Ideal Power Inc.: Form 10-Q for the period ended Jun 30, 2022

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 2021 financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2021. 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 I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021.

Overview

Ideal Power Inc. is located in Austin, Texas. The Company is solely focused on the further development and commercialization of its Bidirectional bipolar junction TRANsistor (B-TRAN™) solid state switch technology.

To date, operations have been funded primarily through the sale of common stock and warrants. Total revenue generated from inception to date as of June 30, 2022 amounted to $16.1 million with approximately $12.4 million of that revenue from discontinued operations and the remainder from grant revenue for bidirectional power switch development. Revenue was $50,978 and $175,986 in the three months and six months ended June 30, 2022, respectively, and $84,705 and $326,766 in the three and six months ended June 30, 2021, respectively. Revenue for the three and six months ended June 30, 2022 and 2021 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 our financial performance will depend on future developments, including, among other things, the duration and spread of COVID-19 and its related 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 additional volatility in the global financial markets in the future, our 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, our operating results may be materially and adversely affected.

While the COVID-19 pandemic has caused some disruption to our business, it 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 electrical component shortages and unavailability, difficulties in securing fabrication capacity, delays in critical development and commercialization activities and/or result in potential incremental costs associated with mitigating the effects of the COVID-19 pandemic. There has been a significant disruption in the supply chain for semiconductors due both to the COVID-19 pandemic and increased demand for semiconductors. While this disruption has not materially impacted us to date, it may materially and adversely impact us in the future. The COVID-19 pandemic is ongoing, and its dynamic nature, including uncertainties relating to the ultimate spread of the virus and its related variants, the duration of the pandemic, the timing, scope and efficacy of vaccination efforts and additional actions that may be taken by governmental authorities in response to the pandemic, makes it difficult to forecast the effects on our business and results of operations for the remainder of 2022 and thereafter.

Results of Operations

Comparison of the three months ended June 30, 2022 to the three months ended June 30, 2021

Grant Revenues. Grant revenues for the three months ended June 30, 2022 and 2021 were $50,978 and $84,705, respectively. 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 solid state circuit breaker (“SSCB”). In June 2022, NAVSEA approved a 6-month extension to the program and the program is currently expected to be completed by the end of the year. We expect the remaining grant revenue of $64,671 related to this subcontract to be recognized during the third and fourth quarters of this year. We also expect to pursue additional government funding that may result in additional grant revenues in the future.

We expect to introduce our initial product for commercial sale as early as late 2022.

Cost of Grant Revenues. Cost of grant revenues for the three months ended June 30, 2022 and 2021 was $50,978 and $84,705, respectively. The cost of grant revenues relates to the subcontract with DTI 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 from other grants that we are pursuing or may pursue in the remainder of 2022.

Research and Development Expenses. Research and development expenses increased by $167,690, or 30%, to $728,383 in the three months ended June 30, 2022 from $560,693 in the three months ended June 30, 2021. The increase was due to higher semiconductor fabrication costs of $115,061, wafer and driver component costs of $95,212 and higher stock-based compensation expense of $70,689, partly offset by lower contract labor costs of $71,692 and other B-TRAN™ development spending of $41,580. In the three months ended June 30, 2021, our semiconductor fabrication costs were partially funded by government grants. In the three months ended June 30, 2022, almost all of our semiconductor fabrication costs were not funded by government grants. We expect higher research and development expenses in the remainder of 2022 as we continue to accelerate development of our B-TRAN™ technology and self-fund, at least in the short term, semiconductor fabrication costs and other development previously funded through government grants. Research and development expenses will be subject to quarterly variability due primarily to the number, size and timing of semiconductor fabrication runs and their associated cost as well as the timing and cost of other major development activities.

General and Administrative Expenses. General and administrative expenses increased by $131,119, or 22%, to $734,637 in the three months ended June 30, 2022 from $603,518 in the three months ended June 30, 2021. The increase was due to higher stock-based compensation expense of $45,974, professional fees of $27,581, Board fees and expenses of $20,554, personnel costs of $18,392 and other costs of $18,618. We expect flat to modestly lower general and administrative expenses in the remainder of 2022.

Sales and Marketing Expenses. Sales and marketing expenses increased by $121,119, or 108%, to $233,152 in the three months ended June 30, 2022 from $112,033 in the three months ended June 30, 2021. The increase was due to higher personnel costs of $44,578, as we hired our first two sales and marketing employees in 2021, professional fees of $22,633, stock-based compensation expense of $22,100, travel costs of $15,392 and other spending of $16,416. We expect higher sales and marketing expenses in the remainder of 2022 as we engage more broadly with prospective customers and continue the commercialization of our B-TRAN™ technology.

Loss from Operations. Our loss from operations for the three months ended June 30, 2022 was $1,696,172, or 33% higher, than the $1,276,244 loss from operations for the three months ended June 30, 2021 for the reasons discussed above.

Other Income. Other income was $6,178 for the three months ended June 30, 2022 compared to $89,551 for the three months ended June 30, 2021. The other income in the three months ended June 30, 2021 related primarily to a gain on forgiveness of long-term debt of $91,407.

Net Loss. Our net loss for the three months ended June 30, 2022 was $1,689,994, or 42% higher, as compared to a net loss of $1,186,693 for the three months ended June 30, 2021, for the reasons discussed above.

Comparison of the six months ended June 30, 2022 to the six months ended June 30, 2021

Grant Revenues. Grant revenues for the six months ended June 30, 2022 and 2021 were $175,986 and $326,766, respectively. The grant revenues relate primarily to a $1.2 million subcontract with DTI discussed above.

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 U.S. Department of Energy to develop a B-TRAN™-driven low loss alternating current SSCB. We completed our work under this subcontract in February 2022.

Cost of Grant Revenues. Cost of grant revenues for the six months ended June 30, 2022 and 2021 was $175,986 and $326,766, respectively. The cost of grant revenues relates to the subcontracts with DTI 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 $735,357, or 90%, to $1,556,930 in the six months ended June 30, 2022 from $821,573 in the six months ended June 30, 2021. The increase was due to higher semiconductor fabrication costs of $365,598, stock-based compensation expense of $152,865, personnel costs of $110,903, wafer and driver component costs of $96,594 and other B-TRAN™ spending of $9,397. In the six months ended June 30, 2021, our semiconductor fabrication costs were partially funded by government grants. In the six months ended June 30, 2022, almost all of our semiconductor fabrication costs were not funded by government grants.

General and Administrative Expenses. General and administrative expenses increased by $383,382, or 32%, to $1,587,586 in the six months ended June 30, 2022 from $1,204,204 in the six months ended June 30, 2021. The increase was due to higher investor relations spending, inclusive of services paid in stock, of $109,770, stock-based compensation expense of $101,275, Board search and placement fees and expenses of $91,495, professional fees of $31,645, insurance of $23,448 and other costs of $25,749.

Sales and Marketing Expenses. Sales and marketing expenses increased by $277,970, or 159%, to $452,581 in the six months ended June 30, 2022 from $174,611 in the six months ended June 30, 2021. The increase was due to higher personnel costs of $138,534, as we hired our first two sales and marketing employees in 2021, stock-based compensation of $54,455, travel costs of $29,056, professional fees of $23,800 and other spending of $32,125.

Loss from Operations. Our loss from operations for the six months ended June 30, 2022 was $3,597,097, or 63% higher, than the $2,200,388 loss from operations for the six months ended June 30, 2021 for the reasons discussed above.

Other Income. Other income was $2,462 for the six months ended June 30, 2022 compared to $89,545 for the six months ended June 30, 2021. The other income in the six months ended June 30, 2021 related primarily to a gain on forgiveness of long-term debt of $91,407.

Net Loss. Our net loss for the six months ended June 30, 2022 was $3,594,635, or 70% higher, as compared to a net loss of $2,110,843 for the six months ended June 30, 2021, for the reasons discussed above.

Liquidity and Capital Resources

We currently generate grant revenue only. We expect to generate grant revenue and potentially commercial revenue in late 2022, depending on the ultimate date that our initial product is introduced for commercial sale and the timing of any development agreements that we may enter into with potential customers. We have incurred losses since inception. We have funded our operations to date through the sale of common stock and warrants.

At June 30, 2022, we had cash and cash equivalents of $20.0 million. Our net working capital at June 30, 2022 was $19.9 million. We had no outstanding debt at June 30, 2022. Accordingly, we expect that our cash and cash equivalents will be sufficient to fund our activities for at least the next twelve months from the date of filing this Quarterly Report on Form 10-Q; however, we may require additional funds to fully implement our plan of operation and business strategy.

Operating activities in the six months ended June 30, 2022 resulted in cash outflows of $3,081,517, which were due to the net loss for the period of $3,594,635 and unfavorable changes in net working capital of $138,271, partly offset by stock-based compensation of $462,238, stock issued for services of $100,100 and depreciation and amortization of $89,051. Operating activities in the six months ended June 30, 2021 resulted in cash outflows of $1,801,095, which were due primarily to the net loss for the period of $2,110,843 and a non-cash gain on loan forgiveness of $91,407, partly offset by stock-based compensation of $153,644, favorable balance sheet timing of $107,960, depreciation and amortization of $70,343 and stock issued for services of $68,680.

We expect an increase in cash outflows from operating activities throughout the remainder of 2022 as we continue to accelerate development and commercialization of our B-TRAN™ technology.

Investing activities in the six months ended June 30, 2022 and 2021 resulted in cash outflows of $67,920 and $145,019, respectively, for the acquisition of intangible assets and fixed assets. We expect an increase in cash outflows from investing activities during the second half of 2022 as we intend to acquire equipment to enhance our internal testing capabilities.

Financing activities in the six months ended June 30, 2022 did not result in any cash inflows or outflows. Financing activities in the six months ended June 30, 2021 resulted in cash inflows of $21,204,609 from the net proceeds from our Public Offering (as defined below) in February 2021 and $3,301,226 from the exercise of warrants and stock options.

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, in an underwritten public offering 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 continue to expect 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.

Critical Accounting Estimates

There have been no significant changes during the six months ended June 30, 2022 to the critical accounting estimates 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, 2021.

Trends, Events and Uncertainties

There are no material changes from trends, events or uncertainties disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

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 in the Company’s reports that it files or submits under the Exchange Act 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 management, including the principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Company conducted an evaluation (pursuant to Rule 13a-15(b) of the Exchange Act), under the supervision and with the participation of its Chief Executive Officer (principal executive officer) and its Chief Financial Officer (principal financial and accounting officer) of the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2022 and has concluded that, as of June 30, 2022, the Company’s disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There have been no material changes in our internal controls over financial reporting that occurred during the quarter ended June 30, 2022 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.

There are no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.