ITEM 1. CONDENSED FINANCIAL STATEMENTS
IDEAL POWER INC.
Balance Sheets
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,538,765
|
|
|
$
|
10,022,247
|
|
Accounts receivable, net
|
|
|
279,299
|
|
|
|
221,084
|
|
Inventories, net
|
|
|
131,765
|
|
|
|
251,363
|
|
Prepayments and other current assets
|
|
|
83,382
|
|
|
|
283,208
|
|
Total current assets
|
|
|
6,033,211
|
|
|
|
10,777,902
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
458,856
|
|
|
|
669,571
|
|
Intangible assets, net
|
|
|
2,109,981
|
|
|
|
2,082,014
|
|
Other assets
|
|
|
55,420
|
|
|
|
37,500
|
|
Total Assets
|
|
$
|
8,657,468
|
|
|
$
|
13,566,987
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
737,083
|
|
|
$
|
449,475
|
|
Accrued expenses
|
|
|
1,068,418
|
|
|
|
1,081,155
|
|
Total current liabilities
|
|
|
1,805,501
|
|
|
|
1,530,630
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities
|
|
|
465,181
|
|
|
|
456,234
|
|
Total liabilities
|
|
|
2,270,682
|
|
|
|
1,986,864
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (see Note 8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 10,000,000 shares authorized; 1,518,430 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively
|
|
|
1,518
|
|
|
|
1,518
|
|
Common stock, $0.001 par value; 50,000,000 shares authorized; 14,004,465 shares issued and 13,999,756 shares outstanding at September 30, 2018 and 13,998,465 shares issued and 13,996,121 shares outstanding at December 31, 2017, respectively
|
|
|
14,004
|
|
|
|
13,998
|
|
Additional paid-in capital
|
|
|
67,919,163
|
|
|
|
67,081,359
|
|
Treasury stock, at cost; 4,709 shares at September 30, 2018 and 2,344 shares at December 31, 2017
|
|
|
(10,105
|
)
|
|
|
(7,489
|
)
|
Accumulated deficit
|
|
|
(61,537,794
|
)
|
|
|
(55,509,263
|
)
|
Total stockholders’ equity
|
|
|
6,386,786
|
|
|
|
11,580,123
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
8,657,468
|
|
|
$
|
13,566,987
|
|
The accompanying notes
are an integral part of these condensed financial statements.
IDEAL POWER INC.
Statements of Operations
(unaudited)
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Product revenue
|
|
$
|
342,661
|
|
|
$
|
444,640
|
|
|
$
|
1,144,103
|
|
|
$
|
973,680
|
|
Cost of product revenue
|
|
|
552,127
|
|
|
|
418,529
|
|
|
|
1,471,890
|
|
|
|
1,894,068
|
|
Gross profit (loss)
|
|
|
(209,466
|
)
|
|
|
26,111
|
|
|
|
(327,787
|
)
|
|
|
(920,388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
854,364
|
|
|
|
1,075,849
|
|
|
|
2,517,688
|
|
|
|
3,374,386
|
|
General and administrative
|
|
|
921,276
|
|
|
|
899,882
|
|
|
|
2,630,936
|
|
|
|
2,976,260
|
|
Sales and marketing
|
|
|
264,705
|
|
|
|
271,844
|
|
|
|
588,937
|
|
|
|
1,240,713
|
|
Total operating expenses
|
|
|
2,040,345
|
|
|
|
2,247,575
|
|
|
|
5,737,561
|
|
|
|
7,591,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2,249,811
|
)
|
|
|
(2,221,464
|
)
|
|
|
(6,065,348
|
)
|
|
|
(8,511,747
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
|
(112
|
)
|
|
|
3,865
|
|
|
|
36,817
|
|
|
|
15,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,249,923
|
)
|
|
$
|
(2,217,599
|
)
|
|
$
|
(6,028,531
|
)
|
|
$
|
(8,496,307
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share – basic and fully diluted
|
|
$
|
(0.16
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.43
|
)
|
|
$
|
(0.66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding – basic and fully diluted
|
|
|
13,996,299
|
|
|
|
13,990,202
|
|
|
|
13,993,423
|
|
|
|
12,964,452
|
|
The accompanying notes
are an integral part of these condensed financial statements.
IDEAL POWER INC.
Statements of Cash
Flows
(unaudited)
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,028,531
|
)
|
|
$
|
(8,496,307
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
(98,677
|
)
|
|
|
226,557
|
|
Write-down of inventory
|
|
|
67,515
|
|
|
|
703,220
|
|
Depreciation and amortization
|
|
|
297,007
|
|
|
|
339,493
|
|
Write-off of capitalized patents
|
|
|
15,478
|
|
|
|
268,789
|
|
Write-off of fixed assets
|
|
|
7,128
|
|
|
|
53,445
|
|
Stock-based compensation
|
|
|
837,810
|
|
|
|
833,637
|
|
Decrease (increase) in operating assets:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
40,462
|
|
|
|
(234,980
|
)
|
Inventories
|
|
|
52,083
|
|
|
|
214,466
|
|
Prepayments and other current assets
|
|
|
181,906
|
|
|
|
159,366
|
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
287,608
|
|
|
|
(59,653
|
)
|
Accrued expenses
|
|
|
(3,790
|
)
|
|
|
67,722
|
|
Net cash used in operating activities
|
|
|
(4,344,001
|
)
|
|
|
(5,924,245
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(19,613
|
)
|
|
|
(44,819
|
)
|
Acquisition of intangible assets
|
|
|
(117,252
|
)
|
|
|
(220,865
|
)
|
Net cash used in investing activities
|
|
|
(136,865
|
)
|
|
|
(265,684
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of stock
|
|
|
-
|
|
|
|
13,657,331
|
|
Payment of taxes related to stock award vesting
|
|
|
(2,616
|
)
|
|
|
(1,574
|
)
|
Exercise of options and warrants
|
|
|
-
|
|
|
|
11,143
|
|
Net cash provided by (used in) financing activities
|
|
|
(2,616
|
)
|
|
|
13,666,900
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(4,483,482
|
)
|
|
|
7,476,971
|
|
Cash and cash equivalents at beginning of period
|
|
|
10,022,247
|
|
|
|
4,204,916
|
|
Cash and cash equivalents at end of period
|
|
$
|
5,538,765
|
|
|
$
|
11,681,887
|
|
The accompanying notes
are an integral part of these condensed financial statements.
Ideal Power Inc.
Notes to Financial
Statements
(unaudited)
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 develops power
conversion solutions with an initial focus on solar + storage, microgrid and stand-alone energy storage applications. The principal
products of the Company are 30-kilowatt power conversion systems, including 2-port and multi-port products.
Since its inception, the Company has generated
limited revenues from the sale of products and has financed its research and development efforts and operations through the sale
of common stock and, prior to its initial public offering, the issuance of convertible debt. 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, sale or licensing of developed intellectual property or other alternatives.
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.
Note 2 – Summary of Significant Accounting
Policies
Basis of Presentation
The accompanying unaudited financial statements
have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for Form 10-Q. Accordingly,
certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and regulations. The Balance Sheet at December 31,
2017 has been derived from the Company’s audited financial statements.
In the opinion of management, these financial
statements reflect all normal recurring, and other adjustments, necessary for a fair presentation. These financial statements should
be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2017. Operating results for interim periods are not necessarily indicative of operating results for
an entire fiscal year or any other future periods.
Liquidity and Going Concern
As reflected in the accompanying condensed
financial statements, the Company had a net loss of $6.0 million and used $4.3 million of cash in operating activities
for the nine months ended September 30, 2018. At September 30, 2018, the Company had net working capital of $4.2
million and the Company’s principal source of liquidity consisted of $5.5 million of cash and cash equivalents.
In order to meet the Company’s operating
requirements, 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 forecasted
revenue growth does not materialize, the Company will be required to reduce operating costs, which could jeopardize future strategic
initiatives and business plans.
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 condensed financial statements do
not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Recently Adopted Standards
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. The adoption of this standard did not have a material effect on the Company’s
financial statements, nor required an adjustment to the opening balance of accumulated deficit at January 1, 2018, the date of
initial adoption. See Note 12 for a discussion of the Company’s revenue recognition policy.
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. 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. The ASU is applied prospectively on and after the effective date. The standard did not have
a material effect on the Company’s financial statements.
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 Note 9 and Note 11.
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. While the Company is continuing to assess the potential impact of this standard, it expects its lease commitment will
be subject to the updated standard and recognized as a lease liability and right-of-use asset upon adoption.
Management does not believe that any other
recently issued, but not yet effective, accounting standard, if adopted, would have a material impact on the Company’s financial
statements.
Note 3 – Accounts Receivable
Accounts receivable, net consisted of the
following:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
|
(unaudited)
|
|
|
|
|
Trade receivables
|
|
$
|
285,924
|
|
|
$
|
378,894
|
|
Other receivables
|
|
|
-
|
|
|
|
20,589
|
|
|
|
|
285,924
|
|
|
|
399,483
|
|
Allowance for doubtful accounts
|
|
|
(6,625
|
)
|
|
|
(178,399
|
)
|
|
|
$
|
279,299
|
|
|
$
|
221,084
|
|
The Company had receivable balances from
three customers that accounted for 44% of net trade receivables at September 30, 2018.
Activity in the allowance for doubtful accounts
was as follows:
Balance at December 31, 2017
|
|
|
|
|
|
$
|
(178,399
|
)
|
Write offs
|
|
|
73,097
|
|
Provisions
|
|
|
(63,683
|
)
|
Recovery
|
|
|
162,360
|
|
Balance at September 30, 2018
|
|
$
|
(6,625
|
)
|
Note 4 – Inventories
Inventories, net consisted of the following:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
|
(unaudited)
|
|
|
|
|
Raw materials
|
|
$
|
191,407
|
|
|
$
|
222,436
|
|
Finished goods
|
|
|
66,700
|
|
|
|
149,370
|
|
|
|
|
258,107
|
|
|
|
371,806
|
|
Reserve for obsolescence
|
|
|
(126,342
|
)
|
|
|
(120,443
|
)
|
|
|
$
|
131,765
|
|
|
$
|
251,363
|
|
Note 5 – Property and Equipment
Property and equipment, net consisted of
the following:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
|
(unaudited)
|
|
|
|
|
Machinery and equipment
|
|
$
|
1,023,327
|
|
|
$
|
1,013,133
|
|
Building leasehold improvements
|
|
|
395,335
|
|
|
|
395,335
|
|
Furniture, fixtures, software and computers
|
|
|
193,568
|
|
|
|
218,571
|
|
|
|
|
1,612,230
|
|
|
|
1,627,039
|
|
Accumulated depreciation and amortization
|
|
|
(1,153,374
|
)
|
|
|
(957,468
|
)
|
|
|
$
|
458,856
|
|
|
$
|
669,571
|
|
Note 6 – Intangible Assets
Intangible assets, net consisted of the
following:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
|
(unaudited)
|
|
|
|
|
Patents
|
|
$
|
1,656,042
|
|
|
$
|
1,554,268
|
|
Other intangible assets
|
|
|
732,175
|
|
|
|
732,175
|
|
|
|
|
2,388,217
|
|
|
|
2,286,443
|
|
Accumulated amortization
|
|
|
(278,236
|
)
|
|
|
(204,429
|
)
|
|
|
$
|
2,109,981
|
|
|
$
|
2,082,014
|
|
Amortization expense amounted to $24,775
and $73,807 for the three and nine months ended September 30, 2018, respectively, and $22,822 and $59,291 for the three and
nine months ended September 30, 2017, respectively. Amortization expense for patents for the succeeding five years and thereafter
is approximately $25,000 (2018), $100,000 (2019-2022) and $1,172,000 (thereafter).
At September 30, 2018 and December 31,
2017, the Company had capitalized $512,515 and $472,928, respectively, for costs related to patents that have not been awarded.
Note 7 – Accrued Expenses
Accrued expenses consisted of the following:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
|
(unaudited)
|
|
|
|
|
Accrued compensation
|
|
$
|
310,998
|
|
|
$
|
247,343
|
|
Warranty reserve
|
|
|
432,117
|
|
|
|
426,115
|
|
Other
|
|
|
325,303
|
|
|
|
407,697
|
|
|
|
$
|
1,068,418
|
|
|
$
|
1,081,155
|
|
Note 8 – 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 21, 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:
Year Ended December 31,
|
|
Amount
|
|
2018
|
|
$
|
46,194
|
|
2019
|
|
|
189,086
|
|
2020
|
|
|
196,477
|
|
2021
|
|
|
83,149
|
|
|
|
$
|
514,906
|
|
The Company incurred rent expense of $63,675
and $181,850 for the three and nine months ended September 30, 2018, respectively, and $58,543 and $175,617 for the three
and nine months ended September 30, 2017, 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 which enhances its intellectual property portfolio related to semiconductor power switches. 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, 2017 and each subsequent year of the agreement, up to a maximum of $100,000 per year
(i.e. five issued patents). At September 30, 2018, two patents associated with the agreements had been issued and the
corresponding long-term liability for the estimated present value of future payments under the licensing agreement is
$465,181. The Company is accruing interest for future payments related to the issued patent associated with the
agreement.
Note 9 — Common Stock
and Net Loss Per Share
On March 3, 2017, the Company closed
on a definitive securities purchase agreement, or 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 $13.7 million
after offering fees and expenses, including the placement agent fee of $1.1 million.
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 September 30, 2018 and 2017, potentially dilutive shares outstanding amounted to 9,249,626 and 9,005,714,
respectively.
Note 10 — 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 September 30, 2018, 430,963 shares
of common stock were available for issuance under the Plan.
During the nine months ended September 30,
2018, the Company granted 122,039 stock options to Board members and 300,000 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, of which
$300,713 was recognized during the nine months ended September 30, 2018.
During the nine months ended
September 30, 2018, the Company also granted 117,500 restricted stock units and 12,000 performance stock units to employees,
of which 6,000 performance stock units were forfeited during the three months ended September 30, 2018 as the related
performance conditions were not achieved. The estimated fair value of these awards, based on the Company’s stock price
on the date of grant and net of subsequent forfeitures, was $150,730, of which $37,842 was recognized during the nine months
ended September 30, 2018.
A summary of the Company’s stock
option activity and related information is as follows:
|
|
Stock
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Life
(in years)
|
|
Outstanding at December 31, 2017
|
|
|
1,232,236
|
|
|
$
|
6.44
|
|
|
|
6.8
|
|
Granted
|
|
|
422,039
|
|
|
$
|
1.31
|
|
|
|
|
|
Forfeited/Expired/Exchanged
|
|
|
(124,728
|
)
|
|
$
|
5.23
|
|
|
|
|
|
Outstanding at September 30, 2018
|
|
|
1,529,547
|
|
|
$
|
5.12
|
|
|
|
7.1
|
|
Exercisable at September 30, 2018
|
|
|
1,397,562
|
|
|
$
|
5.22
|
|
|
|
7.0
|
|
At September 30, 2018, there was $482,136
of unrecognized compensation cost related to non-vested equity awards granted under the Plan. That cost is expected to be recognized
over a weighted average period of 0.7 years.
Note 11 — Warrants
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 will 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 also
has a three-year term. 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 Company had 7,481,079 warrants outstanding
at both September 30, 2018 and December 31, 2017 with a weighted average exercise price of $2.79 per share. At September 30, 2018
all warrants are exercisable, although for the Company’s two largest beneficial owners their warrants 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 common stock.
Note 12 — Revenue
Revenue Recognition
Revenue is recognized in accordance with
ASC Topic 606 upon transfer of control of promised products or services to customers in an amount that reflects the consideration
we expect to receive in exchange for those products or services. We enter into contracts that typically are for products only although
contracts could include various combinations of products and services, which are generally distinct and accounted for as separate
performance obligations. Revenue is recognized net of taxes collected from customers, which are subsequently remitted to governmental
authorities. The Company generally sells its products FOB shipping and recognizes revenue when products are shipped. Revenue from
services, which consist of commissioning services, if any, is recognized as services are performed.
The Company had revenue from two customers
which accounted for 35% and 11% of net revenue for the nine months ended September 30, 2018 and revenue from two customers which
accounted for 19% and 10% of net revenue for the nine months ended September 30, 2017.
Deferred Revenues
We record deferred revenues when cash payments
are received in advance of our performance. Based on our review of customer credit, we may require full or partial payment before
the products or services are delivered to the customer.
Activity in the deferred revenue account was
as follows:
Balance at December 31, 2017
|
|
|
|
|
|
$
|
-
|
|
Deferral of revenue
|
|
|
96,786
|
|
Recognition of revenue
|
|
|
(87,755
|
)
|
Balance September 30, 2018
|
|
$
|
9,031
|
|
Note 13 —
Legal Proceedings
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 nine months ended September 30, 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 cost of product revenue 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 nine months ended September 30, 2018, the Company reversed the allowance for doubtful accounts of $162,000,
originally recorded in 2017, with a corresponding reduction in sales and marketing expense, 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.
Neither of these legal proceedings impacted
the statement of operations for the three months ended September 30, 2018.
SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION
CONTAINED IN THIS REPORT
This report contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements give our
current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly
to historical or current facts. You can find many (but not all) of these statements by looking for words such as "approximates,"
"believes," "expects," "anticipates," "estimates," "projects," "intends,"
"plans," "would," "should," "could," "may" or other similar expressions in this
report. In particular, these include statements relating to future actions, prospective products, applications, customers, technologies,
future performance or results of anticipated products, expenses, and financial results. These forward-looking statements are subject
to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our
present expectations or projections. Factors that could cause actual results to differ from those discussed in the forward-looking
statements include, but are not limited to:
|
•
|
our ability to achieve profitability;
|
|
•
|
our limited operating history;
|
|
•
|
our ability to successfully market and sell our products;
|
|
•
|
the size and growth of markets for our current and future products;
|
|
•
|
our expectations regarding the growth and expansion of our customer base;
|
|
•
|
regulatory developments that may affect our business;
|
|
•
|
our ability to successfully develop new technologies, including our bi-directional bipolar junction transistor, or B-TRAN™;
|
|
•
|
our expectations regarding the completion of testing of new products under development and the timing of the introduction of
those new products;
|
|
•
|
the expected performance of new and existing products, including future products incorporating our B-TRAN™;
|
|
•
|
the performance of third-party manufacturers who supply and manufacture our products;
|
|
•
|
our expectations of the reliability of our products over the applicable warranty term and the future costs associated with
warranty claims;
|
|
•
|
our ability to cost effectively manage product life cycles, inclusive of product launches and end of product life situations;
|
|
•
|
the rate and degree of market acceptance for our current and future products;
|
|
•
|
our ability to successfully obtain certification for our products, including in new markets, and the timing of the receipt
of any necessary certifications;
|
|
•
|
our ability to successfully license our technology;
|
|
•
|
our ability to obtain, maintain, defend and enforce intellectual property rights protecting our current and future products;
|
|
•
|
our expectations regarding the decline in prices of battery energy storage systems;
|
|
•
|
our ability to manage our cost structure;
|
|
•
|
general economic conditions and events and the impact they may have on us and our potential customers;
|
|
•
|
our ability to obtain adequate financing in the future, as and when we need it;
|
|
•
|
our success at managing the risks involved in the foregoing items; and
|
|
•
|
other factors discussed in this report.
|
The forward-looking statements are based
upon management’s beliefs and assumptions and are made as of the date of this report. We undertake no obligation to publicly
update or revise any forward-looking statements included in this report. You should not place undue reliance on these forward-looking
statements.
Unless otherwise stated or the context
otherwise requires, the terms “Ideal Power,” “we,” “us,” “our” and the “Company”
refer to Ideal Power Inc.
ITEM 2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis
of our financial condition and results of operations should be read in conjunction with the financial statements and related notes
included elsewhere in this Quarterly Report on Form 10-Q as well as our audited 2017 financial statements and related notes included
in our Annual Report on Form 10-K. In addition to historical information, the discussion and analysis here and throughout this
Form 10-Q contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ
materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited,
to those set forth under “Risk Factors” in Part II, Item 1A of this report.
OVERVIEW
Ideal Power is located in Austin, Texas.
We design, market and sell electrical power conversion products using our proprietary technology called Power Packet Switching
Architecture™, or PPSA™. PPSA™ is a power conversion technology that improves upon existing power conversion
technologies in key product metrics, such as size and weight while providing built-in isolation and bi-directional and multi-port
capabilities. PPSA™ utilizes standardized hardware with application specific embedded software. Our products are designed
to be used in both on-grid and off-grid applications.
We sell our products primarily to systems
integrators as part of a larger turn-key systems which enable end users to manage their electricity consumption by reducing demand
charges or fossil fuel consumption, integrating renewable energy sources and forming their own microgrid. Our products are made
by contract manufacturers to our specifications, enabling us to scale production to meet demand on a cost-effective basis without
requiring significant expenditures on manufacturing facilities and equipment. As our products establish a foothold in key power
conversion markets, we may begin to focus on licensing our proprietary PPSA™-based product designs to OEMs to reach more
markets and customers. We may seek to build a portfolio of relationships that generate license fees and royalties from OEMs for
sales of their products which integrate PPSA™.
On April 16, 2018, the Company realigned
into two separate operating divisions: Power Conversion Systems to focus on its PPSA™ and B-TRAN to develop its bi-directional
bi-polar junction transistor (B-TRAN™) solid state switch technology.
We were founded on May 17, 2007. To date,
operations have been funded primarily through the sale of common stock and, prior to our initial public offering, the issuance
of convertible debt. Total revenue generated from inception to date as of September 30, 2018 amounted to $14.3 million with
approximately 19% of that revenue coming from government grants. We may pursue additional research and development grants, if and
when available, for the purpose of developing new products and improving current products.
Power Conversion Systems Division
Our Technology
PPSA™ uses indirect power flow in
which power flows through input switches and is temporarily stored in our proprietary AC link inductor. Our proprietary fast switching
algorithms enable the transfer of quantum packets of power between ports in our system. As the AC link becomes charged, it disconnects
from its input switches, resonates without being connected to either the input or output switches, and then reconnects to its output
switches when it reaches the correct voltage and frequency for the application. PPSA™ is a power conversion technology that
differentiates itself from traditional power conversion technology in key product metrics, such as size and weight while providing
built-in isolation and bi-directional and multi-port capabilities. At September 30, 2018, we had been granted 38 US patents and
five foreign patents related to PPSA™.
Products
We currently sell three power conversion
systems, or PCS, utilizing our patented PPSA™ technology. These products are described as follows:
|
·
|
The 30kW Stabiliti™ series has two product offerings,
two-port (AC-DC) and multi-port (AC-DC-DC) models, which are both UL1741 Supplement A, or UL1741 SA, certified. These products
are intended to be used for the commercial and industrial stand-alone energy storage, electric vehicle fast charging and microgrid
markets, including solar plus storage microgrids. They are bi-directional and operate in both grid-tied and grid-forming modes
with near seamless transfer between operating modes. Grid-forming mode provides customers the ability to form and manage a microgrid.
The products operate in both 50Hz and 60Hz environments.
|
|
·
|
The 30kW SunDial Plus™, which is also UL1741 SA
certified, is intended to be used for the commercial and industrial grid-tied solar plus storage market. The SunDial™ Plus
is a PV string inverter with a second DC port to connect batteries to a solar PV array. This product includes a built-in 6 string
PV combiner and DC disconnects and is grid-tied, AC export only. The product operates in both 50Hz and 60Hz environments.
|
Business Strategy
Our business strategy is to promote and
expand the uses of PPSA™ initially through product development and product sales. To bring our products to market, we plan
to seek out best-in-class partners who will distribute, white-label or integrate our innovative products into higher value systems
resulting in multiple strategic sales channels for our PPSA™-based products and product designs. As our products gain broader
acceptance in the power conversion market, we intend to license our proprietary PPSA™-based product designs to OEMs within
our target markets, as well as license our technologies for other markets which we do not plan to enter directly. The basis for
this approach is the belief that OEMs may achieve higher product margins and gain more market share by providing PPSA™-based
products, which are differentiated from the traditional product offerings in the industry, to their customers. We believe such
strategic relationships with key OEM licensees would enable us to reap the benefits of PPSA™ and gain market share more quickly
than by strictly manufacturing and distributing our products.
Target Markets
Currently, our primary target markets are
solar + storage and, to a lesser extent, microgrids. We also intend to be opportunistic with regard to other markets, including
the stand-alone energy storage and electric vehicle fast charging markets.
Solar + Storage and Microgrid Markets
Solar PV has one of the lowest levelized
costs of energy for new electrical generation capacity and we expect this to remain true in the near term. We expect distributed
PV to continue to be a high growth business as system costs have fallen dramatically over the past several years. Accordingly,
we expect the economics of generating PV for local consumption to remain strong for several more years, especially given the investment
tax credit, or ITC, extension passed by Congress and signed into law in 2015 for solar energy production. Our SunDial™ Plus
product was launched to directly address this market. One shortcoming of distributed, behind-the-meter PV systems is that they
require connection to the utility power grid in order to operate. For example, a business with PV on its roof will not, in most
cases, benefit from the ability to generate power should the utility power grid go down. Another shortcoming of distributed PV
systems is the instability they cause on the local power lines. Utility power grids were not designed to manage power inflow from
the end of the lines. As a result, distributed generation sources can lead to wide swings in line voltages when clouds pass and
power output falls off, requiring the utility to ramp up its power generation to make up for the shortfall in solar. We believe
the proliferation of PV, its intermittency and the elimination of net metering in many states may drive growth in the solar + storage
market.
Whether for emergency backup power or for
baseload generation in remote locations with weak or no electric grids, microgrids are an emerging business case for solar paired
with energy storage. A distributed PV system connected to a battery energy storage system, or BESS that includes one of our Stabiliti™
multi-port PCS enable a business to benefit from the ability to form and manage a local microgrid powered by the PV system and
BESS even when the utility power grid is down. This capability is attractive to electricity consumers who need to power critical
loads even in a blackout. In remote locations where there is no reliable electric grid or a dependence on diesel generators, which
may be as diverse as a military battlefield or remote tropical island resort, or in locations where local electric rates are high
due to aging and inefficient generation technology, a trend towards self-generation microgrids is developing. These sites can use
solar, batteries and other forms of generation all brought together by one or more of our Stabiliti™ PCS to form and manage
a microgrid using maximum solar generation for lowest cost. As such, we believe our products may become increasingly attractive
to co-locate BESS with distributed PV.
According to its research, IHS Markit Technology
believes that systems will be deployed in two principal configurations. One configuration is to have separate BESS and PV systems
tied together through the AC wiring, which is supported by our legacy products. A second, emerging configuration is to place the
BESS and the PV system behind a single PCS with two DC inputs. Our Stabiliti™ and SunDial™ Plus were designed specifically
to enable this configuration which we believe is the lower cost and more efficient configuration. By tying the solar and batteries
together as a DC-coupled system, the batteries become eligible for ITC and accelerated depreciation further enhancing the project
economics.
Stand-Alone Storage Market
The stand-alone energy storage market is
served by BESS. BESS are racks of batteries coupled with a system controller and a power conversion system, such as those manufactured
by us, to enable electric power to be captured, stored, and used in conjunction with electric power grids. These systems can be
large, megawatt-scale systems operated by utilities to better manage their system resources, or smaller kilowatt-scale systems
used by businesses and designed to enable these businesses to manage their power use and mitigate utility imposed "peak demand
charges", which are charges utilities levy on their business customers for delivery of power at peak usage times of the day,
such as mid-afternoons in the summer. The growth of peak demand charges has been substantial over the past decade and now can make
up 50% or more of a commercial utility bill in certain markets. This is a trend that is likely to continue as more intermittent
resources are added to the utility power grid causing grid instability. Utilities and aggregators of distributed generation resources
are also expected to adopt BESS due to the proliferation of renewables and to take advantage of additional value streams such as
energy arbitrage, frequency regulation and ancillary services, infrastructure upgrade deferral and locational capacity.
There are strong economic incentives available
to commercial and industrial consumers in major US markets such as California and New York in the form of reduced time-of-use and/or
demand charges for installing a BESS and managing when power is drawn from the grid or reducing peak consumption. There is also
strong regulatory support for such systems. For example, California has issued a mandate for over 1,800 megawatts of new energy
storage to be installed by 2020. Other states, including New York and Massachusetts, have also issued mandates for energy storage
and we expect this trend to continue.
We expect the cost of commercial and industrial
BESS to continue to decline due primarily to lower battery costs and, as a result, expect significant expansion in the addressable
market for these systems. We also believe the combination of lower BESS costs, third-party financing, increases in utility demand
charges, and the entrance of large, established companies to the BESS space may contribute to accelerating market growth for stand-alone
energy storage.
Other Markets
In addition to the markets discussed above,
we may also have opportunities for market expansion into electric vehicle fast chargers in certain applications where our products’
compact size and multi-port capabilities can unlock value for the system integrator particularly in locations where battery storage
is coupled with the charging system to eliminate demand charges or expand the charging systems response capabilities. Earlier this
year, one of our customers received certification for an electric vehicle fast charger utilizing our two-port Stabiliti™
product and has plans to utilize our multi-port Stabiliti™ product in an electric vehicle fast charger with buffer storage.
Another customer is developing an electric vehicle fast charger utilizing our multi-port Stabiliti™ product for an electric
vehicle fast charger with buffer storage. We may have additional opportunities for growth in this market in the future.
Although our technology may be suitable
for other vertical markets within the global power conversion market landscape, we do not currently offer products for sale directly
to other power conversion markets such as the variable-frequency drive, uninterruptible power supply, rail, wind or electric vehicle
traction drive markets.
We plan to continue to monitor all power
conversion markets for opportunities to create solutions for customers and unlock the broader value of our patented technology.
Future Innovations
Our existing products incorporate multiple
insulated gate bipolar transistors, or IGBTs, which are power switches used in the process to convert power from one current form
to another. IGBTs switch power in only one direction (DC to AC or AC to DC) and require the use of a blocking diode to prevent
power from flowing back through the system. To enable our existing products to perform bi-directional power conversion, for each
IGBT and diode used in our products, we must include a second IGBT and diode. These additional components have slight voltage drops
that affect the electrical efficiency of our products and generate heat that must be dissipated. We have patented and are developing
a new, highly efficient power switch called a B-TRAN™ that we believe will allow us to substitute one B-TRAN™ for two
pairs of IGBTs and diodes used in our current products. Based on third party device software simulations and initial prototype
testing, we believe that the B-TRANs™ can significantly improve electrical efficiency in our power converters. The higher
efficiency would substantially reduce the heat generated by the operation of our products. As a result, products incorporating
B-TRANs™ will require less space for heat dissipation which would allow us to increase power density, or power per pound,
and reduce material costs.
B-TRAN Division
Our Technology
In 2016, one of our semiconductor fabricators
successfully tested single-sided B-TRAN™ silicon dies and the results were consistent with third party simulations that predict
significant performance and efficiency improvements over conventional power switches such as SCRs, IGBTs and MOSFETs. In the second
half of 2017, we shifted our focus to de-risking the proof of concept phase of the B-TRAN™ development timeline, as this
phase of development was taking longer than anticipated due to the complexity of manufacturing complicated, two-sided power semiconductor
devices. To facilitate this, we engaged a second semiconductor fabricator, on a parallel path, to produce, on an accelerated schedule,
a B-TRAN™ that is less complex to manufacture for proof of concept and initial testing. In the first quarter of 2018, we
successfully completed proof of concept testing of double-sided B-TRAN™ prototypes, validating the ability to make B-TRAN™
semiconductor power switches using conventional silicon semiconductor fabrication equipment and processes. Test results on the
standard double-sided prototypes measured B-TRAN™ electrical losses at less than 40% that of conventional power switches
such as silicon IGBTs.
In the second quarter of 2018, a domestic
semiconductor fabricator was qualified and engaged for development runs on the standard version of the B-TRAN™. As a result,
we now have the next run of devices with two fabricators in process. These runs incorporate the results of prior runs and testing
into the B-TRAN™ design and their manufacturing process. With the double-sided transistor behavior and low conduction losses
confirmed and corrections and improvements in the manufacturing process implemented, the next goal is the completion of the fabrication
of prototype engineering samples for engineering evaluation and evaluation by potential customers and partners. These samples will
include a packaging design based on our previous work and a driver. We have completed the first design for the driver with a prototype
driver already built and tested for basic functionality. The coupling of device samples with a driver will form the basis of an
intelligent module required for potential customer and partner evaluation.
At September 30, 2018, we had 32 US and
nine foreign issued patents covering the operation, control and manufacturing of the B-TRAN™ device.
Products
As our B-TRAN™ technology is currently
under development, we do not yet offer commercial B-TRAN™ products.
Business Strategy and Target Markets
We plan to first utilize the B-TRAN™
in our own power conversion products and then introduce it into the multi-billion dollar power semiconductor market utilizing a
licensing model. We believe our new B-TRAN™ technology can potentially address a significant portion of the power semiconductor
market that currently relies on power semiconductor devices such as IGBTs. Potential addressable markets for B-TRAN™-based
products include solar photovoltaic inverters, microgrid power conversion systems, electric vehicle drivetrains, bi-directional
energy storage, solid-state DC and AC contactors and breakers, variable frequency drives and other power conversion and control
applications that could benefit from B-TRAN™’s enhanced switching performance.
Critical Accounting Policies
There have been no significant changes
during the nine months ended September 30, 2018 to the critical accounting policies disclosed in Management’s
Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2017.
Results of Operations
Comparison of the three months ended September 30,
2018 to the three months ended September 30, 2017
Revenues.
Revenues for
the three months ended September 30, 2018 of $342,661 were $101,979, or 23%, lower than the $444,640 we earned in revenues
for the three months ended September 30, 2017 due to lower sales of our Stabilti™ product and a customer rescheduling,
with our approval, a SunDial™ Plus shipment to October.
Cost of Revenues.
Cost
of revenues increased for the three months ended September 30, 2018 to $552,127 compared to $418,529 for the three months
ended September 30, 2017. Cost of revenues for the three months ended September 30, 2018 was impacted by an unfavorable adjustment
to the Company’s product warranty accrual of $165,000, an unfavorable purchase price variance (PPV) on sales of the SunDial™
Plus of $43,593 and a write-off of legacy product finished goods of $41,600, partially off-set by lower volumes.
Gross Profit (Loss).
Gross
loss for the three months ended September 30, 2018 was $209,466 compared to a gross profit of $26,111 for the three months
ended September 30, 2017.
Research and Development Expenses.
Research and development expenses decreased by $221,485, or 21%, to $854,364 in the three months ended September 30,
2018 from $1,075,849 in the three months ended September 30, 2017. The decrease was due primarily to the impact of cost reduction
activities including lower personnel, development and certification costs and the timing of semiconductor fabrication expenditures.
General and Administrative Expenses.
General and administrative expenses increased by $21,394, or 2%, to $921,276 in the three months ended September 30,
2018 from $899,882 in the three months ended September 30, 2017.
Sales and Marketing Expenses.
Sales
and marketing expenses decreased by $7,139, or 3%, to $264,705 in the three months ended September 30, 2018 from $271,844
in the three months ended September 30, 2017.
Loss from Operations.
Our loss from operations for the three months ended September 30, 2018 was $2,249,811 compared to loss from operations
of $2,221,464
for the three months ended September 30, 2017.
Interest Income (Expense), Net.
Net interest expense was $112 for the three months ended September 30, 2018 compared to net interest income
of $3,865 for the three months ended September 30, 2017.
Net Loss.
Our net loss
for the three months ended September 30, 2018 was $2,249,923 as compared to a net loss of $2,217,599 for the three months
ended September 30, 2017.
Comparison of the nine months ended September 30,
2018 to the nine months ended September 30, 2017
Revenues.
Revenues for
the nine months ended September 30, 2018 of $1,144,103 were $170,423, or 18%, higher than the $973,680 we earned in revenues
for the nine months ended September 30, 2017 due to higher sales of our Sun Dial™ Plus product.
Cost of Revenues.
Cost
of revenues decreased by $422,178, or 22%, to $1,471,890 for the nine months ended September 30, 2018 compared to $1,894,068
for the nine months ended September 30, 2017. The decrease was due primarily to a non-cash write-down of legacy product inventory
in the nine months ended September 30, 2017 of $703,220 partially offset by a net unfavorable adjustment to the Company’s
warranty accrual of $150,000 and the impact of higher sales volumes.
Gross Loss.
Gross loss
for the nine months ended September 30, 2018 was $327,787 compared to a gross loss of $920,388 for the nine months ended September 30,
2017 due to the decline in cost of revenues.
Research and Development Expenses.
Research and development expenses decreased by $856,698, or 25%, to $2,517,688 in the nine months ended September 30,
2018 from $3,374,386 in the nine months ended September 30, 2017. The decrease was due primarily to the impact of cost reduction
activities including lower personnel, development and certification costs.
General and Administrative Expenses.
General and administrative expenses decreased by $345,324, or 12%, to $2,630,936 in the nine months ended September 30,
2018 from $2,976,260 in the nine months ended September 30, 2017. The decrease was primarily due to lower non-cash charges
for patent abandonments and stock-based compensation and the favorable impact of cost reduction activities, including lower personnel
costs, partly offset by higher legal fees.
Sales and Marketing Expenses.
Sales
and marketing expenses decreased by $651,776, or 53%, to $588,937 in the nine months ended September 30, 2018 from $1,240,713
in the nine months ended September 30, 2017. The decrease was due to a $325,235 decline in bad debt expense, including a $162,000
recovery in the nine months ended September 30, 2018, and the impact of costs reduction activities including lower professional
fees of $221,871 and personnel costs of $175,095, partially offset by higher stock-based compensation costs of $167,429 due to
significant forfeitures in 2017.
Loss from Operations.
Our loss from operations for the nine months ended September 30, 2018 was $6,065,348 compared to loss from operations
of $8,511,747
for the nine months ended September 30, 2017.
Interest Income, net.
Net
interest income was $36,817 for the nine months ended September 30, 2018 compared to $15,440 for the nine months ended September 30,
2017. The increase was the result of late fees associated with the recovery of a delinquent customer receivable.
Net Loss.
Our net loss
for the nine months ended September 30, 2018 was $6,028,531 as compared to a net loss of $8,496,307 for the nine months ended
September 30, 2017. The decrease is attributable to reduced operating expenses as the result of cost reduction activities,
the favorable resolution of legal proceedings and higher non-cash charges associated with inventory write-downs, patent impairments
and bad debt expense in 2017.
Liquidity and Capital Resources
We do not currently generate enough revenue
to sustain our operations. We have funded our operations through the sale of common stock and, prior to our initial public offering,
the issuance of convertible debt.
At September 30, 2018, we had cash
and cash equivalents of $5,538,765. Our net working capital and long-term debt at September 30, 2018 were $4,227,710 and $0,
respectively.
Operating activities in the nine months
ended September 30, 2018 resulted in cash outflows of $4,344,001, which were due primarily to the net loss for the period
of $6,028,531, partly offset by non-cash items of $1,126,261, related primarily to stock-based compensation of $837,810 and depreciation
and amortization of $297,007, and favorable balance sheet timing of $558,269. Operating activities in the nine months ended September 30,
2017 resulted in cash outflows of $5,924,245, which were due primarily to the net loss for the period of $8,496,307, partly offset
by non-cash items of $2,425,141, related primarily to stock-based compensation of $833,637, inventory write-downs of $703,220,
depreciation and amortization of $339,493, patent impairments of $268,789 and bad debt expense of $226,557 as well as favorable
balance sheet timing of $146,921.
Investing activities in the nine months
ended September 30, 2018 and 2017 resulted in cash outflows of $136,865 and $265,684, respectively, for the acquisition of
fixed assets and intangible assets.
In the second quarter of 2017, we began
implementing a cost reduction plan with the goal of reducing our cash outflows for operating and investing activities. This plan
included the simplification of our product roadmap to focus on our 30kW SunDial™ Plus and Stabilti™ products for the
solar plus storage and microgrid markets and eliminate activities that did not present significant near-term revenue opportunities.
In addition, we discontinued our legacy products, including our 125kW product, and postponed our development and certification
efforts related to other applications and international markets.
Financing activities in the nine months
ended September 30, 2018 resulted in cash outflows of $2,616 related to the payment of taxes associated with the vesting of
stock awards. Financing activities in the nine months ended September 30, 2017 resulted in cash inflows of $13,666,900 related
primarily to our Private Placement net proceeds of $13,657,331. 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 $15.0 million. Net cash proceeds are after offering
fees and expenses, including the placement agent fee of $1.1 million.
In order to meet our operating requirements,
we will need to obtain additional financing from third parties. There can be no assurance that we will be successful in obtaining
third party financing with commercially reasonable terms or at all. If we are unable to obtain such financing or it is inadequate
to fund our operations, we will be required to reduce operating costs, which could jeopardize future strategic initiatives and
business plans.
Off-Balance Sheet Transactions
We do not have any off-balance sheet transactions.
Trends, Events and Uncertainties
There are no material changes from trends,
events or uncertainties disclosed in our 2017 Annual Report on Form 10-K.