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 (the “Board”) 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 and PPSA™ technology. On September 19, 2019, the Company closed on the sale of the power conversion systems
division and the Company is now solely focused on the further development and commercialization of its B-TRAN™ technology.
Prior to the sale of our PPSA™ business and technology on September 19, 2019, the Company classified this division as held
for sale. The Company show this division as a discontinued operation in these financial statements.
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 and warrants. The Company’s continued operations are dependent upon its ability to obtain adequate
sources of funding through future revenues, follow-on stock offerings, issuances of warrants, 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.
Reclassifications
Certain items in prior period financial statements
have been reclassified to conform to current year presentation. Such reclassifications did not impact the Company’s reported
net loss or financial position.
Reverse Stock Split
On August 15, 2019, the Company effected
a reverse stock split of the outstanding shares of its common stock by a ratio of one-for-ten, and its common stock began trading
on the Nasdaq Capital Market on a split-adjusted basis on August 20, 2019. The par value of the Company’s common stock remained
unchanged at $0.001 per share after the reverse stock split. All share amounts, per share data, share prices, exercise prices and
conversion rates set forth in these notes and the accompanying financial statements have, where applicable, been adjusted retroactively
to reflect the reverse stock split. See Note 8.
Liquidity and Going Concern
The Company has incurred net losses and negative
operating cash flows since inception, including a net loss of $3.9 million and cash used in operating activities of $3.2 million
for the year ended December 31, 2019. At December 31, 2019, the Company had net working capital of $2.6 million and the Company’s
principal source of liquidity consisted of $3.1 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.
Additionally, the outbreak of COVID-19 has caused significant disruptions to the global financial markets which could impact the
Company’s ability to raise additional capital. 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.
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
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Shorter of lease term or useful life
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Machinery and equipment
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5 years
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Furniture, fixtures and IT equipment
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3 – 5 years
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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. See Note 3.
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 $14,707 and $56,504 during the years ended December 31, 2019 and 2018, 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:
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•
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Level 1 — Quoted prices in active markets for identical assets or liabilities;
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•
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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
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•
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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
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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 and 2019, 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 13 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 sold its products FOB shipping, where the risk of loss and title passed to
the customer at the shipping point, and recognized revenue when products were shipped. All revenue is included within loss from
discontinued operations for the years ended December 31, 2019 and 2018.
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, 2019 and 2018, 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.
In accordance with ASC 260, shares issuable
for little or no cash consideration are considered outstanding common shares and included in the computation of basic earnings
per share. As such, the Company has included 868,443 pre-funded warrants with an exercise price of $0.001 in its computation of
earnings per share and excluded these pre-funded warrants from potentially dilutive shares outstanding. See Note 8. At December 31,
2019 and 2018, potentially dilutive shares outstanding amounted to 2,633,043, exclusive of the 868,443 pre-funded warrants, and
879,544, respectively.
Stock Based Compensation
The Company applies FASB ASC 718, “Stock
Compensation,” when recording stock-based compensation. Grants to non-employees are also accounted for under ASC 718. The
fair value of each stock option award is estimated on the date of grant using the Black-Scholes option valuation model.
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. 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.
Recently Adopted Standard
In February 2016, the FASB issued Accounting
Standards Update (“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 Company adopted this standard effective January 1, 2019.
Upon adoption, the Company recognized its lease commitment as a lease liability and right-of-use asset. For more details regarding
the lease commitment, see Note 12.
In June 2018, the FASB issued ASU 2018-07,
Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments granted to
nonemployees for goods and services. The ASU aligns most of the guidance on share-based payments granted to nonemployees to the
requirements for share-based payments granted to employees. The Company adopted this standard effective January 1, 2019. The adoption
of this standard did not have a material effect on the Company’s financial statements upon adoption or for the year ended
December 31, 2019.
Recent Accounting Pronouncements
Management does not believe that any recently
issued, but not yet effective, accounting standards, if adopted, would have a material impact on the Company’s financial
statements.
Note 3 — Sale of Power Conversion Systems
Division
On January 2, 2019, the Board approved a
strategic shift to focus on the commercialization of the Company’s B-TRAN™ technology and a plan to suspend further
power conversion 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’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 were 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.
On September 19, 2019, the Company closed
on the sale of its power conversion systems division to CE+T Energy Solutions, Inc. (“CE+T Energy”). The consideration
consisted of $200,000 in cash, received at closing, and 50 shares of CE+T Energy’s common stock, issued on December 11, 2019,
which represented a 5% ownership interest in CE+T Energy as of the closing date. The Company did not record any value of the equity
consideration obtained in the sale as there is not currently a market for such shares and the Company does not have access to current
financial information and future financial projections of CE+T Energy. CE+T Energy also assumed certain liabilities of the power
conversion systems division in connection with the sale. The net cash proceeds from the sale were $23,587.
As a result of the sale, the financial statements
for the year ended December 31, 2019 do not include assets held for sale.
The following is a reconciliation of the
carrying amounts of major classes of assets and liabilities of the discontinued operations to assets and liabilities held for sale:
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December 31,
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2018
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Accounts receivable, net
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$
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270,768
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Inventories, net
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131,342
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Prepayments and other current assets
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22,322
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Property and equipment, net
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329,738
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Intangible assets, net
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342,153
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Current assets held for sale (1)
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$
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1,096,323
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Accounts payable
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$
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356,113
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Accrued expenses
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521,642
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Current liabilities held for sale
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$
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877,755
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(1)
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The assets of the discontinued operations classified as held for sale are classified as current on the December 31, 2018 balance sheet as it was deemed probable that the sale would occur and proceeds would be collected within one year.
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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:
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December 31,
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2019
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2018
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Product revenue
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$
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115,000
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$
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1,624,773
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Cost of product revenue
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141,647
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1,968,648
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Research and development
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228,641
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2,095,138
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General and administrative
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79,306
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59,873
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Sales and marketing
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59,431
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774,500
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Impairment (1)
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405,000
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360,000
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Loss on discontinued operations
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$
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(799,025
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)
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$
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(3,633,386
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(1)
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Impairment charge was calculated as the net book value of assets held for sale prior to the impairment less the expected net proceeds from the planned sale. The expected net proceeds were 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. For the year ended December 31, 2019, the Company recorded a loss on the sale of discontinued operations of $9,107.
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Note 4 — Prepayments and Other Current Assets
Prepayments and other current assets consisted
of the following:
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December 31,
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2019
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2018
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Prepaid insurance
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$
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169,832
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$
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220,969
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Prepaid software
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39,475
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43,409
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Other
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38,841
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69,499
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$
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248,148
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$
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333,877
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Note 5 — Property and Equipment
Property and equipment, net consisted of
the following:
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December 31,
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2019
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2018
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Machinery and equipment
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$
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89,559
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$
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64,258
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Building leasehold improvements
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25,090
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187,128
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Furniture, fixtures, software and IT equipment
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114,880
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135,285
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229,529
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386,671
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Accumulated depreciation and amortization
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(182,227
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)
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(323,457
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)
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$
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47,302
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$
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63,214
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Note 6 — Intangible Assets
Intangible assets, net consisted of the following:
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December 31,
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2019
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2018
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Patents
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$
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909,142
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$
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824,004
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Other intangible assets
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|
|
964,542
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|
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732,175
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|
|
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1,873,684
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1,556,179
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Accumulated amortization
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(239,306
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)
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(159,770
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)
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$
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1,634,378
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$
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1,396,409
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At December 31, 2019 and 2018, the Company
had capitalized approximately $335,224 and $354,427, respectively, for costs related to patents that have not been awarded. During
the years ended December 31, 2019 and 2018, the Company wrote-off $14,707 and $56,504, respectively, in previously capitalized
patent costs.
Amortization expense amounted to $79,536
and $64,981 for the years ended December 31, 2019 and 2018, respectively. Amortization expense for the succeeding five years
and thereafter is $87,813 (2020-2024) and $860,088 (thereafter).
Note 7 — Accrued Expenses
Accrued expenses consisted of the following:
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December 31,
|
|
|
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2019
|
|
|
2018
|
|
Accrued professional fees
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|
$
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44,500
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|
|
$
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47,000
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Accrued compensation
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|
|
42,659
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|
|
|
43,822
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Accrued licensing fees
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|
|
60,000
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|
|
|
40,000
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|
Accrued board of director fees
|
|
|
30,000
|
|
|
|
30,000
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|
Accrued taxes
|
|
|
54,160
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|
|
|
4,987
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Accrued semiconductor fabrication costs
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|
|
55,000
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|
|
|
—
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Accrued certification costs
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30,978
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|
|
|
—
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Other
|
|
|
1,838
|
|
|
|
1,946
|
|
|
|
$
|
319,135
|
|
|
$
|
167,755
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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.
Private Placement
On November 7, 2019, the Company entered
into a securities purchase agreement with certain institutional and accredited investors, including Dr. Lon E. Bell, Chief Executive
Officer and Chairman of the Board, for a private placement of the Company’s common stock and warrants to purchase common
stock for aggregate gross proceeds of $3.5 million and net proceeds of $3.1 million (the “Offering”). The Offering
closed on November 13, 2019. In the Offering, the Company issued an aggregate of (i) 544,950 shares of common stock at $2.4763
per share and (ii) pre-funded warrants to purchase 868,443 shares of common stock that are immediately exercisable and have no
expiration date, at a price of $2.4763 less a nominal exercise price of $0.001 per pre-funded warrant. The Company also issued
to the investors warrants to purchase up to an aggregate of 1,766,751 shares of common stock at an exercise price of $2.32 per
share that are immediately exercisable and will expire five years from the issuance date. As compensation to the placement agent
in the Offering, in addition to a cash fee for its services, the Company also issued to the placement agent a warrant to purchase
up to 70,670 shares of common stock, with an exercise price of $2.9716 per share. The other terms of the placement agent warrant
are substantially the same as the investor warrants. For his investment of $500,000, Dr. Bell received 201,914 shares of common
stock and 252,393 warrants in the Offering. Pursuant to a registration rights agreement, the Company filed a registration statement
with the SEC (which was declared effective on December 20, 2019) to register the resale of the shares of common stock and the shares
of common stock issuable upon exercise of the warrants issued in the Offering.
Reverse Stock Split
On August 15, 2019, after receipt of stockholder
and Board approval, the Company filed a Certificate of Amendment to the Certificate of Incorporation of Ideal Power Inc. to effect
a one-for-ten (1:10) reverse stock split of all issued and outstanding shares of the Company’s common stock. The Company’s
common stock began trading on the Nasdaq Capital Market on a split-adjusted basis when the market opened on August 20, 2019. The
par value of the Company’s common stock remained unchanged at $0.001 per share after the reverse stock split.
The reverse stock split reduced the number
of shares of the Company’s common stock outstanding from 14,722,840 to 1,474,001, inclusive of full shares received for fractional
interests. The number of shares of the Company’s common stock issuable upon conversion of the outstanding shares of the Company’s
preferred stock was reduced from 810,000 shares to 81,000 shares. The number of authorized shares of the Company’s common
stock was not changed by the reverse stock split.
The reverse stock split proportionately
affected the number of shares of the Company’s common stock available for issuance under the Company’s equity incentive
plans. The number of shares of the Company’s common stock subject to all options, warrants and stock awards of the Company
outstanding immediately prior to the reverse stock split were proportionately adjusted in accordance with their terms.
Preferred Stock
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 is convertible at any time at the option of the holder into one-tenth shares 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.
On February 21, 2019, a shareholder converted
708,430 shares of preferred stock to 70,843 shares of common stock. On December 12, 2019, a shareholder converted 810,000 shares
of preferred stock to 81,000 shares of common stock. At December 31, 2019, there was no preferred stock outstanding.
Nasdaq Compliance
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.
On September 4, 2019, the Company received
a notice letter from Nasdaq that the Company had regained compliance with the minimum bid price requirement and the matter was
closed.
On August 21, 2019, the Company was notified
by the Nasdaq Listing Qualifications Department that the Company was not in compliance with the minimum stockholders’ equity
requirement under Nasdaq Listing Rule 5550(b)(1) for continued listing on the Nasdaq Capital Market because the Company’s
stockholders’ equity was below the required minimum of $2.5 million, and, as of the date of the notification, the Company
did not meet the alternatives of market value of listed securities or net income from continuing operations. In accordance with
Nasdaq Listing Rules, the Company had 45 calendar days, or until October 3, 2019, to submit a plan to regain compliance. The Company
submitted a plan of compliance on October 3, 2019 addressing how it intended to regain compliance with Nasdaq Listing Rule 5550(b).
On October 31, 2019, Nasdaq notified the Company of approval of the compliance plan, and Nasdaq granted the Company an extension
through November 30, 2019 to take action to evidence compliance with Nasdaq Listing Rule 5550(b), which would require, among other
things, that the Company demonstrate compliance within its periodic report for the fiscal year ending December 31, 2019.
On November 13, 2019, the Company closed
on the Offering and filed a related Form 8-K with the SEC for the Offering. On November 25, 2019, the Company received written
confirmation from Nasdaq notifying the Company that it had regained compliance with the minimum stockholder’s equity requirement
under Nasdaq Listing Rule 5550(b)(1) based on the Company’s Form 8-K filed with the SEC on November 13, 2019. In this annual
report for the fiscal year ending December 31, 2019 of which these audited financial statements form a part, the Company demonstrated
compliance with Nasdaq Listing Rule 5550(b)(1) as the Company reported stockholders’ equity of $3.9 million. As such, at
December 31, 2019, the Company was in compliance with the continued listing requirements of the Nasdaq Capital Market.
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.
On April 4, 2019, the Company entered into
Award Forfeiture Agreements (“Forfeiture Agreements”) with certain of the Company’s executives and members of
its Board. Pursuant to the Forfeiture Agreements, these individuals voluntarily forfeited their equity award grants with a grant
date prior to January 1, 2018. The forfeitures included 49,584 stock options and 11,900 performance stock units (“PSUs”)
issued under the Plan, and 25,000 stock options not issued under the Plan. In April 2019, the Company accelerated the recognition
of $80,492 of stock compensation expense in connection with the unvested, forfeited awards.
At December 31, 2019, there were 22,663
shares of common stock available for issuance under the Plan.
During the year ended December 31, 2019,
the Company granted 23,400 stock options to Board members, 94,000 stock options to executives and 1,000 stock options to an employee
under the Plan. The estimated fair value of these stock options, calculated using the Black-Scholes option valuation model, was
$253,074, of which $76,808 was recognized during the year ended December 31, 2019.
During the year ended December 31, 2018,
the Company granted 12,206 stock options to Board members and 30,000 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 11,750 restricted stock units (“RSUs”) and 1,200 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 and
PSU activity is as follows:
|
|
RSUs
|
|
|
PSUs
|
|
Outstanding at January 1, 2019
|
|
|
6,938
|
|
|
|
11,900
|
|
Forfeited
|
|
|
(6,938
|
)
|
|
|
(11,900
|
)
|
Outstanding at December 31, 2019
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
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,
|
|
|
|
2019
|
|
|
2018
|
|
Average risk-free interest rate
|
|
|
2.12
|
%
|
|
|
2.76
|
%
|
Expected dividend yield
|
|
|
—
|
%
|
|
|
—
|
%
|
Expected life
|
|
|
5.16 to 6.25 years
|
|
|
|
3.25 to 5.63 years
|
|
Expected volatility
|
|
|
80
|
%
|
|
|
70
|
%
|
A summary of the Company’s stock option
activity and related information is as follows:
|
|
2019
|
|
|
2018
|
|
|
|
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
|
|
|
147,054
|
|
|
$
|
50.79
|
|
|
|
6.8
|
|
|
|
123,234
|
|
|
$
|
64.39
|
|
|
|
6.8
|
|
Granted
|
|
|
118,400
|
|
|
$
|
3.14
|
|
|
|
|
|
|
|
42,206
|
|
|
$
|
13.08
|
|
|
|
|
|
Forfeited
|
|
|
(95,474
|
)
|
|
$
|
67.64
|
|
|
|
|
|
|
|
(18,386
|
)
|
|
$
|
55.38
|
|
|
|
|
|
Outstanding at December 31
|
|
|
169,980
|
|
|
$
|
8.13
|
|
|
|
9.1
|
|
|
|
147,054
|
|
|
$
|
50.79
|
|
|
|
6.8
|
|
Exercisable at December 31
|
|
|
74,980
|
|
|
$
|
14.81
|
|
|
|
8.1
|
|
|
|
140,163
|
|
|
$
|
51.09
|
|
|
|
6.8
|
|
The following table sets forth additional
information about stock options outstanding at December 31, 2019:
Range of Exercise Prices
|
|
Options
Outstanding
|
|
|
Weighted
Average
Remaining
Life
(in years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Options
Exercisable
|
|
$2.85 – $4.25
|
|
|
118,400
|
|
|
|
9.7
|
|
|
$
|
3.14
|
|
|
|
23,400
|
|
$12.20 – $15.60
|
|
|
42,206
|
|
|
|
8.3
|
|
|
$
|
13.08
|
|
|
|
42,206
|
|
$29.71 – $79.40
|
|
|
9,374
|
|
|
|
4.6
|
|
|
$
|
48.98
|
|
|
|
9,374
|
|
|
|
|
169,980
|
|
|
|
|
|
|
|
|
|
|
|
74,980
|
|
Stock options granted under the Plan have
ten-year terms and generally vest annually over a three-year or 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, 2019 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, 2019, there was $176,266
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 1.5 years.
Note 10 — Warrants
During the year ended December 31, 2019 and
in connection with the Offering, the Company issued pre-funded warrants to purchase 868,443 shares of common stock that are immediately
exercisable and have no expiration date. The pre-funded warrants were recorded as a component of stockholders’ equity within
additional paid-in capital. Also in connection with the Offering, investors received warrants to purchase 1,766,751 shares of common
stock at an exercise price of $2.32 per share that will expire five year from the date of issuance. The placement agreement received
70,670 warrants to purchase shares of common stock as part of its placement agent fee. The placement agent warrant has an exercise
price of $2.9716 per share and expires five year from the date of issuance.
The warrants were sold with shares of common
stock or pre-funded warrants for $2.4763 per unit. The unit price was allocated to the warrants and common stock or pre-funded
warrants based upon the relative fair value of the securities, with the warrants valued using the Black-Scholes model. The allocated
fair value of the warrants was estimated to be $1.6 million on the date of issuance. In addition, the placement agent warrant was
valued at $98,592 on the date of issuance.
The assumptions used in the Black-Scholes
model for these warrants are as follows:
Average risk-free interest rate
|
|
|
1.69
|
%
|
Expected dividend yield
|
|
|
—
|
%
|
Expected life
|
|
|
5 years
|
|
Expected volatility
|
|
|
80
|
%
|
A summary of the Company’s warrant
activity and related information is as follows:
|
|
2019
|
|
|
2018
|
|
|
|
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding at January 1
|
|
|
713,652
|
|
|
$
|
26.19
|
|
|
|
748,155
|
|
|
$
|
27.87
|
|
Granted
|
|
|
2,705,864
|
|
|
$
|
1.59
|
|
|
|
—
|
|
|
$
|
—
|
|
Forfeited/Expired
|
|
|
(88,010
|
)
|
|
$
|
38.70
|
|
|
|
(34,503
|
)
|
|
$
|
62.50
|
|
Outstanding at December 31
|
|
|
3,331,506
|
|
|
$
|
5.88
|
|
|
|
713,652
|
|
|
$
|
26.19
|
|
All warrants were exercisable at December 31,
2019. The weighted average remaining life, excluding the 868,443 pre-funded warrants with no expiration date, is 3.7 years. The
estimated aggregate pre-tax intrinsic value (the difference between the Company’s stock price on the last day of the year
ended December 31, 2019 and the exercise prices, multiplied by the number of in-the-money warrants) is $0.
For certain investors in the Offering, including
the Company’s four largest beneficial owners, the warrants they received in connection with the Offering as well as certain
other warrants 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 4.99% (or, at the investor’s election, 9.99%) of the outstanding shares of the Company’s
stock.
Note 11 — Income Taxes
Income taxes are disproportionate to income
due to net operating loss carryforwards, which are fully reserved. As of December 31, 2019, the Company has federal net operating
loss carryforwards of approximately $54 million. The federal net operating loss carryforward for years prior to 2018 expire from
2031 through 2038. Federal net operating loss carryforwards for year 2018 and thereafter do not expire.
Pursuant to Internal Revenue Code Sections
382 and 383, use of the Company’s net operating loss and credit carryforwards may be limited if a cumulative change in ownership
of more than 50% occurs within any three-year period since the last ownership change. The Company may have had one or more changes
in control under these Sections. However, the Company does not anticipate performing a complete analysis of the limitation on the
annual use of the net operating loss and tax credit carryforwards until the time that it projects it will be able to utilize these
tax attributes.
Management has concluded that it is more
likely than not that the Company will not have sufficient foreseeable taxable income within the carryforward period as applicable
and 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, 2019
and 2018.
The following is a summary of the significant
components of the Company’s net deferred income tax assets and liabilities as of December 31, 2019 and 2018:
|
|
For the Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Current deferred income tax assets:
|
|
|
|
|
|
|
|
|
Inventory – uniform capitalization
|
|
$
|
—
|
|
|
$
|
23,000
|
|
Accrued compensation and other
|
|
|
9,000
|
|
|
|
63,000
|
|
Less: valuation allowance
|
|
|
(9,000
|
)
|
|
|
(86,000
|
)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Non-current deferred income tax assets and (liabilities):
|
|
|
|
|
|
|
|
|
Net operating loss
|
|
$
|
11,382,000
|
|
|
$
|
10,435,000
|
|
Research and development credit
|
|
|
18,000
|
|
|
|
18,000
|
|
Warranty reserve
|
|
|
—
|
|
|
|
81,000
|
|
Warrants issued for services
|
|
|
45,000
|
|
|
|
45,000
|
|
Depreciation and amortization
|
|
|
76,000
|
|
|
|
73,000
|
|
Exercise of options and warrants
|
|
|
(33,000
|
)
|
|
|
(33,000
|
)
|
Stock based compensation
|
|
|
775,000
|
|
|
|
759,000
|
|
Intangibles and other
|
|
|
(425,000
|
)
|
|
|
(422,000
|
)
|
Less: valuation allowance
|
|
|
(11,838,000
|
)
|
|
|
(10,956,000
|
)
|
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, 2019
and 2018, 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, 2019, and 2018,
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 2015. 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,
|
|
|
|
2019
|
|
|
2018
|
|
Statutory federal income tax rate
|
|
|
(21
|
)%
|
|
|
(21
|
)%
|
Stock based compensation
|
|
|
1
|
|
|
|
1
|
|
Tax Reform
|
|
|
—
|
|
|
|
—
|
|
Valuation allowance
|
|
|
20
|
|
|
|
20
|
|
|
|
|
—
|
%
|
|
|
—
|
%
|
Note 12 — Lease
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 was $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. The lease does not contain
renewal or termination options.
On January 1, 2019, the Company adopted
ASC 842 utilizing a modified retrospective approach with a date of initial application at the beginning of the period of adoption.
At adoption, the Company recognized a right of use asset of $422,819 and lease liability of $427,131. As the discount rate implicit
in the lease was not readily determinable and the Company did not have any outstanding indebtedness, the Company utilized market
data, giving consideration to remaining term of the lease, to estimate its incremental borrowing rate at 8% per annum for purposes
of calculating the right of use asset and lease liability.
On September 19, 2019, the Company entered
into a sublease with CE+T Energy pursuant to which the Company subleases approximately seventy-five (75%) percent of its Austin,
Texas facility to CE+T Energy. Under the sublease, CE+T Energy is obligated to make monthly payments equal to 75% of all sums due
under the master lease and 100% of any maintenance and repair costs related to the subleased premises. The sublease replaced a
temporary agreement between the Company and CE+T Energy, effective July 22, 2019, that contained similar payment obligations by
CE+T Energy for utilization of the subleased premises. Consistent with the master lease, the sublease terminates on May 31, 2021.
During the year ended December 31, 2019, CE+T Energy made payments of $89,257 to the Company related to the subleased premises.
The payments included CE+T Energy’s prorated share of rent as well as its prorated and proportionate share of operating costs
for the building under the master lease. The Company recognized these payments as a reduction in general and administrative
expenses.
Future minimum payments under the lease,
as amended, are as follows:
For the Year Ended December 31,
|
|
Master Lease
|
|
|
Sublease Income
|
|
|
Net
|
|
2020
|
|
|
196,477
|
|
|
|
(147,357
|
)
|
|
|
49,120
|
|
2021
|
|
|
83,149
|
|
|
|
(62,362
|
)
|
|
|
20,787
|
|
Total future undiscounted minimum lease payments
|
|
$
|
279,626
|
|
|
$
|
(209,719
|
)
|
|
$
|
69,907
|
|
Less: imputed interest
|
|
|
(14,452
|
)
|
|
|
|
|
|
|
|
|
Total lease liability
|
|
$
|
265,174
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2019, operating
cash outflows for lease payments totaled $189,086 and the operating lease cost, recognized on a straight-line basis, totaled $193,950.
At December 31, 2019, the remaining lease term was 17 months.
Note 13 — Commitments and Contingencies
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 payments,
all of which were paid prior to 2017, and ongoing 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 each year of the agreements, up to a maximum of $100,000 each year (i.e. five issued patents).
In April 2019, a patent associated with
these agreements was issued and the Company recorded, as a non-cash activity, an asset and a corresponding liability of $232,367,
representing the estimated present value of future payments under the licensing agreements for this issued patent. Through December
31, 2019, a total of three patents associated with the agreements were issued. At December 31, 2019 and 2018, the corresponding
long-term liability for the estimated present value of future payments under the licensing agreement was $595,802 and $428,163,
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
On April 11, 2019, the Company entered
into an asset purchase agreement (the “APA”) with Pathion Holdings, Inc., a Delaware corporation, and Pathion, Inc.,
a Delaware corporation, (together, “Pathion”) to sell certain assets (the “PPSA Assets”) related to the
Company’s PPSA™ / Power Conversion Systems business (“PPSA Business”). The purchase price consisted of
$500,000 in cash and 150,000 shares of the common stock of Pathion Holdings, Inc. Pursuant to the APA, Pathion would also assume
certain liabilities relating to the PPSA Business.
On June 13, 2019, the Company filed a petition
in the district court of the 250th Judicial District in Travis County (the “Court”), naming Pathion and
certain Pathion officers as defendants. The petition asserts breach of the APA and the related sublease agreement for failure by
Pathion to pay any cash amounts due thereunder, and fraudulent inducement by Pathion and the individual defendants for misrepresenting
Pathion’s financial position and its stock value. The petition also requested a declaratory judgment that Pathion has no
rights to the PPSA Assets.
On July 15, 2019, Pathion filed a general
denial to the Company’s petition.
On July 22, 2019, the Company filed a motion
for partial summary judgment on its declaratory judgment action and for severance. Pathion responded to the motion for summary
judgment on August 6, 2019. That same day, Pathion filed a counterclaim, and requested injunctive relief and a declaratory judgment.
On August 13, 2019, the Court conducted
a hearing on the Company’s motion for summary judgment. On August 23, 2019, the Court issued an order granting the Company’s
motion for summary judgment and fees and severing judgment from remaining claims. Under this order, the Court declared and decreed
that Pathion has no rights to the PPSA Assets and awarded the Company $24,800 in legal fees. On October 15, 2019, the Court issued
a writ of garnishment against Pathion’s bank to enable collection of these legal fees.
On October 14, 2019, the Court granted
Pathion’s counsel’s motion to withdraw. Ten days later, a new lawyer appeared for Pathion, and the next day, October
25, 2019, the Court issued a scheduling order requiring Pathion to produce documents and appear for deposition in December 2019
and set trial to begin on August 31, 2020. On December 12, 2019, after Pathion filed an emergency order to delay depositions, the
Court set a new deposition date of January 7, 2020. The deposition occurred on January 7, 2020. On February 20, 2020, Pathion filed
a request for the Company to produce documents within 30 days. The Company responded to this request on March 23, 2020.
At this time, the Company, even though
it does not expect an unfavorable outcome related to this proceeding, is unable to estimate the possible gain or loss, if any,
related to this proceeding.
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.
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.
The Company may be subject to other litigation
from time to time in the ordinary course of business. The Company is not currently party to any legal proceedings that it believes
would reasonably have a material adverse impact on its business, financial results, and cash flows.
Indemnification Obligations
In connection with the sale of its power
conversion systems division, the Company entered into an Asset Purchase Agreement with CE+T Energy that contains mutual indemnification
obligations for breaches of representations, warranties and covenants and for certain other matters, including indemnification
by the Company for assets and liabilities excluded from the sale and by CE+T Energy for liabilities assumed in the sale.
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 14 — 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, 2019 and 2018.
Note 15 — Subsequent Events
Subsequent to December 31, 2019, the Company
granted 52,791 stock options to Board members and 57,000 stock options to executives, that are subject to cancellation in the
event the Company does not obtain shareholder approval of an increase in the shares reserved for issuance under the Plan at the
2020 Annual Shareholder Meeting, and 3,000 stock options to employees under the Plan. The estimated fair value of these stock
options, calculated using the Black-Scholes option valuation model, was $173,184, of which $169,339 is expected to be recognized
during the year ended December 31, 2020.
In March 2020, 616,648 warrants with a weighted-average
exercise price of $24.28 per share expired.
In March 2020, the World Health Organization
declared the outbreak of a novel coronavirus (“COVID-19”) as a pandemic, which continues to spread throughout the United
States. The ultimate extent of the impact of COVID-19 on the financial performance of the Company
will depend on future developments, including the duration and spread of COVID-19, and the overall economy, all of which are highly
uncertain and cannot be predicted. If the financial markets and/or the overall economy are impacted for an extended period,
the Company's operating results may be materially and adversely affected.