# Ideal Power Inc.: Form 10-K for the period ended Dec 31, 2014

- Company: [Ideal Power Inc.](/companies/ipwr.md) (CIK 1507957)
- Form: 10-K
- Filed: 2015-03-25
- Accepted by EDGAR: Mar 25, 2015, 16:10 ET
- Period: 2014-12-31
- Accession: 0001144204-15-018355
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1507957/000114420415018355/v403448_10k.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1507957/000114420415018355/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2014-12-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 12 months, 2014-01-01 to 2014-12-31 | $1.8m | us-gaap:Revenues |
| Cost of revenue | 12 months, 2014-01-01 to 2014-12-31 | $2.3m | us-gaap:CostOfRevenue |
| Gross profit | 12 months, 2014-01-01 to 2014-12-31 | −$476.8k | us-gaap:GrossProfit |
| Research and development | 12 months, 2014-01-01 to 2014-12-31 | $2.3m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 12 months, 2014-01-01 to 2014-12-31 | −$6.9m | us-gaap:OperatingIncomeLoss |
| Net income | 12 months, 2014-01-01 to 2014-12-31 | −$6.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 12 months, 2014-01-01 to 2014-12-31 | −$0.98 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 12 months, 2014-01-01 to 2014-12-31 | −$5.5m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 12 months, 2014-01-01 to 2014-12-31 | $342.2k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2014-12-31 | $7.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2014-12-31 | $8.9m | us-gaap:AssetsCurrent |
| Total assets | at 2014-12-31 | $10.3m | us-gaap:Assets |
| Current liabilities | at 2014-12-31 | $1.2m | us-gaap:LiabilitiesCurrent |
| Shareholders' equity | at 2014-12-31 | $9.1m | us-gaap:StockholdersEquity |

## Business

As filed, 46,815 characters.

### Our Company

Ideal Power was formed in Texas on May 17, 2007 and converted to a Delaware corporation on July 15, 2013. Ideal Power has developed an electronic power conversion technology called Power Packet Switching Architecture (“PPSA”). PPSA is a power conversion technology that improves upon existing power conversion technologies in key product metrics, such as size, weight, cost, and efficiency. PPSA utilizes standardized hardware with application specific embedded software. Ideal Power has been granted 19 United States, one European, one Chinese and two other foreign patents on PPSA and its applications, and continues to build its intellectual property portfolio around this core technology.

Electronic power conversion systems change electrical energy between direct current (“DC”) and alternating current (“AC”) to enable generation, distribution, consumption and storage of electricity. Additional features of electronic power conversion systems include current, voltage and frequency management, and balancing system resources to optimize generation and load profiles of the customer.

Evolving sources and uses of energy are driving the need for a new energy infrastructure and supporting technologies. In particular, the deployment of unpredictable sources of renewable energy such as wind and solar is driving a need for technological advancement to mitigate this variability. Placement of PV solar at the customer site, high current demands for electric vehicle (“EV”) charging, and renewable energy intermittency are driving demand for systems to counteract these emerging technologies and keep the electrical system in balance. Energy storage systems have recently evolved as a new resource in the toolkit to better manage sources and uses of energy whether at the utility substation or in the electrical room of a small business. Distributed power conversion systems are an integral element of this new infrastructure as they are the device that enables local power management and control. Power conversion systems managing distributed grid energy storage can improve the resiliency of the power grid and also create islanded micro-grids to bring power to a home or building when the grid fails. In short, today’s modern power conversion systems are a key component for managing power and ensuring continuity from generation through distribution and ultimately consumption.

Connecting power sources and uses together on the power grid requires keeping them electrically isolated to prevent power from flowing in the wrong direction and damaging components of the power system or creating potential safety hazards. Traditionally, power conversion systems use a transformer to isolate components. Transformer-based power conversion systems rely on one hundred year-old technology, which is big, heavy and expensive due to the large quantity of copper and magnetic material required. Thus, power conversion systems with transformers are costly to manufacture, ship and install, require a lot of space and generate a lot of heat due to their inefficient operation.

Ideal Power’s PPSA is the only transformerless power conversion system on the market that provides the necessary electrical isolation required to connect electrical devices together on the grid. Electrical isolation is at the core of Ideal Power’s PPSA technology. As a result, Ideal Power’s PPSA power conversion systems are lighter, smaller and more efficient than transformer-based power conversion systems. Consequently, PPSA has the potential to impact several fast-growing electric power conversion markets.

Ideal Power has developed and commercialized power conversion systems that take advantage of the inherent benefits of its PPSA technology and sells these systems in markets where the value of this technology is the greatest. The primary markets for Ideal Power’s technology today are commercial and industrial sites where there is a need for power conversion systems driven by one of several value streams. These value streams include managing consumption to reduce peak power demands, integrating new sources of generation such as distributed photovoltaic power, and adding new resources such as EV chargers to the facility. Ideal Power’s products provide advantages to the commercial or industrial customer over traditional power conversion systems due to their reduced weight, compact size, quiet operation, high efficiency and reliability, and advanced programmability features enabling the Company to optimize the system to specific customer needs.

### Our Technology

PPSA technology uses in-direct power flow where power flows through input switches and is temporarily stored in a proprietary AC link inductor. Fast switching algorithms, which enable the transfer of quantum packets of power, are at the heart of Ideal Power’s PPSA technology. As the AC link becomes charged, it disconnects from its input switches and reconnects to its output switches, providing true isolation without the need for a transformer.

Figure 1: Schematic of PPSA Process

Traditional power conversion system technology uses continuous power flow that relies on several magnetic components and bulk capacitors that are heavy and expensive, have custom hardware for fixed functions that are inflexible and costly, and have high electrical and thermal stresses that drive component failures and losses. Ideal Power’s PPSA technology eliminates the majority of the passive components of traditional power conversion systems including transformers, inductors and bulk capacitors. PPSA technology provides isolated power conversion in a single compact device, which provides clear advantages over traditional technologies. Among them are:

- Size and Weight: PPSA architecture reduces size and weight by eliminating passive components such as transformers, inductors and bulk capacitors. Our 30kW power conversion system weighs 97 pounds. By contrast, similar transformer-based 30kW power conversion systems weigh over 600 pounds.
- Efficiency: Efficiency is the measure of power out of the power conversion system as a percentage of the power into the system. Thus, high efficiency systems use less power in the conversion process and supply more power for use. In the California Energy Commission (“CEC”) weighted efficiency test, our 30kW power conversion system scored 96.5%. PPSA efficiency improvement can be even more significant when operating the system at relatively low rated power, which is more common in battery systems.

Figure 2: PPSA Size, Weight and Efficiency Comparison

- Cost: Reduced weight results in lower material and manufacturing, transportation and installation costs.
- Safety: Since PPSA provides isolation, it allows the systems in which it is used to be grounded. Non-grounded systems require additional safeguards to pass U.S. safety regulations, which increase system cost and reduce efficiency.
- Scalability/Flexibility: PPSA technology uses standardized hardware with application specific software, thus providing more scalability that enables rapid development cycles for new products and new applications. PPSA’s flexibility enables uses from small commercial-scale (below 10kW) to utility-scale (over 1MW).
- Reliability: PPSA technology enables a simplified product that eliminates several common failure modes. These design features are likely to increase overall system reliability.

Ideal Power is developing a next generation bi-directional insulated gate bipolar transistors (“BD-IGBT”) with funds from a $2.5 million ARPA-E grant from the U.S. Department of Energy as well as Company research and development spending. For a discussion of the economic terms and conditions of the ARPA-E grant, please see the discussion in the section of this report titled “Management’s Discussion and Analysis of Results of Operations and Financial Condition — Critical Accounting Policies — Revenue Recognition”. If successful in its development, Ideal Power believes these BD-IGBTs will further improve the competitive advantages of its core technology.

### Business Strategy

The Company’s business strategy is to promote and expand the uses of its PPSA technology initially through product development and product sales, followed by licensing product designs to other OEMs all while continuing to innovate and expand the company’s intellectual property portfolio in the power conversion space. To bring its products to market, the Company will seek out best-in-class partners who will build Ideal Power’s innovative products into higher value products resulting in multiple strategic sales channels with Ideal Power’s core PPSA technology as a key aspect of a system.

*Products:* The Company has developed products commercializing its PPSA technology and makes these products available for sale both directly to customers and through a distributor in the United States. The Company is currently selling six power conversion products utilizing its patented PPSA technology. These products are described as follows:

- A 30kW PV Inverter, which is available in the United States as a UL 1741 Certified product for commercial and industrial PV installations. This product was Ideal Power’s first product and was an important building block in validating the Company’s technology and provided valuable operating

experience in conditions outside of the laboratory. This product shares the same hardware as the Company’s 30kW battery converter but uses embedded software specific to a PV application. While it is still available for sale it is not actively marketed and the company expects it to have little to no revenue going forward as the Company’s product focus has shifted to higher-value bi-directional applications.

- A 30kW Battery Converter for the growing commercial and industrial grid-tied distributed energy storage market. Ideal Power’s second product, the 30kW battery converter received UL1741 certification, required for connection to the power grid in the United States, in January 2013. The 30kW bi-directional battery converter uses the same hardware design as the 30kW PV Inverter, but with more sophisticated embedded software for bi-directional power conversion and control. This product has significant performance advantages over other solutions in the market for Battery Energy Storage Systems (“BESS”) including its 96.5% CEC-weighted efficiency. Traditional, transformer-based power conversion systems typically have a 92 – 93% CEC-weighted efficiency. Ideal Power’s 4% improvement is effectively an 8% improvement due to the fact that the CEC weighting only counts efficiency in one conversion step but two are required (grid → battery & battery → grid) due to the bi-directional nature of BESS applications. As a result, a BESS using a transformer-based product requires 8% more input electricity and 4% more battery storage capacity to create the same electrical output as a BESS using Ideal Power’s product. Ideal Power’s product is approximately 1/5th the size and weight of transformer-based products, reducing the costs of materials, manufacturing, shipping, installation and maintenance. Ideal Power’s 30kW Battery Converter also has a significantly lower acoustic noise profile, which allows for installation in buildings without the need for acoustic isolation or insulation. This product is selling in volume today and it represented the majority of 2014 product revenue.
- A 30kW grid-resilient AC-DC-DC multi-port power conversion system, formerly known as a “hybrid” power conversion system, which has two DC ports enabling both PV and a DC battery system to be installed with one simple connection. This product was introduced in summer 2014 and is capable of operating in both 50Hz and 60Hz environments making it Ideal Power’s first “world-product”. This product also has the ability to form and manage a “micro-grid”, effectively using energy storage with distributed generation resources to make its own power grid to support critical loads or simply allow a building to disconnect from the utility power grid. This product is used in both off-grid and grid-tied applications and received the “Electrical Energy Storage Award” for product innovation at InterSolar, Germany, the world’s largest solar exhibition. For grid-tied applications, this product is expected to receive its UL 1741 certification in Spring 2015.
- A 125kW grid-resilient AC-DC power conversion system, which was introduced in October 2014, for higher power applications. This 125kW system has over four times the power of the 30kW product, is also a “world-product”, and also has the ability to form and manage a micro-grid. First articles of this new product will be delivered to customers in Spring 2015. This product is primarily for use in grid-tied applications and as such it is expected to receive its UL 1741 certification in late Summer 2015 and begin shipping in volume shortly thereafter.
- A 125kW grid-resilient AC-DC-DC multi-port power conversion system, which was also introduced in October 2014, for higher power applications with multi-port capabilities. This 125kW system has over four times the power of the 30kW multi-port product, is also a “world-product,” and also has the ability to form and manage a micro-grid. First articles of this new product will be delivered to early customers in Spring 2015. This product is mostly for off-grid and micro-grid management applications and as such is not currently planned to receive a UL 1741 certification in 2015.
- A new 30kW grid-resilient AC-DC power conversion system, which was introduced in February 2015 as the next generation of Ideal Power’s 30kW batter converter. This new product has all of the design features of Ideal Power’s new “world-products” including the ability to form and manage a microgrid as is targeted for those customers who want Ideal Power’s best-selling 30kW battery converter but need to use the product overseas or need the ability to form a micro-grid. This new product is not a replacement for the 30kW battery converter but rather it is a complimentary product with additional features that will open up new markets for Ideal Power.

Figure 3: Ideal Power Product Family

*Licensing:* As its products establish a foothold in key power conversion markets, the Company may begin to focus on licensing its proprietary PPSA-based product designs to OEMs to reach more markets and customers. The Company may seek to build a portfolio of relationships that generate license fees and royalties from OEMs for sales of their products which integrate PPSA technology. The basis for this approach is the belief that OEMs may achieve higher product margins and gain more market share by providing PPSA-based products to their customers, which are differentiated from the balance of the product offerings from the industry. Ideal Power will first target OEMs in the power conversion space that serve markets and geographies that would be difficult or costly for Ideal Power to pursue directly and which make complementary products but do not compete with the Company in its core markets or core product offerings. The Company believes such strategic relationships with key OEM licensees would enable it to reap the benefits of its PPSA technology and gain market share more quickly than by strictly manufacturing and distributing its own products.

*Future Innovations:* Ideal Power continues to focus its long-term development efforts on next-generation power switches, including the Bi-Directional Insulated Gate Bipolar Transistors (“BD-IGBT”). Standard, single-direction IGBTs are widely used in power conversion systems today. In conventional power conversion systems, IGBT’s are used as power switches to conduct and block current in a single direction. Thanks to its unique, patented PPSA architecture, Ideal Power has successfully deployed these standard single-direction IGBTs in its PPSA systems and enabled bi-directional power flow with industry-leading efficiency.

Ideal Power’s technology can possibly be even more efficient. With new, bi-directional power switches conducting and blocking current in both directions, Ideal Power may be able to replace two traditional IGBT’s and two diodes with one new BD-IGBT in its systems, possibly enabling even higher efficiency and potentially further reducing material costs which may further enhance the market competitiveness of Ideal Power’s products and core PPSA technology.

Figure 4: Potential Benefits of BD-IGBT Power Switch Components

Our BD-IGBT development effort is being partially funded by the U.S. Department of Energy’s $2.5 million ARPA-E grant. The grant funds were fully utilized as of December 31, 2014 and the Company is self-funding current development efforts.

The Company believes that the commercialization of these next generation power switches may further improve the Company’s advantages in efficiency, weight and cost across its entire range of products. Among other efforts in this area, Ideal Power is actively filing patents on this core technology, the semiconductor processing techniques involved, and the variety of applications for these new power switches. If the Company is successful in its efforts to commercialize these new power switches, it will extend the Company’s product performance advantages in efficiency, power density, reliability, and cost in its current market applications, as well as accelerate its ability to deliver disruptive solutions in larger mature markets.

*Intellectual Property:* As a company focused on the development and commercialization of technology, we expect that our most valuable asset will be our intellectual property. This includes U.S. and foreign patents, patent applications, common-law trademarks, trade secrets and know-how. We are pursuing an aggressive intellectual property strategy.

We have 19 issued U.S. patents and 4 issued foreign patents. We have filed numerous additional pending U.S., foreign and international patent applications. The pending foreign and international patent applications, barring unforeseen problems, are expected to provide patent protection in additional countries including the European Union, China, India, Korea, Malaysia, the Philippines, Singapore and Brazil. We expect to file a significant number of additional patent applications for both our core power conversion technology and other technological developments that broaden the scope of our technology platform. The issue date and expiration date of our issued U.S. and foreign patents is included in the table below:

| Title | Number | Issued | Expires (Estimate) |
| --- | ---: | --- | --- |
| Universal Power Converter | 7,599,196 | 6-Oct-09 | 6-Oct-2028 |
| Universal Power Converter Methods | 7,778,045 | 17-Aug-10 | 5-Jun-2029 |
| Power Conversion with Added Pseudo-Phase | 8,295,069 | 23-Oct-12 | 17-Aug-2030 |
| Converter For Enhanced Efficiency Power Conversion | 8,300,426 | 30-Oct-12 | 30-Mar-2028 |
| Universal Power Converter with Bidirectional Switching Devices | 8,345,452 | 1-Jan-13 | 6-Jun-2027 |
| Power Transfer Devices, Methods, and Systems with Crowbar Switch Shunting Energy-Transfer Reactance | 8,391,033 | 5-Mar-13 | 29-Jun-2030 |
| Buck-Boost Power Converter Circuits, Methods and Systems | 8,395,910 | 12-Mar-13 | 6-Jun-2027 |
| Universal Power Converter with Two Input Drive Operations During Each Half-Cycle | 8,400,800 | 19-Mar-13 | 6-Jun-2027 |

6

| Title | Number | Issued | Expires (Estimate) |
| --- | ---: | --- | --- |
| Power Conversion with Added Pseudo-Phase | 8,406,025 | 26-Mar-13 | 17-Aug-2030 |
| Power Transfer Devices, Methods, and Systems with Crowbar Switch Shunting Energy-Transfer Reactance | 8,432,711 | 30-Apr-13 | 29-Jun-2030 |
| Power Transfer Devices, Methods, and Systems with Crowbar Switch Shunting Energy-Transfer Reactance | 8,441,819 | 14-May-13 | 29-Jun-2030 |
| PV Array Systems, Methods, and Devices with Improved Diagnostics and Monitoring | 8,446,042 | 21-May-13 | 30-Nov-2031 |
| PV Array Systems, Methods, and Devices with Improved Diagnostics and Monitoring | 8,446,043 | 21-May-13 | 30-Nov-2031 |
| Power Transfer Devices, Methods, and Systems with Crowbar Switch Shunting Energy-Transfer Reactance | 8,446,705 | 21-May-13 | 29-Jun-2030 |
| Power Transfer Devices, Methods, and Systems with Crowbar Switch Shunting Energy-Transfer Reactance | 8,451,637 | 28-May-13 | 29-Jun-2030 |
| Photovoltaic Array Systems, Methods, and Devices with Bidirectional Converter | 8,461,718 | 11-Jun-13 | 30-Nov-2031 |
| Photovoltaic Array Systems, Methods, and Devices with Bidirectional Converter | 8,471,408 | 25-Jun-13 | 30-Nov-2031 |
| Power Conversion with Added Pseudo-Phase | 8,514,601 | 20-Aug-13 | 17-Aug-2030 |
| Power Conversion with Current Sensing Coupled through Saturating Element | 8,531,858 | 10-Sep-13 | 30-Nov-2031 |
| Universal Power Converter | CN101523710B | 5-Mar-14 | 6-Jun-2027 |
| Photovoltaic Array Systems, Methods, and Devices with Bidirectional Converter | SG190401 | 28-May-14 | 30-Nov-2031 |
| Universal Power Converter | EP2025051 | 31-Dec-14 | 6-Jun-2027 |
| Power Converter with Added Pseudo-Phase | CA2808490 | 3-Feb-15 | 17-Aug-2030 |

On October 4, 2013 we received a letter from a competitor alleging that the system architecture that appears on our website “appears” to infringe on patents licensed to or held by the competitor. The letter asks that we explain why we believe that our technology does not represent an infringement. We have investigated this claim and we have determined that the allegation is without merit. No resolution regarding this assertion has been reached. In early 2014, we met with the competitor to discuss the issue. No subsequent discussions have been held with, and no further correspondence has been received from, this competitor.

We rely on a combination of patent filings, laws that protect intellectual property, confidentiality procedures, and contractual restrictions with our employees and others, to establish and protect our intellectual property rights. In addition, the software that is shipped with our products is encrypted.

### Target Markets

The global power conversion market was approximately $50 Billion in 2014 and is forecast to grow to over $70 Billion by 2020 as shown below in the graphic by Yole Development, a Lyon, France based global research firm specializing in the scientific and power electronics markets.

Figure 5: Inverter Market

### Inverters market (M$)

### including PV inverter, wind turbine, rail traction, EV/HEV, motor drives & UPS

#### (Source: Inverter market trends for 2013 – 2020 and major technology changes report, February 2013, Yole Development)

Of this nearly $70 billion of 2020 market potential, the vast majority of the growth will come from three segments of the industry as shown in the below graphic based on data from the same Yole Development study. Ideal Power has products both in production and in development that directly address the highest predicted growth segment (Battery & Microgrid).

Figure 6: Inverter Market Segmentation

### Battery and Microgrid Power Conversion Market

Utility power grids are built using Alternating Current (“AC”) generation, transmission, and distribution resources. This method of power transmission and distribution has been proven over time to be reliable and safe. The outlets in a typical home or business are AC but many electrical devices, such as computers, televisions, and other appliances operate on Direct Current (“DC”) power. Batteries and PV solar panels produce DC power as well. In order to operate DC devices on an AC power grid, a power conversion device is necessary.

In the traditional utility model, power is generated from central stations and transmitted over long distance high-voltage transmission lines to substations where the voltage is reduced for distribution to consumers. Utility grids are built to manage the flow of power in one direction, from generation to use, where sophisticated tools have been developed to constantly match the amount of power being generated with the amount being consumed. Utilities ramp power plants up or down to closely match generation with load. The rapid growth in worldwide renewable generation such as wind and solar has added a new level of complexity to the equation. These intermittent resources cannot be dispatched at will or relied upon to meet the peak power demands of the grid. Renewables tend to ramp up and down quickly. A single cloud over a PV farm can cause output to be reduced from full power to nearly nothing in a manner of seconds. These new challenges can make it increasingly difficult for utilities to meet peak power demands. As a result, utilities in certain markets of the United States have begun charging more for peak power to their customers. These are known as “peak demand charges” and offer an incentive for customers to cut peak power usage. This is a trend that is likely to continue in the U.S. and elsewhere as the utility grid enters the information age with smart meters and demand-side management tools available to electricity consumers.

Battery Energy Storage Systems (“BESS”) are blocks of batteries coupled with a power conversion system such as those manufactured by Ideal Power to enable electric power to be captured, stored, and used on electric power grids. These systems can be large, megawatt-scale systems operated by utilities to better manage their system resources, or small, kilowatt-scale systems in homes and businesses designed to enable consumers to manage their power use and mitigate utility imposed demand charges. In certain U.S. markets today, notably California, New York, and Massachusetts, there are strong economic incentives available to commercial and industrial consumers in the form of reduced demand charges for installing a BESS and reducing peak consumption. There is also strong regulatory support for such systems. For example, California has issued a mandate for over 1,000 megawatts of new energy storage to be installed by 2020. Ideal Power’s 30kW and 125kW AC-DC power conversion systems enable these BESS systems to connect to the utility grid and offer these customers substantial cost savings opportunities. This market is still in its infancy, but Ideal Power has established a strong brand and position in this market with the Company’s customers having many systems installed and operating today. This market is forecast to grow 40% annually over the next six years and offers the highest value proposition today for the Company’s power conversion systems.

Distributed PV solar installations are a stable growth business for power conversion systems. The economics of generating PV solar for local consumption remain strong. One shortcoming of these rooftop PV systems is that they require the utility power grid to be connected in order for them to operate. A home or business with PV on the roof will not, in most cases, benefit from the ability to generate power should the utility power grid go down. Ideal Power’s grid-resilient multi-port power conversion systems remove this constraint. When a distributed solar PV system is connected with a BESS to one of Ideal Power’s multi-port power conversion systems, the home or business will benefit from the product’s ability to form and manage a local microgrid powered by the PV system and batteries even when the utility grid is down. This capability is attractive to electricity consumers who need to power critical loads even in a blackout. This capability is not limited to PV systems. Ideal Power products have been proven to connect and manage a diesel generator with batteries to form and operate a microgrid using far less fuel, emitting far fewer pollutants, and providing better power quality than a diesel generator alone.

#### The Commercial and Industrial Battery Energy Storage System (“BESS”) Market

The commercial and industrial battery energy storage system (“BESS”) market is the primary vertical power conversion market for the company’s 30kW Battery Converter, Grid-Resilient 30kW Power Conversion System, and Grid-Resilient 125kW Power Conversion System. These products are currently being sold to commercial BESS integrators such as industry leaders Sharp Electronics, Green Charge Networks, EOS Energy, and Coda Energy. As these product gain traction in the market with these and other customers, the Company believes that it is well positioned to emerge as the market-leader in power conversion solutions to the commercial and industrial segment of the BESS vertical and will benefit from this market’s rapid growth.

With approximately 10 Megawatts of orders booked in the past two quarters, the Company believes this market is at an inflection point as it matures from pilot installations to higher volume installations driven by the underlying economics of the BESS product to the commercial or industrial customer. The primary value proposition for commercial or industrial BESS is to reduce monthly utility demand charges. For example, the cost of installing commercial BESS in California may be recovered over a period of three to five years when combined with high demand charges and the State’s Self Generation Incentive Program. Increasing demand charges and lower system costs should also make commercial BESS solutions financially attractive to commercial businesses in New York, where systems are already being installed, and in many other states. As the market matures, third-party financing has increasingly become available to reduce upfront capital requirements. For example, one of our customers, Green Charge Networks, received $56 million in private funding that will be primarily devoted to financing its BESS solutions in order to eliminate upfront capital requirements.

The company expects the cost of commercial and industrial BESS systems to continue to decline due primarily to lower battery costs. Many larger BESS installations had traditionally used several of our 30kW battery converters. With direct customer feedback, the Company developed its new 125kW products to help reduce installation and system costs for these larger installations. The company believes the combination of lower BESS costs, third-party financing, continued increases in utility demand charges, and the continued entrance of large, established companies to the BESS space will all contribute to accelerating market growth.

#### Commercial BESS with PV Systems

Commercial and industrial BESS systems are able to generate value far beyond peak demand reduction. The Company believes it will become increasingly attractive to co-locate BESS systems with distributed PV. IHS, a global research firm with a strong renewable industry focus, forecasts that global installations of grid-tied commercial BESS systems coupled with PV, a subset of the battery and microgrid market, will grow 111% annually from near obscurity in 2014 to over 600 MW of BESS systems by 2018.

Grid-Tied Commercial BESS Installations with PV

According to their research, IHS believes that systems will be deployed in two principle configurations. The present configuration is to have separate BESS and PV systems tied together through the AC wiring, which is supported with by all of the Company’s products. A second, emerging configuration will be to place the BESS and the PV system behind a single power conversion system with two DC inputs. This configuration is forecast to improve efficiency, reduce costs, and allow PV harvesting when operating without a power grid present in microgrid mode. Ideal Power’s Grid-Resilient 30kW and 125kW Multi-Port Power Conversion Systems were designed specifically to enable this lower cost and more efficient second configuration.

Also according to IHS, the global PV industry is projected to grow from 45GW of annual installations in 2014 to 71GW in 2018. The growth rate of the industry during the next few years is projected to slow to 11% CAGR from a 21% CAGR between 2012 and 2014. Providing a new generation of solutions with integrated energy storage will enable the PV industry to address new markets with high growth potential. These new PV+BESS markets include providing backup power during blackouts, improving grid stability in high penetration PV areas and reducing diesel fuel consumption in remote off-grid microgrids. In the event of a grid failure, grid-tied PV installations are not capable of operating independently. For example, during Superstorm Sandy many PV system owners were displeased to learn that their grid-tied PV installations. Systems incorporating Ideal Power’s mulit-port power conversion systems along with PV and a BESS will be capable of providing backup power during grid blackouts. The Company expects its multi-port products to be attractive to existing customers as a low-cost system upgrade to improve integration of PV. The Company further expects its products to provide competitive solutions for these market requirements.

#### Microgrid Applications

PV has one of the lowest levelized costs of energy for new electrical generation capacity and this is expected to remain true in the near term. Over the next decade the greatest demand for new power generation capacity is likely to occur in regions such as Southeast Asia, Africa, the Middle East, and Central and South America. Remote communities and infrastructure in these regions are more likely to depend on expensive diesel generation for their primary fuel supply and may not have a utility power grid to access for high quality, reliable power.

In contrast to grid-tied BESS and PV applications that are likely to be North American installations, the Company believes off-grid BESS and PV opportunities to develop rapidly across Central and South America, Southeast Asia, Africa and the Middle East. IHS recently forecasted the off grid and microgrid BESS installations with PV market to reach 400MW by 2018 with the majority of this growth coming from regions with less developed electricity infrastructure. The Company believes that its Grid-Resilient 30kW and 125kW Multi-Port Power Conversion Systems offer superior solutions for these applications.

Off Grid Commercial BESS Installations with PV

In September 2014, Ideal Power announced a strategic partnership with EnerDel, who is developing a new line of Mobile Hybrid Power Systems (“MHPS”) that integrate Ideal Power’s Grid-Resilient 30kW Multi-Port Power Conversion System, a diesel genset, and their own lithium-ion batteries and proprietary control system. This new MHPS is designed for both remote and grid-tied microgrid applications that depend on diesel generators as the primary power source. According to EnerDel, this MHPS will offer up to a 70% reduction in diesel fuel consumption compared to stand-alone generators, and is being tested by the United States Army Corps of Engineers’ Engineer Research and Development Center. EnerDel expects its MHPS to reduce diesel consumption and operating costs, while offering a suite of benefits to commercial, industrial, utility and government customers alike. The new MHPS will be a family of modular products with both trailer and skid mounting options that EnerDel expects to sell worldwide.

The Company believes that its award-winning multi-port power conversion architecture is a highly attractive solutions for integrating BESS, PV and diesel generators for both grid-tied and off grid markets. Customer and industry forecasts indicate that these markets will grow dramatically in the coming years, and the Company expects to benefit from this growth.

### Other Markets

Although our technology may be suitable for VFD and additional vertical markets within the global power conversion market landscape, Ideal Power does not currently offer products for sale directly to the VFD, uninterruptible power supply, rail, wind, or EV traction drive markets. Ideal Power products are suitable for use as PV inverters but this market is saturated with incumbents offering devices that are single-direction and suitable only for this application. As such, while Ideal Power does have a number of PV inverters in field service today, the stand-alone PV inverter market is not a primary growth market for the Company. As discussed above, the Company is instead focused on PV integrated BESS applications for its multi-port products where the fullest potential of its technology can be utilized.

In addition to the markets discussed above, the Company has opportunities for market expansion into fast electric vehicle chargers in certain applications where its products compact size and multi-port capabilities can unlock value for the system integrator particularly in locations where battery storage is coupled with the charging system to eliminate demand charges or expand the charging systems response capabilities. The Company has provided power conversion systems to NRG Energy for a CPUC-approved technology demonstration program to reduce the installation and operational costs of EV DC charging infrastructure. In September 2014, NRG purchased two 30kW battery converters from Ideal Power for installation at a demonstration site at the University of California San Diego.

The Company also sees future potential in the commercial wind turbine market where we announced our first order on September 23, 2014. The customer plans to use Ideal Power products in a new 100kW turbine to serve agricultural load requirements.

Ideal Power plans to continue to monitor all power conversion markets for opportunities to create solutions for customers in which unlock the value of the Company’s patented technology

### Development Relationships

PPSA has gained early validation from licensing and development arrangements with organizations in both the private and public sectors.

*Department of Energy:* We have been awarded two significant grants from the U.S. Department of Energy. We have received approximately $2.7 million in revenue from these grants and do not expect to receive additional revenue from these grants. These grants provided funding for long-term research and next generation product development. We expect to apply for additional government grants in the future.

We received an award of $2.5 million from ARPA-E. As of December 31, 2014 we recognized revenue of $2.5 million as the award amount has been fully funded. We used this award to develop advanced power switch technology. While we currently successfully use commodity silicon IGBT and diode components in our products, we are developing advanced power switch components that we believe could significantly improve the efficiency, weight, and manufacturing costs of our products. Research universities and commercial vendors worked under our direction and received the majority of the ARPA-E program funding. This funding was sufficient to develop and demonstrate advanced power switches in simulations and start the initial fabrication of the devices. We expect to demonstrate these advanced power switches in prototypes in 2015.

Our second Department of Energy award was a $150,000 Phase I SBIR grant. We used this grant to develop early prototypes of a 3-port hybrid converter which we commercialized as the grid-resilient 30kW multi-port power conversion system in 2014. We completed this project in May 2013 and we do not expect to receive further awards from the Department of Energy for this project.

*National Renewable Energy Laboratory:* On May 13, 2013 we announced a Cooperative Research and Development Agreement to use our technology to develop and test next generation electric vehicle DC charging infrastructure solutions. The goal of this effort is to create standard reference designs using our patented technology in the 3-port hybrid converter that can readily be adopted by commercial and municipal EV fleets, military installations, and public infrastructure. These reference designs seek to improve the cost, efficiency and reliability of power conversion between EVs, solar panels, storage batteries and electric grid, as well as provide grid energy storage and emergency backup power capabilities. This project was completed in mid-2014 except for final reporting which is expected to be completed in the near term.

### Customers

Although the Company expects to expand its customer base and channels to market in the future, we have historically been reliant on a small number of revenue producing customers. One customer, the Department of Energy, from which the Company received $579,079 in grant revenues in 2014, accounted for 32% of net revenue for the year ended December 31, 2014 while our three largest customers for product sales, from whom we received $789,000 in product revenues in 2014, accounted for 20%, 13% and 11% of net revenues in 2014. One customer, the Department of Energy, from which we received $1,229,036 in net revenues in 2013, accounted for 65% of net revenue for the year ended December 31, 2013. No customers for product sales represented 10% or more of our net revenues in 2013.

### Competition

The Company competes against well-established incumbent power conversion technology providers. The Company believes that, for the markets identified, its patented Power Packet Switching Architecture (“PPSA”) technology provides significant competitive advantages compared to incumbent players. However, the Company does not currently enjoy a significant market share in any vertical market segment of the global power conversion industry.

*Transformer Based:* Transformer-based power conversion systems are the conservative choice, as they are proven and have been commercially available longer than any other type of power conversion system. They provide isolation, but are big, heavy, and relatively inefficient. There have been improvements in the efficiency of transformer-based power conversion systems over the years, but the Company believes further improvements are limited due to the physical characteristics of transformers themselves. Major suppliers in this market include ABB, Eaton, and Schneider Electric.

*Transformerless PV Inverters:* Transformerless photovoltaic (PV) solar inverters are a special class of power conversion system applicable only to PV arrays. They have become a popular choice in the market for distributed PV applications, as they are lighter and more efficient than transformer based inverters. These transformerless inverters are one-way (DC to AC) inverters, and provide no electrical isolation. PV systems are not required to be electrically isolated in most electrical code jurisdictions. These PV inverters have no applicability to markets that require electrical isolation, which includes every application in the electrical power conversion industry in which the Company competes. Key providers of transformerless PV inverters include companies such as SMA and Kaco New Energy.

### Research and Development Costs

During the years ended December 31, 2014 and December 31, 2013, we incurred $2,901,890 and $2,643,096, respectively, in research and development costs, of which $643,421 and $1,430,798, respectively, were included in cost of revenues and $2,258,469 and $1,212,298, respectively, were included in operating expenses.

### Manufacturing

We currently use subcontractors to assemble and test our product from our designs using primarily commodity materials and components.

### Employees

As of February 28, 2015, we had 22 full-time employees. None of these employees are covered by a collective bargaining agreement, and we believe our relationship with our employees is good.

### Industry Certifications

Industry certifications are generally required for our products. The main certification requirement is UL1741, which tests and guarantees grid safety and product safety for distributed generation sources including PV inverters, battery converters, and bi-directional EV chargers. A National Recognized Testing Laboratory (“NRTL”) must complete the certification before our customers may install and use our products in most applications in the United States.

We have worked with Intertek, an NRTL, for these certifications and have completed testing and received authorization to use their ETL mark on our 30kW battery converter and 30kW PV inverters. While we have been able to rapidly and timely complete these certifications, which we believe is indicative of our commitment to the development of our technology, we may not be as successful in completing certification in a timely manner on future products, such as our grid-resilient 30kW and 125kW power conversion systems (“PCS”) and our grid resilient 30kW and 125kW multi-port PCS, which could limit our ability to bring such products to market.

Europe and Japan have different certification test procedures, but generally test for similar capabilities. We do not have familiarity with these other grid safety certifications; however, such certifications are likely to be required to sell our products in these regions. Geographic regions outside of North America, Europe and Japan generally do not have specific certification requirements, but may require one or more of the other regional certifications before products are approved for sale.

### Government Regulation

Government approval is not required for us to sell our products. However government support for renewable energy, grid storage, electric vehicle charging infrastructure and improved grid resiliency may impact growing markets that we service. Utility regulations and support may also impact these end markets. Government and utility support for these markets is generally required near term for these markets to grow and changes in policy by governments or utilities may limit the market opportunities for our products.

### Available Information

Our Internet address is *www.idealpower.com* and our investor relations website is located at *ir.idealpower.com*. We make available free of charge on our investor relations website under the heading “SEC Filings” our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports as soon as reasonably practicable after such materials are electronically filed with (or furnished to) the SEC. Information contained on our website is not incorporated by reference into this Annual Report on Form 10-K. In addition, the public may read and copy materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site, *www.sec.gov*, that includes filings of and information about issuers that file electronically with the SEC.

## Risk factors

As filed, 48,373 characters.

*We are subject to various risks that may materially harm our business, prospects, financial condition and results of operations. An investment in our common stock is speculative and involves a high degree of risk. In evaluating an investment in shares of our common stock, you should carefully consider the risks described below, together with the other information included in this report.*

*The risks described below are not the only risks we face. If any of the events described in the following risk factors actually occurs, or if additional risks and uncertainties later materialize, that are not presently known to us or that we currently deem immaterial, then our business, prospects, results of operations and financial condition could be materially adversely affected. In that event, the trading price of our common stock could decline, and you may lose all or part of your investment in our shares. The risks discussed below include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements.*

### Risks Related to Our Business

***We lack an established operating history on which to evaluate our business and determine if we will be able to execute our business plan, and we can give no assurance that our operations will result in profits.***

We were formed in Texas on May 17, 2007 and converted to a Delaware corporation on July 15, 2013. We have a limited operating history that makes it difficult to evaluate our business. Historical sales of our products have been in low volume, and we cannot say with certainty when we will begin to achieve profitability. No assurance can be made that we will ever become profitable.

***We have incurred losses in prior periods and expect to incur losses in the future. We may never be profitable.***

Since our inception on May 17, 2007 through December 31, 2014, we have sustained $23,652,431 in net losses and we had net losses for the years ended December 31, 2014 and 2013 of $6,900,219 and $9,551,698, respectively. We expect to have operating losses at least until such time as we have developed a substantial and stable revenue base. We cannot assure you that we can develop a substantial and stable revenue base or achieve or sustain profitability on a quarterly or annual basis in the future.

As sales of our products have generated minimal operating revenues, we have relied on borrowings under convertible promissory notes, governmental grants and, recently, proceeds from our initial public offering to continue our operations. If we are unable implement our business plan, generate sustainable revenue and achieve profitable operations with our existing capital we would need to raise funds through equity or debt offerings and there can be no assurance that we will be able to do so.

***To date we have had a limited number of customers. We cannot assure you that our customer base will increase.***

One customer, the Department of Energy, from which we received $579,079 in grant revenues in 2014, accounted for 32% of net revenue for the year ended December 31, 2014 while our three largest customers for product sales, from whom we received $789,000 in product revenues in 2014, accounted for 20%, 13% and 11% of net revenues in 2014. One customer, the Department of Energy, from which we received $1,229,036 in net revenues in 2013, accounted for 65% of net revenue for the year ended December 31, 2013. No customers for product sales represented 10% or more of our net revenues in 2013. As a significant portion of our 2013 and 2014 net revenue was from a single customer under grant programs that have been fully funded, we cannot assure you that we will have significant grant revenue in the future. Also, as the Company has sold its products to a limited number of customers in 2013 and 2014, we cannot assure you that our customer base will expand or that any decline in net revenue attributable to customer losses will be able to be replaced in a timely manner.

***We may not be able to meet our product development and commercialization milestones.***

Product development and testing are subject to unanticipated and significant delays, expenses and technical or other problems. We cannot guarantee that we will successfully achieve our milestones within our planned timeframe or ever. Our plans and ability to achieve profitability depend on acceptance of our technology and our products by key market participants, such as customers, vendors and marketing partners, and potential end-users of our products. We continue to educate potential partners about our PPSA technology and current and planned product offerings. More generally, the commercialization of our products may also be adversely affected by many factors not within our control, including:

- the willingness of market participants to try a new product and the perceptions of these market participants of the safety, reliability, functionality and cost effectiveness of our products;
- the emergence of newer, possibly more effective technologies;
- the future cost and availability of the raw materials and components needed to manufacture and use our products; and
- the adoption of new regulatory or industry standards that may adversely affect the use or cost of our products.

Accordingly, we cannot predict that our products will be accepted on a scale sufficient to support development of mass markets for them.

***We must achieve design wins to retain our existing customers and to obtain new customers, although design wins achieved do not necessarily result in substantial sales.***

The constantly changing nature of technology in the markets we serve causes equipment manufacturers to continually design new systems. We must work with these manufacturers early in their design cycles to modify our equipment or design new equipment to meet the requirements of their new systems. Manufacturers typically choose one or two vendors to provide the components for use with early system shipments. Selection as one of these vendors is called a design win. It is critical that we achieve these design wins in order to retain existing customers and to obtain new customers.

We believe that equipment manufacturers often select their suppliers based on factors including long-term relationships and end user demand. Accordingly, we may have difficulty achieving design wins from equipment manufacturers who are not currently our customers. In addition, we must compete for design wins for new systems and products of our existing customers, including those with whom we have had long-term relationships. Our efforts to achieve design wins are time consuming, expensive, and may not be successful. If we are not successful in achieving design wins, or if we do achieve design wins but our customers’ systems that utilize our products are not successful, our business, financial condition, and results of operations could be materially and adversely impacted.

Once a manufacturer chooses a component for use in a particular product, it is likely to retain that component for the life of that product. Our sales and growth could experience material and prolonged adverse effects if we fail to achieve design wins. However, design wins do not always result in substantial sales, as sales of our products are dependent upon our customers’ sales of their products.

***The prototype of any planned products may not provide the results we expect, may prove to be too expensive to produce and market, or may uncover problems of which we are currently not aware, any of which could harm our business and prospects.***

We commonly develop prototypes of planned products prior to the full commercialization of these products. As an example, we developed a 3-port hybrid converter, which is an integrated solar PV inverter and battery charger/inverter and which we now refer to as a grid-resilient 30kW multi-port power conversion system, during 2013 and 2014 and shipped a prototype of this product to a customer in July 2014. Although this prototype produced positive results consistent with our expectations, we cannot predict whether prototypes of future products will achieve results consistent with our expectations. A prototype could cost significantly more than expected or the prototype design and construction process could uncover problems that are not consistent with our expectations. Prototypes of emerging products are a material part of our business plan, and if they are not proven to be successful, our business and prospects could be harmed.

***We have received grant funds from the United States for the development of a bidirectional insulated gate bipolar transistor (“BD-IGBT”). In certain instances, the United States may obtain title to inventions related to this effort. If we were to lose title to those inventions, we may have to pay to license them from the United States in order to manufacture the BD-IGBT. If we were unable to license those inventions from the United States, it could slow down our product development.***

In conjunction with the Advanced Research Projects Agency-Energy (“ARPA-E”) grant we received from the Department of Energy, we granted to the United States a non-exclusive, nontransferable, irrevocable, paid-up license to practice or have practiced for or on behalf of the United States inventions related to the BD-IGBT and made within the scope of the grant. If we fail to disclose to the Department of Energy an invention made with grant funds that we disclose to patent counsel or for publication, or if we elect not to retain title to the invention, the United States may request that title to the subject invention be transferred to it.

We also granted “march-in-rights” to the United States in connection with any BD-IGBT inventions in which we choose not to retain title, if those inventions are made under the ARPA-E grant. Pursuant to the march-in-rights, the United States has the right to require us, any person to whom we have assigned our rights, or any exclusive licensee to grant a non-exclusive, partially exclusive, or exclusive license in any field of use to a responsible applicant upon terms that are reasonable. If the license is not granted as requested, the United States has the right to grant the license if it determines that we have not achieved practical application of the invention in the field of use, the action is necessary to alleviate health or safety needs, the action is necessary to meet requirements for public use specified by Federal regulations and such requirements have not been satisfied, or the action is necessary because an agreement to manufacture the invention in the United States has not been obtained or waived or because any such agreement has been breached.

If we lost title to the United States as a result of any of these events, we would have to pay to license the inventions to manufacture the BD-IGBT from the United States. If we were unable to license those inventions from the United States, it could slow down our product development.

***We have entered into a Cooperative Research and Development Agreement with the National Renewable Energy Lab (“NREL”). Under that agreement, the United States Government and NREL will have licenses to inventions made under that contract.***

We entered into a Cooperative Research and Development Agreement (“CRADA”) with NREL in May 2013. The CRADA provides that NREL and the Company will jointly develop and demonstrate a hybrid power converter system which includes bi-directional electric vehicle charging, photovoltaic generation, and stationary battery storage using our 3-port hybrid converter. Together with NREL, we will also jointly investigate synergies in tightly integrating these separate power conversion systems. This project was completed in mid-2014 except for final reporting which is expected to be completed in the near term.

The United States retains a nonexclusive, nontransferable, irrevocable, paid-up license to practice or to have practiced for or on behalf of the United States every invention made under this CRADA. The same licensing terms may apply to NREL’s operator, the Alliance for Sustainable Energy LLC.

This agreement also grants “march-in-rights” to the United States in connection with any inventions made under this contract in which we choose not to retain title, if those inventions are made under the CRADA contract. Pursuant to the march-in-rights, the United States has the right to require us, any person to whom we have assigned our rights, or any exclusive licensee to grant a non-exclusive, partially exclusive, or exclusive license in any field of use to a responsible applicant upon terms that are reasonable. If the license is not granted as requested, the United States has the right to grant the license if it determines that we have not achieved practical application of the invention in the field of use, the action is necessary to alleviate health or safety needs, the action is necessary to meet requirements for public use specified by Federal regulations and such requirements have not been satisfied, or the action is necessary because an agreement to manufacture the invention in the United States has not been obtained or waived or because any such agreement has been breached.

There were no inventions under the CRADA.

***As we continue to grow and to develop our intellectual property, we could attract threats from patent monetization firms or competitors alleging infringement. We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights.***

As we continue to grow and to develop our intellectual property, we could attract threats from patent monetization firms or competitors alleging infringement of intellectual property rights. For example, on October 4, 2013 we received a letter from a competitor alleging that the system architecture that appears on our website “appears” to infringe on patents licensed to or held by the competitor. We have investigated this claim and we have determined that the allegation is without merit. No resolution regarding this assertion has been reached. In early 2014, we met with the competitor to discuss the issue. No subsequent discussions have been held with, and no further correspondence has been received from this competitor. If we cannot resolve this matter, the cost to us of any litigation or other proceeding relating to intellectual property rights, even if resolved in our favor, could be substantial, and the litigation would divert management’s attention from our day-to-day operations.

In addition, some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. If we do not prevail in this type of litigation, we may be required to: pay monetary damages; stop commercial activities relating to our product; obtain one or more licenses in order to secure the rights to continue manufacturing or marketing certain products; or attempt to compete in the market with substantially similar products. Uncertainties resulting from the initiation and continuation of any litigation could limit our ability to continue some of our operations.

***We expect to license our technology in the future; however the terms of these agreements may not prove to be advantageous to us. If the license agreements we enter into do not prove to be advantageous to us, our business and results of operations will be adversely affected.***

We expect to license the manufacture of our product designs for certain markets as well as license our technology for certain potential applications which we choose not to pursue directly through the sale of products. However, we may not be able to secure license agreements with customers on terms that are advantageous to us. Furthermore, the timing and volume of revenue earned from license agreements will be outside of our control. If the license agreements we enter into do not prove to be advantageous to us, our business and results of operations will be adversely affected.

***Until recently, we have not devoted significant resources towards the marketing and sale of our products and we continue to rely on the marketing and sales efforts of third parties whom we do not control.***

To date, we have sold low volumes of our battery converter and power conversion system products. We expect that the marketing and sale of these products to end user customers will continue to be conducted primarily by a combination of independent manufacturers’ representatives, third-party strategic partners, distributors, or original equipment manufacturers (“OEMs”). Consequently, commercial success of our products will depend to a great extent on the efforts of others. We intend to enter into strategic marketing and distribution agreements or other collaborative relationships to market and sell our products. However, we have entered into only a limited number of strategic marketing or material distribution agreements at this time. We have recently entered into one distribution agreement with a large electrical equipment distributor and obtained initial orders from this distributor but have not shipped any products through that distributor thus far. We may not be able to identify or establish appropriate relationships in the near term or in the future. We can give no assurance that these distributors or OEMs will focus adequate resources on selling our products or will be successful in selling them. In addition, third-party distributors or OEMs have or may require us to provide volume price discounts and other allowances, customize our products or provide other concessions that could reduce the potential profitability of these relationships. Failure to develop sufficient distribution and marketing relationships in our target markets will adversely affect our commercialization schedule and to the extent we have entered or enter into such relationships, the failure of our distributors and other third parties to assist us with the marketing and distribution of our products, or to meet their monetary obligations to us, may adversely affect our financial condition and results of operations.

***A material part of our success depends on our ability to manage our suppliers and manufacturers. Our failure to manage our suppliers and manufacturers could materially and adversely affect our results of operations and relations with our customers.***

We rely upon suppliers to provide the components necessary to build our products and on contract manufacturers to produce our products. There can be no assurance that key suppliers and manufacturers will provide components or products in a timely and cost efficient manner or otherwise meet our needs and expectations. Our ability to manage such relationships and timely replace suppliers and manufacturers, if necessary, is critical to our success. Our failure to timely replace our contract manufacturers and suppliers, should that become necessary, could materially and adversely affect our results of operations and relations with our customers.

***Our business may be dependent upon our ability to obtain financing. If we do not obtain such financing, we may have to cease our activities.***

There is no assurance that we will operate profitably or generate positive cash flows in the future. In the future, we may require additional financing in order to sell our then current products and to continue the research and development required to produce our next generation of products. At that time, we may not be able to obtain financing on commercially reasonable terms or at all. If we do not obtain such financing when needed, our business could fail.

***The macro-economic environment in the United States and abroad has adversely affected, and may in the future adversely affect, our ability to raise capital, which may potentially impact our ability to continue our operations.***

As a company with limited revenues to date, we may need to rely on raising funds from investors to support our future research and development activities and our operations. Macro-economic conditions in the United States and abroad may result in a tightening of the credit markets and/or less capital available for small public companies, which may make it more difficult to raise capital. If we are unable to raise funds as and when we need them, we may be forced to curtail our operations or even cease operating altogether.

### We are subject to credit risks.

Some of our customers may experience financial difficulties and/or may fail to meet their financial obligations to us. As a result, we may incur charges for bad debt provisions related to some trade receivables. In addition, in connection with the growth of the renewable energy market and other markets for our products, we are gaining new customers, some of which have relatively short histories of operations or are newly formed companies. As a result, it is difficult to ascertain financial information in order to appropriately extend credit to these customers. Further, the volatility in the renewable energy market may put additional pressure on our customers’ financial positions, as they may be required to respond to large swings in revenue. The renewable energy industry has also seen an increasing amount of bankruptcies and reorganizations as the availability of financing has diminished.

If customers fail to meet their financial obligations to us, or if the assumptions underlying our recorded bad debt provisions with respect to receivables obligations do not accurately reflect our customers’ financial conditions and payment levels, we could incur write-offs of receivables in excess of our provisions, which could have a material adverse effect on our cash flow and operating results.

***We may not be able to control our warranty exposure, which could increase our expenses.***

We currently offer and expect to continue to offer a warranty with respect to our products and we expect to offer a warranty with each of our future product applications. Due to our limited long-term history of operating data, our reserve is estimated based on engineering judgment and a third party assessment of our product reliability. If the cost of warranty claims exceeds any reserves we may establish for such claims, our results of operations and financial condition could be adversely affected.

***We may be exposed to lawsuits and other claims if our products malfunction, which could increase our expenses, harm our reputation and prevent us from growing our business.***

Any liability for damages resulting from malfunctions of our products could be substantial, increase our expenses and prevent us from growing or continuing our business. Potential customers may rely on our products for critical needs, such as backup power. A malfunction of our products could result in warranty claims or other product liability. In addition, a well-publicized actual or perceived problem could adversely affect the market’s perception of our products. This could result in a decline in demand for our products, which would reduce revenue and harm our business. Further, since our products are used in devices that are made by other manufacturers, we may be subject to product liability claims even if our products do not malfunction.

***We are highly dependent on the services of R. Daniel Brdar and William Alexander, as well as other key members of our executive management team. Our inability to retain these individuals could impede our business plan and growth strategies, which could have a negative impact on our business and the value of your investment.***

Our ability to implement our business plan depends, to a critical extent, on the continued efforts and services of R. Daniel Brdar, our Chief Executive Officer and President, William Alexander, our founder and Chief Technology Officer, and other members of our executive management team. If we lose the services of any of these persons during this important time in our development, the loss may result in a delay in the implementation of our business plan and plan of operations. We can give no assurance that we could find satisfactory replacements for these individuals on terms that would not be unduly expensive or burdensome to us. We do not currently carry a key-man life insurance policy that would assist us in recouping our costs in the event of the death or disability of any of these persons.

***Any failure by management to properly manage our expected rapid growth could have a material adverse effect on our business, operating results and financial condition.***

If our business develops as expected, we anticipate that we will grow rapidly in the near future. Our failure to properly manage our expected rapid growth could have a material adverse effect on our ability to retain key personnel. Our expansion could also place significant demands on our management, operations, systems, accounting, internal controls and financial resources. If we experience difficulties in any of these areas, we may not be able to expand our business successfully or effectively manage our growth. Any failure by management to manage growth and to respond to changes in our business could have a material adverse effect on our business, financial condition and results of operations.

### Risks Relating to the Industry

***The electric power conversion industry is competitive and has a number of well-financed incumbents. The Company cannot guarantee that it can compete successfully.***

Ideal Power competes against providers of power conversion systems that are well established and have substantially greater assets, including manufacturing, marketing, and financial assets. These incumbents also have strong market share and name brand recognition in the industry. Competitors include ABB, Eaton, SMA, and Schneider Electric. Pricing, financing, servicing, as well as the general quality, efficiency and reliability of products, are significant competitive criteria in this industry. The Company’s ability to successfully compete on each of these criteria is material to the acceptance of its products and its future profitability. In addition, the industry may resist new technology and products from suppliers that are not well capitalized with long track records of performance. Our competitors use their balance sheet and brand recognition to their competitive advantage. Should Ideal Power’s products become commercially successful, competitors may seek to drive their own innovation and adopt or copy ideas, designs and features to regain their competitive positions. Competitors may develop or offer technologies and products that may be more effective or popular than the Company’s products and they may be more successful in marketing their products than Ideal Power is in marketing its own products. Additionally, price competition may result in lower than expected margins for our products.

Ideal Power expects to compete on the basis of its products’ lower cost, smaller footprint, higher efficiency, and technological innovation. Unrelated technological advances in alternative energy products or other power conversion technologies may negatively impact the development of the Company’s products or make the Company’s products uncompetitive or obsolete at any time. Ideal Power cannot guaranty that it will be able to compete successfully in the electric power conversion industry.

***The reduction or elimination of government subsidies and economic incentives for energy-related technologies could harm our business.***

We believe that near-term growth of energy-related technologies, including power conversion technology, relies partly on the availability and size of government and economic incentives and grants (including, but not limited to, the U.S. Investment Tax Credit and various state and local incentive programs). These incentive programs could be challenged by utility companies, or for other reasons found to be unconstitutional, and/or could be reduced or discontinued for other reasons. The reduction, elimination, or expiration of government subsidies and economic incentives could delay the development of our technology and harm our business.

***Changes to the National Electrical Codes (“NEC”) could adversely affect our technology and products.***

Our products are installed by system integrators that must meet the NEC standards, including using equipment that meets industry standards such as UL1741. The NEC standards address the safety of these systems. The NEC standards, along with the UL1741 and IEEE1547 requirements, continue to evolve and are subject to change. If we respond to these changing standards and requirements more slowly than our competitors, or if we are unable to meet new standards and requirements, our products will be less competitive.

***New technologies in the alternative energy industry may supplant our current products and technology in this market, which would harm our business and operations.***

The alternative energy industry is subject to rapid technological change. Our future success will depend on the cutting edge relevance of our technology, and thereafter on our ability to appropriately respond to changing technologies and changes in function of products and quality. If new technologies supplant our power conversion technology, our business would be adversely affected and we will have to revise our plan of operation.

***Businesses, consumers, and utilities might not adopt alternative energy solutions as a means for providing or obtaining their electricity and power needs.***

On-site distributed power generation solutions that utilize our products provide an alternative means for obtaining electricity and are relatively new methods of obtaining electrical power. There is a risk that businesses, consumers, and utilities may not adopt these new methods at levels sufficient to grow our business. Traditional electricity distribution is based on the regulated industry model whereby businesses and consumers obtain their electricity from a government regulated utility. For alternative methods of distributed power to succeed, businesses, consumers and utilities must adopt new purchasing practices and must be willing to rely upon less traditional means of providing and purchasing electricity. As larger solar projects come online, utilities are becoming increasingly concerned with grid stability, power management and the predictable loading of such power onto the grid.

We cannot be certain that businesses, consumers, and utilities will choose to utilize on-site distributed power at levels sufficient to sustain our business. The development of a mass market for our products may be impacted by many factors which are out of our control, including:

- market acceptance of systems that incorporate our products;
- the cost competitiveness of these systems;
- regulatory requirements; and
- the emergence of newer, more competitive technologies and products.

If a mass market fails to develop or develops more slowly than we anticipate, we may be unable to recover the costs we will have incurred to develop these products.

***The industries in which we compete are subject to volatile and unpredictable cycles.***

As a supplier to the grid energy storage, solar combined with storage, microgrid, EV charging infrastructure, wind, electric motor and related industries, we are subject to business cycles. The timing, length, and volatility of these business cycles can be difficult to predict. These industries historically have been cyclical due to sudden changes in customers’ manufacturing capacity requirements and spending, which depend in part on capacity utilization, demand for customers’ products, inventory levels relative to demand, and access to affordable capital. These changes have affected the timing and amounts of customers’ purchases and investments in technology, and affect our orders, net sales, operating expenses, and net income. In addition, we may not be able to respond adequately or quickly to the declines in demand by reducing our costs. We may be required to record significant reserves for excess and obsolete inventory as demand for our products changes.

To meet rapidly changing demand in each of the industries we serve, we must effectively manage our resources and production capacity. During periods of decreasing demand for our products, we must be able to appropriately align our cost structure with prevailing market conditions, effectively manage our supply chain, and motivate and retain key employees. During periods of increasing demand, we must have sufficient manufacturing capacity and inventory to fulfill customer orders, effectively manage our supply chain, and attract, retain, and motivate a sufficient number of qualified individuals. If we are not able to timely and appropriately adapt to changes in our business environment or to accurately assess where we are positioned within a business cycle, our business, financial condition, or results of operations may be materially and adversely affected.

### Risks Related to Owning Our Common Stock

***We are an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”) and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.***

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. At present, we intend to take advantage of the exemption from the requirement of holding a nonbinding advisory vote on executive compensation but do not intend to take advantage of any of the other exemptions, other than as they apply to all other “smaller reporting companies,” though we may do so at some point in the future. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

We will remain an “emerging growth company” for up to five years, although we will lose that status sooner if our revenues exceed $1 billion, if we issue more than $1 billion in non-convertible debt in a three year period, or if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30.

***Our status as an “emerging growth company” under the JOBS Act may make it more difficult to raise capital as and when we need it.***

Because of the exemptions from various reporting requirements provided to us as an “emerging growth company,” we may be less attractive to investors and it may be difficult for us to raise additional capital as and when we need it. Investors may be unable to compare our business with other companies in our industry if they believe that our reporting is not as transparent as other companies in our industry. If we are unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially and adversely affected.

***The public market for our common stock may be volatile. This may affect the ability of our investors to sell their shares as well as the price at which they sell their shares.***

The market price for the shares may be significantly affected by factors such as variations in the volume of trading activity, quarterly and yearly operating results, general trends in the alternative energy industry or other markets we serve, and changes in state or federal regulations affecting us and our industry. Furthermore, in recent years the stock market has experienced extreme price and volume fluctuations that are unrelated or disproportionate to the operating performance of the affected companies. Such broad market fluctuations may adversely affect the market price of our common stock.

***We have the right to issue shares of preferred stock. If we were to issue preferred stock, it is likely to have rights, preferences and privileges that may adversely affect the common stock.***

We are authorized to issue 10,000,000 shares of “blank check” preferred stock, with such rights, preferences and privileges as may be determined from time-to-time by our board of directors. Our board of directors is empowered, without stockholder approval, to issue preferred stock in one or more series, and to fix for any series the dividend rights, dissolution or liquidation preferences, redemption prices, conversion rights, voting rights, and other rights, preferences and privileges for the preferred stock. No shares of preferred stock are presently issued and outstanding and we have no plans to issue shares of preferred stock. The issuance of shares of preferred stock, depending on the rights, preferences and privileges attributable to the preferred stock, could reduce the voting rights and powers of the common stock and the portion of the Company’s assets allocated for distribution to common stockholders in a liquidation event, and could also result in dilution in the book value per share of the common stock we are offering. The preferred stock could also be utilized, under certain circumstances, as a method for raising additional capital or discouraging, delaying or preventing a change in control of the Company, to the detriment of the investors in the common stock offered hereby. We cannot assure you that we will not, under certain circumstances, issue shares of our preferred stock.

***We have not paid dividends in the past and have no immediate plans to pay dividends.***

We plan to reinvest all of our earnings, to the extent we have earnings, in order to market our products and to cover operating costs and to otherwise become and remain competitive. We do not plan to pay any cash dividends with respect to our securities in the foreseeable future. We cannot assure you that we would, at any time, generate sufficient surplus cash that would be available for distribution to the holders of our common stock as a dividend. Therefore, you should not expect to receive cash dividends on our common stock.

***Management of our Company is within the control of the board of directors and the officers. You should not purchase our common stock unless you are willing to entrust management of our Company to these individuals.***

All decisions with respect to the management of the Company will be made by our board of directors and our officers, who beneficially own 11.8% of our common stock, as calculated in accordance with Rule 13d-3 promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”). Therefore, management will retain significant influence in electing a majority of the board of directors who shall, in turn, have the power to appoint the officers of the Company and to determine, in accordance with their fiduciary duties and the business judgment rule, the direction, objectives and policies of the Company including, without limitation, the purchase of businesses or assets; the sale of all or a substantial portion of the assets of the Company; the merger or consolidation of the Company with another corporation; raising additional capital through financing and/or equity sources; the retention of cash reserves for future product development, expansion of our business and/or acquisitions; the filing of registration statements with the Securities and Exchange Commission for offerings of our capital stock; and transactions that may cause or prevent a change in control of the Company or its winding up and dissolution. Accordingly, no investor should purchase our common stock unless such investor is willing to entrust all aspects of the management of the Company to such individuals.

***We have incurred significant increased costs as a result of becoming a public company that reports to the Securities and Exchange Commission and our management is required to devote substantial time to meet compliance obligations.***

As a public company reporting to the Securities and Exchange Commission, we incur significant legal, accounting and other expenses that we did not incur as a private company. We are subject to reporting requirements of the Exchange Act and the Sarbanes-Oxley Act, as well as rules subsequently implemented by the Securities and Exchange Commission that impose significant requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. In addition, there are significant corporate governance and executive compensation-related provisions in the Dodd-Frank Act that are expected to increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and may also place undue strain on our personnel, systems and resources. Our management and other personnel are required to devote a substantial amount of time to these and other new compliance initiatives. In addition, we believe these rules and regulations may make it more difficult and have made it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage in the future. As a result, it may be more difficult for us to attract and retain qualified people to serve on our board of directors, our board committees or as executive officers.

***Failure to build our finance infrastructure and improve our accounting systems and controls could impair our ability to comply with the financial reporting and internal controls requirements for publicly traded companies.***

As a public company, we operate in an increasingly demanding regulatory environment, which requires us to comply with applicable provisions of the Sarbanes-Oxley Act, and the related rules and regulations of the Securities and Exchange Commission, expanded disclosure requirements, accelerated reporting requirements and more complex accounting rules. Company responsibilities required by the Sarbanes-Oxley Act include establishing corporate oversight and adequate internal control over financial reporting and disclosure controls and procedures. Effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent financial fraud. We will need to hire or outsource additional finance personnel and further build our financial infrastructure as a public company, including complying with the applicable requirements of Section 404 of the Sarbanes-Oxley Act. We may be unable to do so on a timely basis. Until we are able to expand our finance and administrative capabilities and establish additional financial reporting infrastructure, we may not be able to prepare and disclose, in a timely manner, our financial statements and other required disclosures or comply with the applicable provisions of the Sarbanes-Oxley Act or existing or new reporting requirements. If we cannot provide reliable financial reports or prevent fraud, our business and results of operations could be harmed and investors could lose confidence in our reported financial information.

***Shares eligible for future sale may adversely affect the market for our common stock.***

Sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could cause the market price of our common stock to decline. These sales could also make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.

As of December 31, 2014, we had 7,048,235 shares of common stock outstanding. Shares beneficially owned by our affiliates and employees are subject to volume and other restrictions under Rules 144 and 701 under the Securities Act of 1933, as amended, or the Securities Act, various vesting agreements, our insider trading policy and any applicable 10b5-1 trading plan. Shares that are not beneficially owned by our affiliates and employees generally can be freely sold in the public market, subject in some cases to restrictions under Rule 144.

As of December 31, 2014, we also had outstanding options and warrants for the purchase of 1,368,047 shares and 1,564,108 shares, respectively, of our common stock and we may grant additional options and/or warrants in the future. If our stock price rises, the holders of vested options or warrants may exercise their options or warrants and sell a large number of shares. Any sale of a substantial number of shares of our common stock may have a material adverse effect on the market price of our common stock.

***Our charter documents and Delaware law may inhibit a takeover that stockholders consider favorable.***

Our Certificate of Incorporation (“Certificate”) and bylaws and applicable provisions of Delaware law may delay or discourage transactions involving an actual or potential change in control or change in our management, including transactions in which stockholders might otherwise receive a premium for their shares, or transactions that our stockholders might otherwise deem to be in their best interests. The provisions in our Certificate and bylaws:

- authorize our board of directors to issue preferred stock without stockholder approval and to designate the rights, preferences and privileges of each class; if issued, such preferred stock would increase the number of outstanding shares of our capital stock and could include terms that may deter an acquisition of us;
- limit who may call stockholder meetings;
- do not permit stockholders to act by written consent;
- do not provide for cumulative voting rights; and
- provide that all vacancies may be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum.

In addition, Section 203 of the Delaware General Corporation Law may limit our ability to engage in any business combination with a person who beneficially owns 15% or more of our outstanding voting stock unless certain conditions are satisfied. This restriction lasts for a period of three years following the share acquisition. These provisions may have the effect of entrenching our management team and may deprive you of the opportunity to sell your shares to potential acquirers at a premium over prevailing prices. This potential inability to obtain a control premium could reduce the price of our common stock. See “Anti-Takeover Effects of Certain Provisions of Delaware Law and Our Charter Documents” for additional information.

***If securities or industry analysts do not publish or do not continue to publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our stock, our stock price and trading volume could decline.***

The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us or our business. Presently, two securities analysts publish reports on us on a regular basis. If any of the analysts who cover us now or in the future issue an adverse opinion regarding our stock, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

## Properties

As filed, 237 characters.

Our principal office is located at 4120 Freidrich Lane, Suite 100, Austin, Texas 78744. We lease 14,782 square feet of office and laboratory space under a triple net lease. The lease commenced on June 1, 2014 and has a term of 48 months.

## Management's discussion and analysis

As filed, 32,747 characters.

*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. Ideal Power was formed to develop and commercialize its patented Power Packet Switching Architecture (“PPSA”) technology, which is designed to improve the performance, size, weight, reliability, flexibility and cost of electronic power conversion systems. The electronic power conversion industry’s vertical markets are large and include power conversion systems for residential, commercial, and utility-scale renewable energy systems, battery energy storage systems (“BESS”), microgrids, electric vehicle chargers, variable frequency drives (“VFDs”) for motors, and on-board power converters for electric vehicles. The Company believes it can, due to the design advantages inherent in its PPSA technology, provide solutions that are both efficient and economically advantageous to many of these markets.

Ideal Power’s initial product focus provides solutions for high-growth markets such as battery energy storage systems, integrated renewable energy and storage, and microgrid applications. The Company has designed its products to target commercial and industrial applications, which it believes have the highest economic value and fastest growth potential in these vertical markets. Within its product family, the company offers value-enhancing solutions for integrating renewable energy with storage systems as well as microgrid capabilities for grid resiliency and off-grid power.

Currently, the Company’s products are designed by Ideal Power, manufactured by contract manufacturers, and sold by Ideal Power both directly to its customers and through a distribution channel partner. The Company may consider additional go-to-market strategies in the future including but not limited to product licensing arrangements with leading global electronics companies. Such agreements could allow for regional manufacturers to build the Company’s products under license for specific markets or specific applications.

The Company was founded on May 17, 2007. To date, operations have been funded primarily through the sale of common stock and convertible debt, as well as through U.S. Department of Energy grants. Total revenue generated from inception to date as of December 31, 2014 is $6,077,196, with the majority of that revenue coming from government grants and product sales. The Company has applied these revenues to research and product development, thereby reducing its capital requirements. The Company will continue to pursue research and development grants, if and when available, for the purpose of developing new products and improving current products. The Company can make no assurances that additional grants will be available in the future.

### Plan of Operation

Ideal Power has completed development, UL Certification, and commercialization for its first two products and has launched four additional products that are actively being developed with plans to obtain UL Certification for three of these products in 2015. All four of these new products have firm customer orders behind them. The Company’s 30kW battery converter is being ordered and deployed by market-leading customers at increasing volumes for commercial and industrial applications. The Company expects to continue to build order backlog for its products and begin realizing increasing revenues in the first quarter of 2015 as we begin to fulfill volume orders.

With the introduction of our new grid-resilient 30kW 2-port and multi-port conversion systems as well as our grid-resilient 125kW 2-port and multi-port power conversion systems, the Company now offers a family of fully compatible products for broad and rapidly growing power conversion markets. Ideal Power products are well suited for commercial and industrial scale energy storage systems, systems combining PV and storage, and for on-grid and off-grid microgrid applications integrating the Company’s power conversion systems with batteries, photovoltaics, diesel, wind and other types of distributed generation in a flexible, modular approach. By using multiple 125kW products in parallel, customers can cost effectively deploy systems to up to many megawatts in scale.

Ideal Power is further developing its technology to allow it to launch additional products, enhance its competitive advantages and enter other large vertical markets. The Company’s goal is to establish PPSA as the leading technology for electronic power conversion for several large markets through both product sales and potentially licensing in selected geographies and markets. The Company’s objectives are to continue to commercialize its technology through the development of a variety of power conversion products, expand its channels to target markets, and may eventually license the manufacture of its products to original equipment manufacturers (“OEMs”) and, in certain markets, directly to large customers.

We expect to continue to use the net proceeds received from the initial public offering of our common stock for new product research, new product and existing product development, the commercialization of our products, protection of our intellectual property, purchases of property and equipment and for working capital and other general corporate purposes. The net cash proceeds from the initial public offering of our common stock totaled approximately $15 million. Our actual and anticipated costs include employee salaries and benefits, compensation paid to consultants, capital costs for research and development lab and other equipment, costs associated with development activities including travel and administration, legal expenses, sales and marketing costs, general and administrative expenses, and other costs associated with an early stage, publicly-traded technology company. We added ten employees from our initial public offering through December 31, 2014 and anticipate increasing the number of employees of the Company by approximately 5 – 10 employees by the end of December 2015. However, this increase is highly dependent on the nature of our development efforts. We have added and anticipate adding employees in the areas of research and development and product engineering and, to a lesser extent, sales and marketing and general and administrative functions as required to support our efforts. We have and expect to incur consulting expenses related to technology development and other efforts as well as legal and related expenses to protect our intellectual property. We also have incurred and expect to incur capital expenditures for the purchase of testing and other lab equipment and leasehold improvements.

The amounts that we actually spend for any specific purpose may vary significantly and will depend on a number of factors including, but not limited to, the pace of progress of our commercialization and development efforts, actual needs with respect to product testing, development and research, market conditions and changes in or revisions to our marketing strategies. In addition, although we do not have any plans for acquisitions at this time, we may use a portion of the net proceeds to acquire complementary products, technologies or businesses.

We received an award of $2.5 million from ARPA-E. Through December 31, 2014, we have recognized revenue of $2.5 million, the full amount of the award under this grant. This award was used in the development of our BD-IGBT power switches and other related power semi-conductor technology. While we currently successfully use commodity silicon IGBT and diode components in our products, we are developing BD-IGBT devices that we believe could significantly improve the efficiency, weight and manufacturing costs of our products as well as have broader potential applications. We have run successful simulations on the BD-IGBT power switches and have begun initial runs of prototype switches at our semiconductor fabrication subcontractor.

### Critical Accounting Policies

The following discussion and analysis of 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, our management uses their 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 Note 2 to our financial statements for a more complete description of our significant accounting policies.

Revenue Recognition. Revenue from product sales is recognized when the risks of loss and title pass to the customer, as specified in (1) the respective sales agreements and (2) other revenue recognition criteria as prescribed by Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements”, as amended by SAB No. 104, “Revenue Recognition”. We generally sell our products free-on-board shipping and recognize revenue when products are shipped. Revenue from service contracts is recognized using the completed-performance or proportional-performance method depending on the terms of the service agreement. When there are acceptance provisions based on customer-specified subjective criteria, the completed-performance method is used. For contracts where the services performed in the last series of acts is very significant, in relation to the entire contract, performance is not deemed to have occurred until the final act is completed. Once customer acceptance has been received, or the last significant act is performed, revenue is recognized. We use the proportional-performance method when a service contract specifies a number of acts to be performed and we have the ability to determine the pattern and value in which service is provided to the customer.

The Company was awarded a grant from ARPA-E on January 30, 2012. The purpose of the grant is to perform research and development on components that may improve the efficiency of the Company’s technology. ARPA-E’s share of the research and development project is $2.5 million. We currently expect to exceed the originally estimated cost of the project of $2.8 million by approximately $0.5 to $1.0 million and the program has been extended to May 29, 2015. The incremental cost will be fully funded by the Company. The Company works with ARPA-E’s program manager to agree upon the specifications and work plans for the grant. The Company then directs all the work to be performed by ARPA-E approved subcontractors, which historically have been universities but are now commercial subcontractors. Upon completion of the work, the Company submits to ARPA-E for payment of 90% of the costs incurred by the Company. Historically, this has been done on a quarterly basis, but it may be as frequently as monthly. The Company bears responsibility for the remaining 10% of the total costs incurred by the Company under the agreed work plans, which amount is included (less any costs that the applicable subcontractor has agreed to share) in our cost of revenues. The Company is also responsible for any costs incurred under the program in excess of the program amount. Any such costs would be recorded in research and development costs rather than cost of revenues. All invoices are supported with copies of expenses and invoices that the Company has received from ARPA-E approved subcontractors. Notwithstanding the foregoing, the Company is the primary obligor of all the costs incurred under the work plans for the grant, except for any costs that the applicable subcontractor has agreed to share. The agreement with ARPA-E establishes “Go/No Go” milestones and deliverables. For each “Go/No Go” milestone and deliverable, the ARPA-E program director must review the Company’s work under the previously agreed work plan, confirm in writing that the Company has achieved the “Go/No Go” milestone and deliverable, and authorize the Company to commence work on the next milestone and deliverable under a corresponding next work plan. If the project were to stop due to an ARPA-E determination that a milestone or deliverable had not been met, then the Company would not submit to ARPA-E for payment any further invoices (except for costs incurred under the previously agreed work plan). As of December 31, 2014, the Company had fully utilized ARPA-E’s share of the research and development project.

The payment conditions of the $150,000 Phase I SBIR grant that we received were substantially similar to those of the ARPA-E grant, except that in the case of the SBIR grant, the Company receives payment from SBIR of one hundred percent of the costs incurred by the Company under the agreed work plans. Nevertheless, the Company is the primary obligor of all the costs incurred under the agreed work plans for the SBIR grant. The work related to the SBIR grant was completed in 2013.

Revenues from government grants are recognized in accordance with the provisions of SAB No. 104 in the period during which the related costs are incurred, provided that the Company has incurred the costs in accordance with the specifications and work plans for the applicable grant. Expenses included in cost of revenues are directly related to research and development activities performed by our subcontractors in order to fulfill the specifications and work plans for the applicable grant. There are no contingencies or ongoing obligations of the Company related to these grant arrangements, other than the obligation of the Company to submit to the applicable government entity invoices for costs incurred by the Company under the agreed work plans for the applicable grant. Under no circumstances is the Company required to repay monies that it receives under any of its government grants, provided that the Company receives no more than the government’s agreed share of the total cost of the project and, with respect to the ARPA-E grant, provided that the Company meets its obligation to cover its share of costs as described above. Costs incurred related to the grants are recorded as grant research and development costs within cost of revenues. Costs incurred in excess of grant award amounts are recorded as research and development costs in operating expenses.

The Company believes that recognizing the government grants as revenues is a better reflection of the economics of the arrangements as (i) there are no contingencies or ongoing obligations of the Company associated with its receipt of or right to retain the funds that it receives under its grants, (ii) the Company is the primary obligor of all the costs incurred under the work plans for the grants, and (iii) the Company has full discretion on the use of the monies that it receives under the grants. In addition, the Company earns the grant funding through the performance of research and development activities, which is one of the Company’s primary business activities. The Company also believes that this presentation provides transparency to users of the Company’s financial statements of the business activities associated with these grants, specifically, grant revenues and grant costs.

Royalty income is recognized as earned based on the terms of the contractual agreements, and has no direct costs.

Research and Development. Grant research and development are costs incurred solely related to grant revenues, and are classified as a line item under cost of revenues. Other research and development costs are presented as a line item under operating expenses and are expensed as incurred.

Patents. The Company capitalizes legal costs and filing fees associated with obtaining patents on its new inventions. Once the patents have been issued, the Company amortizes these costs over the shorter of the legal life of the patent (generally a maximum of 20 years) or its estimated economic life using the straight-line method.

Income Taxes. We account for income taxes using an asset and liability approach that 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. The Company applies Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718, “Stock Compensation,” when recording stock based compensation. 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 of the issuances are determined based on the estimated fair value of the shares at the date of grant prior to the Company’s IPO and the closing share price on the date of grant subsequent to the Company’s IPO.

Risk-free interest rate — The risk free interest rate for periods within the contractual life of the option is based on the U.S. treasury yield in effect at the time of grant.

Expected lives — As permitted by SAB No. 107, due to the Company’s insufficient history of option activity, the management utilizes the simplified approach to estimate the options expected term, which represents the period of time that options granted are expected to be outstanding.

Expected volatility — is determined based on management’s estimate or historical volatilities of comparable companies.

Expected dividend yield — is based on current yield at the grant date or the average dividend yield over the historical period. The Company has never declared or paid dividends and has no plans to do so in the foreseeable future.

The Company accounts for stock issued to non-employees in accordance with the provisions of FASB ASC 505-50 “Equity Based Payments to Non-Employees.” FASB ASC 505-50 states that equity instruments that are issued in exchange for the receipt of goods or services should be measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The measurement date occurs as of the earlier of (a) the date at which a performance commitment is reached or (b) absent a performance commitment, the date at which the performance necessary to earn the equity instruments is complete (that is, the vesting date).

### Results of Operations

### Comparison of the year ended December 31, 2014 to the year ended December 31, 2013

*Revenues.* Revenues for the year ended December 31, 2014 of $1,794,094 were $98,330, or 5%, lower than the $1,892,424 we earned in revenues for the year ended December 31, 2013. The decrease in revenue was due to a $795,877 decrease in grant revenues and a $100,000 decrease in royalty revenues partially offset by a $797,547 increase in product revenues.

Total grant revenues for the year ended December 31, 2014 were $579,079, all from the ARPA-E grant, compared to grant revenues for the year ended December 31, 2013 of $1,374,956, including $1,229,036 from the ARPA-E grant and $145,920 from a Department of Energy SBIR grant. Revenues related to the ARPA-E grant decreased due to the timing of spending and as the ARPA-E grant was fully funded by the end of 2014. Royalty revenue decreased from $100,000 to $0 as the royalty agreement with Lockheed Martin Corporation ended December 31, 2013.

In the year ended December 31, 2014, revenue from the sale of our products was $1,215,015, a 191% increase compared to the year ended December 31, 2013, and related to our 30kW battery converter and, to a much lesser extent, our new grid-resilient 30kW multi-port power conversion system. In the year ended December 31, 2013, revenue from the sale of products was $417,468 with approximately half of our product revenue from each of our 30kW battery converter and 30kW PV inverter. We elected not to sell our 30kW PV inverter in 2014 as the 30kW battery converter, based on the same hardware platform, provided a higher selling price and thus enhanced margins.

*Cost of Revenues.* Cost of revenues for the year ended December 31, 2014 of $2,270,850 were $123,877, or 6%, higher than the $2,146,973 cost of revenues for the year ended December 31, 2013 as the result of an $911,254 increase in product cost of revenue partially offset by a $787,377 decrease in grant research and development costs.

In the year ended December 31, 2014, cost of revenues from the sale of products was $1,627,429. In the year ended December 31, 2013, the cost of revenues from the sale of products was $716,175. The increase in cost of revenues from the sale of products was due to higher unit sales, overhead, including personnel costs, and testing costs for our 30kW battery converter.

The decrease in grant research and development costs was due to the timing of spending under the ARPA-E grant, the full utilization of the ARPA-E grant funds prior to the end of 2014 and the completion of the SBIR grant in May 2013. During the years ended December 31, 2014 and 2013, we recognized $579,079 and $1,229,036, respectively, in grant revenue and $643,421 and $1,284,878, respectively, in grant research and development costs from our ARPA-E grant. We had a cost-sharing arrangement with ARPA-E whereby we contributed ten percent of the total costs of the project (less any costs that our subcontractors have agreed to share), which resulted in our costs exceeding our revenue. During the year ended December 31, 2013, we also recognized $145,920 in grant revenues and $145,920 in grant research and development costs from our SBIR grant.

As the ARPA-E grant was fully utilized in 2014, we do not expect any grant revenue or grant research and development costs for this program in 2015. Any spending in 2015 related to the ARPA-E grant or related technology development will be fully funded by us and recorded as research and development expenses within operating expenses.

*Gross Loss.* Gross loss for the years ended December 31, 2014 and 2013 was $476,756 and $254,549, respectively. Gross loss for the year ended December 31, 2014 was $222,207 higher than in the year ended December 31, 2013 primarily due to increased engineering personnel costs, as we added resources to support our existing products, and higher testing costs related to our 30kW battery converter. We recognized $151,229 in higher personnel costs and $134,266 in higher testing costs within cost of revenues in the year ended December 31, 2014 as compared to the year ended December 31, 2013. In addition, royalty revenue was $100,000 lower in the year ended December 31, 2014 as compared to the year ended December 31, 2013. Higher contributions from increased unit sales of our 30kW battery converter partially offset the higher personnel and testing costs and lower royalty revenue.

The decreases in grant revenue and grant research and development costs had an insignificant impact on gross loss in comparing the years ended December 31, 2014 and 2013 as grant costs exceeded revenues by $64,342 in the year ended December 31, 2014 compared to $55,842 for the year ended December 31, 2013.

*General and Administrative Expenses.* General and administrative expenses increased by $854,095, or 40%, to $2,993,131 in the year ended December 31, 2014 from $2,139,036 in the year ended December 31, 2013. The increase was due primarily to higher stock compensation expense of $291,379, inclusive of $143,037 in higher stock compensation paid to consultants, D&O insurance costs of $166,621, personnel costs of $158,622, legal and professional fees of $121,816 and board fees of $112,500 as the Board elected not to receive cash compensation until we completed our initial public offering in the fourth quarter of 2013.

*Research and Development Expenses.* Research and development expenses increased by $1,046,171, or 86%, to $2,258,469 in the year ended December 31, 2014 from $1,212,298 in the year ended December 31, 2013. The increase was due primarily to higher personnel costs of $521,821 and contract labor costs of $321,028 as we added both firmware and hardware engineering resources, and costs related to advanced power switch development of $73,198 as we funded these efforts after fully utilizing the ARPA-E grant program funding.

*Sales and Marketing Expenses.* Sales and marketing expenses increased by $742,286, or 162%, to $1,199,578 in the year ended December 31, 2014 from $457,292 in the year ended December 31, 2013. The increase was due primarily to higher personnel costs of $405,214, stock compensation expense of $154,731, travel costs of $40,796 and marketing costs of $40,059.

*Loss from Operations.* Due to the increase in our operating expenses and gross loss, our loss from operations for the year ended December 31, 2014 was $6,927,934 or 71% higher than the $4,063,175 loss from operations for year ended December 31, 2013.

*Interest (Income) Expense, Net.* Interest (income) expense, net improved from expense of $5,488,523 for the year ended December 31, 2013 to income of $27,715 for the year ended December 31, 2014, an improvement of $5,516,238. For the year ended December 31, 2014, interest income related to interest earned on our money market account. For the year ended December 31, 2013, interest expense was due to the amortization of debt discount relating to the fair value of warrants and beneficial conversion feature in promissory notes issued in 2010 through 2013 as well as the write-off of the remaining unamortized debt discount upon conversion of these notes into common stock at the time of our initial public offering.

*Net Loss.* As a result of the decrease in interest expense, partly offset by the increase in our loss from operations, our net loss for the year ended December 31, 2014, was $6,900,219 as compared to a net loss of $9,551,698 for the year ended December 31, 2013, a decrease of $2,651,479.

### Liquidity and Capital Resources

We currently do not generate enough revenue to sustain our operations. Our revenues are derived from sales of our products and, to a lesser extent beginning in the year ended December 31, 2014, from grants we have received for the development of our technology. We have funded our operations through the sale of our common stock, including proceeds from our initial public offering, preferred stock (later converted to common stock) and debt securities.

As of December 31, 2014 and 2013, we had cash and cash equivalents of $7,912,011 and $14,137,097, respectively. Our net working capital decreased to $7,658,720 as of December 31, 2014 from $14,140,317 as of December 31, 2013 due primarily to the cash outflow to fund our operations.

Operating activities in the year ended December 31, 2014 resulted in cash outflows of $5,469,550, which were primarily due to the net loss for the period of $6,900,219, offset by stock-based compensation of $944,102, stock compensation paid for services of $180,183, favorable balance sheet timing of $150,965 and other non-cash items of $155,419. Operating activities in the year ended December 31, 2013 resulted in cash outflows of $3,240,792, which were due primarily to the net loss for the period of $9,551,698, offset by amortization of debt discount of $5,318,257, stock-based compensation of $458,983 and other non-cash items of $527,871.

Investing activities in the years ended December 31, 2014 and 2013 resulted in cash outflows of $760,502 and $221,649, respectively. Cash outflows for the development of patents in the years ended December 31, 2014 and 2013 were $418,255 and $142,708, respectively, and cash outflows for the acquisition of fixed assets in the years ended December 31, 2014 and 2013 were $342,247 and $78,941, respectively. Cash outflows for the development of patents increased as we expanded and broadened our patent portfolio while cash outflows for the acquisition of fixed assets increased as we purchased equipment for our development lab to support current and future products.

In the year ended December 31, 2014, we received $4,966 in net proceeds from the exercise of stock options and warrants. In the year ended December 31, 2013, we raised $17,250,000 in gross proceeds ($15,015,985 net of costs) from our initial public offering and $750,000 in gross proceeds ($611,256 net of costs) from the sale of convertible promissory notes, later converted into common stock at the completion of our initial public offering.

Our long-term debt balance, including current portion, was $0 at December 31, 2014 and 2013 due to the conversion of our convertible promissory notes to shares of our common stock following the closing of our initial public offering and the cancellation of our promissory note with the State of Texas in December 2013 upon its exercise of its rights under the Investment Unit issued on October 1, 2010, as amended.

On December 1, 2014, the Company filed a Form S-3 shelf registration statement with the Securities and Exchange Commission. The registration statement allows the Company to offer up to an aggregate $75 million of common stock, preferred stock, warrants to purchase common stock or preferred stock or any combination thereof and provides the Company with the flexibility over three years to potentially raise additional equity in a public or private offering on commercial terms.

### Off-Balance Sheet Transactions

We do not have any off-balance sheet transactions.

### Trends, Events and Uncertainties

Research and development of new technologies is, by its nature, unpredictable. Although we will undertake development efforts with commercially reasonable diligence, there can be no assurance that the net proceeds from the initial public offering of our common stock will be sufficient to enable us to develop our technology to the extent needed to create future sales to sustain operations as contemplated herein. If the net proceeds from the initial public offering of our common stock are insufficient for this purpose, we will consider other options to continue our path to commercialization, including, but not limited to, additional financing through follow-on stock offerings, debt financing, co-development agreements, curtailment of operations, suspension of operations, sale or licensing of developed intellectual or other property, or other alternatives.

We cannot assure you that 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 money as and when we need it to continue our operations. If we cannot raise funds as and when we need them, we may be required to severely curtail, or even to cease, our operations.

Other than as discussed above and elsewhere in this report, we are not aware of any trends, events or uncertainties that are likely to have a material effect on our financial condition.

## Controls and procedures

As filed, 2,217 characters.

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Act”) is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

### Report on Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial and accounting officer), of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. The evaluation was undertaken in consultation with our accounting personnel. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

### Report on Internal Control over Financial Reporting

This annual report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of the company’s registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies.

### Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rule 13a-15(d) or 15d-15(d) of the Act during the period covered by this Annual Report on Form 10-K that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Filed Mar 25, 2015.
Source: SEC EDGAR, the filing index for accession 0001144204-15-018355. Last ingested by Listed: Nov 5, 2026, 19:31 ET. No prices; not investment advice.