Future undiscounted minimum payments under the lease, as amended, are as follows:
| For the Year Ended December 31, | Master Lease | Sublease Income | Net | |||||||||
| 2019 | $ | 48,041 | $ | (36,031 | ) | $ | 12,010 | |||||
| 2020 | 196,477 | (147,357 | ) | 49,120 | ||||||||
| 2021 | 83,149 | (62,362 | ) | 20,787 | ||||||||
| Total future undiscounted minimum lease payments | $ | 327,667 | $ | (245,750 | ) | $ | 81,917 | |||||
| Less: imputed interest | (20,003 | ) | ||||||||||
| Total lease liability | $ | 307,664 | ||||||||||
For the three and nine months ended September 30, 2017, respectively,2019, operating cash flows for lease payments totaled $48,042 and $16,720$141,045 and $45,786the operating lease cost, recognized on a straight-line basis, totaled $48,488 and $145,463. At September 30, 2019, the remaining lease term was 20 months.
On September 19, 2019, the Company entered into a sublease with CE+T Energy pursuant to which the Company subleases approximately seventy-five (75%) percent of its Austin, Texas facility to CE+T Energy. Under the sublease, CE+T Energy is obligated to make monthly payments equal to 75% of all sums due under the master lease and 100% of any maintenance and repair costs related to the subleased premises. The sublease replaced a temporary agreement between the Company and CE+T Energy, effective July 22, 2019, that contained similar payment obligations by CE+T Energy for utilization of the subleased premises. Consistent with the master lease, the sublease terminates on May 31, 2021. During the three and nine months ended September 30, 2016, respectively. Amortization expense19, 2019, CE+T Energy made payments of $38,949 to the Company related to the subleased premises. The payments included CE+T Energy’s prorated share of rent as well as its prorated and proportionate share of operating costs for the succeeding five yearsbuilding under the master lease. The Company recognized these payments as a reduction in general and thereafter is approximately $23,000 (2017), $92,000 (2018-2021) and $1,154,000 (thereafter).
| September 30, 2017 | December 31, 2016 | |||||||
| (unaudited) | ||||||||
| Accrued compensation | $ | 495,138 | $ | 519,485 | ||||
| Warranty reserve | 357,901 | 335,893 | ||||||
| Other | 397,445 | 293,751 | ||||||
| $ | 1,250,484 | $ | 1,149,129 | |||||
Note 86 – Commitments and Contingencies
| Year Ended December 31, | Amount | |||
| 2017 | $ | 41,242 | ||
| 2018 | 68,736 | |||
| Total | $ | 109,978 | ||
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 associated with semiconductor power switches which enhances its intellectual property portfolio related to semiconductor power switches.portfolio. The agreements include both fixed payments, all of which were paid prior to 2017, and ongoing variable payments. The variable payments are a function of the number of associated patent filings pending and patents issued under the agreements. The Company is required towill 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,agreements, up to a maximum of $100,000 pereach year (i.e. five issued patents).
Indemnification Obligations
In connection with the agreement.
Note 7 – Common and Preferred Stock
On June 23, 2017, the Company receivedFebruary 21, 2019, a Notice of Arbitration from Libra alleging claims against the Company and demanding recovery for alleged damages. On July 13, 2017, the Company responded to Libra with a Notice of Defense and Counterclaim. On August 2, 2017, Libra provided their response to the Company's Notice of Defense and Counterclaim. The arbitration will be governed in accordance with the International Institute for Conflict Prevention and Resolution Rules for Non-Administered Arbitration by a sole arbiter. The parties have appointed an arbiter and discovery is in progress. The arbitration hearing is scheduled in Travis County, Texas for the first quarter of 2018. At this time, the Company is unable to estimate the possible loss, if any, associated with this proceeding.
On March 7, 2019 and following an initial notice of non-compliance from Nasdaq on September 7, 2018, the Company received a notice letter from Nasdaq indicating that it had not regained compliance with the minimum bid price requirement of $1 per share, as set forth in Nasdaq Listing Rule 5550(a)(2). However, Nasdaq determined that the Private PlacementCompany was eligible for aggregate gross proceedsan additional 180-day period, or until September 3, 2019, to regain compliance based on the fact that it met the continued listing requirement for market value of $15 million. Net cash proceeds were $13,657,331 after offering feespublicly held shares and expenses, includingall other initial listing standards for the placement agent fee of approximately $1.1 million. The Company expects to utilize net proceeds fromNasdaq Capital Market, with the offering for working capital and general corporate purposes.
On August 15, 2019, after receipt of stockholder and Board approval, the Company filed a Certificate of Amendment to the Certificate of Incorporation of Ideal Power Inc. to effect a one-for-ten (1:10) reverse stock split of all issued and outstanding shares of the Company’s common stock. The Company’s common stock began trading on the Nasdaq Capital Market on a split-adjusted basis when the market opened on August 20, 2019. The par value of the Company’s common stock remained unchanged at $0.001 and a stated valueper share after the reverse stock split.
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The reverse stock split reduced the number of $2.535 and is convertible at
The reverse stock split proportionately affected the number of shares of the Company’s common stock available for issuance under the Company’s equity incentive plans. The number of shares of the Company’s common stock subject to all options, warrants and stock awards of the Company outstanding immediately prior to the reverse stock split were proportionately adjusted in accordance with their terms.
On September 4, 2019, the Company received a notice letter from Nasdaq that the Company had regained compliance with the minimum bid price requirement and the matter was closed.
On August 21, 2019, the Company was notified by the Nasdaq Listing Qualifications Department that the Company was not in compliance with the minimum stockholders’ equity requirement under Nasdaq Listing Rule 5550(b)(1) for continued listing on the Nasdaq Capital Market because the Company’s stockholders’ equity was below the required minimum of $2.5 million, and, as of the date of the notification, the Company did not meet the alternatives of market value of listed securities or net income from continuing operations. In accordance with Nasdaq Listing Rules, the Company had 45 calendar days, or until October 3, 2019, to submit a plan to regain compliance. The Company submitted a plan of compliance on October 3, 2019 addressing how it intends to regain compliance with Nasdaq Listing Rule 5550(b). On October 31, 2019, Nasdaq notified the Company of approval of the compliance plan, and Nasdaq granted the Company an extension through November 30, 2019 to take action to evidence compliance with Nasdaq Listing Rule 5550(b), which will require, among other things, that the Company demonstrate compliance within its periodic report for the fiscal year ending December 31, 2019. If the Company does not regain compliance, the Company may be subject to delisting.
Note 10 —8 – 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 Board.
On April 4, 2019, the Company entered into Award Forfeiture Agreements (“Forfeiture Agreements”) with certain of the Company’s Boardexecutives and members of Directors. its Board. Pursuant to the Forfeiture Agreements, these individuals voluntarily forfeited their equity award grants with a grant date prior to January 1, 2018. The forfeitures included 49,584 stock options and 11,900 performance stock units issued under the Plan, and 25,000 stock options not issued under the Plan. In April 2019, the Company accelerated the recognition of $80,492 of stock compensation expense in connection with the unvested, forfeited awards.
At September 30, 2017, 708,9532019, 116,663 shares of common stock were available for issuance under the Plan.
A summary of the Company’s stock option activity and related information is as follows:
| Stock Options | Weighted Average Exercise Price | Weighted Average Remaining Life (in years) | ||||||||||
| Outstanding at December 31, 2018 | 147,054 | $ | 50.79 | 6.8 | ||||||||
| Granted | 24,400 | $ | 4.25 | |||||||||
| Forfeited/Expired/Exchanged | (95,474 | ) | $ | 67.64 | ||||||||
| Outstanding at September 30, 2019 | 75,980 | $ | 14.67 | 8.4 | ||||||||
| Exercisable at September 30, 2019 | 69,130 | $ | 15.70 | 8.3 | ||||||||
During the nine months ended September 30, 2019, the Company granted 23,400 stock options to the independent directors and 1,000 stock options to employees, the fair value of which was determined to be $65,386 and $2,999, respectively.
A summary of the Company’s restricted stock unit activity is as follows:
| Restricted Stock Units | ||||
| Outstanding at December 31, 2018 | 6,938 | |||
| Granted | — | |||
| Vested | — | |||
| Forfeited | (6,938 | ) | ||
| Outstanding at September 30, 2019 | — | |||
| 9 |
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 September 30, 2017 | 1,400,635 | $ | 6.50 | 7.1 | |||||
| Exercisable at September 30, 2017 | 984,554 | $ | 6.64 | 6.8 | |||||
The Company had 0 and 11,900 performance stock units outstanding at September 30, 2019 and December 31, 2018, respectively.
At September 30, 2017,2019, there was $1,403,775$19,033 of unrecognized compensation cost related to non-vested equity awards granted under the Plan. That cost is expected to be recognized over a weighted average period of 1.80.4 years.
Note 11 —9 – Warrants
The Company had 684,095 and 713,652 warrants outstanding at September 30, 2019 and December 31, 2018, respectively, with the Private Placement, investors received warrants to purchase 5,929,256 shares of common stock. The warrants have ana weighted average exercise price of $2.41$25.37 and $26.19 per share, respectively. During the three and will expire three years fromnine months ended September 30, 2019, 19,355 and 29,557 warrants expired, respectively. At September 30, 2019, all warrants are exercisable, although warrants held by the dateCompany’s two largest beneficial owners may be exercised only to the extent that the total number of issuance. The placement agent also received 237,170 warrants to purchase shares of common stock then beneficially owned by these shareholders does not exceed 9.99% of the outstanding shares of the Company’s common stock.
Note 10 – Legal Proceedings
On April 11, 2019, the Company entered into an asset purchase agreement (the “APA”) with Pathion Holdings, Inc., a Delaware corporation, and Pathion, Inc., a Delaware corporation (together “Pathion”) to sell certain assets (the “PPSA Assets”) related to the Company’s PPSA™ / Power Conversion Systems business (“PPSA Business”). The purchase price consisted of $500,000 in cash and 150,000 shares of the common stock of Pathion Holdings, Inc. Pursuant to the APA, Pathion would also assume certain liabilities relating to the PPSA Business.
On June 13, 2019, the Company filed a petition in the district court of the 250th Judicial District in Travis County (the “Court”), naming Pathion and certain Pathion officers as partdefendants. The petition asserts breach of the APA and the related Sublease Agreement for failure by Pathion to pay any cash amounts due thereunder, and fraudulent inducement as Pathion and the individual defendants misrepresented Pathion’s financial position and its placement agent fee.stock value. The placement agent warrantpetition also requested a declaratory judgment that Pathion has no rights to the PPSA Assets.
On July 15, 2019, Pathion filed a general denial to the Company’s petition.
On July 22, 2019, the Company filed a motion for partial summary judgment on its declaratory judgment action and for severance. Pathion responded to the motion for summary judgment on August 6, 2019. That same day, Pathion filed a counterclaim, and requested injunctive relief and a declaratory judgment.
On August 13, 2019, the Court conducted a hearing on the Company’s motion for summary judgment. On August 23, 2019, the Court issued an exercise priceorder granting the Company’s motion for summary judgment and fees and severing judgment from remaining claims. Under this order, the Court declared and decreed that Pathion has no rights to the PPSA Assets and awarded the Company $24,800 in legal fees. On October 15, 2019, the Court issued a writ of $2.89 per share,garnishment against Pathion’s bank to enable collection of these legal fees.
On October 14, 2019, the Court granted Pathion’s counsel’s motion to withdraw. Ten days later, a new lawyer appeared for the Pathion Defendants, and the next day, October 25, 2019, the Court issued a scheduling order requiring Pathion to produce documents and appear for deposition in December 2019. The Court set trial to begin on August 31, 2020.
At this time, the Company is non-exercisable for 12 months and has a three-year term. The warrants contain a provisionunable to protect investors from potential future dilutive events,estimate the possible gain or a down-round provision. Theloss, if any, related to this proceeding.
Note 11 – Subsequent Events
On October 28, 2019, the Company electedgranted 94,000 stock options to early adopt ASU 2017-11 and will recognizeexecutives, the fair value of which was determined to be $184,689.
On November 7, 2019, the effectCompany entered into a securities purchase agreement with certain institutional and accredited investors, including Dr. Lon E. Bell, Chief Executive Officer and Chairman of the down round provision, if and/or when triggered.
| 10 |
| 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 September 30, 2017 | 7,481,079 | $ | 2.79 | 2.3 | |||||
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" or other similar expressions in this report. In particular, these include statements relating to future actions, prospective products, applications, customers, technologies, future performance or results of anticipated products, expenses, and financial results. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:
| • | the rate and degree of market acceptance for our B-TRAN™; | |
| • | the time required for third parties to redesign, test and certify their products incorporating our B-TRAN™; |
| • | our ability to obtain adequate financing in the future, as and when we need it; | |
| • | our ability to maintain listing of our common stock on the Nasdaq Capital Market; |
| 11 |
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.
| 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 20162018 financial statements and related notes included in our Annual Report on Form 10-K.10-K for the year ended December 31, 2018. 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. WePrior to April 2018, we were primarily focused on the design, marketmarketing and sellsale of electrical power conversion products using our proprietary technology called Power Packet Switching Architecture™, or PPSA™. PPSA™ is a power conversion technology that improves upon existing power conversion technologies in key product metrics, such as size and weight while providing built-in isolation and bi-directional and multi-port capabilities. PPSA™ utilizes standardized hardware with application specific embedded software. Our products arewere designed to be used in both on-grid and off-grid applications with a focus on solar + storage, microgrid and stand-alone energy storage applications. Our advanced technology is importantThe principal products of the Company were 30-kilowatt power conversion systems, including 2-port and multi-port products.
On April 16, 2018, we realigned into two operating divisions: Power Conversion Systems, to our business and we make significant investments in research and development and protectioncontinue the commercialization of our intellectual property. Our PPSA™ technology, and bi-directionalB-TRAN, to develop our Bi-directional bi-polar junction TRANsistor (B-TRAN™) solid state switch technologies are protected bytechnology.
On January 2, 2019, our Board of Directors approved a patent portfolio of 60 US and 12 foreign issued patents at September 30, 2017.
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.stock. Total revenue generated from inception to date as of September 30, 20172019 amounted to $12,939,525$14.9 million with approximately 20%$12.4 million of that revenue coming from government grants.discontinued operations and the remainder from grant revenue for bi-directional power switch development. We did not have revenue from continuing operations in the nine months ended September 30, 2019 and 2018. We may pursue additional research and development grants, if and when available, forto further develop and/or improve our B-TRAN™ technology.
Sale of Power Conversion Systems Division
On September 19, 2019, we closed on the purposesale of developing new products and improving current products.
On September 19, 2019, we entered into a sublease with CE+T Energy pursuant to which we sublease approximately seventy-five (75%) percent of our Austin, Texas facility to CE+T Energy. Under the sublease, CE+T Energy is obligated to make monthly payments equal to 75% of all sums due under the master lease and 100% of any maintenance and repair costs related to the subleased premises. The sublease replaced a temporary agreement between us and CE+T Energy, effective July 22, 2019, that contained similar payment obligations by CE+T Energy for utilization of the subleased premises. Consistent with the master lease, the sublease terminates on May 31, 2021.
Private Placement of Common Stock and Warrants
On November 7, 2019, we entered into a securities purchase agreement with certain institutional and accredited investors, including Dr. Lon E. Bell, our Chief Executive Officer and Chairman of the Board, for a private placement of our common stock and warrants to purchase common stock for aggregate gross proceeds of $3.5 million and estimated net proceeds of $3.1 million (the “Offering”). The Offering closed on November 13, 2019. In the Offering, we issued an aggregate of (i) 544,950 shares of common stock and (ii) pre-funded warrants to purchase 868,443 shares of common stock that are immediately exercisable and have no expiration date, in each case at a price of $2.4763 per share (or pre-funded warrant). We also issued to the investors warrants to purchase up to an aggregate of 1,766,751 shares of common stock at an exercise price of $2.32 per share that are immediately exercisable and will expire five years from the issuance date. As compensation to the placement agent in the Offering, in addition to a cash fee for its services, we also issued to the placement agent a warrant to purchase up to 70,670 shares of common stock, with an exercise price of $2.9716 per share. The other terms of the placement agent warrant are substantially the same as the investor warrants. We intend to use the net proceeds from this Offering for working capital and general corporate purposes.
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Reverse Stock Split
On August 15, 2019, we effected a reverse stock split of the outstanding shares of our common stock by a ratio of one-for-ten, and our common stock began trading on the Nasdaq Capital Market on a split-adjusted basis on August 20, 2019. The par value of our common stock remained unchanged at $0.001 per share after the reverse stock split. All share amounts, per share data, share prices, exercise prices and conversion rates have, where applicable, been adjusted retroactively to reflect the reverse stock split.
Nasdaq Listing Compliance
On August 21, 2019, we were notified by the Nasdaq Listing Qualifications Department that we were not in compliance with the minimum stockholders’ equity requirement under Nasdaq Listing Rule 5550(b)(1) for continued listing on the Nasdaq Capital Market because our stockholders’ equity was below the required minimum of $2.5 million, and, as of the date of the notification, we did not meet the alternatives of market value of listed securities or PCS, utilizing our patented PPSA™ technology. These products are described as follows:
Critical Accounting Policies
On January 1, 2019, we adopted ASC 842 utilizing a modified retrospective approach iswith a date of initial application at the belief that OEMs may achieve higher product marginsbeginning of the period of adoption. At adoption, we recognized a right of use asset of $422,819 and gain more market share by providing PPSA™-based products, which are differentiated fromlease liability of $427,131. As the traditional
There have been no other significant changes during the nine months ended September 30, 20172019 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, 2016.2018.
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Results of Operations
Comparison of the three months ended September 30, 20172019 to the three months ended September 30, 2016
Research and Development Expenses. Research and development expenses decreased by $75,960, or 23%, to $250,773 in the three months ended September 30, 2019 from $326,733 in the three months ended September 30, 2018. The decrease was due primarily to lower stock compensation expense. We expect higher research and development expenses in the fourth quarter of 2019 due to the timing of B-TRAN™ development spending related to the fabrication of prototype engineering samples for evaluation by potential partners.
General and Administrative Expenses. General and administrative expenses decreased by $440,491, or 48%, to $471,272 in the three months ended September 30, 2019 from $911,763 in the three months ended September 30, 2018. The decrease was due primarily to lower legal fees of $294,171, stock compensation expense of $54,100, sublease income of $38,949 and other net cost savings. General and administrative expenses were impacted by our cost reduction plan, inclusive of reduced headcount, and the sale of our power conversion systems division. We expect relatively flat general and administrative expenses in the fourth quarter of 2019 exclusive of the impact of any equity award grants.
Interest (Income) Expense, Net. Net interest expense was $2,763 for the three months ended September 30, 20172019 compared to net interest expense of $444,640 were $5,370, or 1%, higher than the $439,270 we earned in revenues$112 for the three months ended September 30, 2016.
Loss from Continuing Operations.
Our loss from continuing operations for the three months ended September 30,Loss from Discontinued Operations. Our loss from discontinued operations for the three months ended September 30, 2017 compared to $11,5542019 was $78,796, or 92% lower than the $1,011,315 loss from discontinued operations for the three months ended September 30, 2016.
Loss on Sale of Discontinued Operations. Our loss on sale of discontinued operation for the three months ended September 30, 2019 was $9,107.
Net Loss.
Our net loss for the three months ended September 30,Comparison of the nine months ended September 30, 20172019 to the nine months ended September 30, 2016
Research and Development Expenses. Research and development expenses increased by $61,246, or 8%, to $804,741 in the nine months ended September 30, 2019 from $743,495 in the nine months ended September 30, 2018. The increase was due primarily to higher personnel costs as we hired a Senior Development Engineer in early 2019.
General and Administrative Expenses. General and administrative expenses decreased by $1,076,849, or 41%, to $1,520,325 in the nine months ended September 30, 2019 from $2,597,174 in the nine months ended September 30, 2018. The decrease was due primarily to lower stock compensation expense of $418,491, lower personnel costs of $350,680, lower legal fees of $138,425, lower contract labor costs of $104,060 and other net cost savings. General and administrative expenses were impacted by our cost reduction plan, inclusive of reduced headcount, and an absence of annual grants in recent years to tenured executives.
Interest (Income) Expense, Net. Net interest expense was $3,072 for the nine months ended September 30, 20172019 compared to net interest income of $973,680 were $284,350, or 23%, lower than the $1,258,030 we earned in revenues$36,817 for the nine months ended September 30, 2016. The decrease was the result of lower sales into our initial target market of stand-alone storage. We have shifted our focus primarily to solar + storage as we believe this market is beginning to transact and meaningful revenue growth is achievable for us in this market in the short term.
Loss from Continuing Operations.
Our loss from continuing operations for the nine months ended September 30,Loss from Discontinued Operations. Our loss from discontinued operations for the nine months ended September 30, 2017 compared to $26,7782019 was $768,047, or 72% lower than the $2,724,679 loss from discontinued operations for the nine months ended September 30, 2016.
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Loss on Sale of Discontinued Operations. Our loss on sale of discontinued operation for the nine months ended September 30, 2019 was $9,107.
Net Loss.
Our net loss for the nine months ended September 30,Liquidity and Capital Resources
We currently do not currently generate enough revenue to sustain our operations.revenue. We have funded our operations primarily through the sale of common stock and, prior to our initial public offering, the issuance of convertible debt.
At September 30, 2017,2019, we had cash and cash equivalents of $11,681,887.$769,833. Our net working capital and long-term debt at September 30, 20172019 were $11,029,978$347,251 and $0, respectively.
Operating activities in the nine months ended September 30, 20172019 resulted in cash outflows of $5,924,245,$2,433,236, which were due primarily to the net loss from continuing operations for the period of $8,496,307,$2,328,138 and cash used in operating activities related to discontinued operations of $557,096 partly offset by non-cash items, of $2,425,141, related primarily toincluding depreciation and amortization and stock-based compensation, of $833,637, inventory write-downs$239,795 and favorable balance sheet timing of $703,220, depreciation and amortization of $339,493, patent impairments of $268,789 and bad debt expense of $226,557.$212,203. Operating activities in the nine months ended September 30, 20162018 resulted in cash outflows of $7,616,314,$4,344,000, which were due primarily to the net loss from continuing operations for the period of $8,192,090 and negative working capital changes$3,303,852, cash used in operating activities related to discontinued operations of $1,085,926,$2,076,842, partly offset by non-cash items of $1,661,702, related primarily to stock-based compensation of $1,135,008 and$645,349, favorable balance sheet timing of $270,627, depreciation and amortization of $290,474. Negative working capital changes included$109,845 and patent impairment charges of $10,873. We expect a $520,730, or 99%, increasefurther reduction in finished goods inventorycash outflows from operating activities due to lower than expected product sales in the nine months ended September 30, 2016.
Investing activities in the nine months ended September 30, 20172019 and 20162018 resulted in cash outflows of $265,684$55,008 and $628,070,$136,866, respectively, primarily for the acquisition of fixed assets and intangible assets.
Financing activities in the nine months ended September 30, 20172019 and 2018 resulted in cash inflowsoutflows of $13,666,900 related primarily$0 and $2,616, respectively.
On November 7, 2019, we entered into a securities purchase agreement with certain institutional and accredited investors, including Dr. Lon E. Bell, our Chief Executive Officer and Chairman of the Board, for a private placement of our common stock and warrants to our Private Placementpurchase common stock for aggregate gross proceeds of $3.5 million and estimated net proceeds of $13,657,331.$3.1 million. The Offering closed on November 13, 2019. 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 purchasedOffering, we issued an aggregate of 5,220,826(i) 544,950 shares of common stock and 708,430 shares of preferred stock together with(ii) pre-funded warrants to purchase 5,929,256868,443 shares of common stock that are immediately exercisable and have no expiration date, in the Private Placement for aggregate gross proceedseach case at a price of $15.0 million. Net cash proceeds are $13.7 million after offering fees and expenses, including the placement agent fee of $1.1 million. Other financing activities in the nine months ended September 30, 2017 and 2016 resulted in cash inflows of $9,569 and $35,536, respectively, relating primarily$2.4763 per share (or pre-funded warrant). We also issued to the exercise of stock options and warrants.
As our B-TRAN™ technology is in the development stage and has not yet been commercialized, we may be required to obtain additional financing in the future to continue our operations and execute our business plan. We may not be able to obtain such financing on commercially reasonable terms or preferred stockat all. If we are unable to obtain such financing if or any combination thereofwhen needed, we will be required to reduce operating costs, which could jeopardize future strategic initiatives and provides us withbusiness plans, or cease operations. In addition, there can be no assurances that the flexibility over three yearsCompany will be able to potentially raise additional equity in public or private offerings on commercial terms. Atsuccessfully commercialize its technology and develop profitable operations.
Off-Balance Sheet Arrangements
As of September 30, 2017, our availability under this registration statement is $58 million.
Trends, Events and Uncertainties
There are no material changes from trends, events or uncertainties disclosed in our 2018 Annual Report on Form 10-K.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
As a smaller reporting company, we are not required to provide this information.
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We conducted an evaluation (pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), under the supervision and with the participation of management, including our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial and accounting officer), of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e)) as of September 30, 2019.
These disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that this 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
Based on the participation ofevaluation, our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial and accounting officer), has concluded that, as of September 30, 2017,2019, 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 September 30, 20172019 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Limitations on the Effectiveness of Controls
Control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems’ objectives are being met. Further, the design of any system of controls must reflect the fact that there are resource constraints, and the benefits of all controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of error or mistake. Control systems can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
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II - OTHERII-OTHER INFORMATION
| ITEM 1. | LEGAL PROCEEDINGS |
On May 17, 2017,April 11, 2019, we entered into an asset purchase agreement (the “APA”) with Pathion Holdings, Inc., a Delaware corporation, and Pathion, Inc., a Delaware corporation (together “Pathion”) to sell certain assets (the “PPSA Assets”) related to our PPSA™ / Power Conversion Systems business (“PPSA Business”). The purchase price consisted of $500,000 in cash and 150,000 shares of the Company provided Libra Industries,common stock of Pathion Holdings, Inc. (Libra)Pursuant to the APA, Pathion would also assume certain liabilities relating to the PPSA Business.
On June 13, 2019, we filed a petition in the district court of the 250th Judicial District in Travis County (the “Court”), its prior contract manufacturer, notice that it was innaming Pathion and certain Pathion officers as defendants. The petition asserts breach of the Master SupplyAPA and the related Sublease Agreement (MSA) betweenfor failure by Pathion to pay any cash amounts due thereunder, and fraudulent inducement as Pathion and the parties. On May 19, 2017,individual defendants misrepresented Pathion’s financial position and its stock value. The petition also requests a declaratory judgment that Pathion has no rights to the Company received notice from Libra that the Company was allegedly in breach of the MSA. On June 23, 2017, the Company received a Notice of Arbitration from Libra alleging claims against the Company and demanding recovery for alleged damages. PPSA Assets.
On July 13, 2017, the Company15, 2019, Pathion filed a general denial to our petition.
On July 22, 2019, we filed a motion for partial summary judgment on its declaratory judgment action and for severance. Pathion responded to Libra withthe motion for summary judgment on August 6, 2019. That same day, Pathion filed a Notice of Defensecounterclaim, and Counterclaim. requested injunctive relief and a declaratory judgment.
On August 2, 2017, Libra provided their response13, 2019, the Court conducted a hearing on our motion for summary judgment. On August 23, 2019, the Court issued an order granting our motion for summary judgment and fees and severing judgment from the remaining claims. Under this order, the Court declared that Pathion has no rights to the Company's NoticePPSA Assets and awarded us $24,800 in legal fees. On October 15, 2019, the Court issued a writ of Defense and Counterclaim. The arbitration will be governed in accordance withgarnishment against Pathion’s bank to enable collection of these legal fees.
On October 14, 2019, the International Institute for Conflict Prevention and Resolution Rules for Non-Administered Arbitration byCourt granted Pathion’s counsel’s motion to withdraw. Ten days later, a sole arbiter. The parties have appointed an arbiter and discovery is in progress. The arbitration hearing is scheduled in Travis County, Texasnew lawyer appeared for the first quarter of 2018. Pathion Defendants, and the next day, October 25, 2019, the Court issued a scheduling order requiring Pathion to produce documents and appear for deposition in December 2019. The Court set trial to begin on August 31, 2020.
At this time, the Company iswe are unable to estimate the possible gain or loss, if any, associated withrelated to this proceeding.
| ITEM 1A. | RISK FACTORS |
You should carefully consider the risk factors discloseddiscussed in Part I, Item 1A. “Risk Factors” in our 2016 Annual Report on Form 10-K except as noted below.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.
| ITEM 5. | OTHER INFORMATION |
None.
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| ITEM 6. | EXHIBITS |
Exhibit Number | Document | |
| 10.2+ | Sublease Agreement, dated September 19, 2019, by and between Ideal Power Inc. and CE+T Energy Solutions, Inc. (2) | |
| 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 | |
| XBRL Instant Document | ||
| XBRL Taxonomy Extension Schema Document | ||
| XBRL Taxonomy Extension Calculation Linkbase Document | ||
| XBRL Taxonomy Extension Definition Linkbase Document | ||
| XBRL Taxonomy Extension Label Linkbase Document | ||
| XBRL Taxonomy Extension Presentation Linkbase Document |
| * | Filed herewith |
| ** | Furnished herewith |
| (1) | Incorporated by reference to the registrant’s Form 8-K filed with the Securities and Exchange Commission on August 20, 2019. |
| (2) | Incorporated by reference to the registrant’s Form 8-K filed with the Securities and Exchange Commission on September 24, 2019. |
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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 9, 201714, 2019IDEAL POWER INC. By: /s/ R. Daniel BrdarLon E. Bell R. Daniel BrdarLon E. Bell Chief Executive Officer By: /s/ Timothy W. Burns Timothy W. Burns Chief Financial Officer 19 -21-