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. Until April 2018, we were primarily
focused on the design, marketing and sale of electrical power conversion
products using our proprietary technology called Power Packet Switching
Architecture™, or PPSA™. PPSA™ is a power conversion technology that improves
upon existing power conversion technologies in key product metrics, such as size
and weight while providing built-in isolation and bi-directional and multi-port
capabilities. PPSA™ utilizes standardized hardware with application specific
embedded software. Our products were designed to be used in both on-grid and
off-grid applications with a focus on solar + storage, microgrid and stand-alone
energy storage applications. The principal products of the Company were
30-kilowatt power conversion systems, including 2-port and multi-port products.
In April 2018, we realigned into two operating divisions: Power Conversion
Systems, to continue the commercialization of our PPSA™ technology, and B-TRAN,
to develop our Bi-directional bi-polar junction TRANsistor (B-TRAN™) solid state
switch technology.
In January 2019, our Board approved a strategic shift to focus on the
commercialization of our B-TRAN™ technology and a plan to suspend further power
converter system, or PPSA™, development and sales while we located a buyer for
our power conversion systems division and PPSA™ technology. In September 2019,
we closed on the sale of our power conversion systems division and are now
solely focused on the further development and commercialization of our B-TRAN™
technology. Prior to the sale of our PPSA™ business and technology in
September 2019, we classified this division as held for sale. We show this
division as a discontinued operation in our financial statements.
To date, operations have been funded primarily through the sale of common stock
and warrants. Total revenue generated from inception to date as of December 31,
2020 amounted to $15.3 million with approximately $12.4 million of that revenue
from discontinued operations and the remainder from grant revenue for
bi-directional power switch development. Revenue from continuing operations was
$428,129 and $0 in the years ended December 31, 2020 and 2019, respectively, and
related to a government grant. We may pursue additional research and development
grants, if and when available, to further develop and/or improve our technology.
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 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.
Strategic Shift
In January 2019, our Board approved a strategic shift to focus on the
commercialization of our B-TRAN™ technology and a plan to suspend further power
converter system, or PPSA™, development and sales while we located a buyer for
our power conversion systems division and PPSA™ technology. While we closed on
the sale of this division in September 2019, it remains uncertain whether this
strategic shift will be successful.
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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 our financial performance will depend on future
developments, including, among other things, the duration and spread of
COVID-19, the timing 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. The COVID-19 pandemic has
caused significant volatility in the global financial markets, which may impact
our ability to raise additional capital, if necessary, on acceptable terms or at
all, though such risk has not materialized to date. If the financial markets
and/or the overall economy are negatively impacted for an extended period, our
operating results may be materially and adversely affected.
While the outbreak of COVID-19 initially disrupted our business in the first and
second quarters of 2020, the COVID-19 pandemic did not have a material adverse
impact on our operations in the second half of 2020. 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 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 2021 and thereafter. See "Item 1A: Risk Factors - Risks Related
to the Company - Our business, including our supply chain, liquidity, financial
condition and financial results may be adversely disrupted and impacted due to
COVID-19 pandemic."
Sale of Power Conversion Systems Division
In September 2019, we closed on the sale of our power conversion systems
division to CE+T Energy. The consideration consisted of $200,000 in cash and 50
shares of CE+T Energy's common stock, which represented a 5% ownership interest
in CE+T Energy as of the closing date. We did not record any value of the equity
consideration obtained in the sale as there is not currently a market for such
shares and we do not have access to current financial information and future
financial projections of CE+T Energy. CE+T Energy also assumed certain
liabilities of the power conversion systems division in connection with the
sale. The net cash proceeds from the sale were $23,587.
In September 2019, we entered into a sublease with CE+T Energy pursuant to which
we sublease approximately seventy-five (75%) percent of our Austin, Texas
facility to CE+T Energy. Under the sublease, CE+T Energy is obligated to make
monthly payments equal to 75% of all sums due under the master lease and 100% of
any maintenance and repair costs related to the subleased premises. The sublease
replaced a temporary agreement between us and CE+T Energy, effective in
July 2019, that contained similar payment obligations by CE+T Energy for
utilization of the subleased premises. Consistent with the master lease, the
sublease terminates on May 31, 2021.
February 2021 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 net proceeds to us from the February 2021 Offering were
$21.2 million. We intend 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.
Early Warrant Exercise Transaction
In August 2020, we closed the Early Warrant Exercise Transaction, pursuant to
which certain holders of our outstanding Series A warrants exercised such
Series A warrants to purchase an aggregate of 1,176,137 shares of common stock,
and we issued to such holders new Series C warrants to purchase up to an
aggregate of 705,688 shares of common stock with an exercise price of $8.90 per
share and an expiration date of August 4, 2025. We raised net proceeds of $2.5
million in the Early Warrant Exercise Transaction. We intend to use 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.
Private Placement
In November 2019, we entered into a securities purchase agreement with certain
institutional and accredited investors, including Dr. Lon E. Bell, our former
Chief Executive Officer and Chairman of the Board, for a private placement of
our common stock and warrants to purchase common stock for net proceeds of $3.1
million.
18
Critical Accounting Policies
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 policies and 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 or can be
materially affected by changes from period to period in economic factors or
conditions that are outside of our control. 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 are 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 information available from other outside sources, as appropriate.
Please see Footnote 2 to our financial statements for a more complete
description of our critical accounting policies.
Revenue Recognition. We recognize revenue and related cost of revenue in
accordance with Financial Accounting Standards Board ("FASB") Accounting
Standards Codification ("ASC") 606, "Revenue from Contracts with Customers" and,
as applicable, with the guidance issued by the FASB in June 2018 for the
recipients of grants.
Currently, we recognize grant revenue and cost of grant revenue only. Government
contracts, including grants, are agreements that generally provide us with cost
reimbursement for certain types of development activities over a contractually
defined period. Grant revenue is recognized in the period during which we incur
the related costs, provided that we incur the cost in accordance with the
specifications and work plans determined between us and the government entity.
Research and Development. Research and development costs are presented as a line
item under operating expenses and are expensed as incurred.
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 on our new inventions 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, or its
estimated economic life using the straight-line method. For the other intangible
assets, we amortize the asset over the term of the underlying agreements.
Leases.On January 1, 2019, we adopted ASC 842 utilizing a modified retrospective
approach with a date of initial application at the beginning of the period of
adoption. At adoption, we recognized a right of use asset of $422,819 and lease
liability of $427,131. As the discount rate implicit in the lease was not
readily determinable and we did not have any outstanding indebtedness, we
utilized market data, giving consideration to remaining term of the lease, to
estimate our incremental borrowing rate at 8% per annum for purposes of
calculating the right of use asset and lease liability.
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.
Stock-Based Compensation. We apply Financial Accounting Standards Board ("FASB")
Accounting Standards Codification ("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.
19
Results of Operations
Comparison of the year ended December 31, 2020 to the year ended December 31,
2019
Grant Revenues. Grant revenues for the year ended December 31, 2020 were
$428,129. The grant revenues relate 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 circuit breaker. We expect the grant revenue related
to the NAVSEA subcontract to continue throughout 2021 with zero or minimal
revenue recognized in 2022. 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 year ended December 31,
2020 was $428,129. The cost of grant revenues relates to the subcontract
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 or other
grants that we are pursuing, or may pursue, in 2021.
Research and Development Expenses. Research and development expenses increased
by $670,742, or 64%, to $1,720,893 in the year ended December 31, 2020 from
$1,050,151 in the year ended December 31, 2019. The increase was due primarily
to higher stock-based compensation expense of $392,556, contract labor for
B-TRAN™ driver design of $115,063, semiconductor fabrication costs of $108,879
and personnel costs of $58,840. Stock-based compensation expense was higher as a
majority of stock option grants in 2020 vested immediately. We expect modestly
higher research and development expenses in 2021 as we accelerate development
and commercialization of our B-TRAN™ technology.
General and Administrative Expenses. General and administrative expenses
increased by $281,977, or 14%, to $2,347,089 in the year ended December 31, 2020
from $2,065,112 in the year ended December 31, 2019. The increase was due
primarily to higher stock-based compensation costs of $291,752 as a majority of
stock option grants in 2020 vested immediately. Higher personnel costs of
$249,101 and chief executive officer search fees of $137,459 were offset by
lower legal fees of $214,057 and cost reduction activities of $182,278,
including, but not limited to, lower facilities costs, insurance, taxes and
travel, with lower travel primarily being a result of the COVID-19 pandemic. We
expect our general and administrative expenses to remain relatively flat in
2021.
Other Expenses. Other expenses increased by $3,721,648 to $3,725,915 for the
year ended December 31, 2020 from $4,267 in the year ended December 31, 2019.
The increase in other expenses was due to non-cash warrant inducement expense of
$3,720,866 in connection with the Early Warrant Exercise Transaction, as
discussed below.
Loss from Continuing Operations. Our loss from continuing operations for the
year ended December 31, 2020 was $7,793,897 or 150% higher than the $3,119,530
loss from continuing operations for year ended December 31, 2019, driven by the
factors discussed above including the non-cash warrant inducement expense of
$3,720,866 and higher research and development and general and administrative
spending.
Loss from Discontinued Operations. We did not have a loss from discontinued
operations for the year ended December 31, 2020. Our loss from discontinued
operations for the year ended December 31, 2019 was $799,025. Loss from
discontinued operations for the year ended December 31, 2019 included a $405,000
impairment on assets held for sale to write-down these assets to expected net
proceeds from the sale. Our discontinued operations were sold in September 2019.
Loss on Sale of Discontinued Operations. We did not have a loss on sale of
discontinued operations for the year ended December 31, 2020 as our discontinued
operations were sold in September 2019. Our loss on sale of discontinued
operation for the year ended December 31, 2019 was $9,107.
Net Loss. Our net loss increased by $3,866,235, or 98%, to $7,793,897 for the
year ended December 31, 2020 from a net loss of $3,927,662 for the year ended
December 31, 2019 for the reasons discussed above.
Liquidity and Capital Resources
We currently generate grant revenue only and expect grant revenue to likely 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.
As of December 31, 2020 and 2019, we had cash and cash equivalents of $3,157,256
and $3,057,682, respectively. Our net working capital and long-term debt at
December 31, 2020 were $2,786,900 and $91,407, respectively. As discussed below,
in May 2020, we received a PPP Loan (as defined below) to temporarily subsidize
our payroll and facilities costs in a business landscape impacted by the
COVID-19 pandemic.
Operating activities in the year ended December 31, 2020 resulted in cash
outflows of $3,019,032, which were due to the loss from continuing operations
for the period of $7,793,897 and slightly unfavorable balance sheet timing of
$7,461, partly offset by non-cash items including warrant inducement expense of
$3,720,866, stock-based compensation of $868,648, depreciation and amortization
of $122,152, stock issued for services of $50,000 and patent impairment charges
of $20,660.
20
Operating activities in the year ended December 31, 2019 resulted in cash
outflows of $3,218,657, which were due to the loss from continuing operations
for the period of $3,119,530 and cash used in operating activities related to
discontinued operations of $688,074, partly offset by favorable balance sheet
timing of $279,438, stock-based compensation of $184,339, depreciation and
amortization of $110,463 and patent impairment charges of $14,707.
We expect a modest increase in cash outflows from operating activities in 2021
as we accelerate development and commercialization of our B-TRAN™ technology.
Investing activities related to continuing operations in the years ended
December 31, 2020 and 2019 resulted in cash outflows of $67,160 and $104,098,
respectively, primarily for the acquisition of intangible assets. Investing
activities related to discontinued operations in the year ended December 31,
2019 resulted in a cash inflow of $23,587 on the net proceeds from the sale of
these discontinued operations in September 2019.
Financing activities in the year ended December 31, 2020 resulted in cash
inflows of $3,185,766 and included net proceeds from the exercise of warrants of
$3,094,359 and proceeds from loans of $91,407. Financing activities in the year
ended December 31, 2019 resulted in cash inflows of $3,098,773 related to the
net proceeds from the Private Placement, as defined and further described below.
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. We received total
proceeds of $91,407 from the unsecured PPP Loan. The PPP Loan is scheduled to
mature in May 2022 and has an interest rate of 1.00% per annum and is subject to
the terms and conditions applicable to loans administered by the U.S. Small
Business Administration under the CARES Act. The PPP Loan may be prepaid by us
at any time prior to its maturity with no prepayment penalties. The first
payment due date was originally in December 2020 but BBVA USA extended the first
due date to May 2021 as the PPP Flexibility Act of 2020 extended the deferral
period for payment of principal and interest for all PPP borrowers.
The PPP Loan contains customary events of default relating to, among other
things, payment defaults and breaches of representations and warranties. Subject
to certain conditions, the PPP Loan may be forgiven in whole or in part by
applying for forgiveness pursuant to the CARES Act and the PPP. The amount of
loan proceeds eligible for forgiveness is based on a formula based on a number
of factors, including the amount of loan proceeds used by us during the 8-week
or 24-week period after the loan origination for certain purposes, including
payroll costs, rent payments on certain leases and certain qualified utility
payments, provided that, among other things, at least 60% of the loan amount is
used for eligible payroll costs, the employer maintaining or rehiring employees
and maintaining salaries at certain level. In accordance with the requirements
of the CARES Act and the PPP, 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. It is our expectation that the PPP Loan will be forgiven but no
assurance can be given that we will be granted forgiveness of the PPP Loan in
whole or in part.
February 2021 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 net proceeds to us from the February 2021 Offering were
$21.2 million. We intend to use the net proceeds from the February 2021 Offering
to fund commercialization and development of our B-TRAN™ technology and general
corporate and working capital purposes.
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 in the Private Placement. 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 intend to utilize 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 equal to 60% of the shares underlying the Original
Warrants included in the Transaction. The New Warrants have an exercise price of
$8.90 per share and an expiration date of August 4, 2025. The estimated fair
value of the New Warrants was $3.7 million on the date of issuance and was
recognized as a non-cash warrant inducement expense within other expenses in our
statement of operations.
21
Private Placement
In November 2019, we entered into a securities purchase agreement with certain
institutional and accredited investors, including Dr. Lon E. Bell, our former
Chief Executive Officer and Chairman of the Board, for a private placement of
our common stock and warrants to purchase common stock for net proceeds of $3.1
million (the "Private Placement"). The Private Placement closed in
November 2019. In the Private Placement, we issued an aggregate of (i) 544,950
shares of common stock at a price of $2.4763 per share and (ii) pre-funded
warrants to purchase 868,443 shares of common stock that are immediately
exercisable and have no expiration date, at a price of $2.4763 less a nominal
exercise price of $0.001 per pre-funded warrant. We also issued to the investors
warrants to purchase up to an aggregate of 1,766,751 shares of common stock at
an exercise price of $2.32 per share that are immediately exercisable and will
expire five years from the issuance date. As compensation to the placement agent
in the Private Placement, in addition to a cash fee for its services, we also
issued to the placement agent a warrant to purchase up to 70,670 shares of
common stock, with an exercise price of $2.9716 per share. The other terms of
the placement agent warrant are substantially the same as the investor warrants.
We have utilized a majority, and expect to utilize the remainder, of the net
proceeds from the Private Placement to fund development of our B-TRAN™
technology and working capital and general corporate purposes.
Contractual Obligations and Commitments
As a smaller reporting company, we are not required to provide this information.
Off-Balance Sheet Arrangements
As of December 31, 2020, we did not have any off-balance sheet arrangements.
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IDEAL POWER INC. 