UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


	☒
ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2017~~

2021


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

~~4120 Freidrich Lane,~~

5508 Highway 290 West, Suite ~~100~~

120

Austin, Texas ~~78744~~

78735

(Address of principal executive offices)

(Zip Code)

(512)264-1542

(Registrant’s telephone number, including area code)

~~(Former~~

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

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. Yes ý ☒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). Yes ý ☒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 ¨ ☒		Smaller reporting company x ☒
~~(Do not check if a smaller reporting company)~~
	Emerging growth company x ☐

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

☐

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

☒

As of November ~~6, 2017,~~9, 2021, the issuer had ~~13,996,121~~5,892,046 shares of common stock, par value $.001, outstanding.

Table of Contents

TABLE OF CONTENTS


PART I	FINANCIAL INFORMATION	3

~~PART I~~		~~FINANCIAL INFORMATION~~

Item 1.		Condensed Financial Statements		1 3

		Balance Sheets at September 30, ~~2017~~2021 (Unaudited) and December 31, ~~2016~~2020		1 3
		Statements of Operations for the three and nine months ended September 30, ~~2017~~2021 and ~~2016~~2020 (Unaudited)		2 4
		Statements of Cash Flows for the nine months ended September 30, ~~2017~~2021 and ~~2016~~2020 (Unaudited)		3 5
	Statements of Stockholders’ Equity for the three-month periods during the nine months ended September 30, 2021 and 2020 (Unaudited)	6
	Notes to Unaudited Financial Statements		4 7

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		11 14

Item 3.		Quantitative and Qualitative Disclosures About Market Risk		17 18

Item 4.		Controls and Procedures		17 18

PART II		OTHER INFORMATION		19

Item 1.		Legal Proceedings		18 19

Item 1A.		Risk Factors		18 19

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		19

Item 3.		Defaults Upon Senior Securities		19

Item 4.		Mine Safety Disclosures		20 19

Item 5.		Other Information		20 19

Item 6.	Exhibits	~~Exhibits~~		20

SIGNATURES			21

~~PART I - FINANCIAL INFORMATION~~

Table of Contents

PART I-FINANCIAL INFORMATION

ITEM 1. CONDENSED FINANCIAL STATEMENTS

IDEAL POWER INC.

Balance Sheets

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,		December 31,
	2021		2020
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	24,487,547	$	3,157,256
Accounts receivable, net		262,527		170,287
Prepayments and other current assets		100,360		118,883
Total current assets		24,850,434		3,446,426

Property and equipment, net		62,720		37,125
Intangible assets, net		2,038,911		1,568,903
Right of use asset		321,248		79,719
Other assets		11,189		—
Total assets	$	27,284,502	$	5,132,173

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	57,355	$	101,984
Accrued expenses		625,693		475,487
Current portion of lease liability		57,484		82,055
Total current liabilities		740,532		659,526

Long-term debt		—		91,407
Long-term lease liability		282,847		—
Other long-term liabilities		959,408		552,031
Total liabilities		1,982,787		1,302,964

Commitments and contingencies (Note 6)

Stockholders’ equity:
Common stock, $0.001 par value; 50,000,000 shares authorized; 5,873,367 shares issued and 5,872,046 shares outstanding at September 30, 2021 and 3,265,740 shares issued and 3,264,419 shares outstanding at December 31, 2020		5,873		3,266
Additional paid-in capital		103,794,384		78,974,964
Treasury stock, at cost, 1,321 shares at September 30, 2021 and December 31, 2020		(13,210)		(13,210)
Accumulated deficit		(78,485,332)		(75,135,811)
Total stockholders’ equity		25,301,715		3,829,209
Total liabilities and stockholders’ equity	$	27,284,502	$	5,132,173

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

Table of Contents

IDEAL POWER INC.

Statements of Operations

(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				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Grant revenue	$	121,028	$	147,787	$	447,794	$	154,302
Cost of grant revenue		121,028		147,787		447,794		154,302
Gross profit		—		—		0		0

Operating expenses:
Research and development		604,476		494,548		1,426,049		1,161,537
General and administrative		500,942		657,967		1,705,146		1,753,615
Sales and marketing		128,248		20,000		302,859		20,000
Total operating expenses		1,233,666		1,172,515		3,434,054		2,935,152

Loss from operations		(1,233,666)		(1,172,515)		(3,434,054)		(2,935,152)

Other income (expenses):
Interest expense, net		(5,012)		(1,358)		(6,874)		(2,480)
Warrant inducement expense		—		(3,720,866)		0		(3,720,866)
Gain on forgiveness of long-term debt		—		—		91,407		0
Total other income (expenses)		(5,012)		(3,722,224)		84,533		(3,723,346)

Net loss	$	(1,238,678)	$	(4,894,739)	$	(3,349,521)	$	(6,658,498)

Net loss per share – basic and diluted	$	(0.20)	$	(1.28)	$	(0.57)	$	(2.04)

Weighted average number of shares outstanding – basic and diluted		6,125,874		3,821,717		5,868,122		3,264,860

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

Table of Contents

IDEAL POWER INC.

Statements of Cash Flows

(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,
	2021		2020
Cash flows from operating activities:
Net loss	$	(3,349,521)	$	(6,658,498)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		113,607		86,368
Write-off of capitalized patents		528		18,235
Stock-based compensation		247,512		434,782
Stock issued for services		68,680		50,000
Warrant inducement expense		0		3,720,866
Gain on forgiveness of long-term debt		(91,407)		0
Decrease (increase) in operating assets:
Accounts receivable		(92,240)		(28,623)
Prepaid expenses and other assets		105,687		127,632
Increase (decrease) in operating liabilities:
Accounts payable		(44,629)		(116,246)
Accrued expenses		49,040		61,845
Net cash used in operating activities		(2,992,743)		(2,303,639)

Cash flows from investing activities:
Purchase of property and equipment		(43,685)		(12,407)
Acquisition of intangible assets		(139,116)		(35,836)
Net cash used in investing activities		(182,801)		(48,243)

Cash flows from financing activities:
Net proceeds from issuance of common stock		21,204,609		0
Exercise of options and warrants		3,301,226		2,972,018
Proceeds from loans		0		91,407
Net cash provided by financing activities		24,505,835		3,063,425

Net increase in cash and cash equivalents		21,330,291		711,543
Cash and cash equivalents at beginning of period		3,157,256		3,057,682
Cash and cash equivalents at end of period	$	24,487,547	$	3,769,225

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

Table of Contents

IDEAL POWER INC.

Statements of Stockholders’ Equity

For the Three-Month Periods during the Nine Months Ended September 30, 2021 and 2020

(unaudited)


				Additional							Total
	Common Stock			Paid-In		Treasury Stock			Accumulated		Stockholders’
	Shares	Amount		Capital		Shares	Amount		Deficit		Equity
Balances at December 31, 2019	2,101,272	$	2,101	$	71,242,256	1,321	$	(13,210)	$	(67,341,914)	$	3,889,233
Stock-based compensation	—		—		116,497	—		—		—		116,497
Net loss for the three months ended March 31, 2020	—		—		—	—		—		(930,501)		(930,501)
Balances at March 31, 2020	2,101,272		2,101		71,358,753	1,321		(13,210)		(68,272,415)		3,075,229
Stock-based compensation	—		—		109,671	—		—		—		109,671
Stock issued for services	26,316		26		49,974	—		—		—		50,000
Exercise of warrants	225,718		226		175,590	—		—		—		175,816
Net loss for the three months ended June 30, 2020	—		—		—	—		—		(833,258)		(833,258)
Balances at June 30, 2020	2,353,306		2,353		71,693,988	1,321		(13,210)		(69,105,673)		2,577,458
Stock-based compensation	—		—		208,614	—		—		—		208,614
Exercise of warrants	250,566		251		248,365	—		—		—		248,616
Early warrant exercise transaction	372,837		373		2,547,213	—		—		—		2,547,586
Warrant inducement expense	—		—		3,720,866	—		—		—		3,720,866
Net loss for the three months ended September 30, 2020	—		—		—	—		—		(4,894,739)		(4,894,739)
Balances at September 30, 2020	2,976,709	$	2,977	$	78,419,046	1,321	$	(13,210)	$	(74,000,412)	$	4,408,401

Balances at December 31, 2020	3,265,740	$	3,266	$	78,974,964	1,321	$	(13,210)	$	(75,135,811)	$	3,829,209
Issuance of shares of common stock in public offering	1,352,975		1,353		21,203,256	—		—		—		21,204,609
Exercise of options and warrants	1,250,652		1,250		3,299,976	—		—		—		3,301,226
Stock issued for services	4,000		4		68,676	—		—		—		68,680
Stock-based compensation	—		—		61,933	—		—		—		61,933
Net loss for the three months ended March 31, 2021	—		—		—	—		—		(924,150)		(924,150)
Balances at March 31, 2021	5,873,367		5,873		103,608,805	1,321		(13,210)		(76,059,961)		27,541,507
Stock-based compensation	—		—		91,711	—		—		—		91,711
Net loss for the three months ended June 30, 2021	—		—		—	—		—		(1,186,693)		(1,186,693)
Balances at June 30, 2021	5,873,367		5,873		103,700,516	1,321		(13,210)		(77,246,654)		26,446,525
Stock-based compensation	—		—		93,868	—		—		—		93,868
Net loss for the three months ended September 30, 2021	—		—		—	—		—		(1,238,678)		(1,238,678)
Balances at September 30, 2021	5,873,367	$	5,873	$	103,794,384	1,321	$	(13,210)	$	(78,485,332)	$	25,301,715

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

Table of Contents

Ideal Power Inc.

Notes to Financial Statements

(unaudited)

Note 1 – Organization and Description of Business

Ideal Power Inc. (the “Company”) was incorporated in Texas on May 17, 2007 under the name Ideal Power Converters, Inc. The Company changed its name to Ideal Power Inc. on July 8, 2013 and re-incorporated in Delaware on July 15, 2013. With headquarters in Austin, Texas, ~~it develops power conversion solutions with a focus on solar + storage, microgrid and stand-alone energy storage applications. The principal products of~~ the Company ~~are power conversion systems, including 2-port~~is solely focused on the further development and ~~multi-port products.~~

commercialization of its Bidirectional bipolar junction TRANsistor (B-TRAN™) solid state switch technology.

Since its inception, the Company ~~has generated limited revenues from the sale of products and~~ has financed its research and development efforts and operations primarily through the sale of common stock and ~~prior~~warrants. The Company’s continued operations are dependent upon, among other things, its ability to ~~its initial public offering, the issuance~~obtain adequate sources of ~~convertible debt.~~

funding through future revenues, follow-on stock offerings, issuances of warrants, debt financing, co-development agreements, government grants, sale or licensing of developed intellectual property or other alternatives.

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 have been condensed or omitted pursuant to such rules and regulations. The balance sheet at December 31, ~~2016~~2020 has been derived from the Company’s audited financial ~~statements.~~

statements included in its Annual Report on Form 10-K filed with the SEC on March 26, 2021.

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.~~2020. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year or any other future periods.

~~Recent Accounting Pronouncements~~

Reclassifications

Certain items in prior financial statements have been reclassified to conform to current year presentation. These changes did not impact total revenue, loss from operations or net loss.

Net Loss Per Share

In ~~May 2014,~~accordance with ASC 260, shares issuable for little or no cash consideration are considered outstanding common shares and included in 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~~computation of ~~revenue to which it expects to be entitled~~basic net loss per share. As such, for the ~~transfer~~three and nine months ended September 30, 2021, the Company included pre-funded warrants to purchase 253,828 shares of ~~promised goods or services~~common stock, and, for the three and nine months ended September 30, 2020, the Company included pre-funded warrants to ~~customers.~~purchase 568,093 shares of common stock and 803,300 excess warrant shares held in abeyance, in its computation of net loss per share. The ~~FASB has recently~~pre-funded warrants were issued ~~several amendments to the standard, including clarification on accounting for licenses~~in November 2019 with an exercise price 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$0.001 and the ~~standard is not expected to have a material effect on the Company’s financial statements.~~

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

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

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718 to a change to the terms or conditions of a share-based payment award. The amendments in this ASU

are effective for public entities for fiscal years and interim periods beginning after December 15, 2017, with early adoption permitted. The ASU should be applied prospectively on and after the effective date. The Company is evaluating the impact of this ASU.

In July 2017, the FASB issued ASU 2017-11, Accounting for Certain Financial Instruments with Down Round Features and Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Part I of this ASU addresses the complexity of accounting for certain financial instruments with down round features. Per the ASU, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value asabeyance were a result of the ~~existence~~Early Warrant Exercise Transaction (as defined below) in August 2020. See Note 9.

In periods with a net loss, no common share equivalents are included in the computation of ~~a down round feature. The ASU is effective for public entities for fiscal years beginning after December 15, 2018~~diluted net loss per share because their effect would be anti-dilutive. At September 30, 2021, potentially dilutive shares outstanding amounted to 1,242,357 shares and ~~early adoption is permitted. The Company has elected~~exclude prefunded warrants to ~~early adopt the ASU and will recognize the value~~purchase shares of the effect of the down round provision, if and/or when triggered. The provision is associated with stock warrants issued as part of the Company's 2017 definitive securities purchase agreement, or the Private Placement. For more details regarding the 2017 Private Placement, see Notes 9 and 11.

common stock.

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.

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Note 3 – ~~Accounts Receivable~~

~~Accounts receivable, net consisted 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

At September 30, 2017, the allowance for doubtful accounts represents trade receivables from two customers which were fully reserved as it was determined that the probability 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 changes in the allowance for doubtful accounts are reflected within the sales and marketing line item of the statement of operations.

~~Note 4 – Inventories~~

~~Inventories, net consisted of the following:~~

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

During the nine months ended September 30, 2017, the Company recorded a non-cash inventory charge of $703,220, of which $699,243 is related to excess finished goods inventory of its end-of-life, legacy 125kW and IBC-30 battery converters and is reflected within the cost of product revenue line item of the statement of operations.

~~Note 5 – Property and Equipment~~

~~Property and equipment, net consisted of the following:~~

September 30, 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

~~Note 6 –~~ 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,		December 31,
	2021		2020
	(unaudited)
Patents	$	1,080,289	$	941,701
Other intangible assets		1,391,479		964,542
		2,471,768		1,906,243
Accumulated amortization		(432,857)		(337,340)
	$	2,038,911	$	1,568,903

Amortization expense amounted to $36,642 and $95,517 for the three and nine months ended September 30, 2021, respectively, and $23,110 and $68,456 for the three and nine months ended September 30, 2020, respectively. Amortization expense for the succeeding five years and thereafter is $36,812 (2021), $147,249 (2022-2025) and $1,160,015 (thereafter).

At September 30, ~~2017~~2021 and December 31, ~~2016,~~2020, the Company had capitalized ~~$514,524~~$253,088 and ~~$678,410,~~$270,000, respectively, for costs related to patents that have not been awarded.

Note 4–Loans

In ~~June 2017,~~May 2020, the Company entered into a Loan Agreement and Promissory Note (collectively the “PPP Loan”) with BBVA USA pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. ~~patent~~Small Business Administration (“SBA”). The Company received total proceeds of $91,407 from the unsecured PPP Loan. The PPP Loan was ~~issued associated~~scheduled to mature in May 2022 and had an interest rate of 1.00% per annum and was subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act.In accordance with ~~licensing agreements~~the requirements of the CARES Act and the PPP, the Company ~~recorded an intangible asset and corresponding long-term liability~~used the proceeds from the PPP Loan primarily for payroll costs. The Company applied for forgiveness of the PPP Loan during the first quarter of 2021.In May 2021, the SBA approved forgiveness of the Company’s PPP Loan in the principal amount of $91,407, including accrued interest. The $91,407 gain on forgiveness of the PPP Loan is shown in other income (expenses) in the financial statements for the estimated present value of future payments of $261,303. The Company is amortizing the capitalized costs over the remaining term of the agreements. For further discussion of the licensing agreements, see Note 8.

~~Amortization expense amounted to $22,822 and $59,291 for the three and~~ nine months ended September 30, ~~2017, respectively,~~2021 and $16,720 and $45,786 for the three and nine months ended September 30, 2016, respectively. Amortization expense for the succeeding five years and thereafter is approximately $23,000 (2017), $92,000 (2018-2021) and $1,154,000 (thereafter).

represents a non-cash financing activity.

Note 75 – ~~Accrued Expenses~~

~~Accrued expenses consisted of the following:~~

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 8 – Commitments and Contingencies~~

Lease

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

During the nine months ended September 30, 2021, CE+T Energy made payments of $88,822 to the Company related to the subleased premises. The ~~triple net~~payments included CE+T Energy’s share of rent as well as its proportionate share of operating costs for the building under the master lease. The Company recognized these payments as a reduction in general and administrative expenses.

In March 2021, the Company entered into a lease ~~has a term~~agreement for 4,070 square feet of ~~48 months~~office and ~~commenced~~laboratory space located in Austin, Texas. The commencement of the lease occurred on June 1, ~~2014.~~2021 and the initial term of the lease is 63 months. The ~~annual~~actual base rent in the first year of the lease ~~was $154,324~~is $56,471 and is net of $18,824 in abated rent over the first three months of the lease term. The annual base rent in the second year of the lease is $77,330 and increases by ~~$3,548~~$2,035 in each succeeding year of the lease. In addition, the Company is required to pay its proportionate share of operating costs for the ~~building.~~building under this triple net lease. The lease contains a 5-year fair market renewal option. It does not contain a termination option. The Company recognized a right of use asset of $339,882 and a corresponding lease liability for this lease upon lease commencement.

For purposes of calculating the right of use asset and lease liability included in the Company’s financial statements, the Company estimated its incremental borrowing rate at 6% per annum.

~~At September 30, 2017, the remaining annual base rent commitments~~

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Future minimum payments under the lease are as follows:

Year Ended December 31, Amount
2017 $ 41,242
2018 68,736
Total $ 109,978

~~The Company incurred rent expense of $58,543 and $175,617 for~~


For the Year Ended December 31,
2021 (remaining)	$	18,824
2022		76,482
2023		78,517
2024		80,552
2025		82,587
2026		56,132
Total lease payments	$	393,094
Less: imputed interest		(52,763)
Total lease liability	$	340,331

At September 30, 2021, the remaining lease term was 59 months.

For the three months ended September 30, 2021 and 2020, operating cash flows for lease payments totaled $0 and $49,889, respectively, and for the nine months ended September 30, ~~2017,~~2021 and 2020, operating cash outflows for lease payments totaled $89,423 and $146,588, respectively. For the three months ended September 30, 2021 and 2020, operating lease cost, recognized on a straight-line basis, totaled $19,017 and $48,488, respectively, and ~~$56,492 and $167,816~~ for the ~~three and~~ nine months ended September 30, ~~2016,~~2021 and 2020, operating lease cost, recognized on a straight-line basis, totaled $106,169 and $145,463, respectively.

Note 6 – Commitments and Contingencies

License Agreement

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 to~~will pay $10,000 for each patent filing pending and $20,000 for each patent issued annually with one-half the annual payment due within 20 days of December 21 ~~2017~~^st of each year and one-half annual the payment due within 20 days of June 21^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,~~March 2021, two patents associated with these agreements were issued and the Company recorded, as a ~~U.S. patent was~~non-cash activity, an intangible asset and a corresponding other long-term liability of $426,937, representing the estimated present value of future payments under the licensing agreements for these two issued patents. As of March 2021, all five patents associated with the agreements were issued. At September 30, 2021 and December 31, 2020, the ~~Company recorded an intangible asset and corresponding~~other 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, 2017~~agreements was $959,408 and ~~is included in accrued expenses in the Company's balance sheet.~~$552,031, respectively. The Company is accruing interest for future payments related to the issued patents associated with these agreements.

Legal Proceedings

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

~~Litigation~~

~~On May 17, 2017,~~ordinary course of business. The Company is not currently party to any legal proceedings.

Indemnification Obligations

The employment agreements of Company executives include an indemnification provision whereby the Company ~~provided Libra Industries, Inc. (Libra),~~shall indemnify and defend, at the Company's expense, its ~~prior contract manufacturer, notice that it was~~executives so long as an executive's actions were taken in ~~breach~~good faith and in furtherance of Company's business and within the scope of executive's duties and authority.

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COVID-19 Pandemic

As of the ~~Master Supply Agreement (MSA) between~~date of these financial statements, the ~~parties. On May 19, 2017,~~COVID-19 pandemic continues to spread throughout the United States and the rest of the world. The ultimate extent of the impact of COVID-19 on the financial performance of the Company ~~received notice from Libra that~~will depend on future developments, including, among other things, the ~~Company was allegedly~~duration and spread of COVID-19, including variants, the timing, scope and efficacy of vaccination efforts, additional governmental restrictions 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. If the COVID-19 pandemic contributes to significant volatility in the global financial markets in the future, the Company’s ability to raise additional capital, if necessary, on acceptable terms or at all, may be impacted, though such risk has not materialized to date. If the financial markets and/or the overall economy are negatively impacted for an extended period, the Company's ~~Notice of Defense~~operating results may be materially 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,adversely affected.

Note 7 — Common Stock

February 2021 Public Offering

In February 2021, the Company ~~is unable to estimate the possible loss, if any, associated with this proceeding.~~

~~Note 9 — Equity~~

~~On March 3, 2017, the Company closed on a definitive securities purchase agreement, or the Private Placement, to sell the Company’s~~issued and sold 1,352,975 shares of its common stock, and preferred stock together with warrants to purchase shares of common stock. In the Private Placement, each share of common stock or preferred stock was sold together with a warrant to purchase one share of common stock at a collective price of $2.535. Investors purchased an aggregate of 5,220,826including 176,475 additional shares of common stock ~~and 708,430 shares~~pursuant to the exercise of ~~preferred stock together with warrants~~the underwriter’s option to purchase ~~5,929,256~~additional shares in full, in an underwritten public offering at a price of $17.00 per share (the “February 2021 Offering”). The net proceeds to the Company from the February 2021 Offering were $21.2 million. The Company intends to use the net proceeds from the February 2021 Offering to fund commercialization and development of its B-TRAN™ technology and general corporate and working capital purposes.

Stock Issuance

In February 2021, the Company issued 4,000 unregistered shares of common stock, in the Private Placement for aggregate gross proceeds of $15 million. Net cash proceeds were $13,657,331 after offering fees and expenses, including the placement agent fee of approximately $1.1 million. The Company expects to utilize net proceeds from the offering for working capital and general corporate purposes.

In February 2017, the Company's Board of Directors authorized Series A Convertible Preferred Stock consisting of 3,000,000 shares. Each share of the preferred stock has a par value of $0.001 and a stated value of $2.535 and is convertiblevalued at

~~any time~~ $68,680 at the ~~option~~time of ~~the holder into one share of common stock. The holder cannot convert the preferred stock~~issuance, to ~~the extent its beneficial ownership would exceed 4.99% of the Company's common stock outstanding, subject to adjustment~~a third-party vendor as provided in the Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock. The shares have no voting power, no liquidation preference or additional dividend entitlements. In February 2017, an investor exchanged 810,000 shares of common stockcompensation for ~~810,000 shares of preferred stock. As a result, in the nine months ended September 30, 2017, the Company issued 1,518,430 shares of the Company's Series A Convertible Preferred Stock.~~

services performed.

Note 108 — Equity Incentive Plan

In May ~~17,~~ 2013, the Company adopted the 2013 Equity Incentive Plan (the “Plan”) and reserved shares of common stock for issuance under the ~~Plan.~~Plan, which was amended effective June 16, 2021. As a result of the amendment, the number of shares authorized for issuance under the Plan increased by 500,000 shares and the Plan will now terminate on June 16, 2031, unless sooner terminated or extended by the Board. The Plan is administered by the Compensation Committee of the Company’s Board of ~~Directors. At~~Directors.At September 30, ~~2017, 708,953~~2021, 567,140 shares of common stock were available for issuance under the Plan.

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


				Weighted
		Weighted		Average
		Average		Remaining
	Stock	Exercise		Life
	Options	Price		(in years)
Outstanding at December 31, 2020	391,650	$	5.70	8.1
Granted	81,821	$	11.61
Exercised	(17,534)	$	3.79
Outstanding at September 30, 2021	455,937	$	6.83	7.6
Exercisable at September 30, 2021	371,901	$	6.14	7.3

During the nine months ended September 30, ~~2017,~~2021, the Company granted ~~83,625~~31,821 stock options to Board members and ~~84,100~~50,000 stock options to employees under the Plan. The estimated fair value of these stock options, calculated using the Black-Scholes option valuation model, was ~~$296,107,~~$691,728, $228,837 of which ~~$130,952~~ was recognized during the nine months ended September 30, ~~2017.~~

During the nine months ended September 30, 2017, 96,000 performance stock units (“PSUs”) were forfeited by an employee as the continued service conditions were not achieved at the time of the employee's termination. The PSUs were initially granted in 2015 and, due to the forfeiture, the Company reversed $174,804 of stock-based compensation expense in the second quarter of 2017.

~~During the nine months ended September 30, 2017, 26,743 options to purchase shares of the Company’s common stock were exercised resulting in net proceeds of $11,143.~~

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

Stock
Options

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Life
(in years)
Outstanding at December 31, 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

2021.

At September 30, ~~2017,~~2021, there was ~~$1,403,775~~$491,588 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 ~~1.8~~1.1 years.

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Note 119 — Warrants

~~In connection~~

The Company had 1,040,248 warrants outstanding at September 30, 2021 with a weighted average exercise price of $3.92 per share, down from 2,273,369 warrants outstanding at December 31, 2020 due to the ~~Private Placement, investors received~~exercise of 1,233,121 warrants in the three months ended March 31, 2021. NaN warrants were exercised subsequent to ~~purchase 5,929,256~~March 31, 2021 and through September 30, 2021.

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

Early Warrant Exercise Transaction

In July 2020, the Company entered into letter agreements with certain of the Company’s Series A warrant holders (the “Series A Warrant Holders”), who were previously issued 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 ~~as part~~ of ~~its placement agent fee.~~the Company. The ~~placement agent warrant has~~Series 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 in August 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 the~~estimated fair value of the ~~effect~~Series C warrants, calculated using the Black-Scholes model, was $3.7 million on the date of issuance and was recognized as a non-cash warrant inducement expense within other income (expenses) in the statement of operations. The assumptions used in the Black Scholes model included a risk-free interest rate of 0.22%, a 0 expected dividend yield, an expected life of 5 years and an expected volatility of 90%.

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~~outstanding common stock of the ~~Company’s common stock~~Company, such excess warrant ~~activity and related information is~~shares will be held in abeyance for the benefit of such Series A Warrant Holder until such time as ~~follows:~~its right thereto would not result in the holder exceeding this limitation. The term of the abeyance shall extend no later than May 12, 2025.

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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, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as ~~amended.~~amended, or the Exchange Act. These statements include, but are not limited to, statements regarding our future financial performance, business condition and results of operations and pursuing additional government funding. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. You can find many (but not all) of these statements by looking for words such as "approximates," "believes," "hopes," "expects," "anticipates," "estimates," "projects," "intends," "plans," "would," "should," "could," "may" or other similar expressions in this report. In particular, these include statements relating to future actions, prospective products, applications, customers, technologies, future performance or results of anticipated products, expenses, and financial results. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

●

our history of losses;

●

our ability to generate revenue;

●

our limited operating history;

●

the size and growth of markets for our technology;

●

regulatory developments that may affect our business;

●

our ability to successfully develop new technologies, particularly our bidirectional bipolar junction transistor, or B-TRAN™;

●

our expectations regarding the timing of prototype and commercial fabrication of B-TRAN™ devices;

●

our expectations regarding the performance of our B-TRAN™ and the consistency of that performance with both internal and third-party simulations;

●

the expected performance of future products incorporating our B-TRAN™;

●

the performance of third-party consultants and service providers whom we have and will continue to rely on to assist us in development of our B-TRAN™ and related drive circuitry;

●

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 successfully commercialize our B-TRAN™ technology;

●

our ability to secure strategic partnerships with semiconductor fabricators and others related to our B-TRAN™ technology;

●

our ability to obtain, maintain, defend and enforce intellectual property rights protecting our technology;

●

the success of our efforts to manage cash spending, particularly prior to the commercialization of our B-TRAN™ technology;

●

general economic conditions and events and the impact they may have on us and our potential partners and licensees;

~~our history~~

Table of ~~losses;~~Contents

~~our ability to achieve profitability;~~

●

our ability to obtain adequate financing in the future, if and when we need it;

●

the impact of the novel coronavirus (COVID-19) on our business, financial condition and results of operations;

●

our success at managing the risks involved in the foregoing items; and

●

other factors discussed in this report.

~~our limited operating history;~~

~~our ability to successfully market and sell our products;~~

~~the size and growth of markets for our current and future products;~~

~~our expectations regarding the growth and expansion of our customer base;~~

~~regulatory developments that may affect our business;~~

~~our ability to successfully develop new technologies, including our bi-directional bipolar junction transistor, or B-TRAN™;~~

~~our expectations regarding the completion of testing of new products under development and the timing of the introduction of those new products;~~

~~the expected performance of new and existing products, including future products incorporating our B-TRAN™;~~

~~the performance of third-party manufacturers who supply and manufacture our products;~~

~~our expectations of the reliability of our products over the applicable warranty term and the future costs associated with warranty claims;~~

~~our ability to cost effectively manage product life cycles, inclusive of product launches and end of product life situations;~~

~~the rate and degree of market acceptance for our current and future products;~~

~~our ability to successfully obtain certification for our products, including in new markets, and the timing of the receipt of any necessary certifications;~~

~~our ability to successfully license our technology;~~

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

~~our expectations regarding the decline in prices of battery energy storage systems;~~

~~the success of our cost reduction plan;~~

~~general economic conditions and events and the impact they may have on us and our potential customers;~~

~~our ability to obtain adequate financing in the future, as and when we need it;~~

~~our success at managing the risks involved in the foregoing items; and~~

~~other factors discussed in this report.~~

The forward-looking statements are based upon management’s beliefs and assumptions and are made as of the date of this report. We undertake no obligation to publicly update or revise any forward-looking statements included in this report. You should not place undue reliance on these forward-looking statements.

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

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

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 ~~2016~~2020 financial statements and related notes included in our Annual Report on Form ~~10-K.~~10-K for the year ended December 31, 2020. 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,~~I, Item 1A of ~~this report.~~

~~OVERVIEW~~

our Annual Report on Form 10-K for the year ended December 31, 2020.

Overview

Ideal Power Inc. is located in Austin, Texas. ~~We design, market and sell electrical power conversion products using our proprietary technology called Power Packet Switching Architecture™, or PPSA™. PPSA™~~The Company 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 are designed to be used in both on-grid and off-grid applications. Our advanced technology is important to our business and we make significant investments in research andsolely focused on the further development and ~~protection~~commercialization of ~~our intellectual property. Our PPSA™ and bi-directional~~its Bidirectional bipolar junction TRANsistor (B-TRAN™) solid state switch ~~technologies are protected by a patent portfolio of 60 US and 12 foreign issued patents at September 30, 2017.~~

We sell our products primarily to systems integrators as part of larger turn-key systems which enable end users to manage their electricity consumption by reducing demand charges or fossil fuel consumption, integrating renewable energy sources and forming their own microgrid. Our products are made by contract manufacturers to our specifications, enabling us to scale production to meet demand on a cost-effective basis without requiring significant expenditures on manufacturing facilities and equipment. As our products establish a foothold in key power conversion markets, we may begin to focus on licensing our proprietary PPSA™-based product designs to OEMs to reach more markets and customers. We may seek to build a portfolio of relationships that generate license fees and royalties from OEMs for sales of their products which integrate PPSA™.

~~We were founded on May 17, 2007.~~ technology.

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, ~~2017~~2021 amounted to ~~$12,939,525~~$15.8 million with approximately ~~20%~~$12.4 million of that revenue ~~coming~~ from discontinued operations and the remainder from grant revenue for bidirectional power switch development. Revenue was $121,028 and $447,794 in the three months and nine months ended September 30, 2021, respectively, and $147,787 and $154,302 in the three and nine months ended September 30, 2020, respectively. Revenue for the three and nine months ended September 30, 2021 and 2020 related to government grants. We may pursue additional research and development grants, if and when available, to further develop and/or improve our technology.

COVID-19 Impact

As of the date of this report, the COVID-19 pandemic continues to spread throughout the United States and the rest of the world. The ultimate extent of the impact of COVID-19 on the financial performance of the Company will depend on future developments, including, among other things, the duration and spread of COVID-19, including variants, the timing, scope and efficacy of vaccination efforts, additional governmental restrictions in response to the COVID-19 pandemic, and the overall economy, all of which are highly uncertain and cannot be predicted. If the COVID-19 pandemic contributes to significant volatility in the global financial markets in the future, the Company’s ability to raise additional capital, if necessary, on acceptable terms or at all, may be impacted, though such risk has not materialized to date. If the financial markets and/or the overall economy are negatively impacted for an extended period, the Company's operating results may be materially and adversely affected.

While the outbreak of COVID-19 has caused some disruption to our business, particularly in the first and second quarters of 2020, the COVID-19 pandemic has not had a material adverse impact on our operations to date. However, the COVID-19 pandemic may disrupt our business in the future and cause delays in critical development and commercialization activities and/or result in potential incremental costs associated with mitigating the effects of the COVID-19 pandemic. The COVID-19 pandemic is ongoing, and its dynamic nature, including uncertainties relating to the ultimate spread of the virus, the severity of the disease, the duration of the outbreak, the timing, scope and efficacy of vaccination efforts and additional actions that may be taken by governmental authorities to contain the outbreak or to treat its impact, makes it difficult to forecast the effects on our business and results of operations for the ~~purpose~~remainder of ~~developing new products~~2021 and ~~improving current products.~~ thereafter.

~~Our Technology~~

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~~PPSA™ uses indirect power flow in which power flows through input switches and is temporarily stored in our proprietary AC link inductor. Our proprietary fast switching algorithms enable~~

Results of Operations

Comparison of the ~~transfer of quantum packets of power between ports in our system. As~~three months ended September 30, 2021 to the AC link becomes charged, it disconnects from its input switches, resonates without being connected to either the input or output switches, and then reconnects to its output switches when it reaches the correct voltage and frequencythree months ended September 30, 2020

Grant Revenues. Grant revenues for the ~~application. PPSA™ is~~three months ended September 30, 2021 and 2020 were $121,028 and $147,787, respectively. The grant revenues relate primarily to a ~~power conversion~~$1.2 million subcontract with Diversified Technologies, Inc. (“DTI”) to supply B-TRAN™ devices as part of a two-year contract awarded to DTI by the United States Naval Sea Systems Command (“NAVSEA”) for the development and demonstration of a B-TRAN™ enabled high efficiency direct current solid state circuit breaker (“SSCB”). The program started in late June 2020. In September 2021, we entered into and began work under a $50,000 subcontract with DTI under a Phase I Small Business Innovation Research (“SBIR”) grant from the Department of Energy (“DOE”) to develop a B-TRAN™-driven low loss alternating current SSCB. We expect the grant revenue related to these subcontracts to continue over the next two quarters with minimal revenue recognized thereafter. We also expect to pursue additional government funding that may result in additional grant revenues in the future.

Cost of Grant Revenues. Cost of grant revenues for the three months ended September 30, 2021 and 2020 was $121,028 and $147,787, respectively. The cost of grant revenues relates primarily to the subcontracts with DTI discussed above and are equal to the associated grant revenues resulting in no gross profit. We expect no gross profit under the subcontracts with DTI or from other grants that we are pursuing or may pursue in the remainder of 2021.

Research and Development Expenses. Research and development expenses increased by $109,928, or 22%, to $604,476 in the three months ended September 30, 2021 from $494,548 in the three months ended September 30, 2020. The increase was due to higher contract labor for device and driver development and the expansion of internal test capabilities of $104,418 and higher personnel costs of $102,705 and other B-TRAN™ development spending of $10,166, partly offset by lower stock-based compensation expense of $107,361. We expect quarterly research and development expenses to ramp higher, as compared to the three months ended September 30, 2021, during the fourth quarter of this year and throughout 2022 as we accelerate development of our B-TRAN™ technology. Research and development expenses will be subject to quarterly variability due primarily to the timing of semiconductor fabrication costs.

General and Administrative Expenses. General and administrative expenses decreased by $157,025, or 24%, to $500,942 in the three months ended September 30, 2021 from $657,967 in the three months ended September 30, 2020. The decrease was due to lower bonus expense of $185,253, partly offset by higher other costs of $28,228. We expect general and administrative expenses to be modestly higher, as compared to the three months ended September 30, 2021, for the next few quarters.

Sales and Marketing Expenses. Sales and marketing expenses increased by $108,248 to $128,248 in the three months ended September 30, 2021 from $20,000 in the three months ended September 30, 2020. The increase was due primarily to the hiring of a Vice President of Business Development in the first quarter of 2021 and subsequent spending to work towards commercializing our B-TRAN™ technology. We expect higher sales and marketing expenses, as compared to the three months ended September 30, 2021, going forward as we engage with prospective customers and continue to work towards commercializing our B-TRAN™ technology.

Loss from Operations. Our loss from operations for the three months ended September 30, 2021 was $1,233,666 or 5% higher than the $1,172,515 loss from operations for the three months ended September 30, 2020 for the reasons discussed above.

Other Expenses. Other expenses were $5,012 for the three months ended September 30, 2021 compared to other expenses of $3,722,224 for the three months ended September 30, 2020. The other expenses in the three months ended September 30, 2020 related primarily to warrant inducement expense of $3,720,866. See “Early Warrant Exercise Transaction” below.

Net Loss. Our net loss for the three months ended September 30, 2021 was $1,238,678, or 75% lower, as compared to a net loss of $4,894,739 for the three months ended September 30, 2020, for the reasons discussed above.

Comparison of the nine months ended September 30, 2021 to the nine months ended September 30, 2020

Grant Revenues. Grant revenues for the nine months ended September 30, 2021 and 2020 were $447,794 and $154,302, respectively. The grant revenues relate primarily to a $1.2 million subcontract with DTI discussed above. We expect the grant revenue related to the NAVSEA and DOE subcontracts to continue over the next two quarters with minimal revenue recognized thereafter. We also expect to pursue additional government funding that may result in additional grant revenues in the future.

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Cost of Grant Revenues. Cost of grant revenues for the nine months ended September 30, 2021 and 2020 was $447,794 and $154,302, respectively. The cost of grant revenues relates primarily to the subcontracts with DTI discussed above and are equal to the associated grant revenues resulting in no gross profit. We expect no gross profit under the subcontracts with DTI or from other grants that we are pursuing or may pursue in the remainder of 2021.

Research and Development Expenses. Research and development expenses increased by $264,512, or 23%, to $1,426,049 in the nine months ended September 30, 2021 from $1,161,537 in the nine months ended September 30, 2020. The increase was due to higher contract labor for device and driver development and the expansion of internal test capabilities of $230,317 and personnel costs of $88,733, an initial license fee of $50,000 for the right to certain semiconductor technology ~~that differentiates itself~~and higher other B-TRAN™ spending of $40,813, partly offset by lower stock-based compensation expense of $145,351. We expect quarterly research and development expenses to ramp higher, as compared to the three months ended September 30, 2021,during the fourth quarter of this year and throughout 2022 as we accelerate development of our B-TRAN™ technology. Research and development expenses will be subject to quarterly variability due primarily to the timing of semiconductor fabrication costs.

General and Administrative Expenses. General and administrative expenses decreased by $48,469, or 3%, to $1,705,146 in the nine months ended September 30, 2021 from ~~traditional power conversion technology~~$1,753,615 in ~~key product metrics, such~~the nine months ended September 30, 2020. The decrease was due to one-time CEO search fees in 2020 of $137,968, lower stock-based compensation expense of $105,538 and lower other costs of $29,746, partly offset by higher investor relations spending of $156,103 and professional services paid in stock of $68,680. We expect general and administrative expenses to be modestly higher, as ~~size~~compared to the three months ended September 30, 2021, for the next few quarters.

Sales and ~~weight while providing built-in isolation~~Marketing Expenses. Sales and ~~bi-directional~~marketing expenses were $302,859 in the nine months ended September 30, 2021 compared to $20,000 in the nine months ended September 30, 2020. The increase was due primarily to the hiring of a Vice President of Business Development in the first quarter of 2021 and ~~multi-port capabilities.~~ subsequent spending to work towards commercializing our B-TRAN™ technology. We expect higher sales and marketing expenses, as compared to the three months ended September 30, 2021, in the future as we engage with prospective customers and commercialize our B-TRAN™ technology.

Loss from Operations. Our loss from operations for the nine months ended September 30, 2021 was $3,434,054 or 17% higher than the $2,935,152 loss from operations for the nine months ended September 30, 2020 for the reasons discussed above.

Other Income (Expenses). Other income was $84,533 for the nine months ended September 30, 2021 compared to other expenses of $3,723,346 for the nine months ended September 30, 2020. The other income in the nine months ended September 30, 2021 related primarily to a gain on forgiveness of long-term debt of $91,407. See “PPP Loan” below. The other expenses in the nine months ended September 30, 2020 related primarily to warrant inducement expense of $3,720,866. See “Early Warrant Exercise Transaction” below.

Net Loss. Our net loss for the nine months ended September 30, 2021 was $3,349,521, or 50% lower, as compared to a net loss of $6,658,498 for the nine months ended September 30, 2020, for the reasons discussed above.

Liquidity and Capital Resources

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

At September 30, ~~2017,~~2021, we had ~~been granted 36 US patents~~cash and ~~five foreign patents related to PPSA™.~~

~~Products~~

cash equivalents of $24.5 million. Our net working capital at September 30, 2021 was $24.1 million. We ~~currently sell several power conversion systems, or PCS, utilizing our patented PPSA™ technology. These products are described as follows:~~

The 30kW SunDial™ and the 30kW SunDial™ Plus, which are UL-1741 certified and are intended to be used for the commercial and industrial grid-tied solar and solar + storage market. The SunDial™ is a photovoltaic (PV) string inverter which is field upgradable through the addition of a drop-in second DC port to connect batteries to a solar PV array. The SunDial™ Plus includes the PV inverter and the second DC battery port in one package. The products operate in both 50Hz and 60Hz environments and include a built-in 6 string PV combiner and DC disconnects and are grid-tied, AC export only.

~~The 30kW Stabiliti™ series has two product offerings, two-port (AC-DC) and multi-port (AC-DC-DC) models, which are both UL-1741 certified. These products are intended to be used~~had no outstanding debt at September 30, 2021.

Operating activities in the ~~stand-alone storage and microgrid markets, including the solar + storage market. They are bi-directional and operate~~nine months ended September 30, 2021 resulted in both grid-tied and grid-forming modes with near seamless transfer between operating modes. Grid-forming mode provides customers the ability to form and manage a microgrid. The products operate in both 50Hz and 60Hz environments.

~~Future Innovations~~

~~Bi-Directional Switches~~

~~Our existing products incorporate multiple insulated gate bipolar transistors, or IGBTs,~~cash outflows of $2,992,743, which are power switches used in the process to convert power from one current form to another. IGBTs switch power in only one direction (DC to AC or AC to DC) and require the use of a blocking diode to prevent power from flowing back through the system. To enable our existing products to perform bi-directional power conversion, for each IGBT and diode used in our products, we must include a second IGBT and diode. These additional components have slight voltage drops that affect the electrical efficiency of our products and generate excess heat that must be dissipated. We have patented and are developing a new, highly efficient silicon switch called a bi-directional bipolar transistor, or B-TRAN™, that we believe will allow us to substitute one B-TRAN™ for two pairs of IGBTs and diodes used in our current products and is also a potential replacement for conventional power switches in certain segments of the broader power semiconductor market.

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

~~In 2016, one of our semiconductor fabricators successfully tested single-sided B-TRAN™ silicon dies and the results~~ were consistent with third party simulations that predict significant performance and efficiency improvements over conventional power switches such as SCRs, IGBTs and MOSFETs. Our current focus has shifted to de-risking the proof of concept phase of the B-TRAN development timeline, as this phase of development is taking longer than anticipated due to the ~~complexity~~net loss for the period of ~~manufacturing complicated, two-sided power semiconductor devices. To facilitate this, we have now engaged~~$3,349,521 and a ~~second semiconductor fabricator,~~non-cash gain on ~~a parallel path, to produce a simplified, easier to manufacture B-TRAN™ on an accelerated schedule~~loan forgiveness of $91,407, partly offset by stock-based compensation of $247,512, depreciation and amortization of $113,607, stock issued for ~~proof~~services of ~~concept~~$68,680, favorable balance sheet timing of $17,858 and ~~initial testing. The testing is intended to show key qualities~~patent impairment charges of $528. Operating activities in the B-TRAN™ over IGBTs including reduced losses, both switching and conduction losses, and increased speed. The next major milestone towards commercialization will be to complete, package and test prototype B-TRAN™ devices. We are currently working with two packaging houses to develop the necessary device packaging in advance of having manufactured, two-sided B-TRAN™ prototypes. We expect packaging from at least one of the packaging houses to be complete this year. The results of the testing and characterization of these prototype B-TRAN™ devices will be utilized to guide our further development and optimization efforts including potential changes in how the devices are manufactured or driven in an actual circuit.

We plan to first utilize the B-TRAN™ in our own power conversion products and then introduce it into the rapidly growing power semiconductor market, estimated to be $19 billion in 2017 according to research firm IHS Technology, or IHS, utilizing a licensing model. We believe our new B-TRAN™ technology may potentially address a significant portion of the power semiconductor market that currently relies on power semiconductor devices such as IGBTs. Potential addressable markets for B-TRAN™-based products include very low loss solid-state DC and AC contactors, electric vehicle drivetrains, variable frequency drives, solar PV inverters, bi-directional energy storage and microgrid power conversion systems, matrix converters and other power conversion products. Atnine months ended September 30, ~~2017, we had 24 US and seven foreign issued patents covering the operation, control and manufacturing~~2020 resulted in cash outflows of ~~the B-TRAN™ device.~~

~~Business Strategy~~

Our business strategy is to promote and expand the uses of PPSA™ initially through product development and product sales. To bring our products to market, we will seek out best-in-class partners who will distribute, white-label or integrate our innovative products into higher value systems resulting in multiple strategic sales channels for our PPSA™-based products and product designs. Although our primary market is the United States, we expect to begin targeting markets outside the United States as early as 2018. As our products gain broader acceptance in the power conversion market, we intend to license our proprietary PPSA™-based product designs to OEMs within our target markets, as well as license our technologies for other markets$2,303,639, which we do not plan to enter directly. The basis for this approach is the belief that OEMs may achieve higher product margins and gain more market share by providing PPSA™-based products, which are differentiated from the traditional

product offerings in the industry, to their customers. We believe such strategic relationships with key OEM licensees would enable us to reap the benefits of PPSA™ and gain market share more quickly than by strictly manufacturing and distributing our products.

~~Target Markets~~

Currently, our primary markets are solar + storage and, to a lesser extent, microgrids. We also intend to be opportunistic with regards to the stand-alone storage market. Until recently, our primary market was the stand-alone storage market but we have shifted our strategic focus to solar + storage as that market leverages the mature and global solar market and the stand-alone storage market has been slow to develop.

~~Solar + Storage and Microgrid Markets~~

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

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

Whether for emergency backup power or for baseload generation in remote locations with weak or no electric grids, microgrids are an emerging business case for solar paired with storage. A distributed PV system connected to a BESS that includes one of our Stabiliti™ multi-port PCS may enable a business to benefit from the ability to form and manage a local microgrid powered by the PV system and BESS even when the utility power grid is down. This capability is attractive to electricity consumers who need to power critical loads even in a blackout. Our Stabiliti™ PCS are also equipped to meet evolving utility requirements for low voltage ride-through and other key operating parameters, which may enable the PV and BESS it connects to the grid to help stabilize the utility power grid when voltage or frequency fluctuates due to imbalances in load and supply. In remote locations where there is no reliable electric grid or a dependence on diesel generators, which may be as diverse as a military battlefield or remote tropical island resort, or in locations where local electric rates are high due to aging and inefficient generation technology, a trend towards self-generation microgrids is developing. These sites can use solar, batteries and other forms of generation all brought together by one or more of our Stabiliti™ PCS to form and manage a microgrid using maximum solar generation for lowest cost. As such, we believe our products may become increasingly attractive to co-locate BESS with distributed PV.

According to their research, IHS believes that systems will be deployed in two principal configurations. The present configuration is to have separate BESS and PV systems tied together through the AC wiring, which is supported by all of our current products. A second, emerging configuration will be to place the BESS and the PV system behind a single PCS with two DC inputs. Our Stabiliti™ and SunDial™ Plus were designed specifically to enable this configuration which we believe is the lower cost and more efficient configuration. A key unique feature of the SunDial™’s patented technology is its ability to be deployed first as a standard commercial PV inverter and later be upgraded in the field to bring storage into the PV system using the same inverter. We believe this is the only product in the market today to have this unique field-upgrade capability for pairing solar with storage in one inverter.

According to IHS, the global commercial PV industry is projected to grow to over 33GW annually by 2020. IHS further forecasts that these commercial systems will have a 2% storage attachment rate by 2020, providing for a nearly 700MW annual commercial solar + storage market. These new solar + storage markets include providing backup power during blackouts, improving grid stability in high penetration PV areas and reducing fossil fuel consumption in remote and off-grid microgrids.

~~Stand-Alone Storage Market~~

The stand-alone storage market is served by battery energy storage systems, or BESS. BESS are racks of batteries coupled with a system controller and a power conversion system, such as those manufactured by us, to enable electric power to be

captured, stored, and used in conjunction with electric power grids. These systems can be large, megawatt-scale systems operated by utilities to better manage their system resources, or smaller kilowatt-scale systems used by businesses and designed to enable these businesses to manage their power use and mitigate utility imposed time-of-use and/or "peak demand charges", which are charges utilities levy on their business customers for delivery of power at peak usage times of the day, such as mid-afternoons in the summer. The growth of peak demand charges has been substantial over the past decade and now can make up 50% or more of a commercial utility bill in certain markets. This is a trend that may continue as more intermittent resources are added to the utility power grid causing grid instability. Utilities and aggregators of distributed generation resources are also expected to adopt BESS due to the ~~proliferation~~net loss for the period of ~~renewables~~$6,658,498, partly offset by warrant inducement expense of $3,720,866, stock-based compensation of $434,782, depreciation and ~~to take advantage~~amortization of ~~additional value streams such~~$86,368, stock issued for services of $50,000, patent impairment charges of $18,235 and favorable balance sheet timing of $44,608. We expect a modest ramp up in cash outflows from operating activities during the fourth quarter of this year and throughout 2022 as ~~energy arbitrage, frequency regulation~~we accelerate development and ~~ancillary services, infrastructure upgrade deferral and locational capacity.~~commercialization of our B-TRAN™ technology.

~~There are strong economic incentives available to commercial and industrial consumers in major US markets such as California and New York~~

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Investing activities in the ~~form~~nine months ended September 30, 2021 and 2020 resulted in cash outflows of ~~reduced time-of-use and/or demand charges~~$182,801 and $48,243, respectively, for ~~installing a BESS~~the acquisition of intangible assets and ~~managing when power is drawn~~fixed assets.

Financing activities in the nine months ended September 30, 2021 resulted in cash inflows of $21,204,609 from the ~~grid or reducing peak consumption. There~~net proceeds from our February 2021 Offering and $3,301,226 from the exercise of warrants and stock options. Financing activities in the nine months ended September 30, 2020 resulted in cash inflows of $3,063,425 and included net proceeds from the exercise of warrants of $2,972,018 and proceeds from loans of $91,407.

PPP Loan

In May 2020, we entered into a Loan Agreement and Promissory Note (collectively the “PPP Loan”) with BBVA USA pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration (“SBA”). We received total proceeds of $91,407 from the unsecured PPP Loan. The PPP Loan was scheduled to mature in May 2022 and had an interest rate of 1.00% per annum and was subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. In accordance with the requirements of the CARES Act and the PPP, we used the proceeds from the PPP Loan primarily for payroll costs. We applied for forgiveness of the PPP Loan during the first quarter of 2021. In May 2021, the SBA approved forgiveness of our PPP Loan.

Early Warrant Exercise Transaction

In July 2020, we entered into letter agreements (the “Letter Agreements”) with certain of our Series A warrant holders (the “Series A Warrant Holders”), who were previously issued warrants (the “Original Warrants”) to purchase shares of our common stock. The Series A Warrant Holders agreed to the early exercise of their Original Warrants pursuant to the Letter Agreements (the “Early Warrant Exercise Transaction”). The transaction closed in August 2020. We raised net proceeds of $2.5 million in the Early Warrant Exercise Transaction. We utilized the net proceeds from the Early Warrant Exercise Transaction to fund commercialization and development of our B-TRAN™ technology and general corporate and working capital purposes.

Pursuant to the Letter Agreements, in consideration of the Series A Warrant Holders exercising Original Warrants to purchase an aggregate of 1,176,137 shares of common stock, we issued to the Series A Warrant Holders new Series C warrants (the “New Warrants”) to purchase up to an aggregate of 705,688 shares of common stock, which is ~~also strong regulatory support for such systems. For example, California has issued a mandate for over 1,800 megawatts~~equal to 60% of ~~new energy storage to be installed by 2020. Although we believe~~ the ~~economic incentives~~shares underlying the Original Warrants included in the Transaction. The New Warrants have an exercise price of $8.90 per share and ~~regulatory support are expected to accelerate growth in this market over coming years, to~~an expiration date of August 4, 2025. The estimated fair value of the ~~slow pace~~New Warrants was $3.7 million on the date of ~~realization of these economic incentives has actually hindered market growth.~~

~~We expect the cost of commercial~~issuance and ~~industrial BESS to continue to decline due primarily to lower battery costs and,~~was recognized as a ~~result, expect significant expansion~~non-cash warrant inducement expense within other income (expenses) in ~~the addressable market for these systems. We also believe the combination~~our statement of ~~lower BESS costs, third-party financing, increases in utility demand charges,~~operations.

February 2021 Offering

In February 2021, we issued and ~~the entrance~~sold 1,352,975 shares of ~~large, established companies~~our common stock, including 176,475 additional shares of common stock pursuant to the ~~BESS space may contribute~~exercise of the underwriter’s option to ~~accelerating market growth for~~purchase additional shares in full, in an underwritten public offering at a price of $17.00 per share. The net proceeds to us from the ~~nascent stand-alone storage market.~~

~~Other Markets~~

~~Although our technology may be suitable for other vertical markets within~~February 2021 Offering were $21.2 million. We intend to use the ~~global power conversion market landscape, we do not currently offer products for sale directly~~net proceeds from the February 2021 Offering to ~~other power conversion markets such as the VFD, uninterruptible power supply, rail, wind or electric vehicle traction drive markets.~~

~~In addition to the markets discussed above, we may also have opportunities for market expansion into fast electric vehicle chargers in certain applications where our products’ compact size~~fund commercialization and multi-port capabilities can unlock value for the system integrator particularly in locations where battery storage is coupled with the charging system to eliminate demand charges or expand the charging systems response capabilities.

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

B-TRAN™ technology and general corporate and working capital purposes.

Critical Accounting Policies

There have been no significant changes during the nine months ended September 30, ~~2017~~2021 to the critical accounting policies disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016.~~

~~Trends, Events and Uncertainties~~

~~The early market for stand-alone storage has been, and continues to be, heavily dependent on California’s Self Generation Incentive Program, or SGIP. The pace and deployment~~2020.

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.

Historically, most of our backlog has related to orders for the stand-alone storage market and this backlog has not translated into revenue at the pace we have expected due to the stagnation in stand-alone storage deployments in California. There is significant uncertainty around the pace and timing of growth in this market and the customer representing a majority of our backlog in 2015 and 2016 exited the system integration business for commercial and industrial stand-alone storage. This customer exit has had a material adverse impact on our backlog and we are currently evaluating whether we have any recourse against this customer for unfulfilled orders.

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

To address the uncertainty surrounding the stand-alone storage market, we have transitioned our focus to the solar + storage market. This market leverages the far larger, and more mature, global solar market and we believe our products solve key customer problems in this market such as demand management, backup power and critical load support that solar only solutions are not capable of addressing. In the next several quarters we expect our revenue growth to be driven by growth in the solar + storage market and, to a lesser extent, the microgrid market.

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

~~Results of Operations~~

~~Comparison of the three months ended~~ September 30, ~~2017 to the three months ended September 30, 2016~~

~~Revenues.~~ ~~Revenues for the three months ended September 30, 2017 of $444,640 were $5,370, or 1%, higher than the $439,270~~2021, we ~~earned in revenues for the three months ended September 30, 2016.~~

~~Cost of Revenues.~~ Cost of revenues decreased for the three months ended September 30, 2017 to $418,529 compared to $737,937 for the three months ended September 30, 2016. The decrease was primarily due to a charge of $328,537 associated with excess and obsolete ("E&O") inventory in connection with the end-of-life of our IBC-30 battery converter in the three months ended September 30, 2016. We have completed the transition from our legacy products, including both our first and second generation products, to our third generation SunDial™ and Stabiliti™ products.

~~Gross Profit (Loss).~~ ~~Gross profit for the three months ended September 30, 2017 was $26,111 compared to a gross loss of $298,667 for the three months ended September 30, 2016.~~

~~Research and Development Expenses.~~ Research and development expenses decreased by $155,175, or 13%, to $1,075,849 in the three months ended September 30, 2017 from $1,231,024 in the three months ended September 30, 2016. The decrease was due primarily to lower personnel costs. For the balance of the year, our PPSA™ research and development efforts will be focused on our SunDial™ and Stabiliti™ products including firmware development for, and certification to, the new UL-1741SA standard, and a more efficient version of our SunDial™ and Stabiliti™ products with an improved form factor.

~~General and Administrative Expenses.~~ ~~General and administrative expenses decreased by $7,453, or 1%, to $899,882 in the three months ended September 30, 2017 from $907,335 in the three months ended September 30, 2016.~~

~~Sales and Marketing Expenses.~~ Sales and marketing expenses decreased by $224,950, or 45%, to $271,844 in the three months ended September 30, 2017 from $496,794 in the three months ended September 30, 2016. The decease was primarily due to lower bad debt expense of $117,070 due partly to a bad debt recovery in the three months ended September 30, 2017, stock-based compensation costs of $37,794 and personnel costs of $25,996 as well as lower placement, consulting and trade show costs.

~~Loss from Operations.~~ ~~Our loss from operations for the three months ended September 30, 2017 was $2,221,464 compared to $2,933,820 loss from operations for the three months ended September 30, 2016.~~

~~Interest Income, net.~~ ~~Net interest income was $3,865 for the three months ended September 30, 2017 compared to $11,554 for the three months ended September 30, 2016.~~

~~Net Loss.~~ Our net loss for the three months ended September 30, 2017 was $2,217,599 as compared to a net loss of $2,922,266 for the three months ended September 30, 2016. The decrease was attributable to the E&O charge associated with our legacy products in the three months ended September 30, 2016 and our reduced operating expenses due partly to the cost reduction activities implemented in the second quarter of 2017.

~~Comparison of the nine months ended September 30, 2017 to the nine months ended September 30, 2016~~

~~Revenues.~~ Revenues for the nine months ended September 30, 2017 of $973,680 were $284,350, or 23%, lower than the $1,258,030 we earned in revenues 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.

~~Cost of Revenues.~~ Cost of revenues increased by $362,440, or 24%, to $1,894,068 for the nine months ended September 30, 2017 compared to $1,531,628 for the nine months ended September 30, 2016. The increase was due to higher E&O charges of $361,150 and adjustments to the Company's warranty accrual of $77,010, both related to legacy products, partially offset by lower sales volumes.

~~Gross Loss.~~ ~~Gross loss for the nine months ended September 30, 2017 was $920,388 compared to a gross loss of $273,598 for the nine months ended September 30, 2016.~~

~~Research and Development Expenses.~~ Research and development expenses decreased by $539,802, or 14%, to $3,374,386 in the nine months ended September 30, 2017 from $3,914,188 in the nine months ended September 30, 2016. The decrease was due primarily to lower costs associated with bi-directional power switch development.

~~General and Administrative Expenses.~~ General and administrative expenses increased by $266,935, or 10%, to $2,976,260 in the nine months ended September 30, 2017 from $2,709,325 in the nine months ended September 30, 2016. The increase was primarily due to higher non-cash patent impairments of $197,680, as we abandoned certain patent filings to focus on filings with the highest strategic value, and higher legal and consulting costs.

~~Sales and Marketing Expenses.~~ Sales and marketing expenses decreased by $81,044, or 6%, to $1,240,713 in the nine months ended September 30, 2017 from $1,321,757 in the nine months ended September 30, 2016. The decrease was due primarily to lower stock-based compensation costs of $284,011, due to forfeitures, offset by higher bad debt expense of $141,183 and consulting costs of $51,301. We have seen an increase in both our bad debt expense and days sales outstanding as many companies, including certain of our customers, are having difficulty securing financing or generating sufficient working capital due to the lack of growth in the stand-alone storage market.

~~Loss from Operations.~~ ~~Our loss from operations for the nine months ended September 30, 2017 was $8,511,747 compared to a $8,218,868 loss from operations for the nine months ended September 30, 2016.~~

~~Interest Income, net.~~ ~~Net interest income was $15,440 for the nine months ended September 30, 2017 compared to $26,778 for the nine months ended September 30, 2016.~~

~~Net Loss.~~ Our net loss for the nine months ended September 30, 2017 was $8,496,307 as compared to a net loss of $8,192,090 for the nine months ended September 30, 2016. The increase was attributable to higher non-cash charges associated with inventory write-downs, patent impairments and bad debt expense.

~~Liquidity and Capital Resources~~

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

~~At September 30, 2017, we had cash and cash equivalents of $11,681,887. Our net working capital and long-term debt at September 30, 2017 were $11,029,978 and $0, respectively.~~

Operating activities in the nine months ended September 30, 2017 resulted in cash outflows of $5,924,245, which were due primarily to the net loss for the period of $8,496,307, partly offset by non-cash items of $2,425,141, related primarily to stock-based compensation of $833,637, inventory write-downs of $703,220, depreciation and amortization of $339,493, patent impairments of $268,789 and bad debt expense of $226,557. Operating activities in the nine months ended September 30, 2016 resulted in cash outflows of $7,616,314, which were due primarily to the net loss for the period of $8,192,090 and negative working capital changes of $1,085,926, partly offset by non-cash items of $1,661,702, related primarily to stock-based compensation of $1,135,008 and depreciation and amortization of $290,474. Negative working capital changes included a $520,730, or 99%, increase in finished goods inventory due to lower than expected product sales in the nine months ended September 30, 2016.

~~Investing activities in the nine months ended September 30, 2017 and 2016 resulted in cash outflows of $265,684 and $628,070, respectively, for the acquisition of fixed assets and intangible assets.~~

In the second quarter of 2017, we implemented a cost reduction plan with the goal of reducing our cash outflows for operating and investing activities. This plan included the simplification of our product roadmap for the balance of 2017 to focus on our 30kW SunDial™ and Stabiliti™ products for the solar + storage and microgrid markets and elimination of activities that did ~~not present significant near-term revenue opportunities. In addition, we discontinued our legacy products, including our~~

125kW product, and postponed our development and certification efforts related to international markets and electric vehicle fast charging. These changes have resulted and we believe will continue to result in a reduced cash burn in advance of our expected revenue growth.

Financing activities in the nine months ended September 30, 2017 resulted in cash inflows of $13,666,900 related primarily to our Private Placement net proceeds of $13,657,331. In the Private Placement, each share of common stock or preferred stock was sold together with a warrant to purchase one share of common stock at a collective price of $2.535. Investors purchased an aggregate of 5,220,826 shares of common stock and 708,430 shares of preferred stock together with warrants to purchase 5,929,256 shares of common stock in the Private Placement for aggregate gross proceeds of $15.0 million. Net cash proceeds 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 to the exercise of stock options and warrants.

On December 1, 2014, we filed a Form S-3 shelf registration statement with the Securities and Exchange Commission. The registration statement allows us to offer up to an aggregate $75 million of common stock, preferred stock, warrants to purchase common stock or preferred stock or any combination thereof and provides us with the flexibility over three years to potentially raise additional equity in public or private offerings on commercial terms. At September 30, 2017, our availability under this registration statement is $58 million.

~~Off-Balance Sheet Transactions~~

~~We do~~ not have any off-balance sheet transactions.

Trends, Events and Uncertainties

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

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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 ~~its~~the 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 ~~our~~its Chief Executive Officer (principal executive officer) and ~~our~~its Chief Financial Officer (principal financial and accounting officer), of the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2021 and has concluded that, as of September 30, ~~2017, our~~2021, the Company’s 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, ~~2017~~2021 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Limitations on the Effectiveness of Controls

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

~~PART II - OTHER INFORMATION~~

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PART II-OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

~~On May 17, 2017,~~

We may be subject to litigation from time to time in the ~~Company provided Libra Industries, Inc. (Libra), its prior contract manufacturer, notice that it was in breach~~ordinary course 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 respondedbusiness. We are not currently party 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.~~

legal proceedings.

ITEM 1A. RISK FACTORS

There are no material changes from the risk factors disclosed in our ~~2016~~2020 Annual Report on Form ~~10-K except as noted below.~~

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

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

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

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

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

~~Backlog may not result in revenue.~~

We define backlog as consisting of accepted orders from customers for which an expected product delivery schedule has been specified. The purchase orders comprising backlog are not cancelable in most cases and such orders generally do not provide price protection. Nevertheless, deliveries against received purchase orders may be rescheduled within negotiated parameters or canceled in certain limited instances and our backlog may, therefore, not be indicative of revenues in any given period. Our backlog is highly concentrated with a limited number of customers. If any of these customers exited the energy storage market, particularly if their purchase orders with us are subject to cancellation provisions, or declared bankruptcy, our backlog would be materially adversely impacted.

In particular, there is significant uncertainty around the pace and timing of growth in the stand-alone storage market and the customer representing a majority of our backlog in 2015 and 2016 exited the system integration business for commercial and industrial stand-alone storage. This customer exit has had a material adverse impact on our backlog and we are currently evaluating whether we have any recourse against this customer for unfulfilled orders.

10-K.

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

On March 3, 2017, we closed on a definitive securities purchase agreement to sell to certain accredited investors our common stock and preferred stock together with warrants to purchase shares of common stock, or the Private Placement. In the Private Placement, each share of common stock or preferred stock was sold together with a warrant to purchase one share of common stock at a collective price of $2.535. Investors purchased an aggregate of 5,220,826 shares of common stock and 708,430 shares of preferred stock together with warrants to purchase 5,929,256 shares of common stock in the Private Placement for aggregate gross proceeds of $15.0 million. The warrants have an exercise price of $2.41 per share and will expire three years from the date of issuance. We filed a Registration Statement on Form S-3 covering the resale of the registrable securities on March 31, 2017 with the Commission which was declared effective on April 21, 2017.

Net cash proceeds were $13.7 million after offering fees and expenses, including the placement agent fee of $1.1 million. The placement agent also received 237,170 warrants to purchase shares of common stock as part of its placement agent fee. The placement agent warrant has an exercise price of $2.89 per share, is non-exercisable for 12 months and has a three-year term. We expect to utilize net proceeds from the offering for working capital and general corporate purposes.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

~~Not applicable.~~

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ITEM 6. EXHIBITS


Exhibit Number		Document

~~Exhibit~~ ~~Number~~ 31.1		~~Document~~

~~10.1*†~~		~~Amendment No. 1 to Employment Agreement between the Company and William C. Alexander dated August 18, 2017~~

~~31.1~~		Certification of Principal Executive Officer pursuant to Exchange Act Rule, 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

31.2		Certification of Principal Financial Officer pursuant to Exchange Act Rule, 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

32.1		Certification pursuant to 18 U.S.C. 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**

~~101.INS~~ 101.INS*		Inline XBRL ~~Instant~~Instance Document *– the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

~~101.SCH~~ 101.SCH*		Inline XBRL Taxonomy Extension Schema Document *

~~101.CAL~~ 101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase Document *

~~101.DEF~~ 101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase Document *

~~10.LAB~~ 10.LAB*		Inline XBRL Taxonomy Extension Label Linkbase Document *

~~101.PRE~~ 101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase Document *



* 104		Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101).

*	Filed herewith

**	Furnished herewith
†	~~Management contract or compensatory agreement~~

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SIGNATURES

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



Dated November ~~9, 2017~~12, 2021	IDEAL POWER INC.

	By:	/s/ R. Daniel Brdar
		R. Daniel Brdar
		Chief Executive Officer

	By:	/s/ Timothy W. Burns
		Timothy W. Burns
		Chief Financial Officer

~~-21-~~