Ideal Power Inc.: Form 10-Q for the period ended Mar 31, 2024

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 2023 financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2023. 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, 2023.

Overview

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

To date, operations have been funded primarily through the sale of common stock and we have generated $3.7 million in grant revenue for bidirectional power switch development. Grant revenue was $0 and $664 in the three months ended March 31, 2024 and 2023, respectively. We may pursue additional research and development grants, if and when available, to further develop and/or improve our technology.

We are in the process of commercializing our B-TRAN™ technology and launched our first two commercial products, the SymCool™ Power Module and SymCool™ IQ Intelligent Power Module, in 2023. We generated $78,739 in commercial revenue in the three months ended March 31, 2024.

Product Launches

In early 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 market. We commenced shipment of SymCool™ Power Modules to fulfill customer orders in the first quarter of 2024.

In late 2023, we launched our second commercial product, the SymCool™ IQ Intelligent Power Module (IPM). The SymCool™ IQ IPM 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 other industrial applications. We expect initial sales of this product as early as late 2024.

Development Agreement

During the fourth quarter of 2022, we announced, and began Phase 1 of, a product development agreement with Stellantis, a top 10 global automaker, for a custom B-TRAN™ power module for use in the automaker’s 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 Stellantis 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 collaborated with Stellantis and the program partners, including both the program’s packaging company and the organization building the initial drivetrain inverter, to supply B-TRAN™ devices for integration into the custom power module and inverter designs. Also, as part of Phase 2, we provided Stellantis a comprehensive test plan for the testing required to achieve certification to automotive standards for B-TRAN™. The test plan was subsequently approved as submitted. In the first quarter of 2024, we successfully completed Phase 2 of the program. We recorded the remaining revenue under Phase 2 of this program in the first quarter of 2024. We are currently finalizing the scope of work for the next phase of the program with Stellantis.

Distribution Agreement

In March 2024, we announced a global distribution agreement with Richardson Electronics, Ltd. (RELL). RELL is the first distributor for our products. We commenced shipments of our products to RELL to fulfill end customer orders late in the first quarter of 2024.

Test and Evaluation Agreements

Since the middle of 2021, we announced several test and evaluation agreements with prospective customers, including, but not limited to, 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 mid-2023.

March 2024 Offering

In March 2024, we issued and sold 1,366,668 shares of our common stock at a price of $7.50 per share and 633,332 pre-funded warrants to purchase shares of our common stock at a price of $7.499 per pre-funded warrant in an underwritten public offering. The pre-funded warrants have an exercise price of $0.001 per share. The underwriter had a 30-day option to purchase up to an additional 300,000 shares of our common stock at the offering price, less the underwriting discounts and commissions. In April 2024, the underwriter exercised this option in full. The estimated net proceeds to us from the March 2024 Offering are $15.7 million, inclusive of the underwriter’s exercise of its option to purchase additional shares in full. We intend to use the net proceeds from the March 2024 Offering to fund further commercialization and development of our B-TRAN™ technology and general corporate and working capital purposes.

Results of Operations

Comparison of the three months ended March 31, 2024 to the three months ended March 31, 2023

Commercial Revenue. Commercial revenue was $78,739 for the three months ended March 31, 2024, compared to $0 in the three months ended March 31, 2023, as we completed Phase 2 of our development agreement with Stellantis and began to fulfill customer orders for our products.

Grant Revenue. Grant revenue was immaterial for the three months ended March 31, 2024 and 2023. We expect to pursue additional government funding that may result in additional grant revenues in the future.

Cost of Commercial Revenue. Cost of commercial revenue was $68,498 for the three months ended March 31, 2024, compared to $0 in the three months ended March 31, 2023, as we completed Phase 2 of our development agreement with Stellantis and began to fulfill customer orders for our products.

Cost of Grant Revenue. Cost of grant revenue was immaterial for the three months ended March 31, 2024 and 2023. Cost of grant revenue was equal to the associated grant revenue resulting in no gross profit. We expect no gross profit from other grants that we are pursuing or may pursue in 2024.

Research and Development Expenses. Research and development expenses decreased by $73,135, or 5%, to $1,366,893 in the three months ended March 31, 2024 from $1,440,028 in the three months ended March 31, 2023. The decrease was due to lower stock-based compensation expense of $168,612, partly offset by higher personnel costs of $78,863 and other B-TRAN™ development spending of $16,614. We expect higher research and development expenses in the remainder of 2024 as compared to 2023 as we continue development of our B-TRAN™ technology.

General and Administrative Expenses. General and administrative expenses decreased by $41,245, or 5%, to $853,688 in the three months ended March 31, 2024 from $894,933 in the three months ended March 31, 2023. The decrease was due to lower stock-based compensation expense of $65,390 and other general and administrative spending of $6,757, partly offset by higher investor relations spending of $30,902. We expect slightly higher general and administrative expenses, exclusive of stock-based compensation, in the remainder of 2024 as compared to 2023.

Sales and Marketing Expenses. Sales and marketing expenses increased by $12,285, or 4%, to $316,611 in the three months ended March 31, 2024 from $304,326 in the three months ended March 31, 2023. The increase was due to higher personnel costs of $55,274 and other spending of $761, partly offset by lower search and placement fees of $43,750. We expect higher sales and marketing expenses in the remainder of 2024 as compared to 2023 as we further commercialize our B-TRAN™ technology.

Loss from Operations. Our loss from operations for the three months ended March 31, 2024 was $2,526,951, or 4% lower, as compared to the $2,639,287 loss from operations for the three months ended March 31, 2023, for the reasons discussed above.

Interest Income, Net. Net interest income was $57,325 for the three months ended March 31, 2024 compared to $111,302 for the three months ended March 31, 2023 as a result of the impact of a declining cash balance on the interest earned from our money market account.

Net Loss. Our net loss for the three months ended March 31, 2024 was $2,469,626, or 2% lower, as compared to a net loss of $2,527,985 for the three months ended March 31, 2023, for the reasons discussed above.

Liquidity and Capital Resources

We currently generate commercial revenue only. We have incurred losses since inception. We have funded our operations to date primarily through the sale of common stock and pre-funded warrants.

At March 31, 2024, we had cash and cash equivalents of $20.2 million. Our net working capital at March 31, 2024 was also $19.8 million. We had no outstanding debt at March 31, 2024.

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

Operating activities in the three months ended March 31, 2024 resulted in cash outflows of $1,875,295 which were due to the net loss for the period of $2,469,626, partly offset by stock-based compensation of $381,019, favorable balance sheet timing of $105,817 and other non-cash items of $107,495.

Operating activities in the three months ended March 31, 2023 resulted in cash outflows of $1,755,723, which were due to the net loss for the period of $2,527,985, partly offset by stock-based compensation of $609,926, favorable balance sheet timing of $93,960 and other non-cash items of $68,376.

We expect an increase in cash outflows from operating activities in the remainder of 2024 as we further develop and commercialize our B-TRAN™ technology.

Investing activities in the three months ended March 31, 2024 and 2023 resulted in cash outflows of $103,550 and $69,450, respectively, for the acquisition of intangible assets and fixed assets.

Financing activities in the three months ended March 31, 2024 resulted in cash inflows of $13,652,663 from the March 2024 Offering, as discussed above, and $86,757 from the exercise of stock options.

Critical Accounting Estimates

There have been no significant changes during the three months ended March 31, 2024 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, 2023.

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, 2023.

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the Company’s reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. The Company’s disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that this information is accumulated and communicated to management, including the principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Company conducted an evaluation (pursuant to Rule 13a-15(b) of the Exchange Act), under the supervision and with the participation of its Chief Executive Officer (principal executive officer) and its Chief Financial Officer (principal financial and accounting officer) of the effectiveness of the Company’s disclosure controls and procedures as of March 31, 2024 and has concluded that, as of March 31, 2024, the Company’s disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There have been no material changes in our internal controls over financial reporting that occurred during the quarter ended March 31, 2024 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, 2023.