The accompanying notes are an integral part
of these financial statements.
The accompanying notes are an integral part
of these financial statements.
The accompanying notes are an integral part
of these financial statements.
The accompanying notes are an integral part
of these financial statements.
Notes to Financial Statements
Note 1 — Organization and Description of
Business
Ideal Power Inc. (the “Company”)
was incorporated in Texas on May 17, 2007 under the name Ideal Power Converters, Inc. The Company changed its name to Ideal Power
Inc. on July 8, 2013 and re-incorporated in Delaware on July 15, 2013. With headquarters in Austin, Texas, it developed power
conversion solutions with a focus on solar + storage, microgrid and stand-alone energy storage applications. The principal products
of the Company were 30-kilowatt power conversion systems, including 2-port and multi-port products.
On April 16, 2018, the Company realigned
into two operating divisions: Power Conversion Systems, to continue the commercialization of its PPSA™ technology, and B-TRAN,
to develop its Bi-directional bi-polar junction TRANsistor (B-TRAN™) solid state switch technology. On January 2, 2019, the
Board of Directors of the Company approved a strategic shift to focus on the commercialization of its B-TRAN™ technology
and a plan to suspend further power converter system development and sales while the Company located a buyer for its power conversion
systems division.
Since its inception, the Company has generated
limited revenues from the sale of products and has financed its research and development efforts and operations primarily through
the sale of common stock. The Company’s continued operations are dependent upon its ability to obtain adequate sources of
funding through future revenues, follow-on stock offerings, debt financing, co-development agreements, government grants, sale
or licensing of developed intellectual property or other alternatives.
Note 2 — Summary of Significant Accounting
Policies
Basis of Presentation
The preparation of financial statements in
conformity with US GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Liquidity and Going Concern
The Company has incurred net losses and negative
operating cash flows since inception, including a net loss of $7.9 million and cash used in operating activities of $6.5 million
for the year ended December 31, 2018. At December 31, 2018, the Company had net working capital of $3.5 million and the Company’s
principal source of liquidity consisted of $3.3 million of cash and cash equivalents.
In order to meet the Company’s operating
requirements through at least the next twelve months from the date of issuance of these financial statements, it will need to raise
additional capital from third parties. There can be no assurance that the Company will be successful in obtaining third-party financing.
If external financing sources are not available or are inadequate to fund operations, or the technology under development is not
capable of generating sustainable revenues in the future, the Company will be required to reduce operating costs, which could jeopardize
future strategic initiatives and business plans. Accordingly, these factors, among others raise substantial doubt about the Company’s
ability to continue as a going concern.
The accompanying financial statements have been prepared on a going concern basis, which contemplates
the realization of assets and the settlement of liabilities and commitments in the normal course of business. The ability of the
Company to continue as a going concern is dependent on its ability to raise additional capital and to develop profitable operations
through implementation of its current business initiatives, however, there can be no assurances that the Company will be able to
do so. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to
continue as a going concern.
Cash and Cash Equivalents
The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash equivalents.
Accounts Receivable
Trade accounts receivable are stated net
of an allowance for doubtful accounts. The Company performs ongoing credit evaluations of its customers’ financial condition.
In limited instances, the Company may require an upfront deposit and, in most cases, the Company charges interest on past due amounts.
Management estimates the allowance for doubtful accounts based on review and analysis of specific customer balances that may not
be collectible, customer payment history and any other customer-specific information that may impact the evaluation of the specific
customer’s credit. All trade accounts receivable are included within current assets held for sale at both December 31, 2018
and 2017.
Inventories
Inventories are stated at the lower of
cost (first in, first out method) or net realizable value. Net realizable value is the estimated selling price less the selling
costs. Inventory quantities on hand are reviewed regularly and a write-down for excess and obsolete inventory is recorded based
primarily on an estimated forecast of product demand, market conditions and anticipated production requirements in the near future.
All inventories, net of reserves, are included within current assets held for sale at both December 31, 2018 and 2017.
Property and Equipment
Property and equipment are stated at historical
cost less accumulated depreciation and amortization. Major additions and improvements are capitalized while maintenance and repairs
that do not improve or extend the useful life of the respective asset are expensed. Depreciation and amortization of property and
equipment is computed using the straight-line method over their estimated useful lives. Leasehold improvements are amortized over
the shorter of the life of the asset or the related leases. Estimated useful lives of the principal classes of assets are as follows:
Leasehold improvements
|
|
Shorter of lease term or useful life
|
Machinery and equipment
|
|
5 years
|
Furniture, fixtures and computers
|
|
3 – 5 years
|
Intangible Assets
The Company’s intangible assets are
composed of patents, which are recorded at cost, and other intangible assets, which are recorded at cost plus the estimated present
value of all future payments associated with the other intangible assets. The Company capitalizes third-party legal costs and filing
fees, if any, associated with obtaining patents or other intangible assets. Once the patent asset has been placed in service, the
Company amortizes these costs over the shorter of the asset’s legal life, generally 20 years, or its estimated economic life
using the straight-line method. For the other intangible assets, the Company amortizes the asset over the 17-year term of the underlying
agreements.
Assets and Liabilities of Discontinued Operations Held for
Sale
Assets and liabilities are classified as
held for sale when all of the following criteria for a plan of sale have been met: (1) management, having the authority to approve
the action, commits to a plan to sell the assets; (2) the assets are available for immediate sale, in their present condition,
subject only to terms that are usual and customary for sales of such assets; (3) an active program to locate a buyer and other
actions required to complete the plan to sell the assets have been initiated; (4) the sale of the assets is probable and is expected
to be completed within one year; (5) the assets are being actively marketed for a price that is reasonable in relation to their
current fair value; and (6) actions required to complete the plan indicate that it is unlikely that significant changes to the
plan will be made or the plan will be withdrawn. When all of these criteria have been met, the assets (and liabilities) are classified
as held for sale in the balance sheet. Assets classified as held for sale are reported at the lower of their carrying value or
fair value less costs to sell. Depreciation of assets ceases upon designation as held for sale.
Impairment of Long-Lived Assets
The long-lived assets, consisting of property
and equipment and intangible assets, held and used by the Company are reviewed for impairment no less frequently than annually
or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In the event
that facts and circumstances indicate that the cost of any long-lived assets may be impaired, an evaluation of recoverability is
performed. For continuing operations, management has determined that there was an impairment in the value of long-lived assets
in the amount of $56,504 and $92,156 during the years ended December 31, 2018 and 2017, respectively.
Fair Value
Fair value is the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Assets and liabilities measured at fair value are categorized based on whether or not the inputs are observable in the market and
the degree that the inputs are observable. The categorization of financial assets and liabilities within the valuation hierarchy
is based upon the lowest level of input that is significant to the fair value measurement. The three levels of inputs used to establish
fair value are the following:
|
•
|
Level 1 — Quoted prices in active markets for identical assets or liabilities;
|
|
•
|
Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
|
|
•
|
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities
|
The Company’s financial instruments
primarily consist of cash and cash equivalents, accounts payable and long-term liabilities. As of the balance sheet dates, the
estimated fair values of the financial instruments were not materially different from their carrying values as presented on the
balance sheets. This is primarily attributed to the short-term nature of these instruments.
In 2016, the Company recorded a long-term
liability for the estimated present value of future payments under a licensing agreement. In 2017, the Company recorded an adjustment
to increase the long-term liability due to an increase in the future payments due under this licensing agreement. The Company determined
the discount rate to estimate the present value of the future payments based on the applicable treasury rates. The Company's long-term
liability is classified within Level 3. See Note 6 and Note 12 for more details regarding the licensing agreement. The Company
did not identify any other assets and liabilities that are required to be presented in the balance sheets at fair value.
Revenue Recognition
Revenue from product sales is recognized
in accordance with Accounting Standards Codification, or ASC, Topic 606, “Revenue from Contracts with Customers.” Revenue
is recognized in an amount that reflects the expected consideration to be received in exchange for the transfer of the promised
goods or services to customers. The Company generally sells its products FOB shipping, where the risk of loss and title pass to
the customer at the shipping point, and recognizes revenue when products are shipped. All revenue is included within loss from
discontinued operations for the years ended December 31, 2018 and 2017.
Product Warranties
The Company generally provides a ten-year
limited warranty on its products except for its product for the solar + storage market for which the Company provides a five-year
limited warranty. Accruals for product warranties are estimated based upon limited historical warranty experience, engineering
experience and judgment, and third-party assessments of the reliability of the Company’s products. Accruals for product warranties
were previously recorded in cost of product revenue at the time revenue was recognized in order to match revenues with related
expenses but are now included in loss from discontinued operations for the years ended December 31, 2018 and 2017. The Company
assesses the adequacy of its estimated warranty liability quarterly and adjusts the reserve as necessary. The warranty reserve
was previously included within accrued expenses but is now included within current liabilities held for sale at both December 31,
2018 and 2017.
Research and Development
Research and development costs are presented
as a line item under operating expenses and are expensed as incurred.
Income Taxes
The Company accounts for income taxes using
an asset and liability approach which 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 the Company is able to realize their benefits, or that future deductibility is uncertain.
At December 31, 2018 and 2017, the Company has established a full reserve against all deferred tax assets.
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. The tax benefits recognized in the financial statements from such a position are
measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate resolution.
Net Loss Per Share
The Company applies Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 260, “Earnings per Share.”
Basic earnings (loss) per share is computed by dividing earnings (loss) available to common stockholders by the weighted-average
number of common shares outstanding. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except
that the denominator is increased to include additional common shares available upon exercise of equity awards and warrants using
the treasury stock method. In periods with a net loss, no common share equivalents are included because their effect would be anti-dilutive.
At December 31, 2018 and 2017, potentially dilutive shares outstanding amounted to 8,794,900 and 8,837,315, respectively.
Stock Based Compensation
The Company applies FASB 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 Black-Scholes option valuation model.
The Company uses a Monte Carlo simulation
pricing model to determine the fair value of performance stock units (“PSUs”). A typical Monte Carlo exercise simulates
a distribution of stock prices to yield an expected distribution of stock prices during and at the end of the performance period.
The simulations are repeated many times in order to derive a probabilistic assessment of stock performance. The stock-paths are
simulated using assumptions which include expected stock price volatility and risk-free interest rate.
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).
The Company issues common stock upon exercise
of equity awards and warrants.
Presentation of Sales Taxes
Certain states impose a sales tax on the
Company’s sales to nonexempt customers. The Company collects that sales tax from customers and remits the entire amount to
the states. The Company’s accounting policy is to exclude the tax collected and remitted to the states from revenues and
cost of revenues.
Concentration of Credit Risk
Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company
maintains its cash with a major financial institution located in the United States. Balances are insured by the Federal Deposit
Insurance Corporation up to $250,000. The Company maintains balances in excess of federally insured limits. The Company has not
experienced losses in such accounts and believes it is not exposed to significant credit risk regarding its cash and cash equivalents.
The Company encounters a certain amount of
risk as a result of a concentration of revenue from a few significant customers. Credit is extended to customers based on an evaluation
of their financial condition. In limited instances, the Company may require an upfront deposit. The Company performs ongoing credit
evaluations of its customers and records an allowance for potential bad debts based on available information.
Recently Adopted Standard
In July 2017, the FASB issued ASU 2017-11,
Accounting for Certain Financial Instruments with Down Round Features and Replacement of the Indefinite Deferral for Mandatorily
Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with
a Scope Exception. Part I of this ASU addresses the complexity of accounting for certain financial instruments with down round
features. Per the ASU, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted
for as a derivative liability at fair value as a result of the existence of a down round feature. The ASU is effective for public
entities for fiscal years beginning after December 15, 2018 and early adoption is permitted. The Company has elected to early adopt
the ASU and will recognize the value of the effect of the down round provision, if and/or when triggered. The provision is associated
with stock warrants issued as part of the Company's 2017 definitive securities purchase agreement, or the Private Placement. For
more details regarding the 2017 Private Placement, see Notes 8 and 10.
In May 2014, the Financial Accounting Standards
Board, or FASB, issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606),
requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or
services to customers. The FASB issued several amendments to the standard, including clarification on accounting for licenses of
intellectual property and identifying performance obligations. The standard replaced most existing revenue recognition guidance
in U.S. GAAP when it became effective on January 1, 2018 and permits the use of either the retrospective or cumulative effect transition
method. Adoption of the standard did not result in an adjustment to the opening balance of accumulated deficit at January 1, 2018,
the date of initial adoption, and did not have a material effect on the Company’s financial statements for the year ended
December 31, 2018.
In August 2016, the FASB issued ASU
2016-15, Statement of Cash Flows (Topic 230), in order to address eight specific cash flow issues with the objective of reducing
the existing diversity in practice. The updated standard is effective for financial statements issued for annual periods beginning
after December 15, 2017 and interim periods within those fiscal years with early adoption permitted. The adoption of the standard
did not have a significant effect on the Company’s financial statements.
In May 2017, the FASB issued ASU 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU provides clarity and reduces both (1)
diversity in practice and (2) cost and complexity when applying the guidance in Topic 718 to a change to the terms or conditions
of a share-based payment award. The amendments in this ASU are effective for public entities for fiscal years and interim periods
beginning after December 15, 2017, with early adoption permitted. The adoption of this standard did not have a material effect
on the Company’s financial statements.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842), to increase transparency and comparability among organizations by requiring the recognition of lease assets
and lease liabilities on the balance sheet. Most prominent among the amendments is the recognition of assets and liabilities by
lessees for those leases classified as operating leases under previous U.S. GAAP. Under the new standard, disclosures are required
to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising
from leases. The new standard will be effective for annual and interim periods beginning after December 15, 2018, with early adoption
permitted. The Company elected to not early adopt this standard. The Company will recognize its lease commitment as a lease liability
and right-of-use asset upon adoption. For more details regarding the lease commitment, see Note 12.
Management does not believe that any other
recently issued, but not yet effective, accounting standards, if adopted, would have a material impact on the Company’s financial
statements.
Note 3 — Discontinued Operations and Assets
Held for Sale
In January 2019, the Board of Directors
of the Company approved a strategic shift to focus on the commercialization of its B-TRAN™ technology and a plan to suspend
further power converter system development and sales while the Company located a buyer for its power conversion systems division.
The Company’s power conversion system division, a component supplier to energy storage system integrators, had not achieved
the necessary scale to generate positive cash flows. As the division was dependent on the ability of its customers to scale in
the small commercial and industrial segment of the storage market and based on the sales forecasts and commitments provided by
these customers, the Company did not expect its power conversion systems division to scale sufficiently in the short term, requiring
an inflow of additional capital for the business. As such, the decision was made to exit the power conversion systems business
and sell the division and the Company’s PPSA™ technology and focus on the Company’s B-TRAN™ technology.
As a result, the assets held for sale and
discontinued operations criteria have been met and the Company’s financial statements are presented in accordance with ASC
205. Under ASC 205-20-45-10, during the period in which a component meets the assets held for sale and discontinued operations
criteria, an entity must present the assets and liabilities of the discontinued operation separately in the asset and liability
sections of the balance sheet for the comparative reporting periods. The prior period balance sheet should be reclassified for
the held for sale items. For income statements, the current and prior periods should report the results of operations of the component
in discontinued operations when comparative income statements are presented.
The following is a reconciliation of the
carrying amounts of major classes of assets and liabilities of the discontinued operations to assets and liabilities held for sale:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Accounts receivable, net
|
|
$
|
270,768
|
|
|
$
|
215,466
|
|
Inventories, net
|
|
|
131,342
|
|
|
|
251,363
|
|
Prepayments and other current assets
|
|
|
22,322
|
|
|
|
32,878
|
|
Current assets held for sale (1)
|
|
|
|
|
|
|
499,707
|
|
Property and equipment, net
|
|
|
329,738
|
|
|
|
534,917
|
|
Intangible assets, net (2)
|
|
|
342,153
|
|
|
|
697,181
|
|
Noncurrent assets held for sale (1)
|
|
|
|
|
|
|
1,232,098
|
|
Assets held for sale (1)
|
|
$
|
1,096,323
|
|
|
$
|
1,731,805
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
356,113
|
|
|
$
|
236,651
|
|
Accrued expenses
|
|
|
521,642
|
|
|
|
632,970
|
|
Current liabilities held for sale
|
|
$
|
877,755
|
|
|
$
|
869,621
|
|
|
(1)
|
The assets of the discontinued operations classified as held for sale are classified as current on the December 31, 2018 balance
sheet because it is probable that the sale will occur and proceeds will be collected within one year.
|
|
(2)
|
Includes an impairment charge of $360,000, calculated as the net book value of assets held for sale prior to the impairment
less the expected proceeds from the planned sale. The expected proceeds are based on the estimated fair value of the net assets
held for sale less the estimated cost to sell the net assets held for sale.
|
The following is a reconciliation of the
major classes of line items constituting loss on discontinued operations to loss on discontinued operations shown in the Statement
of Operations:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Product revenue
|
|
$
|
1,624,773
|
|
|
$
|
1,212,270
|
|
Cost of product revenue
|
|
|
1,968,648
|
|
|
|
2,241,682
|
|
Research and development
|
|
|
2,095,138
|
|
|
|
3,469,064
|
|
General and administrative
|
|
|
59,873
|
|
|
|
278,043
|
|
Sales and marketing
|
|
|
774,500
|
|
|
|
1,448,517
|
|
Impairment
|
|
|
360,000
|
|
|
|
—
|
|
Loss on discontinued operations
|
|
$
|
(3,633,386
|
)
|
|
$
|
(6,225,036
|
)
|
Note 4 — Prepayments and Other Current Assets
Prepayments and other current assets consisted
of the following:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Prepaid insurance
|
|
$
|
220,969
|
|
|
$
|
160,926
|
|
Prepaid software
|
|
|
43,409
|
|
|
|
41,253
|
|
Other
|
|
|
69,499
|
|
|
|
48,151
|
|
|
|
$
|
333,877
|
|
|
$
|
250,330
|
|
Note 5 — Property and Equipment
Property and equipment, net consisted of
the following:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Machinery and equipment
|
|
$
|
64,258
|
|
|
$
|
63,170
|
|
Building leasehold improvements
|
|
|
187,128
|
|
|
|
187,128
|
|
Furniture, fixtures, software and computers
|
|
|
135,285
|
|
|
|
135,285
|
|
|
|
|
386,671
|
|
|
|
385,583
|
|
Accumulated depreciation and amortization
|
|
|
(323,457
|
)
|
|
|
(250,929
|
)
|
|
|
$
|
63,214
|
|
|
$
|
134,654
|
|
Note 6 — Intangible Assets
Intangible assets, net consisted of the following:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Patents
|
|
$
|
824,004
|
|
|
$
|
747,447
|
|
Other intangible assets
|
|
|
732,175
|
|
|
|
732,175
|
|
|
|
|
1,556,179
|
|
|
|
1,479,622
|
|
Accumulated amortization
|
|
|
(159,770
|
)
|
|
|
(94,789
|
)
|
|
|
$
|
1,396,409
|
|
|
$
|
1,384,833
|
|
At December 31, 2018 and 2017, the Company
had capitalized approximately $354,427 and $330,070, respectively, for costs related to patents that have not been awarded. During
the years ended December 31, 2018 and 2017, the Company wrote-off $56,504 and $87,655, respectively, in previously capitalized
patent costs.
Amortization expense amounted to $64,981
and $51,732 for the years ended December 31, 2018 and 2017, respectively. Amortization expense for the succeeding five years
and thereafter is $65,787 (2019-2023) and $713,047 (thereafter).
Note 7 — Accrued Expenses
Accrued expenses consisted of the following:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Accrued professional fees
|
|
$
|
47,000
|
|
|
$
|
48,481
|
|
Accrued compensation
|
|
|
43,822
|
|
|
|
92,358
|
|
Accrued licensing fees
|
|
|
40,000
|
|
|
|
40,000
|
|
Accrued board of director fees
|
|
|
30,000
|
|
|
|
62,500
|
|
Accrued litigation
|
|
|
—
|
|
|
|
100,000
|
|
Accrued semiconductor fabrication costs
|
|
|
—
|
|
|
|
90,250
|
|
Other
|
|
|
6,933
|
|
|
|
14,596
|
|
|
|
$
|
167,755
|
|
|
$
|
448,185
|
|
Note 8 — Equity
All shares of common stock have a par value
of $0.001. Each holder of common stock is entitled to one vote per share outstanding.
In February 2017, the Company's Board of
Directors authorized Series A Convertible Preferred Stock consisting of 3,000,000 shares. Each share of the preferred stock has
a par value of $0.001 and a stated value of $2.535 and is convertible at any time at the option of the holder into one share of
common stock. The holder cannot convert the preferred stock to the extent its beneficial ownership would exceed 4.99% of the Company's
common stock outstanding, subject to adjustment as provided in the Certificate of Designation of Preferences, Rights and Limitations
of Series A Convertible Preferred Stock. The shares have no voting power, no liquidation preference or additional dividend entitlements.
In February 2017, an investor exchanged 810,000 shares of common stock for 810,000 shares of preferred stock.
On March 3, 2017, the Company closed on a
definitive securities purchase agreement, or the Private Placement, to sell the Company’s common stock and preferred stock
together with warrants to purchase shares of common stock. In the Private Placement, each share of common stock or preferred stock
was sold together with a warrant to purchase one share of common stock at a collective price of $2.535. Investors purchased an
aggregate of 5,220,826 shares of common stock and 708,430 shares of preferred stock together with warrants to purchase 5,929,256
shares of common stock in the Private Placement for aggregate gross proceeds of $15 million. Net cash proceeds were $13,657,331
after offering fees and expenses, including the placement agent fee of approximately $1.1 million.
As a result of the exchange and Private Placement,
in the year ended December 31, 2017, the Company issued 1,518,430 shares of the Company's Series A Convertible Preferred Stock.
Note 9 — Equity Incentive Plan
On May 17, 2013, the Company adopted the
2013 Equity Incentive Plan (the “Plan”) and reserved shares of common stock for issuance under the Plan. The Plan is
administered by the Compensation Committee of the Company’s Board of Directors.
At December 31, 2018, there were 517,563
shares of common stock available for issuance under the Plan.
During the year ended
December 31, 2018, the Company granted 122,039 stock options to Board members and 300,000 immediately vested stock
options to an executive under the Plan. The estimated fair value of these stock options, calculated using the Black-Scholes
option valuation model, was $330,713, all of which was recognized during the year ended December 31, 2018.
During the year ended December 31, 2018,
the Company granted 117,500 restricted stock units (“RSUs”) and 12,000 performance stock units (“PSUs”)
to employees. The estimated fair value of these awards, calculated based on the closing stock price on the dates of grant, was
$158,110, of which $37,880 was forfeited and $45,467, net of a reversal of $6,481, was recognized during the year ended December
31, 2018. The RSUs vest in four equal installments over a two-year vesting period.
For the year ended December 31, 2018, 6,000
PSUs vested and 6,000 PSUs were canceled as the related performance condition was not met.
A summary of the Company’s RSU activity
is as follows:
|
|
Restricted Stock Units
|
|
Outstanding at January 1, 2018
|
|
|
—
|
|
Granted
|
|
|
117,500
|
|
Vested
|
|
|
(23,125
|
)
|
Forfeited
|
|
|
(25,000
|
)
|
Outstanding at December 31, 2018
|
|
|
69,375
|
|
As permitted by SAB 107, management utilizes
the simplified approach to estimate the expected term of stock options, which represents the period of time that options granted
are expected to be outstanding. 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. The volatility is estimated based on the historical volatilities of comparable
companies. The Company has never declared or paid dividends and has no plans to do so in the foreseeable future.
The assumptions used in the Black-Scholes
model are as follows:
|
|
For the year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Average risk-free interest rate
|
|
|
2.76
|
%
|
|
|
2.16
|
%
|
Expected dividend yield
|
|
|
—
|
%
|
|
|
—
|
%
|
Expected life
|
|
|
3.25 to 5.63 years
|
|
|
|
5.31 to 6.25 years
|
|
Expected volatility
|
|
|
70
|
%
|
|
|
65
|
%
|
A summary of the Company’s stock option
activity and related information is as follows:
|
|
2018
|
|
|
2017
|
|
|
|
Stock
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Life
(in years)
|
|
|
Stock
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Life
(in years)
|
|
Outstanding at January 1
|
|
|
1,232,236
|
|
|
$
|
6.44
|
|
|
|
6.8
|
|
|
|
1,385,204
|
|
|
$
|
6.89
|
|
|
|
7.5
|
|
Granted
|
|
|
422,039
|
|
|
$
|
1.31
|
|
|
|
|
|
|
|
167,725
|
|
|
$
|
2.99
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
(26,743
|
)
|
|
$
|
0.42
|
|
|
|
|
|
Forfeited
|
|
|
(183,828
|
)
|
|
$
|
5.54
|
|
|
|
|
|
|
|
(293,950
|
)
|
|
$
|
7.14
|
|
|
|
|
|
Outstanding at December 31
|
|
|
1,470,447
|
|
|
$
|
5.08
|
|
|
|
6.8
|
|
|
|
1,232,236
|
|
|
$
|
6.44
|
|
|
|
6.8
|
|
Exercisable at December 31
|
|
|
1,401,522
|
|
|
$
|
5.11
|
|
|
|
6.8
|
|
|
|
910,436
|
|
|
$
|
6.52
|
|
|
|
6.6
|
|
The following table sets forth additional
information about stock options outstanding at December 31, 2018:
Range of Exercise Prices
|
|
Options
Outstanding
|
|
|
Weighted
Average
Remaining
Life
(in years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Options
Exercisable
|
|
$1.22 – $2.50
|
|
|
451,139
|
|
|
|
9.2
|
|
|
$
|
1.37
|
|
|
|
429,314
|
|
$2.51 – $5.00
|
|
|
190,942
|
|
|
|
6.4
|
|
|
$
|
3.72
|
|
|
|
168,942
|
|
$5.01 – $7.50
|
|
|
385,828
|
|
|
|
5.3
|
|
|
$
|
6.91
|
|
|
|
371,753
|
|
$7.51 – $8.27
|
|
|
442,538
|
|
|
|
5.9
|
|
|
$
|
7.86
|
|
|
|
431,513
|
|
|
|
|
1,470,447
|
|
|
|
|
|
|
|
|
|
|
|
1,401,522
|
|
The Company recognized a charge of $28,009
related to modification of a 2018 stock option grant to an executive. Under the original grant, the executive had up to 90 days
after the termination of service to exercise the stock options. Pursuant to the amendment, the executive now has up to 5 years
after the termination of service to exercise the stock options.
Stock options granted under the
Plan have ten-year terms and generally vest annually over a four-year vesting period except for option grants to independent
directors that generally vest quarterly over a one-year vesting period.
The estimated aggregate pretax intrinsic
value (the difference between the Company’s stock price on the last day of the year ended December 31, 2018 and the
exercise prices, multiplied by the number of vested in-the-money options) is $0. This amount changes based on the fair value of
the Company’s stock.
As of December 31, 2018, there was $302,207 of unrecognized
compensation cost related to non-vested share-based compensation arrangements. That cost is expected to be recognized over a weighted
average period of 0.7 years.
Note 10 — Warrants
During the year ended December 31, 2017
and in connection with the Private Placement, investors received warrants to purchase 5,929,256 shares of common stock. The warrants
have an exercise price of $2.41 per share and expire three years from the date of issuance. The placement agent also received 237,170
warrants to purchase shares of common stock as part of its placement agent fee. The placement agent warrant has an exercise price
of $2.89 per share and has a three-year term from the date of issuance. The warrants contain a provision to protect investors from
potential future dilutive events, or a down-round provision. The Company elected to early adopt ASU 2017-11 and will recognize
the value of the effect of the down-round provision, if and/or when triggered.
The warrants were sold with shares of common
stock for $2.535 per unit. The unit price was allocated to the warrants and common stock based upon the pro rata fair market value
of the securities, with the warrants valued using the Black-Scholes model. The allocated fair value of the warrants was estimated
to be $4.7 million on the date of issuance. In addition, the placement agent warrant was valued at $249,440 on the date of issuance.
The assumptions used in the Black-Scholes
model for these warrants are as follows:
Average risk-free interest rate
|
|
|
1.59
|
%
|
Expected dividend yield
|
|
|
—
|
%
|
Expected life
|
|
|
3 years
|
|
Expected volatility
|
|
|
65
|
%
|
A summary of the Company’s warrant
activity and related information is as follows:
|
|
2018
|
|
|
2017
|
|
|
|
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding at January 1
|
|
|
7,481,079
|
|
|
$
|
2.79
|
|
|
|
1,398,653
|
|
|
$
|
4.57
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
|
|
6,166,426
|
|
|
$
|
2.43
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Forfeited/Expired
|
|
|
(345,001
|
)
|
|
$
|
6.25
|
|
|
|
(84,000
|
)
|
|
$
|
6.25
|
|
Outstanding at December 31
|
|
|
7,136,078
|
|
|
$
|
2.62
|
|
|
|
7,481,079
|
|
|
$
|
2.79
|
|
No warrants were unvested at December 31,
2018. For the Company’s two largest beneficial owners, the warrants they received in connection with the Private Placement
may be exercised only to the extent that the total number of shares of common stock then beneficially owned by these shareholders
does not exceed 9.99% of the outstanding shares of the Company’s stock. The weighted average remaining life is 1.1 years.
The estimated aggregate pretax intrinsic value (the difference between the Company’s stock price on the last day of the year
ended December 31, 2018 and the exercise prices, multiplied by the number of in-the-money warrants) is $0.
Note 11 — Income Taxes
Income taxes are disproportionate to
income due to net operating loss carryforwards, which are fully reserved. As of December 31, 2018, the Company has
federal net operating loss carryforwards of approximately $50 million which will begin to expire in 2031. The availability of
the Company’s net operating loss carryforwards may be subject to limitation if there is a change in the ownership of
its stock of 50% or more. Management has concluded that it is more likely than not that the Company will not have
sufficient foreseeable taxable income within the carryforward period permitted by current law to allow for the utilization of
certain of the deductible amounts generating the deferred tax assets; therefore, a full valuation allowance has been
established to reduce the net deferred tax assets to zero at December 31, 2018 and 2017.
The following is a summary of the significant
components of the Company’s net deferred income tax assets and liabilities as of December 31, 2018 and 2017:
|
|
For the Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Current deferred income tax assets:
|
|
|
|
|
|
|
|
|
Inventory – uniform capitalization
|
|
$
|
23,000
|
|
|
$
|
11,000
|
|
Accrued compensation and other
|
|
|
63,000
|
|
|
|
93,000
|
|
Less: valuation allowance
|
|
|
(86,000
|
)
|
|
|
(104,000
|
)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Non-current deferred income tax assets and (liabilities):
|
|
|
|
|
|
|
|
|
Net operating loss
|
|
$
|
10,435,000
|
|
|
$
|
8,995,000
|
|
Research and development credit
|
|
|
18,000
|
|
|
|
18,000
|
|
Warranty reserve
|
|
|
81,000
|
|
|
|
89,000
|
|
Warrants issued for services
|
|
|
45,000
|
|
|
|
45,000
|
|
Depreciation and amortization
|
|
|
73,000
|
|
|
|
47,000
|
|
Exercise of options and warrants
|
|
|
(33,000
|
)
|
|
|
(33,000
|
)
|
Stock based compensation
|
|
|
759,000
|
|
|
|
680,000
|
|
Intangibles and other
|
|
|
(422,000
|
)
|
|
|
(466,000
|
)
|
Less: valuation allowance
|
|
|
(10,956,000
|
)
|
|
|
(9,375,000
|
)
|
Net non-current deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
The Company has applied the provisions of
FASB ASC 740,
Income Tax,
which clarifies the accounting for uncertainty in tax positions. FASB ASC 740 requires the recognition
of the impact of a tax position in the financial statements if that position is more likely than not of being sustained on a tax
return upon examination by the relevant taxing authority, based on the technical merits of the position. At December 31, 2018
and 2017, the Company had no unrecognized tax benefits.
The Company recognizes interest and penalties
related to income tax matters in interest expense and operating expenses, respectively. As of December 31, 2018, and 2017,
the Company has no accrued interest and penalties related to uncertain tax positions.
The Company is subject to tax in the United
States (“U.S.”) and files tax returns in the U.S. federal and certain state jurisdictions. The Company is no longer
subject to U.S. federal, state and local income tax examinations by tax authorities for years before 2014. The Company currently
is not under examination by any tax authority.
The reconciliation between the statutory
income tax rate and the effective tax rate is as follows:
|
|
For the Year Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Statutory federal income tax rate
|
|
|
(21
|
)%
|
|
|
(34
|
)%
|
Stock based compensation
|
|
|
1
|
|
|
|
1
|
|
Tax Reform
|
|
|
—
|
|
|
|
56
|
|
Valuation allowance
|
|
|
20
|
|
|
|
(23
|
)
|
|
|
|
—
|
%
|
|
|
—
|
%
|
On December 22, 2017, the Tax Cuts and Jobs
Act (the “Tax Act”) was signed into law. The Tax Act contained significant changes to corporate taxation, including
(i) the reduction of the corporate income tax rate to 21%, (ii) the acceleration of expensing for certain business assets, (iii)
the one-time transition tax related to the transition of U.S. international tax from a worldwide tax system to a territorial tax
system, (iv) the repeal of the domestic production deduction, (v) additional limitations on the deductibility of interest expense
and (vi) expanded limitations on executive compensation.
The key impact of the Tax Act on
the Company’s financial statement for the year ended December 31, 2017, was the re-measurement of deferred tax balances to
the new corporate tax rate. In order to calculate the effects of the new corporate tax rate on the Company’s deferred tax
balances, ASC 740 “Income Taxes” (“ASC 740”) required the re-measurement of the Company’s deferred
tax balances as of the enactment date of the Tax Act, based on the rates at which the balances are expected to reverse in the future.
The re-measurement of deferred tax balances resulted in a net reduction in deferred tax assets of $5.9 million offset with a corresponding
adjustment to the valuation allowance at December 31, 2017.
Note 12 — Commitments and Contingencies
Lease
The Company leases 14,782 square feet of
office and laboratory space located in Austin, Texas. On April 20, 2018, the Company entered into an amendment to its existing
operating lease which extended the lease term from May 31, 2018 to May 31, 2021. The annual base rent in the first year of the
lease extension is $184,775 and increases by $7,391 in each succeeding year of the lease extension. In addition, the Company is
required to pay its proportionate share of operating costs for the building under this triple net lease. Future minimum payments
under the lease, as amended, are as follows:
For the year ended December 31,
|
|
Amount
|
|
2019
|
|
$
|
189,086
|
|
2020
|
|
|
196,477
|
|
2021
|
|
|
83,149
|
|
|
|
$
|
468,712
|
|
Rent expense incurred for the years
ended December 31, 2018 and 2017 amounted to $245,525 and $234,160 respectively.
License Agreement
In 2015, the Company entered into licensing
agreements which expire on February 7, 2033. Per the agreements, the Company has an exclusive royalty-free license associated with
semiconductor power switches which enhances its intellectual property portfolio. The agreements include both fixed and variable
payments. The variable payments are a function of the number of associated patent filings pending and patents issued under the
agreements. The Company will pay $10,000 for each patent filing pending and $20,000 for each patent issued within 20 days of December
21
st
of each year of the agreement, up to a maximum of $100,000 per year (i.e. five issued patents).
Through December 31, 2018, two patents associated
with the agreements were issued. At December 31, 2018 and 2017, the corresponding long-term liability for the estimated present
value of future payments under the licensing agreement was $428,163 and $456,234, respectively. The Company is accruing interest
for future payments related to the issued patents associated with the agreement. This long-term liability incurred in connection
with these patent issuances is a non-cash investing activity with regard to the Company’s statements of cash flows.
Legal Proceedings
In 2017, the Company entered into arbitration
with Libra Industries, Inc. (Libra), its prior contract manufacturer, with both parties asserting claims against the other party.
At December 31, 2017, the Company recorded a $100,000 accrual for the arbitration based on an expired settlement offer made by
the Company to Libra. On June 21, 2018, the arbitrator issued a Final Award, final and binding award on all issues except as to
attorney’s fees and costs. In the Final Award, the arbitrator denied Libra’s claims and awarded the Company $163,105
on it claims. On July 15, 2018, the arbitrator issued a Supplemental Final Award on Attorney’s Fees and Costs, awarding the
Company an additional $165,346. As a result, during the year ended December 31, 2018, the Company reversed the previously recorded
$100,000 accrual resulting in a reduction to general and administrative expense and recognized the Final Award of $163,105 as a
reduction in loss from discontinued operations and the Supplemental Final Award on Attorney’s Fees and Costs of $165,347
as a reduction in general and administrative expense. The Company received full payment on the total award on August 2, 2018.
On April 11, 2018, the Company received $203,121
pursuant to a Judgment of Garnishment dated March 23, 2018 and related to the non-payment of an overdue accounts receivable balance
by a former customer of the Company. The judgment included the past due balance of $162,000 plus late fees and recovery of legal
costs. During the year ended December 31, 2018, the Company reversed the allowance for doubtful accounts of $162,000, originally
recorded in 2017, with a corresponding reduction in loss from discontinued operations, recognized interest income of $35,064 associated
with late fees and a reduction in general and administrative expense of $6,057
for
the partial recovery of legal fees.
Indemnification of Executives
The employment agreements of Company executives
include an indemnification provision whereby the Company shall indemnify and defend, at the Company’s expense, its executives
so as long as an executive’s actions were taken in good faith and in furtherance of Company’s business and within the
scope of executive’s duties and authority.
Note 13 — Retirement Plan
The Company has a defined contribution retirement
plan covering all of its employees. Under the plan, Company contributions are discretionary. No discretionary contributions were
made by the Company in the years ended December 31, 2018 and 2017.
Note 14 — Subsequent Events
On January 2, 2019, the Board
of Directors of the Company approved a strategic shift to focus on the commercialization of its B-TRAN™ technology and
a plan to suspend further power converter system development and sales while the Company located a buyer for its
power conversion systems division. On January 4, 2019, the Company implemented a reduction-in-force in connection with this
exit activity and recognized an expense of $92,600 in involuntary termination benefits. The Company did not recognize other
associated costs related to exiting production of its power converters products as the sale of the power conversion systems
division was deemed probable. At December 31, 2018, the Company has accounted for the assets and liabilities of the power
conversion systems division as held for sale and presented this division as discontinued operations. See Note 2.
On February 21, 2019, a shareholder converted
708,430 shares of preferred stock to 708,430 shares of common stock.
On March 7, 2019, and following an initial
notice of non-compliance from Nasdaq on September 7, 2018, the Company received a notice letter from Nasdaq indicating that it
had not regained compliance with the minimum bid price requirement of $1 per share, as set forth in Nasdaq Listing Rule 5550(a)(2).
However, Nasdaq determined that the Company was eligible for an additional 180-day period, or until September 3, 2019, to regain
compliance based on the fact that it met the continued listing requirement for market value of publicly held shares and all other
initial listing standards for the Nasdaq Capital Market, with the exception of the minimum bid price requirement, and it had provided
written notice to Nasdaq of its intent to cure the deficiency during this second compliance period, by effecting a reverse stock
split, if necessary. If the Company is unable to regain compliance with the Nasdaq’s minimum bid price requirement or with
the continued listing requirements of The NASDAQ Stock Market, its common stock may be delisted in the future which could adversely
affect its ability to raise additional capital.