Ideal Power Inc.: Form 10-Q for the period ended Mar 31, 2023

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 2022 financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2022. 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, 2022.

Overview

Ideal Power Inc. is located in Austin, Texas. We are solely focused on the further development and commercialization of our Bidirectional bipolar junction TRANsistor (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 $664 and $125,008 in the three months ended March 31, 2023 and 2022, 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.

Product Launch

In January 2023, we launched our first commercial product, the SymCool™ Power Module. This multi-die B-TRAN™ module is designed to meet the very low conduction loss needs of the solid-state circuit breaker (SSCB) market. We expect fabrication and initial sales of this product later in 2023.

Development Agreement

During the fourth quarter of 2022, we announced, and began Phase 1 of, a product development agreement with a top 10 global automaker for a custom B-TRAN™ power module for use in the automaker’s electric vehicle (EV) drivetrain inverters in its next generation EV platform. In Phase I of the program, we will provide packaged B-TRAN™ devices, drivers and technical data to the top 10 global automaker for their evaluation. Our expectation is that a successful Phase 1 will lead to us securing Phase 2 of the program. Assuming we secure Phase 2 of the program, we will collaborate with a packaging company selected by the automaker that will fabricate the custom B-TRAN™ modules. In Phase 3, the final development phase under the program, the custom B-TRAN™ power module is expected to be tested and certified in accordance with automotive codes and standards. The delivery of production-ready B-TRAN™-based modules is targeted for 2025. We expect to record modest revenue under this agreement in 2023.

Test and Evaluation Agreements

Since the middle of 2021, we announced several test and evaluation agreements with prospective customers, including a second top 10 global automaker, a top 10 global provider of power conversion solutions to the solar industry, a global diverse power management market leader, a tier 1 automotive supplier, a commercial EV manufacturer and an EV charging company. These companies, along with other current and future participants in our test and evaluation program, intend to test and evaluate the B-TRAN™ for use in their applications. We expect to incorporate the feedback from these customers into our future commercial products.

Results of Operations

Comparison of the three months ended March 31, 2023 to the three months ended March 31, 2022

Grant Revenue. Grant revenue for the three months ended March 31, 2023 and 2022 was $664 and $125,008, respectively. The grant revenue in the three months ended March 31, 2023 relates 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 (SBIR) 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. The grant revenue in the three months ended March 31, 2022 relates to both the NAVSEA and SBIR programs.

We expect the remaining grant revenue of $36,724 related to the NAVSEA program to be recognized in the second quarter 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 Revenue. Cost of grant revenue for the three months ended March 31, 2023 and 2022 was $664 and $125,008, respectively. The cost of grant revenues relates to the subcontracts with DTI discussed above and is equal to the associated grant revenue resulting in no gross profit. We expect no gross profit under the subcontract with DTI related to the NAVSEA program or from other grants that we are pursuing or may pursue in 2023.

Research and Development Expenses. Research and development expenses increased by $611,481, or 74%, to $1,440,028 in the three months ended March 31, 2023 from $828,547 in the three months ended March 31, 2022. The increase was due to higher stock-based compensation expense of $280,829, semiconductor fabrication costs of $214,971 and personnel costs of $121,203, partly offset by lower other B-TRAN™ development spending of $5,522. We expect higher research and development expenses in the remainder of 2023 as compared to 2022 as we continue development of our B-TRAN™ technology.

General and Administrative Expenses. General and administrative expenses increased by $41,984, or 5%, to $894,933 in the three months ended March 31, 2023 from $852,949 in the three months ended March 31, 2022. The increase was due to higher stock-based compensation expense of $84,143, personnel costs of $60,170 and professional fees of $47,914, partly offset by services paid in stock in the three months ended March 31, 2022 of $100,100, lower board of directors’ fees and expenses of $49,000 and other general and administrative spending of $1,143. We expect relatively flat general and administrative expenses, exclusive of stock-based compensation, in the remainder of 2023 as compared to 2022.

Sales and Marketing Expenses. Sales and marketing expenses increased by $84,897, or 39%, to $304,326 in the three months ended March 31, 2023 from $219,429 in the three months ended March 31, 2022. The increase was due to higher search and placement fees of $43,750, personnel costs of $21,730, stock-based compensation expense of $13,188 and other spending of $6,229. We expect higher sales and marketing expenses in the remainder of 2023 as compared to 2022 as we engage more broadly with prospective customers and launch our second commercial product in the second half of 2023.

Loss from Operations. Our loss from operations for the three months ended March 31, 2023 was $2,639,287, or 39% higher, as compared to the $1,900,925 loss from operations for the three months ended March 31, 2022, for the reasons discussed above.

Interest Income (Expense), Net. Net interest income was $111,302 for the three months ended March 31, 2023 compared to net interest expense of $3,716 for the three months ended March 31, 2022 as the result of the impact of higher interest rates on our money market account.

Net Loss. Our net loss for the three months ended March 31, 2023 was $2,527,985, or 33% higher, as compared to a net loss of $1,904,641 for the three months ended March 31, 2022, for the reasons discussed above.

Liquidity and Capital Resources

We currently generate grant revenue only. We expect to generate grant revenue as well as initial commercial revenue in 2023. We have incurred losses since inception. We have funded our operations to date primarily through the sale of common stock.

At March 31, 2023, we had cash and cash equivalents of $14.5 million. Our net working capital at March 31, 2023 was also $14.5 million. We had no outstanding debt at March 31, 2023.

We believe that our cash and cash equivalents on hand will be sufficient to meet our ongoing liquidity needs 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 in the future to fully implement our plan of operation 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 three months ended March 31, 2023 resulted in cash outflows of $1,755,723, which were due to the net loss for the period of $2,527,985, partly offset by stock-based compensation of $609,926, favorable balance sheet timing of $109,138 and depreciation and amortization of $53,918.

Operating activities in the three months ended March 31, 2022 resulted in cash outflows of $1,417,123, which were due to the net loss for the period of $1,904,641, partly offset by stock-based compensation of $231,765, favorable balance sheet timing of $111,463, stock issued for services of $100,100 and depreciation and amortization of $44,190.

We expect an increase in cash outflows from operating activities in the remainder of 2023 as we commercialize our B-TRAN™ technology, including the launch of our second commercial product.

Investing activities in the three months ended March 31, 2023 and 2022 resulted in cash outflows of $69,450 and $27,616, respectively, for the acquisition of intangible assets and fixed assets.

Critical Accounting Estimates

There have been no significant changes during the three months ended March 31, 2023 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, 2022.

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, 2022.

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 March 31, 2023 and has concluded that, as of March 31, 2023, 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 March 31, 2023 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, 2022.