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 2019 financial statements and related notes included in our
Annual Report on Form 10-K for the year ended December 31, 2019. In addition to
historical information, the discussion and analysis here and throughout this
Form 10-Q contains forward-looking statements that involve risks, uncertainties
and assumptions. Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including,
but not limited, to those set forth under "Risk Factors" in Part II, Item 1A of
this report.
Overview
Ideal Power Inc. 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 of Directors 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 September 30,
2020 amounted to $15.1 million with approximately $12.4 million of that revenue
from discontinued operations and the remainder from grant revenue for
bi-directional power switch development. Grant revenue was $147,787 and
$154,302, respectively, for the three and nine months ended September 30, 2020.
We did not have revenue from continuing operations in the three and nine months
ended September 30, 2019. We expect to pursue additional research and
development grants, if and when available, to further develop and/or improve our
technology.
COVID-19 Impact
In March 2020, the World Health Organization declared the outbreak of COVID-19
as a pandemic, which continues to spread throughout the United States and the
rest of the world. The ultimate extent of the impact of COVID-19 on the
financial performance of the Company will depend on future developments,
including, among other things, the duration and spread of COVID-19, governmental
restrictions in response to the COVID-19 pandemic, and the overall economy, all
of which are highly uncertain and cannot be predicted. The outbreak of COVID-19
has already caused significant disruptions to the global financial markets which
may impact the Company's ability to raise additional capital, on acceptable
terms or at all. If the financial markets and/or the overall economy are
impacted for an extended period, the Company's operating results may be
materially and adversely affected.
15
Recent Developments - Early Warrant Exercise Transaction
On August 5, 2020, we closed the Early Warrant Exercise Transaction (as defined
below), pursuant to which certain holders of our outstanding Series A warrants
exercised warrants to purchase an aggregate of 1,176,137 shares of common stock,
and we issued to such holders new Series C warrants to purchase up to an
aggregate of 705,688 shares of common stock with an exercise price of $8.90 per
share and an expiration date of August 4, 2025. We raised net proceeds of $2.5
million in the Early Warrant Exercise Transaction. See "Liquidity and Capital
Resources-Early Warrant Exercise Transaction" below for additional information.
Results of Operations
Comparison of the three months ended September 30, 2020 to the three months
ended September 30, 2019
Grant Revenues. Grant revenues for the three months ended September 30, 2020
were $147,787. The grant revenues relate to a $1.2 million subcontract with
Diversified Technologies, Inc. (DTI) to supply B-TRAN™ devices as part of 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 this subcontract to continue over the next two years with a majority of the
revenue to be recognized over the first twelve to fifteen months of the
subcontract.
Cost of Grant Revenues. Cost of grant revenues for the three months ended
September 30, 2020 was $147,787. The cost of grant revenues relates to the
subcontract discussed above and are equal to the associated grant revenues
resulting in no gross profit.
Research and Development Expenses. Research and development expenses increased
by $243,775, or 97%, to $494,548 in the three months ended September 30, 2020
from $250,773 in the three months ended September 30, 2019. The increase was due
to higher stock compensation expense of $127,295, contract labor of $65,688,
semiconductor fabrication costs of $41,319 and consulting costs of $26,469,
partly offset by lower other B-TRAN™ development spending of $16,996. We expect
lower research and development expenses for the fourth quarter of 2020.
General and Administrative Expenses. General and administrative expenses
increased by $206,695, or 44%, to $677,967 in the three months ended September
30, 2020 from $471,272 in the three months ended September 30, 2019. The
increase was due to higher bonus expense of $191,841, stock compensation expense
of $64,626 and other costs of $5,047, partly offset by lower legal fees of
$54,819. We expect lower general and administrative expenses for the fourth
quarter of 2020.
Other Expenses. Other expenses were $3,722,224 for the three months ended
September 30, 2020 compared to $2,763 for the three months ended September 30,
2019. The increase in other expenses was due to non-cash warrant inducement
expense of $3,720,866 as discussed below under Liquidity and Capital Resources:
Early Warrant Exercise Transaction.
Loss from Continuing Operations. Our loss from continuing operations for the
three months ended September 30, 2020 was $4,894,739, or 575% higher than the
$724,808 loss from continuing operations for the three months ended September
30, 2019 due to non-cash warrant inducement expense of $3,720,866 and the
increases in research and development expenses and general and administrative
expenses discussed above.
Loss from Discontinued Operations. Our loss from discontinued operations for
the three months ended September 30, 2019 was $78,796. As we sold our power
conversion systems division in September 2019, we did not have a loss from
discontinued operations for the three months ended September 30, 2020.
Loss on Sale of Discontinued Operations. Our loss on sale of discontinued
operations for the three months ended September 30, 2019 was $9,107.
Net Loss. Our net loss for the three months ended September 30, 2020 was
$4,894,739, or 502% higher, as compared to a net loss of $812,711 for the three
months ended September 30, 2019, for the reasons discussed above.
Comparison of the nine months ended September 30, 2020 to the nine months ended
September 30, 2019
Grant Revenues. Grant revenues for the nine months ended September 30, 2020 were
$154,302. The grant revenues relate to a $1.2 million subcontract with DTI to
supply B-TRAN™ devices as part of a two-year contract awarded to DTI by 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 over the next two years with a majority of the
revenue to be recognized over the first twelve to fifteen months of the
subcontract.
Cost of Grant Revenues. Cost of grant revenues for the nine months ended
September 30, 2020 was $154,302. 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.
16
Research and Development Expenses. Research and development expenses increased
by $356,796, or 44%, to $1,161,537 in the nine months ended September 30, 2020
from $804,741 in the nine months ended September 30, 2019. The increase was due
to higher semiconductor fabrication costs of $136,772, stock compensation
expense of $119,414, bonus expense of $79,519 and other B-TRAN™ development
spending of $21,091.
General and Administrative Expenses. General and administrative expenses
increased by $253,290, or 17%, to $1,773,615 in the nine months ended September
30, 2020 from $1,520,325 in the nine months ended September 30, 2019. The
increase was primarily due to higher bonus expense of $215,522, stock
compensation expense of $158,484 and other costs of $14,313 as well as fees
incurred in connection with the search for our new chief executive officer of
$137,459, partly offset by lower legal fees of $196,269 and facilities costs of
$76,219.
Other Expenses. Other expenses were $3,723,346 for the nine months ended
September 30, 2020 compared to $3,072 for the nine months ended September 30,
2019. The increase in other expenses was due to non-cash warrant inducement
expense of $3,720,866 as discussed below under Liquidity and Capital Resources:
Early Warrant Exercise Transaction.
Loss from Continuing Operations. Our loss from continuing operations for the
nine months ended September 30, 2020 was $6,658,498 or 186% higher than the
$2,328,138 loss from continuing operations for the nine months ended September
30, 2019 due to non-cash warrant inducement expense of $3,720,866 and the
increase in research and development expenses and general and administrative
expenses discussed above.
Loss from Discontinued Operations. Our loss from discontinued operations for
the nine months ended September 30, 2019 was $768,047 and included a $405,000
impairment of assets held for sale. As we sold our power conversion systems
division in September 2019, we did not have a loss from discontinued operations
for the nine months ended September 30, 2020.
Loss on Sale of Discontinued Operations. Our loss on sale of discontinued
operations for the nine months ended September 30, 2019 was $9,107.
Net Loss. Our net loss for the nine months ended September 30, 2020 was
$6,658,498, or 114% higher, as compared to a net loss of $3,105,292 for the nine
months ended September 30, 2019, for the reasons discussed above.
Liquidity and Capital Resources
We currently generate grant revenue only. We have funded our operations through
the sale of common stock and warrants.
At September 30, 2020, we had cash and cash equivalents of $3,769,225 and net
working capital of $3,356,205.
Our long-term debt at September 30, 2020 was $91,407. 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 nine months ended September 30, 2020 resulted in
cash outflows of $2,303,639, which were due to the loss from continuing
operations for the period of $6,658,498, partly offset by warrant inducement
expense of $3,720,866, stock-based compensation of $434,782, depreciation and
amortization of $86,368, stock issued for services of $50,000 and patent
impairment charges of $18,235 and favorable balance sheet timing of $44,608.
Operating activities in the nine months ended September 30, 2019 resulted in
cash outflows of $2,433,236, which were due to the loss from continuing
operations for the period of $2,328,138 and cash used in operating activities
related to discontinued operations of $557,096 partly offset by non-cash items,
including depreciation and amortization and stock-based compensation, of
$239,795 and favorable balance sheet timing of $212,203. We expect flat to
modestly higher cash outflows from operating activities for the fourth quarter
of 2020.
Investing activities in the nine months ended September 30, 2020 and 2019
resulted in cash outflows of $48,243 and $78,595, respectively, for the
acquisition of intangible assets and fixed assets. The sale of our power
conversion systems division resulted in a cash inflow of $23,587 from
discontinued operations in the nine months ended September 30, 2019.
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. For the nine months
ended September 30, 2019, financing activities resulted in no cash inflows or
outflows.
The Company's independent registered public accounting firm, in its report on
the Company's 2019 financial statements, raised substantial doubt about the
Company's ability to continue as a going concern. On August 5, 2020 the Company
completed the Early Warrant Exercise Transaction raising net proceeds of $2.5
million, thereby alleviating the substantial doubt about the Company's ability
to continue as a going concern for at least the next twelve months from the date
of issuance of this report.
17
As our B-TRAN™ technology is in the development stage and has not yet been
commercialized, we may be required to obtain additional financing to continue
our operations and execute our business plan. We may not be able to obtain such
financing on commercially reasonable terms or at all, especially in light of the
market volatility and uncertainty as a result of the COVID-19 outbreak. If we
are unable to obtain such financing if and when needed, we will be required to
reduce operating costs, which could jeopardize future strategic initiatives and
business plans, or cease operations. In addition, there can be no assurances
that we will be able to successfully commercialize our technology and develop
profitable operations.
PPP Loan
On May 4, 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 recently enacted 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 on May 4, 2022 and has an interest
rate of 1.00% per annum and is subject to the terms and conditions applicable to
loans administered by the U.S. Small Business Administration under the CARES
Act. The PPP Loan may be prepaid by us at any time prior to its maturity with no
prepayment penalties.
The PPP Loan contains customary events of default relating to, among other
things, payment defaults and breaches of representations and warranties. Subject
to certain conditions, the PPP Loan may be forgiven in whole or in part by
applying for forgiveness pursuant to the CARES Act and the PPP. The amount of
loan proceeds eligible for forgiveness is based on a formula based on a number
of factors, including the amount of loan proceeds used by us during the 24-week
period after the loan origination for certain purposes, including payroll costs,
rent payments on certain leases, and certain qualified utility payments,
provided that, among other things, at least 60% of the loan amount is used for
eligible payroll costs, the employer maintaining or rehiring employees and
maintaining salaries at certain level. In accordance with the requirements of
the CARES Act and the PPP, we used the proceeds from the PPP Loan primarily for
payroll costs. We intend to apply for forgiveness of the PPL Loan during the
fourth quarter of 2020. 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.
Private Placement
On November 13, 2019, we closed on a private placement of our common stock and
warrants to purchase common stock for aggregate gross proceeds of $3.5 million
and net proceeds of $3.1 million. We have been utilizing, and expect to continue
to utilize, the net proceeds from this private placement to fund
commercialization and development of our B-TRAN™ semiconductor technology and
for working capital and general corporate purposes.
Early Warrant Exercise Transaction
On July 31, 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 pursuant to that certain securities purchase agreement
between us and the other parties thereto, dated as of November 7, 2019. 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 on August 5, 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™ semiconductor 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.
Critical Accounting Policies
Revenue Recognition
We recognize revenue and related cost of revenue in accordance with FASB ASC
606, Revenue from Contracts with Customers (ASC 606) and, as applicable, with
the guidance issued by the FASB in June 2018 for the recipients of grants.
18
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 have incurred the cost in accordance with
the specifications and work plans determined between us and the government
entity.
For the nine months ended September 30, 2020, we recognized $154,302 of grant
revenue and cost of grant revenue. The grant revenue relates to a $1.2 million
subcontract with Diversified Technologies, Inc. (DTI), signed in June 2020, 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 account for this subcontract as an exchange transaction under
applicable guidance. No grant revenue was recognized in the nine months ended
September 30, 2019. Unbilled grant receivables were $28,623 at September 30,
2020 and were included in accounts receivable, net on our balance sheet.
There have been no other significant changes during the nine months ended
September 30, 2020 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, 2019.
Off-Balance Sheet Transactions
As of September 30, 2020, we did not have any off-balance sheet transactions.
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