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 and 50 shares of CE+T Energy’s common stock, issued on December 11, 2019, which represented a 5% ownership interest in CE+T Energy as of the following:

As a result of the sale, the Balance Sheets at September 30, 2017,2020 and December 31, 2019 do not include assets held for sale. 

The following is a reconciliation of the allowance for doubtful accounts represents trade receivables from two customers which were fully reserved as it was determined that the probabilitymajor classes of collection is remote. During the nine months ended September 30, 2017, the Company collected $62,645 of its previously reserved receivables and wrote-off $98,850 of its allowance for doubtful accounts. These changesline items constituting loss on discontinued operations to loss on discontinued operations shown in the allowance for doubtful accounts are reflected within the sales and marketing line itemStatement of the statement of operations.

Intangible assets, net consisted of the following:

Amortization expense amounted to $23,110 and $68,456 for the three and nine months ended September 30, 2020, respectively, and $21,554 and $57,563 for the three and nine months ended September 30, 2019, respectively. Amortization expense for the succeeding five years and thereafter is $23,179 (2020), $92,714 (2021-2024) and $934,447 (thereafter).

At September 30, 20172020 and December 31, 2016,2019, the Company had capitalized $514,524$255,041 and $678,410,$335,224, respectively, for costs related to patents that have not been awarded.

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 right of use asset and lease liability.

In September 2019, the Company entered into a sublease with CE+T Energy pursuant to which the Company subleases approximately seventy-five (75%) percent of its Austin, Texas facility to CE+T Energy. Under the sublease, CE+T Energy is obligated to make monthly payments equal to 75% of all sums due under the master lease and 100% of any maintenance and repair costs related to the subleased premises. The sublease replaced a temporary agreement between the Company and CE+T Energy, effective July 22, 2019, that contained similar payment obligations by CE+T Energy for utilization of the licensing agreements, see Note 8.

Future minimum payments under the lease, as amended, are as follows:

For the three and nine months ended September 30, 2016,2020, operating cash flows for lease payments totaled $49,889 and $146,588, respectively. Amortization expenseFor the three and nine months ended September 30, 2019, operating cash flows for lease payments totaled $48,042 and $141,045, respectively. For both the succeeding five yearsthree and thereafter is approximately $23,000 (2017), $92,000 (2018-2021)nine months ended September 30, 2020 and $1,154,000 (thereafter).

In 2015, the Company entered into licensing agreements which expire onin 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^st of each subsequent year of the agreement,agreements, up to a maximum of $100,000 per year (i.e. five issued patents).

In June 2017,April 2019, a U.S. patent associated with these agreements was issued and the Company recorded, as a non-cash activity, an intangible asset and a corresponding other long-term liability of $232,367, representing the estimated present value of future payments under the licensing agreements for this issued patent. Through September 30, 2020, three patents associated with the agreements were issued. At September 30, 2020 and December 31, 2019, the Company recorded an intangible asset and correspondingother long-term liability for the estimated present value of future payments 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 September 30, 2017, two patents associated with the agreements had been issued and the estimated present value of future payments under the licensing agreement is $533,088, of which $40,000 is due within 20 days of December 21, 2017agreements was $607,974 and is included in accrued expenses in the Company's balance sheet.$595,802, respectively. The Company is accruing interest for future payments related to the issued patents associated with these agreements.

Legal Proceedings

The Company may be subject to litigation from time to time in the agreement.

COVID-19 Pandemic

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to spread throughout the United States and the rest of the world. The ultimate extent of the impact of COVID-19 on the financial performance of the Company provided Libra Industries, Inc. (Libra), its prior contract manufacturer, notice that it waswill depend on future developments, including, among other things, the duration and spread of COVID-19, governmental restrictions in breach of the Master Supply Agreement (MSA) between the parties. On May 19, 2017, the Company received notice from Libra that the Company was allegedly in breach of the MSA. On June 23, 2017, the Company received a 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 COVID-19 pandemic, and the overall economy, all of which are highly uncertain and cannot be predicted. The outbreak of COVID-19 has already caused significant disruptions to the global financial markets which may impact the Company’s ability to raise additional capital, on acceptable terms or at all. If the financial markets and/or the overall economy are impacted for an extended period, the Company's Notice of Defenseoperating results may be materially and Counterclaim. The arbitration will be governed in accordance with the International Institute for Conflict Preventionadversely affected.

Note 7 – Common 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,Preferred Stock

Private Placement

In November 2019, the Company is unable to estimate the possible loss, if any, associated with this proceeding.

Preferred Stock

The Company is authorized to issue 10,000,000 shares of preferred stock.

In February 2019, a shareholder converted 708,430 shares of preferred stock together with warrants to purchase 5,929,25670,843 shares of common stock. On December 12, 2019, a shareholder converted 810,000 shares of preferred stock to 81,000 shares of common stock. At September 30, 2020 and December 31, 2019, there was no preferred stock outstanding.

Stock Issuance

In April 2020, the Company issued 26,316 unregistered 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 May 17, 2013, the Company adopted the 2013 Equity Incentive Plan (the(as amended and restated, the “Plan”) and reserved shares of common stock for issuance under the Plan.Plan, which was amended effective June 16, 2020. As a result of the amendment, the number of shares authorized for issuance under the Plan increased by 350,000 shares and the Plan will now terminate on June 16, 2030, unless sooner terminated or extended by the Board. The Plan is administered by the Compensation Committee of the Company’s Board of Directors. At September 30, 2017, 708,9532020, 226,461 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:

During the nine months ended September 30, 2017,2020, the Company granted 83,62552,791 stock options to Board members, 93,400 stock options to executives and 84,1003,000 stock options to employees under the Plan. The estimated fair value of these stock options, calculated using the Black-Scholes option valuation model, was $296,107,$353,072, of which $130,952$326,421 was recognized during the nine months ended September 30, 2017.

At September 30, 2017,2020, there was $1,403,775$76,097 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 1.80.9 years.

Early Warrant Exercise Transaction

On July 31, 2020, the Company entered into letter agreements with certain of the Private Placement, investors receivedCompany’s Series A warrant holders (the “Series A Warrant Holders”), who were previously issued warrants to purchase 5,929,256 shares of common stock. The warrants have an exercise price of $2.41 per share and will expire three years from the date of issuance. The placement agent also received 237,170 warrants(the “Original Warrants”) to purchase shares of common stock of the Company pursuant to a securities purchase agreement with certain institutional and accredited investors dated as part of its placement agent fee.November 7, 2019. The placement agent warrant hasSeries A Warrant Holders agreed to the early exercise of Series A warrants pursuant to the letter agreements (the “Early Warrant Exercise Transaction”). The transaction closed on August 5, 2020. The Company raised net proceeds of $2.5 million in the Early Warrant Exercise Transaction.

Pursuant to the letter agreements and in consideration of the Series A Warrant Holders exercising Series A warrants to purchase an aggregate of 1,176,137 shares of common stock, the Company issued to the Series A Warrant Holders new Series C warrants to purchase up to an aggregate of 705,688 shares of common stock with an exercise price of $2.89$8.90 per share is non-exercisable for 12 months and has a three-year term.an expiration date of August 4, 2025. The warrants contain a provision to protect investors from potential future dilutive events, or a down-round provision. The Company elected to early adopt ASU 2017-11 and will recognize theestimated fair value of the effectSeries C warrants was $3.7 million on the date of issuance and was recognized as a non-cash warrant inducement expense within other expenses in the statement of operations.

To the extent that a Series A Warrant Holder’s exercise of Original Warrants would result in such holder exceeding beneficial ownership of 9.99% of the down round provision, if and/or when triggered.

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

Excluding the Early Warrant Exercise Transaction and during the nine months ended September 30, 2020, warrant holders exercised 175,934 warrants and 300,350 pre-funded warrants for proceeds to the Company of $424,431.

At September 30, 2020, all warrants are exercisable, although the warrants held by each of the Company’s four largest beneficial owners may be exercised only to the extent that the total number of shares of common stock then beneficially owned by such shareholder does not exceed 9.99% of the outstanding shares of the Company’s common stock.

Note 10 – Loans

In May 2020, the Company entered into a Loan Agreement and Promissory Note (collectively the “PPP Loan”) with BBVA USA pursuant to the Paycheck Protection Program (the “PPP”) under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration. The Company received total proceeds of $91,407 from the unsecured PPP Loan. The PPP Loan is scheduled to mature on May 4, 2022 and has an interest rate of 1.00% per annum and is subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. The PPP Loan may be prepaid by the Company at any time prior to its maturity with no prepayment penalties.

The PPP Loan contains customary events of default relating to, among other things, payment defaults and breaches of representations and warranties. Subject to certain conditions, the PPP Loan may be forgiven in whole or in part by applying for forgiveness pursuant to the CARES Act and the PPP. The amount of loan proceeds eligible for forgiveness is based on a formula based on a number of factors, including the amount of loan proceeds used by the Company during the 24-week period after the loan origination for certain purposes, including payroll costs, rent payments on certain leases and certain qualified utility payments, provided that, among other things, at least 60% of the loan amount is used for eligible payroll costs, the employer maintaining or rehiring employees and maintaining salaries at certain level. In accordance with the requirements of the CARES Act and the PPP, the Company used the proceeds from the PPP Loan primarily for payroll costs. The Company intends to apply for forgiveness of the PPP Loan during the fourth quarter of 2020. There can be no assurance that the Company will be granted forgiveness of the PPP Loan in whole or in part.

In April 2020, the Company also received a $5,000 advance related to a U.S. Small Business Administration Economic Injury Disaster Loan. The Company expects to repay this advance and has included it within accrued expenses.

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.

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.warrants. Total revenue generated from inception to date as of September 30, 20172020 amounted to $12,939,525$15.1 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. Grant revenue was $147,787 and $154,302, respectively, for the three and nine months ended September 30, 2020. We maydid not have revenue from continuing operations in the three and nine months ended September 30, 2019. We expect to pursue additional research and development grants, if and when available, to further develop and/or improve our technology.

COVID-19 Impact

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to spread throughout the United States and the rest of the world. The ultimate extent of the impact of COVID-19 on the financial performance of the Company will depend on future developments, including, among other things, the duration and spread of COVID-19, governmental restrictions in response to the COVID-19 pandemic, and the overall economy, all of which are highly uncertain and cannot be predicted. The outbreak of COVID-19 has already caused significant disruptions to the global financial markets which may impact the Company’s ability to raise additional capital, on acceptable terms or at all. If the financial markets and/or the overall economy are impacted for an extended period, the Company's operating results may be materially and adversely affected.

Recent Developments - Early Warrant Exercise Transaction

On August 5, 2020, we closed the Early Warrant Exercise Transaction (as defined below), pursuant to which certain holders of our outstanding Series A warrants exercised warrants to purchase an aggregate of 1,176,137 shares of common stock, and we issued to such holders new Series C warrants to purchase up to an aggregate of 705,688 shares of common stock with an exercise price of $8.90 per share and an expiration date of August 4, 2025. We raised net proceeds of $2.5 million in the Early Warrant Exercise Transaction. See “Liquidity and Capital Resources—Early Warrant Exercise Transaction” below for additional information.

Results of Operations

Comparison of the three months ended September 30, 2020 to the three months ended September 30, 2019

Grant Revenues. Grant revenues for the purposethree months ended September 30, 2020 were $147,787. The grant revenues relate to a $1.2 million subcontract with Diversified Technologies, Inc. (DTI) to supply B-TRAN™ devices as part of developing new products and improving current products. 

There have been no other significant changes during the nine months ended September 30, 20172020 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.

Off-Balance Sheet Transactions

As of the SGIP has been slow and, despite in excess of 800 projects being submitted in the first two program stages in 2016 and the first quarter of 2017, few projects have reached the reservation stage where funding has been approved for the specific projects.

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

Disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the Company’s reports that it files or submits under the Securities Exchange Act of 1934, as amended,is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. The Company’s disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that this information is accumulated and communicated to the issuer’s management, including itsthe principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management,The Company conducted an evaluation (pursuant to Rule 13a-15(b) of the Exchange Act), under the supervision and with the participation of ourits Chief Executive Officer (principal executive officer) and ourits Chief Financial Officer (principal financial and accounting officer), of the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2020 and has concluded that, as of September 30, 2017, our2020, the Company’s disclosure controls and procedures are effective.

There have been no other material changes in our internal controls over financial reporting that occurred during the quarter ended September 30, 20172020 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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.

None.