The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the audited financial statements
and related notes included elsewhere in this Annual Report on Form 10-K. In
addition to historical information, this discussion and analysis here and
throughout this Form 10-K contains forward-looking statements that involve
risks, uncertainties and assumptions. Our actual results may differ materially
from those anticipated in these forward-looking statements.
Overview
Ideal Power is located in Austin, Texas.
We are solely focused on the further development and commercialization of our
B-TRAN™ solid-state switch technology.
To date, operations have been funded primarily through the sale of common stock
and we have generated $3.7 million in grant revenue for bidirectional power
switch development. Grant revenue was $203,269 and $576,399, respectively, in
the years ended December 31, 2022 and 2021, respectively. We may pursue
additional research and development grants, if and when available, to further
develop and/or improve our technology. We are in the process of commercializing
our B-TRAN™ technology and launched our first commercial product, the SymCool™
Power Module, in January 2023. We expect initial sales of this product later in
2023.
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Trends, Events and Uncertainties
Research and Development
Research and development of new technologies is, by its nature, unpredictable.
We cannot assure you that our research and development will be successful, our
technology will be adopted, that we will ever earn revenues sufficient to
support our operations or that we will ever be profitable. Furthermore, since we
have no committed source of financing, we cannot assure you that we will be able
to raise additional capital if and when we need it to continue our operations.
If we cannot raise funds if and when we need them, we may be required to
severely curtail, or even to cease, our operations.
Public Offering
In February 2021, we received net proceeds from the Public Offering, as defined
and discussed in more detail below, of $21.2 million.
Critical Accounting Estimates
The following discussion and analysis of our financial condition and results of
operations is based upon our financial statements, which have been prepared in
conformity with accounting principles generally accepted in the United States of
America. Certain accounting estimates are particularly important to the
understanding of our financial position and results of operations and require
the application of significant judgment by our management. As a result, they are
subject to an inherent degree of uncertainty. In applying these policies, we use
our judgment to determine the appropriate assumptions to be used in the
determination of certain estimates. Those estimates may be based on our
historical operations, our future business plans and projected financial
results, the terms of existing contracts, our observance of trends in the
industry, information provided by our customers and/or information available
from other outside sources, as appropriate. Please see Footnote 2 to our
financial statements for a summary of our significant accounting policies.
Stock-Based Compensation. We apply FASB ASC 718, "Stock Compensation," when
recording stock-based compensation. Grants to non-employees are also accounted
for under ASC 718. The fair value of each stock option award is estimated on the
date of grant using the commonly used Black-Scholes option valuation model. The
assumptions used in the Black-Scholes model are as follows:
Grant Price - The grant price is determined based on the closing share price on
the date of grant.
Risk-free interest rate - The risk-free interest rate is based on the implied
yield available on US Treasury securities at the time of grant with an
equivalent term of the expected life of the award.
Expected lives - As permitted by SAB 107, due to our insufficient history of
option activity, we utilize the simplified approach to estimate the options'
expected term, calculated as the midpoint between the vesting period and the
contractual life of the award.
Expected volatility - Volatility is estimated based on the historical
volatilities of comparable companies.
Expected dividend yield - Dividend yield is based on current yield at the grant
date or the average dividend yield over the historical period. We have never
declared or paid dividends and have no plans to do so in the foreseeable future.
The fair value for performance stock units, which contain market conditions, is
estimated on the date of grant using a Monte Carlo analysis utilizing the same
expected volatility assumption as utilized in the Black-Scholes model for stock
options.
Intangible Assets. Our intangible assets are composed of patents, which are
recorded at cost, and other intangible assets, which are recorded at cost plus
the estimated present value of all future payments associated with the other
intangible assets. We capitalize third-party legal costs and filing fees, if
any, associated with obtaining patents or other intangible assets. Once the
patent asset has been placed in service, we amortize these costs over the
shorter of the asset's legal life, generally 20 years from the initial filing
date, or its estimated economic life using the straight-line method. For the
other intangible assets, we amortize the asset over the 17-year term of the
underlying agreements.
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Impairment of Long-Lived Assets. The long-lived assets, consisting of property
and equipment and intangible assets, held and used by us are reviewed for
impairment no less frequently than annually or whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In the event that facts and circumstances indicate that the cost of
any long-lived assets may be impaired, an evaluation of recoverability is
performed. We determined that there were immaterial impairments in the value of
long-lived assets during the years ended December 31, 2022 and 2021.
Income Taxes. We account for income taxes using an asset and liability approach
which allows for the recognition and measurement of deferred tax assets based
upon the likelihood of realization of tax benefits in future years. Under the
asset and liability approach, deferred taxes are provided for the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. A valuation allowance is provided for deferred tax assets if it is
more likely than not these items will either expire before we are able to
realize their benefits, or that future deductibility is uncertain. Tax benefits
from an uncertain tax position are recognized only if it is more likely than not
that the tax position will be sustained on examination by the taxing authorities
based on the technical merits of the position.
We have concluded that it is more likely than not that we will not have
sufficient foreseeable taxable income within the carryforward period as
applicable and permitted by current law to allow for the utilization of certain
of the deductible amounts generating the deferred tax assets; therefore, a full
valuation allowance has been established to reduce the net deferred tax assets
to zero at December 31, 2022 and 2021.
Results of Operations
Comparison of the year ended December 31, 2022 to the year ended December 31,
2021
Grant Revenues. Grant revenues decreased by $373,130 to $203,269 for the year
ended December 31, 2022 from $576,399 in the year ended December 31, 2021 due to
the timing of milestones under the program. The grant revenues related primarily
to a $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 2022, NAVSEA
approved two 6-month extensions to the program. No additional grant revenue was
associated with these extensions. In September 2021, we entered into and began
work under a $50,000 subcontract with DTI under a Phase I Small Business
Innovation Research grant from the Department of Energy to develop a
B-TRAN™-driven low loss alternating current SSCB. We completed this work in the
first quarter of 2022. We expect the remaining grant revenue of $37,388 related
to the NAVSEA program to be recognized in the first half of 2023. We also expect
to pursue additional government funding that may result in additional grant
revenues in the future.
We entered into a development agreement in late 2022 and launched our first
commercial product in January 2023. As a result, we expect to generate initial
commercial revenue later in 2023.
Cost of Grant Revenues. Cost of grant revenues decreased by $373,130 to $203,269
for the year ended December 31, 2022 from $576,399 for the year ended December
31, 2021. The cost of grant revenues relates to the subcontracts discussed above
and are equal to the associated grant revenues resulting in no gross profit. We
expect no gross profit under the subcontract with DTI related to the NAVSEA
program or other grants that we are pursuing, or may pursue, in 2023.
Research and Development Expenses. Research and development expenses increased
by $1,439,033, or 75%, to $3,366,776 in the year ended December 31, 2022 from
$1,927,743 in the year ended December 31, 2021. The increase was due to higher
self-funded wafer fabrication runs of $649,044, stock-based compensation expense
of $335,227, materials and supplies, primarily wafers, of $218,394, personnel
costs of $215,584 and other B-TRAN™ spending of $20,784. We expect higher
research and development expenses in 2023 as we continue development of our
B-TRAN™ technology and self-fund, at least in the short term, development
previously partially funded through government grants.
General and Administrative Expenses. General and administrative expenses
increased by $715,427, or 30%, to $3,123,852 in the year ended December 31, 2022
from $2,408,425 in the year ended December 31, 2021. The increase was due
primarily to higher stock-based compensation expense of $219,017, professional
fees of $185,067, Board fees and expenses of $122,037, personnel costs of
$77,927 and other costs of $111,379, including items such as insurance and
franchise taxes. We expect relatively flat general and administrative expenses,
exclusive of stock-based compensation, in 2023.
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Sales and Marketing Expenses. Sales and marketing expenses increased by
$339,524, or 66%, to $852,331 in the year ended December 31, 2022 from $512,807
in the year ended December 31, 2021. The increase was due primarily to the
higher personnel costs of $172,005, stock-based compensation expense of $69,243,
travel costs of $32,873, professional fees of $26,342 and other spending of
$39,061 as we work towards commercializing our B-TRAN™ technology. We expect
higher sales and marketing expenses in 2023 as we engage more broadly with
prospective customers and launch our first two commercial products.
Loss from Operations. Our loss from operations for the year ended December 31,
2022 was $7,342,959 or 51% higher than the $4,848,975 loss from operations for
the year ended December 31, 2021, driven by the factors discussed above.
Other Income. Other income increased by $74,903 to $153,609 for the year ended
December 31, 2022 from $78,706 for the year ended December 31, 2021. Other
income for the year ended December 31, 2022 related to interest income as a
result of the impact of higher interest rates on our money market account. Other
income for the year ended December 31, 2021 was due to a $91,407 gain on the
forgiveness of our PPP Loan (as defined below) partly offset by interest expense
of $12,701.
Net Loss. Our net loss increased by $2,419,081, or 51%, to $7,189,350 for the
year ended December 31, 2022 from a net loss of $4,770,269 for the year ended
December 31, 2021 for the reasons discussed above.
Liquidity and Capital Resources
In 2022, we generated grant revenue only. In 2023, we expect to generate grant
revenue as well as initial commercial revenue. We have incurred losses since
inception. We have funded our operations to date primarily through the sale of
common stock.
As of December 31, 2022 and 2021, we had cash and cash equivalents of
$16,345,623 and $23,170,149, respectively. Our net working capital and long-term
debt at December 31, 2022 were $16,453,606 and $0, respectively.
We believe that our cash and cash equivalents on hand will be sufficient to meet
our ongoing liquidity needs for at least the next 12 months. Additional future
financing may be necessary to fund our operations and there can be no assurance
that, if needed, we will be able to secure additional debt or equity financing
on terms acceptable to us or at all. Although we believe we have adequate
sources of liquidity over the long term, the success of our operations, the
global economic outlook, and the pace of sustainable growth in our markets could
each impact our business and liquidity.
Operating activities in the year ended December 31, 2022 resulted in cash
outflows of $6,383,914, which were due to the net loss for the period of
$7,189,350 and unfavorable balance sheet timing of $458,479, partly offset by
non-cash items including stock-based compensation of $975,801, depreciation and
amortization of $187,077, stock issued for services of $100,100 and the
write-off of long-lived assets of $937.
Operating activities in the year ended December 31, 2021 resulted in cash
outflows of $4,280,864, which were due to the net loss for the period of
$4,770,269, unfavorable balance sheet timing of $137,573 and a non-cash gain on
the forgiveness of our PPP Loan of $91,407, partly offset by other non-cash
items including stock-based compensation of $352,313, stock issued for services
of $207,980, depreciation and amortization of $157,564 and patent impairment
charges of $528.
We expect an increase in cash outflows from operating activities in 2023 as we
commercialize our B-TRAN™ technology, including the launch of our first two
commercial products.
Investing activities in the years ended December 31, 2022 and 2021 resulted in
cash outflows of $312,740 and $236,935, respectively. For the year ended
December 31, 2022, cash outflows for the acquisition of intangible assets were
$130,089 and capital expenditures were $182,651, primarily for lab testing
equipment. .For the year ended December 31, 2021, cash outflows for the
acquisition of intangible assets were $192,668 and capital expenditures were
$44,267.
Financing activities in the year ended December 31, 2022 resulted in cash
outflows of $127,872 for the payment of withholding taxes on the vesting of
restricted stock units. Financing activities in the year ended December 31, 2021
resulted in cash inflows of $21,204,609 from the net proceeds from our Public
Offering and $3,326,083 from the exercise of warrants and stock options.
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Public Offering
In February 2021, we issued and sold 1,352,975 shares of our common stock,
including 176,475 additional shares of common stock pursuant to the exercise of
the underwriter's option to purchase additional shares in full, at a price of
$17.00 per share (the "Public Offering"). The net proceeds to us from the Public
Offering were $21.2 million. We are utilizing, and intend to continue to
utilize, the net proceeds from the Public Offering to fund commercialization and
development of our B-TRAN™ technology and general corporate and working capital
purposes.
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
SBA 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.
Contractual Obligations and Commitments
Lease
In March 2021, we entered into a lease agreement for 4,070 square feet of office
and laboratory space located in Austin, Texas. The commencement of the lease
occurred on June 1, 2021 and the initial term of the lease was 63 months. The
actual base rent in the first year of the lease was $56,471 and was 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 $2,035 in
each succeeding year of the lease. In addition, we are required to pay our
proportionate share of operating costs for the building under this triple net
lease. The lease contains a 5-year fair market renewal option. It does not
contain a termination option. We recognized a right of use asset of $339,882 and
a corresponding lease liability for this lease upon lease commencement.
Future minimum payments under the lease are as follows:
For the Year Ended December 31,
2023 $ 78,517
2024 80,552
2025 82,587
2026 56,132
Total lease payments 297,788
Less: imputed interest (30,204)
Total lease liability $ 267,584
Licensing Agreements
In 2015, we entered into licensing agreements which expire in February 2033. Per
the agreements, we have an exclusive royalty-free license associated with
semiconductor power switches which enhances our intellectual property 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. We will pay $10,000 for each patent filing pending and $20,000 for
each patent issued annually with one-half of the annual payment due within 20
days of December 21st of each year and one-half of the annual payment due within
20 days of June 21st of each year of the agreements, up to a maximum of $100,000
each year (i.e. five issued patents).
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In March 2021, two patents associated with these agreements were issued and we
recorded, as a 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 and,
as a result, the annual payment amount through expiration of the licensing
agreements is $100,000. At December 31, 2022, the corresponding long-term
liability for the estimated present value of future payments under the licensing
agreement was $838,458. We are accruing interest for future payments related to
the issued patents associated with the agreement.
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