Ideal Power Inc.: Form 10-Q for the period ended Sep 30, 2023

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q as well as our audited 2022 financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2022. In addition to historical information, the discussion and analysis here and throughout this Form 10-Q contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited, to those set forth under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022.

Overview

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

To date, operations have been funded primarily through the sale of common stock and we have generated $3.7 million in grant revenue and $100,000 in development revenue for bidirectional power switch development. Revenue was $1,557 and $137,388 in the three and nine months ended September 30, 2023, respectively, and $10,675 and $186,661 in the three and nine months ended September 30, 2022, respectively. Revenue for the three months ended September 30, 2023 related to a development agreement. Revenue for the nine months ended September 30, 2023 related to a development agreement and a government grant. Revenue for the three and nine months ended September 30, 2022 related to government grants. We expect to pursue additional development agreements and government grants, if and when available, to further develop, improve and/or commercialize our technology. We are in the process of commercializing our B-TRAN™ technology.

Product Launch

In January 2023, we launched our first commercial product, the SymCool™ Power Module. This multi-die B-TRAN™ module is designed to meet the very low conduction loss needs of the solid-state circuit breaker (SSCB) market. We expect initial SymCool™ sales to commence as early as late 2023, depending on the ultimate date that this initial product is fabricated and available for commercial sale.

In September 2023, we launched our second commercial product, the SymCool™ IQ Intelligent Power Module. The SymCool™ IQ builds on the bidirectional B-TRAN™ multi-die packaging design of our SymCool™ power module and adds an integrated intelligent driver optimized for bidirectional operation. This product targets several markets including renewable energy, energy storage, EV charging and UPS systems for data centers. We expect initial sales of this product to commence next year.

Development Agreement

During the fourth quarter of 2022, we announced, and began Phase 1 of, a product development agreement with a top 10 global automaker for a custom B-TRAN™ power module for use in the automaker’s electric vehicle (EV) drivetrain inverters in its next generation EV platform. In Phase 1 of the program, we provided packaged B-TRAN™ devices, test kits and technical data to the top 10 global automaker for their evaluation. During the third quarter of 2023, we secured, and began Phase 2 of, this program. In Phase 2 of the program, we are collaborating with a packaging company selected by the automaker that will fabricate the custom B-TRAN™ modules. In Phase 3, the final development phase under the program, the custom B-TRAN™ power module is expected to be tested and certified in accordance with automotive codes and standards. The delivery of production-ready B-TRAN™-based modules is targeted for 2025. We recorded all of the revenue under Phase 1 of this agreement in the nine months ended September 30, 2023. We expect to record revenue for Phase 2 of this program in the next one to two quarters.

Test and Evaluation Agreements

Since the middle of 2021, we announced several test and evaluation agreements with prospective customers, including a second top 10 global automaker, a top 10 global provider of power conversion solutions to the solar industry, two global diverse power management market leaders, a tier 1 automotive supplier and a global power conversion supplier. These companies, along with other current and future participants in our test and evaluation program, intend to test and evaluate the B-TRAN™ for use in their applications. We expect to incorporate the feedback from these customers into our future commercial products. We began B-TRAN™ customer shipments to program participants in June 2023.

Results of Operations

Comparison of the three months ended September 30, 2023 to the three months ended September 30, 2022

Revenue. Revenue for the three months ended September 30, 2023 and 2022 was $1,557 and $10,675, respectively. Revenue for the three months ended September 30, 2023 consisted of development revenue (see Development Agreement above). Revenue for the three months ended September 30, 2022 consisted of grant revenue.

The grant revenue for the three months ended September 30, 2022 related to a $1.2 million subcontract with Diversified Technologies, Inc. (“DTI”) to supply B-TRAN™ devices as part of a contract awarded to DTI by the United States Naval Sea Systems Command (“NAVSEA”) for the development and demonstration of a B-TRAN™ enabled high efficiency direct current solid-state circuit breaker (“SSCB”). We completed our work under the subcontract in the second quarter of 2023.

We launched our first commercial product in January 2023 and expect initial sales of this product to commence as early as late 2023, depending on the ultimate date that this initial product is fabricated and available for commercial sale. We launched our second commercial product in September 2023 and expect initial sales of this product to commence next year. We also expect to pursue additional development agreements, including Phase 3 of the development agreement discussed above, as well as government funding opportunities that may result in additional development and/or grant revenue in the future.

Cost of Revenue. Cost of revenue for the three months ended September 30, 2023 and 2022 was $2,787 and $10,675, respectively. The cost of revenue for the three months ended September 30, 2023 relates to Phase 1 of the development agreement. The cost of revenue for the three months ended September 30, 2022 relates to the subcontract with DTI. For the subcontract with DTI, cost of grant revenue is equal to the associated grant revenue resulting in no gross profit.

Gross Profit (Loss). Gross profit (loss) for the three months ended September 30, 2023 was a gross loss of $1,230. Gross profit (loss) for the three months ended September 30, 2022 was $0. The gross loss in the three months ended September 30, 2023 relates to the development agreement. We recorded no gross profit for the DTI subcontract in the three months ended September 30, 2022 and expect no gross profit from government grants that we are pursuing or may pursue in the future.

Research and Development Expenses. Research and development expenses increased by $910,387, or 117%, to $1,690,538 in the three months ended September 30, 2023 from $780,151 in the three months ended September 30, 2022. The increase was due to higher semiconductor fabrication costs of $552,721, stock-based compensation expense of $284,871, engineering services, primarily device packaging costs, of $71,379, personnel costs of $60,671, partly offset by lower search and placement fees of $53,823 and other B-TRAN™ development spending of $5,432.

In the three months ended September 30, 2023, higher semiconductor fabrication costs included wafer runs at a high-volume production foundry and the start of qualification of a second high-volume production foundry. In the three months ended September 30, 2023, stock-based compensation expense included $207,776 related to performance stock units granted in December 2022 with a derived service period of 0.89 years.

Research and development expenses will be subject to quarterly variability due primarily to the number, size and timing of semiconductor fabrication runs and their associated cost as well as the timing and cost of other major development activities.

General and Administrative Expenses. General and administrative expenses increased by $85,068, or 11%, to $854,025 in the three months ended September 30, 2023 from $768,957 in the three months ended September 30, 2022. The increase was due to higher stock-based compensation expense of $93,470, investor relations spending of $43,158 and personnel costs of $31,736, partly offset by lower consulting costs of $69,550 (relating to our compensation benchmarking study in the three months ended September 30, 2022) and other net costs of $13,746. In the three months ended September 30, 2023, stock-based compensation expense included $66,056 related to performance stock units granted in December 2022 with a derived service period of 0.89 years.

We expect relatively flat general and administrative expenses, exclusive of stock-based compensation, in the fourth quarter of 2023 as compared to the third quarter of 2023.

Sales and Marketing Expenses. Sales and marketing expenses increased by $86,520, or 42%, to $293,963 in the three months ended September 30, 2023 from $207,443 in the three months ended September 30, 2022. The increase was due to higher personnel costs of $57,131, legal fees for commercial contracts of $13,970, stock-based compensation expense of $13,772 and other net spending of $1,647. We expect relatively flat sales and marketing expenses in the fourth quarter of 2023 as compared to the third quarter of 2023.

Loss from Operations. Our loss from operations for the three months ended September 30, 2023 was $2,839,756, or 62% higher, than the $1,756,551 loss from operations for the three months ended September 30, 2022 for the reasons discussed above.

Interest Income, Net. Net interest income was $99,275 for the three months ended September 30, 2023 compared to $52,781 for the three months ended September 30, 2022 due to the impact of higher interest rates on our money market account.

Net Loss. Our net loss for the three months ended September 30, 2023 was $2,740,481, or 61% higher, as compared to a net loss of $1,703,770 for the three months ended September 30, 2022, for the reasons discussed above.

Comparison of the nine months ended September 30, 2023 to the nine months ended September 30, 2022

Revenue. Revenue for the nine months ended September 30, 2023 and 2022 was $137,388 and $186,661, respectively. Revenue for the nine months ended September 30, 2023 included development revenue of $100,000 and grant revenue of $37,388. Revenue for the nine months ended September 30, 2022 consisted of grant revenue.

The grant revenue for the nine months ended September 30, 2023 and 2022 related primarily to the $1.2 million subcontract with DTI discussed above. We completed our work under this subcontract in the second quarter of 2023. For the nine months ended September 30, 2022, grant revenue also included revenue related to a second subcontract with DTI. In late 2021, we entered into and began work under a $50,000 subcontract with DTI under a Phase I Small Business Innovation Research grant from the U.S. Department of Energy to develop a B-TRAN™-driven low loss alternating current SSCB. We completed our work under this subcontract in the first quarter of 2022.

Cost of Revenue. Cost of revenue for the nine months ended September 30, 2023 and 2022 was $114,188 and $186,661, respectively. The cost of revenue relates to the development agreement and the NAVSEA subcontract with DTI for the nine months ended September 30, 2023 and the subcontracts with DTI for the nine months ended September 30, 2022. For the subcontracts with DTI, cost of grant revenue is equal to the associated grant revenue resulting in no gross profit.

Gross Profit. Gross profit for the nine months ended September 30, 2023 and 2022 was $23,200 and $0, respectively. The gross profit in the nine months ended September 30, 2023 related to the development agreement. We recorded no gross profit for the DTI subcontracts in the nine months ended September 30, 2023 and 2022 and expect no gross profit from government grants that we are pursuing or may pursue in the future.

Research and Development Expenses. Research and development expenses increased by $2,000,173, or 86%, to $4,337,254 in the nine months ended September 30, 2023 from $2,337,081 in the nine months ended September 30, 2022. The increase was due to higher stock-based compensation expense of $851,265, semiconductor fabrication costs of $674,098, personnel costs of $286,767, engineering services, primarily device packaging, of $258,812 and other B-TRAN™ spending of $4,390, slightly offset by lower contract labor costs of $75,159.

In the nine months ended September 30, 2023, higher semiconductor fabrication costs included wafer runs at a high-volume production foundry and the start of qualification of a second high-volume production foundry. In the nine months ended September 30, 2022, semiconductor fabrication costs included only fabrication costs incurred at development foundries. In the nine months ended September 30, 2023, stock-based compensation expense included $623,329 related to performance stock units granted in December 2022 with a derived service period of 0.89 years.

General and Administrative Expenses. General and administrative expenses increased by $326,408, or 14%, to $2,682,951 in the nine months ended September 30, 2023 from $2,356,543 in the nine months ended September 30, 2022. The increase was due to higher stock-based compensation expense of $271,083 and personnel costs of $138,027, partly offset by lower consulting costs of $69,550 (relating to our compensation benchmarking study in the nine months ended September 30, 2022) and other net costs of $13,152. In the nine months ended September 30, 2023, stock-based compensation expense included $198,168 related to performance stock units granted in December 2022 with a derived service period of 0.89 years.

Sales and Marketing Expenses. Sales and marketing expenses increased by $210,165, or 32%, to $870,189 in the nine months ended September 30, 2023 from $660,024 in the nine months ended September 30, 2022. The increase was due to higher personnel costs of $129,303, search and placement fees of $43,750 and stock-based compensation of $40,733, slightly offset by lower other net spending of $3,621.

Loss from Operations. Our loss from operations for the nine months ended September 30, 2023 was $7,867,194, or 47% higher, than the $5,353,648 loss from operations for the nine months ended September 30, 2022 for the reasons discussed above.

Interest Income, Net. Net interest income was $318,922 for the nine months ended September 30, 2023 compared to $55,243 for the nine months ended September 30, 2022 due to the impact of higher interest rates on our money market account.

Net Loss. Our net loss for the nine months ended September 30, 2023 was $7,548,272, or 42% higher, as compared to a net loss of $5,298,405 for the nine months ended September 30, 2022, for the reasons discussed above.

Liquidity and Capital Resources

In the nine months ended September 30, 2023, we have generated development and grant revenue only. We expect initial product sales as early as late 2023, depending on the ultimate date that our initial product is fabricated and available for commercial sale. We have incurred losses since inception. We have funded our operations to date through the sale of common stock.

At September 30, 2023, we had cash and cash equivalents of $10.8 million. Our net working capital at September 30, 2023 was $10.4 million. We had no outstanding debt at September 30, 2023.

We believe that our cash and cash equivalents on hand will be sufficient to meet our ongoing liquidity needs for at least the next twelve months from the date of filing this Quarterly Report on Form 10-Q; however, we will require additional funds in the future to fully implement our plan of operation and there can be no assurance that, if needed, we will be able to secure additional debt or equity financing on terms acceptable to us or at all. Although we believe we have adequate sources of liquidity over the long term, the success of our operations, the global economic outlook, and the pace of sustainable growth in our markets could each impact our business and liquidity.

Operating activities in the nine months ended September 30, 2023 resulted in cash outflows of $5,178,734, which were due to the net loss for the period of $7,548,272, partly offset by stock-based compensation of $1,859,209, depreciation and amortization of $193,900 and favorable balance sheet timing of $316,429.

Operating activities in the nine months ended September 30, 2022 resulted in cash outflows of $4,512,733, which were due to the net loss for the period of $5,298,405 and unfavorable changes in net working capital of $145,112, partly offset by stock-based compensation of $696,127, stock issued for services of $100,100 and depreciation and amortization of $134,557.

We expect an increase in cash outflows from operating activities in the fourth quarter of 2023 as we continue to commercialize our B-TRAN™ technology.

Investing activities in the nine months ended September 30, 2023 and 2022 resulted in cash outflows of $406,035 and $206,879, respectively, for the acquisition of intangible assets and fixed assets.

Critical Accounting Estimates

There have been no significant changes during the nine months ended September 30, 2023 to the critical accounting estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Trends, Events and Uncertainties

There are no material changes from trends, events or uncertainties disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the Company’s reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. The Company’s disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that this information is accumulated and communicated to management, including the principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Company conducted an evaluation (pursuant to Rule 13a-15(b) of the Exchange Act), under the supervision and with the participation of its Chief Executive Officer (principal executive officer) and its Chief Financial Officer (principal financial and accounting officer) of the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2023 and has concluded that, as of September 30, 2023, the Company’s disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There have been no material changes in our internal controls over financial reporting that occurred during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Limitations on the Effectiveness of Controls

Control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems’ objectives are being met. Further, the design of any system of controls must reflect the fact that there are resource constraints, and the benefits of all controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of error or mistake. Control systems can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

There are no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.