UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
OR
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TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-36216
IDEAL POWER INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
14-1999058
(I.R.S. Employer Identification No.)
4120 Freidrich Lane, Suite 100
Austin, Texas 78744
(Address of principal executive offices)
(Zip Code)
(512) 264-1542
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.001
Name of each exchange on which each is registered
NASDAQ Capital Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o
No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x
No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company.
Large accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
Accelerated filer o
Smaller reporting company x
Indicate by check mark whether the issuer is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference
to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last
business day of the registrant’s most recently completed second fiscal quarter.
As of June 30, 2015, the aggregate market value of the voting and non-voting common equity held by non-affiliates
computed by reference to the last sale price of the common equity was $51,870,059.
As of March 23, 2016 the issuer has 9,557,747 shares of common stock, par value $0.001, issued and outstanding.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION CONTAINED IN
THIS REPORT
PART I.
TABLE OF CONTENTS
ITEM 1: BUSINESS
ITEM 1A: RISK FACTORS
ITEM 1B: UNRESOLVED STAFF COMMENTS
ITEM 2: PROPERTIES
ITEM 3: LEGAL PROCEEDINGS
ITEM 4: MINE SAFETY DISCLOSURES
PART II.
ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
ITEM 6: SELECTED FINANCIAL DATA.
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
ITEM 9A: CONTROLS AND PROCEDURES
ITEM 9B: OTHER INFORMATION
PART III.
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11: EXECUTIVE COMPENSATION
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV.
ITEM 15: EXHIBITS
Signatures
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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,” “hopes,” “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:
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our history of losses;
our ability to achieve profitability;
our limited operating history;
emerging competition and rapidly advancing technology in our industry that may outpace our technology;
customer demand for the products and services we develop;
the impact of competitive or alternative products, technologies and pricing;
The timing of growth, and the growth rate of, the less mature markets we have entered or may enter in the future;
our ability to have any products we develop manufactured;
the adequacy of protections afforded to us by the patents that we own and the cost to us of maintaining, enforcing and defending
those patents;
our ability to obtain, expand and maintain patent protection in the future, and to protect our non-patented intellectual property;
our exposure to and ability to defend third-party claims and challenges to our patents and other intellectual property rights;
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.
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ITEM 1:
BUSINESS
Our Company
Ideal Power Inc. was formed in Texas on May 17, 2007 and converted to a Delaware corporation on July 15, 2013. Unless otherwise
stated or the context otherwise requires, the terms “Ideal Power,” “we,” “us,” “our” and the “Company” refer to Ideal Power Inc.
We design, market and sell electrical power conversion products using our proprietary technology called Power Packet Switching
Architecture (“PPSA”). PPSA is a power conversion technology that improves upon existing power conversion technologies in key product
metrics, such as size, weight, cost, and efficiency. PPSA utilizes standardized hardware with application specific embedded software. Our
advanced technology is important to our business and we make significant investments in research and development and protection of our
intellectual property. At December 31, 2015, we have been granted 36 United States, three European, one Chinese and two other foreign
patents.
We sell our products primarily to systems integrators for integration into their larger turn-key system which enable end users to manage
their electricity consumption by reducing demand charges or fossil fuel consumption, integrating renewable energy sources and/or form
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
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.
Industry Background
Utility power grids are built using AC generation, transmission, and distribution resources. This method of power transmission and
distribution has been proven over time to be reliable and safe. The outlets in a typical home or business are AC but many electrical devices,
such as computers, televisions, and other appliances operate on DC power. Batteries and PV solar panels produce DC power as well. In
order to connect DC devices to an AC power grid, a power conversion device is necessary.
We believe that significant changes in the supply of and demand for electrical power are driving demand for new energy infrastructure
products and supporting technologies. In a traditional utility model, electrical power is generated from central stations and transmitted over
long distance high-voltage transmission lines to substations where the voltage is reduced for distribution to consumers. Utility power grids
are built to manage the flow of power in one direction, from generation to use, where sophisticated tools have been developed to match the
amount of power being generated with the amount being consumed. Utilities ramp power plants up or down to closely match generation
with load.
The rapid growth in worldwide renewable energy generation, such as wind and solar power, has added a new level of complexity to the
task of matching power generation with consumption. These intermittent resources cannot be dispatched at will or relied upon to meet the
peak power demands of the grid. Renewable energy sources tend to ramp up and down quickly. For example, a single cloud over a
photovoltaic, or PV, farm can cause electrical output to change dramatically in a matter of seconds. These new challenges make it
increasingly difficult for utilities to accurately forecast and meet peak power demands.
Increased peak demand for power also has exposed weaknesses in the existing power grid. In high-cost, high-demand states, such as
California, public utilities have instituted peak demand charges as a way to ration power during periods of peak demand and to incentivize
customers to shift their power consumption to off-peak times. At the same time, both the Federal and certain state governments have
created incentive programs to encourage the development and implementation of alternative energy sources, such as solar and wind power,
which has the perverse consequence of making peak demand more difficult to forecast and satisfy. Strains on the electric grid have resulted
in significant brown-outs and black-outs that have heightened awareness of the vulnerabilities of the existing system. As a result, power
consumers are turning to new technologies to manage their energy consumption, lower costs and assure a reliable source of supply. We
believe that distributed generation with advanced power conversion systems, such as our PPSA products, has become an increasingly
important element of this new infrastructure.
In response to these changes in the market for electrical power, a number of technologies have been developed to enable users to more
effectively manage their consumption and, one of these technologies, energy storage systems, has emerged as the best way to mitigate the
instabilities and market inefficiencies caused by these emerging power grid realities. For example, a commercial business can shift energy
usage from peak to non-peak times by installing a battery energy storage system, or BESS. The commercial business can use electricity
generated during off-peak hours to charge the BESS and then use the stored power to satisfy all or part of its demand during peak hours.
Similarly, a commercial business can install a solar power system to generate power for use either immediately upon generation or for
storage in a BESS for later use.
Battery energy storage systems and many alternative energy sources provide power on a direct current, or DC, basis. However, the
electric power grid and most electrical equipment operates on an alternating current, or AC, basis. Consequently, power conversion systems
are required to convert power from DC to AC or from AC or DC as necessary to make the various components of the system function
together. In addition to converting power, power conversion systems enable customers to regulate current, voltage and frequency while
optimizing system resources such as batteries, PV and the utility power grid to reduce energy costs. Systems incorporating advanced power
converters may also manage distributed grid energy storage and be used to create stand-alone microgrids to bring power to a business or
residence if the main electrical grid, if one is present, is unavailable.
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BESS and alternative energy sources, such as solar or wind power, can only be connected to the existing power grid if they are
electrically isolated to prevent power from flowing back into the grid and potentially damaging components of the power system or creating
potential safety hazards. Traditionally, power conversion systems have been paired with heavy, wire-wound transformers to provide this
isolation and thereby protect the grid. Additionally, power conversion systems based on traditional power conversion technologies use
many other passive components which make them big, heavy, expensive and inefficient due to the large quantity of copper and magnetic
material and hard-switching topologies. Transformer-less power conversion systems in battery applications on the other hand still require
bulky transformers if connected from the grid and thus have many of the same drawbacks as transformer-based systems. Consequently,
power conversion systems with transformers are relatively large, expensive to manufacture, ship and install and require larger spaces for
installation and heat dissipation.
Our Technology
We believe PPSA is the only power conversion technology on the market that provides electrical isolation without the need for the
transformer that conventional power conversion systems require to connect electrical devices such as energy storage systems to the grid.
Electrical isolation is at the core of PPSA.
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, providing true electrical
isolation without the need for a transformer.
Figure 1: Schematic of PPSA Process
Transformer-based power conversion systems use continuous power flow that relies on relatively heavy and expensive magnetic
components and bulk capacitors. Many of these traditional systems have custom hardware for specific applications and are not readily
adaptable or customizable. Because they are relatively inefficient, these systems generate excess heat that causes electrical and thermal
stresses resulting in drive component failures and losses. By contrast, our conversion technology eliminates the majority of the passive
components of traditional power conversion systems, including transformers, inductors and bulk capacitors.
We believe PPSA offers several key advantages over traditional technologies, such as:
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Size and Weight: PPSA architecture reduces size and weight by eliminating passive components such as transformers, inductors
and bulk capacitors. Our 30kW power conversion system weighs 97 pounds. By contrast, similar transformer-based 30kW power
conversion systems typically weigh over 600 pounds.
Efficiency: Efficiency is the measure of power out of the power conversion system as a percentage of the power into the system.
Thus, high efficiency systems use less power in the conversion process and supply more power for use. Our 30kW power
conversion system efficient rating was 96.5% based on the California Energy Commission (“CEC”) weighted efficiency test. Our
efficiency advantage is more pronounced when operating the system at relatively low rated power, which is more common in
battery systems.
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Figure 2: PPSA Size, Weight and Efficiency Comparison
• Cost: Reduced weight results in lower material and manufacturing, transportation and installation costs.
• Safety: Since PPSA provides isolation, it allows the systems in which it is used to be grounded. Non-grounded systems require
additional safeguards to pass U.S. safety regulations, which increase system cost and reduce efficiency.
• Scalability/Flexibility: PPSA is made from standard industry components, is battery agnostic and software driven, thus providing
more scalability that enables rapid development cycles for new products and new applications. This same functionality provides
ultimate flexibility for customers globally as it is capable of power conversion in both 50Hz and 60Hz AC current environments.
• Reliability: PPSA enables a simplified product that eliminates many components, thereby eliminating potential sources of failure, and
several common failure modes. These design features are likely to increase overall system reliability.
Products
We have developed products commercializing PPSA and make these products available for sale both directly to customers and through
distributors. We currently sell five power conversion products utilizing our patented PPSA technology. These products are described as
follows:
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30kW Battery Converter, which is certified for UL1741 conformance and is intended to be used for the commercial
and industrial grid-tied distributed energy storage market. This battery converter is bi-directional, which means
power can flow to or from batteries. This product is more efficient and approximately 1/4th to 1/8th the size and
weight of similar transformer-based products.
30kW Grid-Resilient AC-DC Power Conversion System (“PCS”), which is certified for UL1741 conformance. This
product is capable of power conversion in both 50Hz and 60Hz AC current environments and has the ability to form
and manage a microgrid. This product is intended for customers who need a 30kW battery converter for use overseas
or who need the additional capability to form a microgrid. This product is not a replacement for our 30kW battery
converter but complements the existing product with additional features.
30kW Grid-Resilient AC-DC-DC Multi-Port PCS with two DC ports enabling two DC inputs, such as PV and
batteries, with one power converter. This product is certified for UL1741 conformance. This product is capable of
power conversion in both 50Hz and 60Hz AC current environments, and also has the ability to form and manage a
microgrid. The key feature of this multi-port PCS is that it effectively pairs energy storage with a distributed
generation resource to support critical loads or allow a building to disconnect from the utility power grid. This
product received the “Electrical Energy Storage Award” for product innovation in 2014 at InterSolar Germany, the
world’s largest solar exhibition, and was recognized as one of the 2015 top inverter products by Solar Power World
Magazine.
125kW Grid-Resilient AC-DC PCS, which is certified for UL1741 conformance. This 125kW system has over four
times the power of the 30kW product and is also able to convert in both 50Hz and 60Hz AC current environments
and form and manage a microgrid. This product is a larger version of our 30kW grid-resilient AC-DC PCS for use in
higher power applications.
125kW Grid-Resilient AC-DC-DC Multi-Port PCS for higher power applications with multi-port capabilities. This
product has over four times the power of the 30kW multi-port PCS and is also able to convert in both 50Hz and
60Hz AC current environments as well as form and manage a microgrid. The product is primarily for off-grid and
microgrid management applications currently, as we have not yet sought certification for UL1741 conformance,
required for connection to the utilize grid in the United States, for this product. This product is currently in prototype
production only. We intend to certify this product for UL1741 conformance in late 2016 or early 2017 for grid tied
operation.
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Future Innovations
Variable Frequency Drives
We are developing a PCS for variable frequency drives (“VFD”) based on our core PPSA technology. We believe that this product,
once commercialized, can be offered as a high-efficiency alternative to traditional VFDs which suffer from similar size, weight, and heat
loss inefficiencies as those of traditional power conversion systems. A PPSA-based VFD may offer medium to large low-voltage motors a
high quality drive that improves efficiency, costs less to manufacture and install, and reduces electrical noise and harmonics over traditional
VFDs. Such a product could also open up new markets for VFDs where they may not be commercially viable today due to their size,
efficiency, or power quality.
Bi-Directional Switches
Our existing products incorporate multiple insulated gate bipolar transistors (“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 excess heat that must be dissipated. We have
patented and are developing a new, highly efficient silicon switch called a bi-directional bipolar transistor (“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 our software simulations, we
believe that the B-TRANs can improve electrical efficiency in our power converters from approximately 96.5% to at or greater than 99.0%.
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. We believe that these development efforts, if successful, will enhance the competitive position of our products. In addition,
we believe the B-TRAN may potentially provide significant benefits for uses outside of our power converters as a potential replacement
for IGBTs.
We received an award of $2.5 million from ARPA-E for the development of our bi-directional switch technology. Funds under the
award have been spent and continuing development work is self-funded. The funding from ARPA-E was sufficient to develop and
demonstrate advanced power switches in third party simulations and start the initial process development for fabrication of the devices. We
expect to develop, manufacture and test initial prototypes of these switches in 2016.
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 will seek out best-in-class partners who will distribute, white-label our products or integrate our innovative
products into higher value systems resulting in multiple strategic sales channels for our PPSA based products and product designs.
Although our primary market is the United States, we will increasingly target markets outside the United States. 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 three primary markets are standalone storage, which represented a majority of our sales in 2015, PV + storage, and
microgrids. Based on market studies and forecasts by Navigant Research and Zpryme Research & Consulting, these three markets
combined are forecasted to grow to over $100 Billion by 2020. Assuming that power conversion systems represent approximately 17.5% of
the system cost, a Company estimate, power conversion systems such as those made by Ideal Power are forecasted to account for nearly
$18 billion of this market.
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Figure 3: Target Market Forecasts
Discussion of our Target Power Conversion Markets
Stand-Alone Storage Market
The stand-alone storage market is served by BESS. BESS are racks of batteries coupled with 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 demand charges for installing a BESS and reducing peak consumption. There is also strong regulatory
support for such systems. For example, California has issued a mandate for over 1,000 megawatts of new energy storage to be installed by
2020. Our 30kW and 125kW power conversion systems enable these BESS to connect to the utility power grid and, when paired with
batteries, offer these customers a substantial cost saving opportunity on their monthly electric bill. This market is still in its early years, but
we have established a strong brand and position in this market with our customers having many systems installed and operating today.
Based on market studies and forecasts by Navigant Research and Zpryme Research & Consulting, this market is forecasted to grow 40%
annually over the next five years and we believe it offers the highest value proposition today for our products.
We believe this market is beginning to grow beyond pilot installations to higher volume installations driven by the underlying
economics of BESS to commercial and industrial customers. A good indicator of this is the availability of third party financing for BESS.
Several of our customers have recently signed or announced financing deals for their BESS products, including Gexpro whose PowerIQ
product is being commercially financed by a subsidiary of NextEra Energy Resources (NYSE: NEE).
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 continued entrance of large, established companies to the BESS space will all
contribute to accelerating market growth for stand-alone storage.
PV + Storage Market
PV has one of the lowest levelized costs of energy for new electrical generation capacity and this is expected 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. As such, the economics of generating PV for local consumption is expected to remain strong for several more years, especially given
the investment tax credit (“ITC”) extension passed by Congress in 2015 for solar energy production. One shortcoming of these 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 such, 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 central power stations to make up for the shortfall in solar.
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Our grid-resilient PCS help resolve these shortcomings. For example, when a distributed PV system is connected to a BESS that
includes one of our multi-port PCS, the business will 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. Our grid-resilient PCS are also equipped to meet evolving utility requirements for low voltage ride through and
other key operating parameters, enabling the PV and BESS it connects to the grid to help stabilize the utility power grid when voltage or
frequency fluctuates due to imbalances in load and supply.
Commercial and industrial BESS are able to generate value far beyond peak demand reduction. We believe our products will become
increasingly attractive to co-locate BESS with distributed PV. IHS, a global research firm with a strong renewable industry focus, forecasts
that global installations of grid-tied commercial BESS coupled with PV will grow 111% annually from near obscurity in 2014 to over 600
MW PV + storage systems by 2018.
According to their research, IHS believes that systems will be deployed in two principle configurations. The present configuration is to
have separate BESS and PV systems tied together through the AC wiring, which is supported by all of our current products. A second,
emerging configuration will be to place the BESS and the PV system behind a single PCS with two DC inputs. This configuration is
forecast to improve efficiency, reduce costs, and allow PV harvesting when operating without a utility power grid present in microgrid
mode. Our grid-resilient 30kW and 125kW multi-port PCS were designed specifically to enable this lower cost and more efficient second
configuration.
Also according to IHS, the global PV industry is projected to grow from 45GW of annual installations in 2014 to 71GW in 2018.
Providing a new generation of solutions with integrated energy storage will enable the PV industry to address new markets with high
growth potential. These new PV + storage markets include providing backup power during blackouts, improving grid stability in high
penetration PV areas and reducing fossil fuel consumption in remote and off-grid microgrids. In the event of a grid failure, grid-tied PV
installations are not capable of operating independently. For example, during Superstorm Sandy many PV system owners were displeased
to learn that their grid-tied PV installations would not power their home or business. Systems incorporating our multi-port PCS along with
PV and a BESS will be capable of providing backup power during grid blackouts. We expect our multi-port PCS products to be attractive to
existing customers as a low-cost system upgrade to improve integration of PV. We further expect our products to provide competitive
solutions for these market requirements.
Microgrid Market
Over the next decade the greatest demand for new power generation capacity is likely to occur in regions such as Southeast Asia,
Africa, the Middle East, and Central and South America. Remote communities and infrastructure in these regions are more likely to depend
on expensive and polluting fossil fuel generation for their primary fuel supply and may not have a utility power grid in place to access high
quality, reliable power.
In contrast to grid-tied BESS and PV applications that are likely to be North American installations, we believe off-grid BESS and PV
opportunities will develop rapidly across these regions with the greatest demand for new power generation. IHS recently forecasted the off-
grid and microgrid BESS installations with PV market to reach 400MW by 2018 with the majority of this growth coming from regions with
less developed electricity infrastructure. We believe that our grid-resilient 30kW and 125kW multi-port PCSs offer superior solutions for
these applications.
We believe that our award-winning multi-port power conversion architecture is a highly attractive solution for integrating BESS and
renewables for both grid-tied and off-grid markets. Customer and industry forecasts indicate that these markets will grow dramatically in
the coming years, and we expect to benefit from this growth. The benefits of our multi-port PCS in microgrid application is not limited to
PV or renewable energy systems. Our products have been integrated into systems to manage a diesel generator and, in combination with
batteries, to form and operate a microgrid using far less fuel, emitting far fewer pollutants, and providing better power quality than a diesel
generator alone.
Other Markets
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 VFD, uninterruptible power supply, rail, wind, or
EV traction drive markets. Our products are suitable for use as PV inverters, and our first products were sold into this market, but this
market is saturated with incumbents offering inverters that convert power in a single direction and are thus suitable solely for PV
applications. As such, while we do have a number of PV inverters in field service today, the stand-alone PV inverter market is not a primary
target market for us. As discussed above, we are instead focused on PV integrated BESS applications for our multi-port PCS products
where the fullest potential of our technology can be realized.
In addition to the markets discussed above, we also have opportunities for market expansion into fast electric vehicle 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. We have provided PCS to multiple EV charging system integrators who have deployed initial projects using our products
coupled with batteries at EV charging stations to prove out these concepts. As these initial installations begin to operate, the value
propositions of these new opportunities will become clearer.
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.
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Intellectual Property
We rely on a combination of patents, laws that protect intellectual property, confidentiality procedures, and contractual restrictions with
our employees and others, to establish and protect our intellectual property rights. In addition, the software that is shipped with our products
is encrypted. At December 31, 2015, we had 36 issued U.S. patents and six issued foreign patents. We also had over 100 additional pending
U.S., foreign and international patent applications. We expect to continue to build our patent estate for both our core power conversion
technology, our bi-directional switch technology and other technological developments that broaden the scope of our technology platform.
Customers
Although we are expanding our customer base and channels to market, we have historically been reliant on a small number of
customers. For the year ended December 31, 2015, Sharp, Gexpro, GreenCharge Networks, and Coda Energy, accounted for 66% of net
revenues. For the year ended December 31, 2014, Sharp, GreenCharge Networks and Coda Energy, accounted for 44% of product revenue.
In addition, the Department of Energy, from which we received $579,079 in grant revenues, accounted for 32% of net revenue for the year
ended December 31, 2014.
Sales and Marketing
We sell our products primarily to systems integrators for installation as part of a larger turn-key system providing the end user with a
complete solution for managing their energy consumption. Our products are also sold through distribution channel partners. Before a
system integrator agrees to specify our products in their systems, the integrator engages in a lengthy and time-consuming process of testing
and evaluating our equipment for use, which typically may take from a few months to as long as a year.
For certain geographic markets and applications, we may seek to enter into licensing agreements that would enable licensees to build
our products for sale in local markets or we may license product designs to global brands for specific applications.
Manufacturing and Supply
We use a contract manufacturer to manufacture our products to our specifications. We have an agreement with our contract
manufacturer pursuant to which we provide them with a rolling forecast of our expected demand. Finished products are produced based on
upon our forecast, and we have the ability to delay shipments for up to 18 months from the date of the purchase order. The initial three-year
term of the agreement expires in October of 2017 and renews annually thereafter unless terminated. We believe there are many contract
manufacturers that are qualified to manufacture our products to our specifications and we expect to add a second contract manufacturer in
2016.
Typically, our contract manufacturer is responsible for the sourcing of components and materials. We qualify sources for our
components and materials. Our strategy is to have multiple suppliers for all of our components and materials. Currently, we have multiple
sources for most of our components. A very limited number of components are singled sourced and the process of identifying and
qualifying alternative sources for these components is underway.
Backlog
Our backlog was approximately $5.2 million at December 31, 2015, a 160% increase from our backlog of $2 million at December 31,
2014. The Company defines backlog as consisting of accepted orders from customers for which a product delivery schedule has been
specified. The purchased orders comprising backlog are not cancellable in most cases and such orders do not provide price protection.
Nevertheless, deliveries against received purchase orders may be rescheduled within negotiated parameters and our backlog may therefore
not be indicative of the level of future sales.
Competition
We will compete against well-established incumbent power conversion technology providers as these competitors enter the
commercial and industrial markets. For our target markets, we believe that PPSA provides significant competitive advantages compared to
the traditional power conversion solutions sold by well-established power conversion technology providers.
Transformer Based: Transformer-based power conversion systems are the conservative choice, as they are proven and have been
commercially available longer than any other type of power conversion system. They provide isolation, but are big, heavy, and relatively
inefficient. There have been improvements in the efficiency of transformer-based power conversion systems over the years, but we believe
further improvements are limited due to the physical characteristics of transformers themselves. Major suppliers in this market include
ABB, Eaton, and Schneider Electric.
Transformerless PV Inverters: Transformerless photovoltaic (PV) solar inverters are a special class of power conversion system
applicable only to PV arrays. They have become a popular choice in the market for distributed PV applications, as they are lighter and more
efficient than transformer based inverters. These transformerless inverters are one-way (DC to AC) inverters, and provide no electrical
isolation. PV systems are not required to be electrically isolated in most electrical code jurisdictions. These PV inverters have no
applicability to markets that require electrical isolation, which includes every application in the electrical power conversion industry in
which we compete. Key providers of transformerless PV inverters include companies such as SMA and SolarEdge.
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Research and Development Costs
Grant research and development are costs incurred solely related to grant revenues, and are classified as a line item under cost of
revenues. Other research and development costs are presented as a line item under operating expenses and are expensed as incurred. Total
research and development costs incurred during the year ended December 31, 2015 amounted to $5,521,390, none of which was included in
cost of revenues. Total research and development costs incurred during the year ended December 31, 2014 amounted to $2,983,648,
inclusive of $643,421 related to grant research which was included in cost of revenues.
Employees
As of February 29, 2016, we have 28 full-time employees. None of these employees are covered by a collective bargaining agreement,
and we believe our relationship with our employees is good.
Industry Certifications
Industry certifications are generally required for our products. The main certification requirement is conformance to UL1741, which
specifies standards for grid and product safety for grid-connected generation equipment, including the power conversion systems made by
us. A National Recognized Testing Laboratory (“NRTL”) must certify our products for conformance to UL1741 before our customers may
install and use our products in grid-tied applications in the United States.
We have chosen Intertek, an NRTL, for our certification requirements and have completed testing and received authorization to use
their ETL mark on our products. While we have been able to complete these certifications timely, we may not be as successful in
completing certification in a timely manner on future products, which could limit our ability to bring such products to market in a timely
manner.
Europe, Japan and other major countries have different certification test procedures, but generally test for similar safety and
performance capabilities. Local certifications are likely to be required to sell our products outside of the United States for many
applications. To date, we have not received any international certifications on our products but have deployed products in a few instances in
foreign countries as demonstrations, test projects in laboratories or microgrid applications which may be exempt from the certification
requirements. We expect to start the certification process in one or more international markets in 2016.
Government Regulation
Government approval is not required for us to sell our products. However, government support for renewable energy, grid storage,
electric vehicle charging infrastructure and improved grid resiliency may impact the size and growth rate of our target markets. Utility
regulations and support may also impact these end markets. In the near term, government and utility support for these markets is generally
required for these markets to grow and therefore changes in policy by governments or utilities may limit the near term market opportunities
for our products.
Available Information
Our Internet address is www.idealpower.com and our investor relations website is located at ir.idealpower.com. We make available
free of charge on our investor relations website under the heading “SEC Filings” our Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and amendments to those reports as soon as reasonably practicable after such materials are
electronically filed with (or furnished to) the SEC. We also make available on our website, our corporate governance documents, including
our code of conduct and ethics. Information contained on our website is not incorporated by reference into this Annual Report on Form 10-
K. In addition, the public may read and copy materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE,
Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-
SEC-0330. In addition, the SEC maintains an Internet site, www.sec.gov, that includes filings of and information about issuers that file
electronically with the SEC.
ITEM 1A: RISK FACTORS
We are subject to various risks that may materially harm our business, prospects, financial condition and results of operations. An
investment in our common stock is speculative and involves a high degree of risk. In evaluating an investment in shares of our common
stock, you should carefully consider the risks described below, together with the other information included in this report.
The risks described below are not the only risks we face. If any of the events described in the following risk factors actually occurs, or
if additional risks and uncertainties later materialize, that are not presently known to us or that we currently deem immaterial, then our
business, prospects, results of operations and financial condition could be materially adversely affected. In that event, the trading price of
our common stock could decline, and you may lose all or part of your investment in our shares. The risks discussed below include forward-
looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements.
Risks Related to Our Business
We lack an established operating history on which to evaluate our business and determine if we will be able to execute our business
plan. We have also incurred losses in prior periods, expect to incur losses in the future and we can give no assurance that our
operations will result in profits.
We were formed in Texas on May 17, 2007 and converted to a Delaware corporation on July 15, 2013. We have a limited operating
history that makes it difficult to evaluate our business. Historical sales of our products have been in low volume, and we cannot say with
certainty when we will begin to achieve profitability.
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Since inception, we have sustained $34,093,074 in net losses and we had a net loss for the year ended December 31, 2015 of
$10,440,643. We expect to have operating losses at least until such time as we have developed a substantial and stable revenue base. We
cannot assure you that we can develop a substantial and stable revenue base or achieve or sustain profitability on a quarterly or annual basis
in the future.
As sales of our products have generated limited operating revenues, we have been funding operations primarily through the sale of
common stock and, prior to our initial public offering, the issuance of convertible debt. If we are unable to execute our business plan,
generate sustainable revenue and achieve profitable operations with our existing capital we would need to raise funds through equity or
debt offerings and there can be no assurance that we will be able to do so.
Our future success is difficult to predict because we operate in emerging and evolving markets, and the industries in which we compete
are subject to volatile and unpredictable cycles.
The grid energy storage, solar combined with storage, microgrid and related industries are emerging and evolving markets which may
make it difficult to evaluate our future prospects and which may lead to period to period variability in our operating results. Our products
are based on unique technology which we believe offers significant advantages to our customers, but the markets we serve are in a
relatively early stage of development and it is uncertain how rapidly they will develop. It is also uncertain whether our products will
achieve high levels of demand and acceptance as these markets grow. If companies in the industries we serve do not perceive or value the
benefits of our technologies and products, or if they are unwilling to adopt our products as alternatives to traditional power conversion
solutions, the market for our products may not develop or may develop more slowly than we expect, which could significantly and
adversely impact our operating results.
As a supplier to the grid energy storage, solar combined with storage, microgrid and related industries, we may be subject to business
cycles. The timing, length, and volatility of these business cycles may be difficult to predict. These industries may be cyclical due to sudden
changes in customers’ manufacturing capacity requirements and spending, which depend in part on capacity utilization, demand for
customers’ products, inventory levels relative to demand, and access to affordable capital. These changes may affect the timing and
amounts of customers’ purchases and investments in technology, and affect our orders, net sales, operating expenses, and net income. In
addition, we may not be able to respond adequately or quickly to the declines in demand by reducing our costs. We may be required to
record significant reserves for excess and obsolete inventory as demand for our products changes.
To meet rapidly changing demand in each of the industries we serve, we must effectively manage our resources and production
capacity. During periods of decreasing demand for our products, we must be able to appropriately align our cost structure with prevailing
market conditions, effectively manage our supply chain, and motivate and retain key employees. During periods of increasing demand, we
must have sufficient manufacturing capacity and inventory to fulfill customer orders, effectively manage our supply chain, and attract,
retain, and motivate a sufficient number of qualified individuals. If we are not able to timely and appropriately adapt to changes in our
business environment or to accurately assess where we are positioned within a business cycle, our business, financial condition, or results
of operations may be materially and adversely affected.
To date we have had a limited number of customers. We cannot assure you that our customer base will increase.
We had revenue from four customers which accounted for 66% of net revenue for the year ended December 31, 2015. One of these
customers, Coda Energy, which accounted for 10% of net revenue, declared bankruptcy in December 2015. We had receivable balances
from three customers that accounted for 66% of trade receivables at December 31, 2015. As we sell our products to a limited number of
customers, we cannot assure you that our customer base will expand or that any decline in net revenue attributable to customer losses will
be replaced in a timely manner.
Product development is an inherently uncertain process, and we may encounter unanticipated development challenges and may not be
able to meet our product development and commercialization milestones.
Product development and testing may be subject to unanticipated and significant delays, expenses and technical or other problems. We
cannot guarantee that we will successfully achieve our milestones within our planned timeframe or ever. We commonly develop prototypes
of planned products prior to the full commercialization of these products. We cannot predict whether prototypes of future products will
achieve results consistent with our expectations. A prototype could cost significantly more than expected or the prototype design and
construction process could uncover problems that are not consistent with our expectations. Prototypes of emerging products are a material
part of our business plan, and if they are not proven to be successful, our business and prospects could be harmed.
More generally, the commercialization of our products may also be adversely affected by many factors not within our control,
including:
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the willingness of market participants to try a new product and the perceptions of these market participants of the safety,
reliability, functionality and cost effectiveness of our products;
the emergence of newer, possibly more effective technologies;
the future cost and availability of the raw materials and components needed to manufacture and use our products; and
the adoption of new regulatory or industry standards that may adversely affect the use or cost of our products.
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Accordingly, we cannot predict that our products will be accepted on a scale sufficient to support development of mass markets for
them.
We must achieve design wins to retain our existing customers and to obtain new customers, although design wins achieved do not
necessarily result in substantial sales.
The constantly changing nature of technology in the markets we serve causes equipment manufacturers to continually design new
systems. We must work with these manufacturers early in their design cycles to modify our equipment or design new equipment to meet
the requirements of their new systems. Manufacturers typically choose one or two vendors to provide the components for use with early
system shipments. Selection as one of these vendors is called a design win. It is critical that we achieve these design wins in order to retain
existing customers and to obtain new customers.
We believe that equipment manufacturers often select their suppliers based on factors including long-term relationships and end user
demand. Accordingly, we may have difficulty achieving design wins from equipment manufacturers who are not currently our customers.
In addition, we must compete for design wins for new systems and products of our existing customers, including those with whom we have
had long-term relationships. Our efforts to achieve design wins are time consuming, expensive, and may not be successful. If we are not
successful in achieving design wins, or if we do achieve design wins but our customers’ systems that utilize our products are not successful,
our business, financial condition, and results of operations could be materially and adversely impacted.
Once a manufacturer chooses a component for use in a particular product, it is likely to retain that component for the life of that
product. Our sales and growth could experience material and prolonged adverse effects if we fail to achieve design wins. However, design
wins do not always result in substantial sales, as sales of our products are dependent upon our customers’ sales of their products.
We have received grant funds from the United States for the development of a bi-directional switch. In certain instances, the United
States may obtain title to inventions related to this effort. If we were to lose title to those inventions, we may have to pay to license them
from the United States in order to manufacture the inventions. If we were unable to license those inventions from the United States, it
could slow down our product development.
In conjunction with the Advanced Research Projects Agency-Energy, or ARPA-E, grant we received from the Department of Energy,
we granted to the United States a non-exclusive, nontransferable, irrevocable, paid-up license to practice or have practiced for or on behalf
of the United States inventions related to the bi-directional switch and made within the scope of the grant. If we fail to disclose to the
Department of Energy an invention made with grant funds that we disclose to patent counsel or for publication, or if we elect not to retain
title to the invention, the United States may request that title to the subject invention be transferred to it.
We also granted “march-in-rights” to the United States in connection with any bi-directional switch inventions in which we choose not
to retain title, if those inventions are made under the ARPA-E grant. Pursuant to the march-in-rights, the United States has the right to
require us, any person to whom we have assigned our rights, or any exclusive licensee to grant a non-exclusive, partially exclusive, or
exclusive license in any field of use to a responsible applicant upon terms that are reasonable. If the license is not granted as requested, the
United States has the right to grant the license if it determines that we have not achieved practical application of the invention in the field
of use, the action is necessary to alleviate health or safety needs, the action is necessary to meet requirements for public use specified by
Federal regulations and such requirements have not been satisfied, or the action is necessary because an agreement to manufacture the
invention in the United States has not been obtained or waived or because any such agreement has been breached.
If we lost title to the United States as a result of any of these events, we would have to pay to license the inventions, if needed, to
manufacture the bi-directional switch from the United States. If we were unable to license those inventions from the United States, it could
slow down our product development.
As we continue to grow and to develop our intellectual property, we could attract threats from patent monetization firms or competitors
alleging infringement. We may incur substantial costs as a result of litigation or other proceedings relating to patent and other
intellectual property rights.
As we continue to grow and to develop our intellectual property, we could attract threats from patent monetization firms or competitors
alleging infringement of intellectual property rights.
In addition, some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because
they have substantially greater resources. If we do not prevail in this type of litigation, we may be required to: pay monetary damages; stop
commercial activities relating to our product; obtain one or more licenses in order to secure the rights to continue manufacturing or
marketing certain products; or attempt to compete in the market with substantially similar products. Uncertainties resulting from the
initiation and continuation of any litigation could limit our ability to continue some of our operations.
For instance, on October 4, 2013 we received a letter from a competitor alleging that the system architecture described on our website
appeared to infringe on patents licensed to or held by the competitor. The letter asked that we explain why we believe that our technology
does not represent an infringement. This competitor sent a subsequent letter on February 3, 2014 directly alleging our PPSA technology
infringed upon one of the competitor’s patent. Following receipt of the first letter, we investigated the competitor’s claims and determined
that their allegations were without merit. In early 2014, following our receipt of the February 3, 2014 letter, we met with the competitor to
discuss their claims. No subsequent discussions have been held with, and no further correspondence has been received from, this
competitor.
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We expect to license our technology in the future; however the terms of these agreements may not prove to be advantageous to us. If the
license agreements we enter into do not prove to be advantageous to us, our business and results of operations will be adversely affected.
We expect to license the manufacture of our product designs for certain markets as well as license our technology for certain potential
applications which we choose not to pursue directly through the sale of products. However, we may not be able to secure license
agreements with customers on terms that are advantageous to us. Furthermore, the timing and volume of revenue earned from license
agreements will be outside of our control. If the license agreements we enter into do not prove to be advantageous to us, our business and
results of operations will be adversely affected.
Until recently, we have not devoted significant resources towards the marketing and sale of our products and we continue to rely on the
marketing and sales efforts of third parties whom we do not control.
We expect that the marketing and sale of our battery converter and PCS products to end user customers will continue to be conducted
primarily by a combination of system integrators, third-party strategic partners, distributors, and original equipment manufacturers, or
OEMs. Consequently, commercial success of our products will depend, to a great extent, on the efforts of others. We may not be able to
identify, maintain or establish additional and/or appropriate relationships in the future. We can give no assurance that these third parties
will focus adequate resources on selling our products or will be successful in selling them. In addition, these third-parties have or may
require us to provide volume price discounts and other allowances, customize our products or provide other concessions that could reduce
the potential profitability of these relationships. Failure to develop sufficient customer, distribution and marketing relationships in our target
markets will adversely affect our commercialization schedule and to the extent we have entered or enter into such relationships, the failure
of our distributors and other third parties to assist us with the marketing and distribution of our products, or to meet their monetary
obligations to us, may adversely affect our financial condition and results of operations.
A material part of our success depends on our ability to manage our suppliers and contract manufacturers. Our failure to manage our
suppliers and contract manufacturers could materially and adversely affect our results of operations and relations with our customers.
We rely upon suppliers to provide the components necessary to build our products and on contract manufacturers to procure
components and assemble our products. There can be no assurance that key suppliers and contract manufacturers will provide components
or products in a timely and cost efficient manner or otherwise meet our needs and expectations. Our ability to manage such relationships
and timely replace suppliers and contract manufacturers, if necessary, is critical to our success. Our failure to timely replace our contract
manufacturers and suppliers, should that become necessary, could materially and adversely affect our results of operations and relations
with our customers.
Our business may be dependent upon our ability to obtain financing. If we do not obtain such financing, we may have to cease our
activities.
There is no assurance that we will operate profitably or generate positive cash flows in the future. In the future, we may require
additional financing in order to sell our then current products and to continue the research and development required to develop our next
generation of products. At that time, we may not be able to obtain financing on commercially reasonable terms or at all. If we do not obtain
such financing when needed, our business could fail.
The macro-economic environment in the United States and abroad has adversely affected, and may in the future adversely affect, our
ability to raise capital, which may potentially impact our ability to continue our operations.
As a company with limited revenues to date, we may need to rely on raising funds from investors to support our future research and
development activities and our operations. Macro-economic conditions in the United States and abroad may result in a tightening of the
credit markets and/or less capital available for small public companies, which may make it more difficult to raise capital. If we are unable
to raise funds as and when we need them, we may be forced to curtail our operations or even cease operating altogether.
We are subject to credit risks.
Some of our customers may experience financial difficulties and/or may fail to meet their financial obligations to us. As a result, we
may incur charges for bad debt provisions related to some trade receivables. In addition, in connection with the growth of the renewable
energy market and other markets for our products, we are gaining new customers, some of which have relatively short histories of
operations or are newly formed companies. As a result, it is difficult to ascertain financial information in order to appropriately extend
credit to these customers. Further, the volatility in the renewable energy market may put additional pressure on our customers’ financial
positions, as they may be required to respond to large swings in revenue. The renewable energy industry has also, from time to time, seen an
increasing amount of bankruptcies and reorganizations as the availability of financing has diminished. In 2015, two of our customers filed
for bankruptcy. Although we have limited credit losses related to these bankruptcies, our December 31, 2015 backlog and near term future
revenue were impacted by the bankruptcy of Coda Energy, one of these two customers.
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If customers fail to meet their financial obligations to us, or if the assumptions underlying our recorded bad debt provisions with
respect to receivables obligations do not accurately reflect our customers’ financial condition and payment levels, we could incur write-offs
of receivables in excess of our provisions, which could have a material adverse effect on our cash flow and operating results.
We may not be able to control our warranty exposure, which could increase our expenses.
We currently offer and expect to continue to offer a warranty with respect to our products and we expect to offer a design warranty
under future licensing agreements, if any. Due to our limited long-term history of operating data, our reserve is estimated based on
engineering judgment and third party assessments of our product reliability. If the cost of warranty claims exceeds any reserves we may
establish for such claims, our results of operations and financial condition could be adversely affected.
We may be exposed to lawsuits and other claims if our products malfunction, which could increase our expenses, harm our reputation
and prevent us from growing our business.
Any liability for damages resulting from malfunctions of our products could be substantial, increase our expenses and prevent us from
growing or continuing our business. Potential customers may rely on our products for critical needs and a malfunction of our products
could result in warranty claims or other product liability. In addition, a well-publicized actual or perceived problem could adversely affect
the market’s perception of our products. This could result in a decline in demand for our products, which would reduce revenue and harm
our business. Further, since our products are used in systems that are made by other manufacturers, we may be subject to product liability
claims even if our products do not malfunction.
We are highly dependent on the services of R. Daniel Brdar and William Alexander, as well as other key members of our executive
management team. Our inability to retain these individuals could impede our business plan and growth strategies, which could have a
negative impact on our business and the value of your investment.
Our ability to implement our business plan depends, to a critical extent, on the continued efforts and services of R. Daniel Brdar, our
Chief Executive Officer and President, William Alexander, our founder and Chief Technology Officer, and other members of our executive
management team. If we lose the services of any of these persons during this important time in our development, the loss may result in a
delay in the implementation of our business plan and plan of operations. We can give no assurance that we could find satisfactory
replacements for these individuals on terms that would not be unduly expensive or burdensome to us. We do not currently carry a key-man
life insurance policy that would assist us in recouping our costs in the event of the death or disability of any of these persons.
Any failure by management to properly manage our expected rapid growth could have a material adverse effect on our business,
operating results and financial condition.
If our business develops as expected, we anticipate that we will grow rapidly in the near future. Our failure to properly manage our
expected rapid growth could have a material adverse effect on our ability to retain key personnel. Our expansion could also place
significant demands on our management, operations, systems, accounting, internal controls and financial resources. If we experience
difficulties in any of these areas, we may not be able to expand our business successfully or effectively manage our growth. Any failure by
management to manage growth and to respond to changes in our business could have a material adverse effect on our business, financial
condition and results of operations.
Backlog may not result in revenue.
Our backlog was approximately $5.2 million at December 31, 2015. We define backlog as consisting of accepted orders from
customers for which an expected product delivery schedule has been specified. The purchase orders comprising backlog are not cancellable
in most cases and such orders generally do not provide price protection. Nevertheless, deliveries against received purchase orders may be
rescheduled within negotiated parameters and our backlog may, therefore, not be indicative of revenues in any given period.
Risks Relating to the Industry
The electric power conversion industry is competitive, has a number of well-financed incumbents and may see a significant number of
new market entrants. We cannot guarantee that we can compete successfully.
We may compete against providers of PCS that are well established and have substantially greater assets, including manufacturing,
marketing, and financial assets. These incumbents also have strong market share and name brand recognition in the industry. Potential
competitors include ABB, Ltd., Eaton Corporation plc, SMA Solar Technology AG, and Schneider Electric SE. Pricing and servicing, as
well as the general quality, efficiency and reliability of products, are significant competitive criteria in this industry. New market entrants
may offer competitive new technologies and products, and may also contribute to significant price competition.
Our ability to successfully compete on each of these criteria is material to the acceptance of our products and their future profitability.
In addition, the industry may resist new technology and products from suppliers that are not well capitalized with long track records of
performance. Our competitors use their balance sheet and brand recognition to their competitive advantage. Should our products become
commercially successful, competitors may seek to drive their own innovation and adopt or copy ideas, designs and features to regain their
competitive positions. Incumbent or new competitors may develop or offer technologies and products that may be more effective or
popular than our products and these competitors may be more successful in marketing their products than we are in marketing our products.
Additionally, price competition may result in lower than expected margins for our products.
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We expect to compete on the basis of our products’ lower cost, smaller footprint, higher efficiency, and technological innovation,
flexibility and features. Unrelated technological advances in alternative energy products or other power conversion technologies may
negatively impact the development of our products or make our products uncompetitive or obsolete at any time. We cannot guarantee that
we will be able to compete successfully in the electric power conversion industry.
Our business is substantially dependent on utility rate structures and government incentive programs that encourage the use of
alternative energy sources. The reduction or elimination of government subsidies and economic incentives for energy-related
technologies would harm our business.
We believe that near-term growth of energy-related technologies, including power conversion technology, relies partly on the
availability and size of government and economic incentives and grants (including, but not limited to, the U.S. Investment Tax Credit and
various state and local incentive programs). These incentive programs could be challenged by utility companies, or for other reasons found
to be unconstitutional, and/or could be reduced or discontinued for other reasons. The reduction, elimination, or expiration of government
subsidies and economic incentives could harm our business.
A combination of utility rate structures and government subsidies that encourage the use of alternative energy sources is a primary
driver of demand for our products. For example, public utilities are often allowed to collect demand charges on commercial and industrial
customers in addition to traditional usage charges. In addition, the federal government and many states encourage the use of alternative
energy sources through a combination of direct subsidies and tariff incentives such as net metering for users that use alternative energy
sources such as solar power. California also encourages alternative energy technology through its Self-Generation Incentive Program, or
SGIP, which offers rebates for businesses and consumers who adopt certain new technologies. As a result of these incentives, we believe
that a substantial portion of the products we have sold have been for use by end customers in California. Other states have similar
incentives and mandates which encourage the adoption of alternative energy sources. Notwithstanding the adoption of other incentive
programs, we expect that California will be the most significant market for the sale of our products in the near term for stand-alone storage
applications. Should California or another state in which we derive a substantial portion of our product revenues in the future change its
utility rate structure or eliminate or significantly reduce its incentive programs, demand for our products could be substantially affected,
which would adversely affect our business prospects, financial condition and operating results.
Changes to the National Electrical Codes could adversely affect our technology and products.
Our products are installed by system integrators that must meet the National Electrical Codes, or NEC, standards, including using
equipment that meets industry standards such as UL1741. The NEC standards address the safety of these systems. The NEC standards,
along with the UL1741 and IEEE1547 requirements, continue to evolve and are subject to change. If we respond to these changing
standards and requirements more slowly than our competitors, or if we are unable to meet new standards and requirements, our products
will be less competitive.
New technologies in the alternative energy industry may supplant our current products and technology in this market, which would
harm our business and operations.
The alternative energy industry is subject to rapid technological change. Our future success will depend on the cutting edge relevance
of our technology, and thereafter on our ability to appropriately respond to changing technologies and changes in function of products and
quality. If new technologies supplant our power conversion technology, our business would be adversely affected and we will have to
revise our plan of operation.
Businesses, consumers, and utilities might not adopt alternative energy solutions as a means for providing or obtaining their electricity
and power needs.
On-site distributed power generation solutions that utilize our products provide an alternative means for obtaining electricity and are
relatively new methods of obtaining electrical power. There is a risk that businesses, consumers, and utilities may not adopt these new
methods at levels sufficient to grow our business. Traditional electricity distribution is based on the regulated industry model whereby
businesses and consumers obtain their electricity from a government regulated utility. For alternative methods of distributed power to
succeed, businesses, consumers and utilities must adopt new purchasing practices and must be willing to rely upon less traditional means of
providing and purchasing electricity. As larger solar projects come online, utilities are becoming increasingly concerned with grid stability,
power management and the predictable loading of such power onto the grid.
We cannot be certain that businesses, consumers, and utilities will choose to utilize on-site distributed power at levels sufficient to
sustain our business. The development of a mass market for our products may be impacted by many factors which are out of our control,
including:
•
•
•
•
market acceptance of systems that incorporate our products;
the cost competitiveness of these systems;
regulatory requirements; and
the emergence of newer, more competitive technologies and products.
If a mass market fails to develop or develops more slowly than we anticipate, we may be unable to recover the costs we will have
incurred to develop these products.
16
Our sales cycle is lengthy and variable, which makes it difficult for us to accurately forecast revenue and which may affect our
quarterly results.
The sales cycle for our products is typically lengthy and unpredictable, which makes it difficult for us to accurately forecast revenues in
a given period, and may cause revenue and operating results to vary significantly from period to period. We currently sell our products
primarily to system integrators that integrate our products into larger “turn-key” solutions for their customers. Before system integrators
agree to specify our products in their systems, the integrators engage in a lengthy and time-consuming process of testing and evaluating our
equipment. This process can take from a few months to as long as a year. Even if our products are approved for use by a system integrator,
the system integrator may not place an order for our equipment until the system integrator has entered into a contract with the end user for
the design and installation of the system. In many cases, the system integrator is required to respond to a detailed request for proposal or to
submit a proposal before a contract for the system is executed. As a result, there may be a significant period of time between the time our
products are approved for use by a particular system integrator and the time we record revenue from the sale of our products. As a result of
potentially lengthy sales cycles, we may have difficulty in accurately predicting our operating results for any given period, and may
experience significant unanticipated fluctuations in our revenues from period to period. Any failure to achieve anticipated revenues for a
period could adversely affect our operating results and the market price of our common stock.
Our revenue and operating results for any quarterly reporting period may fluctuate significantly depending on the timing of the delivery
of our products.
Our revenue from product sales has resulted from the sale of a relatively low volume of units to a limited number of customers. As a
result, a change in the expected delivery date for a particular customer order could have a significant impact on our quarterly revenues and
operating results. Although we maintain a small finished goods inventory, in most cases products are produced for us by our contract
manufacturer in response to a particular customer order. Because of our varying sales cycles, our manufacturing lead times and the limited
to moderate flexibility in rescheduling delivery dates we provide to our customers, we may not be able to accurately predict the timing of
the delivery of a particular order. Significant unanticipated fluctuations in our revenues from period to period could adversely affect our
operating results and the market price for our common stock.
Risks Related to Owning Our Common Stock
The public market for our common stock may be volatile. This may affect the ability of our investors to sell their shares as well as the
price at which they sell their shares.
The market price for the shares may be significantly affected by factors such as variations in the volume of trading activity, quarterly
and yearly operating results, general trends in the alternative energy industry or other markets we serve, and changes in state or federal
regulations affecting us and our industry. Furthermore, in recent years the stock market has experienced extreme price and volume
fluctuations that are unrelated or disproportionate to the operating performance of the affected companies. Such broad market fluctuations
may adversely affect the market price of our common stock.
We have the right to issue shares of preferred stock. If we were to issue preferred stock, it is likely to have rights, preferences and
privileges that may adversely affect the common stock.
We are authorized to issue 10,000,000 shares of “blank check” preferred stock, with such rights, preferences and privileges as may be
determined from time-to-time by our board of directors. Our board of directors is empowered, without stockholder approval, to issue
preferred stock in one or more series, and to fix for any series the dividend rights, dissolution or liquidation preferences, redemption prices,
conversion rights, voting rights, and other rights, preferences and privileges for the preferred stock. No shares of preferred stock are
presently issued and outstanding and we have no plans to issue shares of preferred stock. The issuance of shares of preferred stock,
depending on the rights, preferences and privileges attributable to the preferred stock, could reduce the voting rights and powers of the
common stock and the portion of our assets allocated for distribution to common stockholders in a liquidation event, and could also result in
dilution in the book value per share of the common stock we are offering. The preferred stock could also be utilized, under certain
circumstances, as a method for raising additional capital or discouraging, delaying or preventing a change in control of the Company, to the
detriment of the investors in the common stock offered hereby. We cannot assure you that we will not, under certain circumstances, issue
shares of our preferred stock.
We have not paid dividends in the past and have no immediate plans to pay dividends.
We plan to reinvest all of our earnings, to the extent we have earnings, in order to market our products and to cover operating costs and
to otherwise become and remain competitive. We do not plan to pay any cash dividends with respect to our securities in the foreseeable
future. We cannot assure you that we would, at any time, generate sufficient surplus cash that would be available for distribution to the
holders of our common stock as a dividend. Therefore, you should not expect to receive cash dividends on our common stock.
We incur significant costs as a result of becoming a public company that reports to the Securities and Exchange Commission and our
management is required to devote substantial time to meet compliance obligations.
As a public company reporting to the Securities and Exchange Commission, we incur significant legal, accounting and other expenses.
We are subject to reporting requirements of the Exchange Act and the Sarbanes-Oxley Act, as well as rules subsequently implemented by
the Securities and Exchange Commission that impose significant requirements on public companies, including requiring establishment and
maintenance of effective disclosure and financial controls and changes in corporate governance practices. Our management and other
personnel are required to devote a substantial amount of time to these and other new compliance initiatives. In addition, we believe these
rules and regulations may make it more costly for us to obtain director and officer liability insurance, and we may be required to accept
reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage in the future. As a result, it
may be more difficult for us to attract and retain qualified people to serve on our board of directors, our board committees or as executive
officers.
17
Shares eligible for future sale may adversely affect the market for our common stock.
Sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could cause the
market price of our common stock to decline. These sales could also make it more difficult for us to sell equity or equity-related securities
in the future at a time and price that we deem appropriate.
At December 31, 2015, we had 9,549,544 shares of common stock outstanding. Shares beneficially owned by our affiliates and
employees are subject to volume and other restrictions under Rules 144 and 701 under the Securities Act of 1933, as amended, or the
Securities Act, various vesting agreements, our insider trading policy and any applicable 10b5-1 trading plan. Shares that are not
beneficially owned by our affiliates and employees generally can be freely sold in the public market, subject in some cases to restrictions
under Rule 144.
At December 31, 2015, we had 2,846,325 potentially dilutive shares outstanding and we may grant additional options, stock-based
awards and/or warrants in the future. If our stock price rises, the holders of vested options, stock-based awards or warrants may exercise
their options, stock-based awards and/or warrants and sell a large number of shares. Any sale of a substantial number of shares of our
common stock may have a material adverse effect on the market price of our common stock.
Our charter documents and Delaware law may inhibit a takeover that stockholders consider favorable.
Our Certificate of Incorporation, or Certificate, and bylaws and applicable provisions of Delaware law may delay or discourage
transactions involving an actual or potential change in control or change in our management, including transactions in which stockholders
might otherwise receive a premium for their shares, or transactions that our stockholders might otherwise deem to be in their best interests.
The provisions in our Certificate and bylaws:
•
•
•
•
•
authorize our board of directors to issue preferred stock without stockholder approval and to designate the rights,
preferences and privileges of each class; if issued, such preferred stock would increase the number of outstanding shares of
our capital stock and could include terms that may deter an acquisition of us;
limit who may call stockholder meetings;
do not permit stockholders to act by written consent;
do not provide for cumulative voting rights; and
provide that all vacancies may be filled by the affirmative vote of a majority of directors then in office, even if less than a
quorum.
In addition, Section 203 of the Delaware General Corporation Law may limit our ability to engage in any business combination with a
person who beneficially owns 15% or more of our outstanding voting stock unless certain conditions are satisfied. This restriction lasts for
a period of three years following the share acquisition. These provisions may have the effect of entrenching our management team and may
deprive you of the opportunity to sell your shares to potential acquirers at a premium over prevailing prices. This potential inability to
obtain a control premium could reduce the price of our common stock. See “Anti-Takeover Effects of Certain Provisions of Delaware Law
and Our Charter Documents” for additional information.
If securities or industry analysts do not publish or do not continue to publish research or reports about our business, or if they issue an
adverse or misleading opinion regarding our stock, our stock price and trading volume could decline.
The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us
or our business. Presently, a number of securities analysts publish reports on us on a regular basis. If any of the analysts who cover us now
or in the future issue an adverse opinion regarding our stock, our stock price would likely decline. If one or more of these analysts ceases
coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could
cause our stock price or trading volume to decline.
ITEM 1B: UNRESOLVED STAFF COMMENTS
None.
ITEM 2:
PROPERTIES
Our principal office is located at 4120 Freidrich Lane, Suite 100, Austin, Texas 78744. We lease 14,782 square feet of office and
laboratory space under a triple net lease. The lease commenced on June 1, 2014 and has a term of 48 months.
ITEM 3:
LEGAL PROCEEDINGS
We are not a party to any pending legal proceedings.
ITEM 4: MINE SAFETY DISCLOSURES
Not applicable.
18
ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Our common stock is quoted under the symbol IPWR on the NASDAQ Capital Market. The table below presents the range of high and
low sales prices of our common stock for the years ended December 31, 2015 and 2014.
High and low sales prices
Fiscal year ended December 31, 2015
First quarter
Second quarter
Third quarter
Fourth quarter
Fiscal year ended December 31, 2014
First quarter
Second quarter
Third quarter
Fourth quarter
High
Low
$
$
$
$
$
$
$
$
10.21 $
11.53 $
8.55 $
9.65 $
12.59 $
9.60 $
9.40 $
8.00 $
5.93
7.75
6.10
6.45
5.25
7.00
6.51
5.82
As of March 23, 2016 we had approximately 42 shareholders of record. The name, address and telephone number of our stock transfer
agent is Corporate Stock Transfer, Inc., 3200 Cherry Creek South Drive, Suite 430, Denver, Colorado, 80209, (303) 282-4800.
Dividends
We have not paid any cash dividends on our common stock since our inception and do not anticipate paying any cash dividends in the
foreseeable future. We plan to retain our earnings, if any, to provide funds for the expansion of our business.
Securities Authorized for Issuance under Equity Compensation Plans
The table below provides information, as of December 31, 2015, regarding our 2013 Equity Incentive Plan (the “Plan”) under which
our equity securities are authorized for issuance to officers, directors, employees, consultants, independent contractors and advisors.
Number of
securities to be
issued upon exercise
of outstanding
options, warrants
and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of
securities remaining
available for future
issuance under
equity compensation
plans (excluding
securities reflected
in column (a))
(c)
1,428,323(1) $
6.94
831,615(2)
Plan category
Equity compensation plans approved by security holders
(1) This amount includes performance stock units (“PSU”) granted to employees.
(2) This amount will not be subject to future increases, absent shareholder approval of an increase in the securities authorized for issuance
under the Plan.
Recent Issuances of Unregistered Securities
On February 17, 2015, the Company issued 939 shares of common stock to an option holder in connection with the exercise of an
option. The per share exercise price was $2.97149 and the options were exercised on a cashless basis. The Company relied on the
exemption provided by Section 3(a)(9) of the Securities Act of 1933 to issue the common stock.
On April 7, 2015, the Company issued 18,816 shares of common stock to an option holder in connection with the exercise of stock
options. The per share exercise price was $2.97149 and the options were exercised on a cashless basis. The Company relied on the
exemption provided by Section 3(a)(9) of the Securities Act of 1933 to issue the common stock.
On May 5, 2015, the Company issued 9,710 shares of common stock to a warrant holder in connection with the exercise of a warrant.
The per share exercise price was $3.47626 and the warrant was exercised on a cashless basis. The Company relied on the exemption
provided by Section 3(a)(9) of the Securities Act of 1933 to issue the common stock.
On May 6, 2015, the Company issued 11,957 shares of common stock to a warrant holder in connection with the exercise of a warrant.
The per share exercise price was $3.47626 and the warrant was exercised on a cashless basis. The Company relied on the exemption
provided by Section 3(a)(9) of the Securities Act of 1933 to issue the common stock.
On July 1, 2015, the Company issued 7,000 shares of common stock to an option holder in connection with the exercise of stock
options. The per share exercise price was $5.00. The Company relied on the exemption provided by Rule 701 of the Securities Act of 1933
to issue the common stock.
19
On September 1, 2015, we issued 3,293 shares of common stock to a warrant holder in connection with the exercise of a warrant. The
per share exercise price was $3.47626 and the warrant was exercised on a cashless basis. The Company relied on the exemption provided
by Section 3(a)(9) of the Securities Act of 1933 to issue the common stock.
On September 11, 2015, we issued 14,383 shares of common stock to a warrant holder in connection with the exercise of a warrant.
The per share exercise price was $3.47626. The Company relied on the exemption provided by Section 4(a)(2) of the Securities Act of
1933 to issue the common stock inasmuch as the warrant holder was an accredited investor and there was no form of general solicitation or
general advertising relating to the offer.
On October 6, 2015, we issued 14,383 shares of common stock to a warrant holder in connection with the exercise of a warrant. The
per share exercise price was $3.47626. The Company relied on the exemption provided by Section 4(a)(2) of the Securities Act of 1933 to
issue the common stock inasmuch as the warrant holder was an accredited investor and there was no form of general solicitation or general
advertising relating to the offer.
On October 28, 2015, we issued 1,988 shares of common stock to a warrant holder in connection with the exercise of a warrant. The
per share exercise price was $3.47626 and the warrant was exercised on a cashless basis. The Company relied on the exemption provided
by Section 4(a)(2) of the Securities Act of 1933 to issue the common stock inasmuch as the warrant holder was an accredited investor and
there was no form of general solicitation or general advertising relating to the offer.
On October 29, 2015, the Company issued 3,733 shares of common stock to an option holder in connection with the exercise of stock
options. The per share exercise price was $5.00 and the options were exercised on a cashless basis. The Company relied on the exemption
provided by Section 3(a)(9) of the Securities Act of 1933 to issue the common stock.
On November 5, 2015, we issued 49,003 shares of common stock to a warrant holder in connection with the exercise of several
warrants. The per share exercise prices were $3.47626 and $4.34533 and the warrants were exercised on a cashless basis. We relied on the
exemption provided by Section 3(a)(9) of the Securities Act of 1933 to issue the common stock.
On November 9, 2015, the Company issued 6,083 shares of common stock to an option holder in connection with the exercise of stock
options. The per share exercise price was $6.3276 and $5.00 and the options were exercised on a cashless basis. The Company relied on the
exemption provided by Section 3(a)(9) of the Securities Act of 1933 to issue the common stock.
On November 16, 2015, the Company issued 1,621 shares of common stock to an option holder in connection with the exercise of
stock options. The per share exercise price was $5.00 and the options were exercised on a cashless basis. The Company relied on the
exemption provided by Section 3(a)(9) of the Securities Act of 1933 to issue the common stock.
On November 24, 2015, the Company issued 1,603 shares of common stock to an option holder in connection with the exercise of
stock options. The per share exercise price was $5.00 and the options were exercised on a cashless basis. The Company relied on the
exemption provided by Section 3(a)(9) of the Securities Act of 1933 to issue the common stock.
On December 2, 2015, the Company issued 6,085 shares of common stock to an option holder in connection with the exercise of stock
options. The per share exercise prices ranged between $0.79525 and $2.97149 and the options were exercised on a cashless basis. The
Company relied on the exemption provided by Section 3(a)(9) of the Securities Act of 1933 to issue the common stock.
On December 23, 2015, the Company issued 11,107 shares of common stock to an option holder in connection with the exercise of
stock options. The per share exercise price was $2.97149 and the options were exercised on a cashless basis. The Company relied on the
exemption provided by Section 3(a)(9) of the Securities Act of 1933 to issue the common stock.
Use of Proceeds
Our initial public offering of our common stock on registration statement number 333-190414, declared effective on November 21,
2013, raised approximately $15 million in net cash proceeds after expenses.
On May 20, 2015, we closed an underwritten follow-on offering of 2,225,825 shares, inclusive of the underwriter’s overallotment of
290,325 shares, of our common stock at a price of $7.75, before underwriting discounts and commissions. The offer and sale of all shares in
the follow-on offering were registered under the Securities Act of 1933, as amended pursuant to a registration statement on Form S-3
(registration number 333-200661), which was declared effective on April 27, 2015, and raised approximately $15.9 million in net cash
proceeds after expenses.
Through December 31, 2015, we used approximately $16 million of the net cash proceeds from our equity offerings. These funds were
used as follows: $1.1 million for protection of our intellectual property, $1.1 million for purchase of equipment and software and the
remainder for our operations, including research and development and general and working capital purposes. None of the proceeds were
used for construction of plant, building and facilities, the purchase of real estate or the acquisition of any business.
ITEM 6:
SELECTED FINANCIAL DATA.
As a smaller reporting company we are not required to provide this information.
20
ITEM 7: 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
audited financial statements and related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical
information, this discussion and analysis here and throughout this Form 10-K contains forward-looking statements that involve risks,
uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements.
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 enables high efficiency power conversion by eliminating many of
the heavy, passive components used in conventional power conversion products and replacing them with a unique software-enabled
topology. Our products are designed to be used in both on-grid and off-grid applications. We believe our products are the only transformer-
less power converters with electrical isolation certified for on-grid applications. Our technology is protected by a patent portfolio of 36 US
and 6 foreign issued patents.
We sell our products primarily to systems integrators as part of a larger turn-key system which enable end users to manage their
electricity consumption, by reducing demand charges or fossil fuel consumption, integrating renewable energy sources or and form 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. Our existing products that
connect to the power grid are certified for UL 1741 conformance. 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.
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 December 31, 2015 amounted
to $10,337,105 with approximately a third of that revenue coming from government grants. We may continue to pursue research and
development grants, if and when available, for the purpose of developing new products and improving current products.
Critical Accounting Policies
The following discussion and analysis of financial condition and results of operations is based upon our financial statements, which
have been prepared in conformity with accounting principles generally accepted in the United States of America. Certain accounting
policies and estimates are particularly important to the understanding of our financial position and results of operations and require the
application of significant judgment by our management or can be materially affected by changes from period to period in economic factors
or conditions that are outside of our control. As a result, they are subject to an inherent degree of uncertainty. In applying these policies, we
use our judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based
on our historical operations, our future business plans and projected financial results, the terms of existing contracts, our observance of
trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. Please
see Note 2 to our financial statements for a more complete description of our significant accounting policies.
Revenue Recognition. Revenue from product sales is recognized when the risks of loss and title pass to the customer, as specified in
(1) the respective sales agreements and (2) other revenue recognition criteria as prescribed by Staff Accounting Bulletin (“SAB”) No. 101,
“Revenue Recognition in Financial Statements”, as amended by SAB No. 104, “Revenue Recognition”. We generally sell our products
free-on-board shipping and recognize revenue when products are shipped.
In prior years, we received payments from government entities in the form of government grants with the most significant being a $2.5
million grant from ARPA-E awarded on January 30, 2012. Government grants are agreements that generally provide us with cost
reimbursement for certain types of research and development activities over a contractually defined period. Revenues from government
grants are recognized in the period during which we incur the related costs, provided that we have incurred the cost in accordance with the
specifications and work plans determined between us and the government entity. Costs incurred related to grants are recorded as grant
research and development costs. At December 31, 2014, we had recognized all grant revenues related to the ARPA-E grant and no grant
revenue was recognized in the year ended December 31, 2015.
Research and Development. Grant research and development are costs incurred solely related to grant revenues, and are classified as a
line item under cost of revenues. Other research and development costs are presented as a line item under operating expenses and are
expensed as incurred.
Intangible Assets. Our intangible assets are primarily related to patents. We capitalize legal costs and filing fees, if any, associated
with obtaining patents on our new inventions or other intangible assets. Once the asset have been issued or placed in service, we amortize
these costs over the shorter of the legal life (generally a maximum of 20 years) or its estimated economic life using the straight-line
method.
21
Income Taxes. We account for income taxes using an asset and liability approach that 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 we are able to realize their benefits, or that future deductibility is uncertain. 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.
Stock-Based Compensation. We apply Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
718, “Stock Compensation,” when recording stock based compensation. The fair value of each stock option award is estimated on the date
of grant using the commonly used Black-Scholes option valuation model. The assumptions used in the Black-Scholes model are as follows:
Grant Price — The grant price of the issuances are determined based on the closing share price on the date of grant.
Risk-free interest rate — The risk free interest rate is based on the implied yield available on US Treasury securities at the time of
grant with an equivalent term of the expected life of the award.
Expected lives — As permitted by SAB 107, due to our insufficient history of option activity, we utilize the simplified approach to
estimate the options’ expected term, calculated as the midpoint between the vesting period and the contractual life of the award.
Expected volatility — Volatility is estimated based on the historical volatilities of comparable companies.
Expected dividend yield — Dividend yield is based on current yield at the grant date or the average dividend yield over the historical
period. We have never declared or paid dividends and have no plans to do so in the foreseeable future.
We use a Monte Carlo simulation pricing model to determine the fair value of performance stock units (“PSUs”). A typical Monte
Carlo exercise simulates a distribution of stock prices to yield an expected distribution of stock prices during and at the end of the
performance period. The simulations are repeated many times in order to derive a probabilistic assessment of stock performance. The
stock-paths are simulated using assumptions which include expected stock price volatility and risk-free interest rate.
We account for stock issued to non-employees in accordance with the provisions of FASB ASC 505-50 “Equity Based Payments to
Non-Employees.” FASB ASC 505-50 states that equity instruments that are issued in exchange for the receipt of goods or services should
be measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably
measurable. The measurement date occurs as of the earlier of (a) the date at which a performance commitment is reached or (b) absent a
performance commitment, the date at which the performance necessary to earn the equity instruments is complete (that is, the vesting
date).
Results of Operations
Comparison of the year ended December 31, 2015 to the year ended December 31, 2014
Revenues. Revenues for the year ended December 31, 2015 of $4,259,909 were $2,465,815, or 137%, higher than the $1,794,094 we
earned in revenues for the year ended December 31, 2014. The increase in revenue was due to a $3,044,894 increase in product revenues
partially offset by a $579,079 decrease in grant revenues as the ARPA-E grant was fully funded in December 2014.
In the year ended December 31, 2015, the increase in product revenues was driven by higher sales volumes due in part to the
introduction of new products. In the year ended December 31, 2014, revenue from the sale of products was $1,215,015, related primarily to
our 30kW battery converter.
Cost of Revenues. Cost of revenues for the year ended December 31, 2015 of $3,872,672 was $1,683,580, or 77%, higher than the
$2,189,092 cost of revenues for the year ended December 31, 2014 as the result of a significant increase in product cost of revenue on
higher volumes partially offset by a $643,421 decrease in grant research and development costs.
In the year ended December 31, 2015, the increase in cost of revenues from the sale of products was primarily due to higher unit sales
for our 30kW battery converter and our new products, the grid-resilient 30kW 2-port and multi-port PCS and a 125kW 2-port PCS as well as
higher personnel costs of $175,110, as we added engineering and supply chain resources to support new and existing products.
The decrease in grant research and development costs was due to the timing of spending under the ARPA-E grant, as the ARPA-E
grant funds were fully utilized by December 31, 2014. During the year ended December 31, 2014, we recognized $643,421 in grant
research and development costs from our ARPA-E grant.
Gross Profit (Loss). Gross profit for the year ended December 31, 2015 was $387,237 compared to a gross loss of $394,998 for the
year ended December 31, 2014. Gross profit for the year ended December 31, 2015 was primarily due to higher product sales compared to
the year ended December 31, 2014, and the gross profit improvement was partially offset by incremental costs associated with the initial
roll-out of new products at low volumes.
Research and Development Expenses. Research and development expenses increased by $3,181,163, or 136%, to $5,521,390 in the
year ended December 31, 2015 from $2,340,227 in the year ended December 31, 2014. The increase was primarily due to the self-funded
bi-directional power switch development costs of $1,707,620, and higher personnel costs of $715,033 as we added both firmware and
hardware engineering resources. The increase is also attributable to higher development costs for new products, including our grid-resilient
30kW 2-port and multi-port PCS and 125kW 2 port and multi-port PCS, of $396,052 and higher product certification costs of $231,288
compared to the year ended December 31, 2014.
22
General and Administrative Expenses. General and administrative expenses increased by $700,319, or 23%, to $3,693,450 in the year
ended December 31, 2015 from $2,993,131 in the year ended December 31, 2014. The increase was due primarily to higher stock
compensation expense of $277,488, legal and patent fees of $160,653, and personnel costs of $137,605. In addition, we wrote off $45,641
of capitalized software costs in the year ended December 31, 2015.
Sales and Marketing Expenses. Sales and marketing expenses increased by $444,934, or 37%, to $1,644,512 in the year ended
December 31, 2015 from $1,199,578 in the year ended December 31, 2014. The increase was due primarily to severance costs of $139,530,
higher contract labor costs of $116,720, bad debt expense of $48,445 (net of recovery of $24,124), placement costs of $44,427 and
personnel costs of $43,344.
Loss from Operations. Due to the increase in our operating expenses, our loss from operations for the year ended December 31, 2015
was $10,472,115 or 51% higher than the $6,927,934 loss from operations for year ended December 31, 2014.
Interest Income. Interest income increased to $31,472 for the year ended December 31, 2015 compared to $27,715 for the year ended
December 31, 2014. The increase is primarily due to a higher average cash balance for the year ended December 31, 2015 due to our
follow-on offering in May 2015.
Net Loss. As a result of the increase in our loss from operations, partly offset by the increase in gross profit, our net loss for the year
ended December 31, 2015, was $10,440,643 as compared to a net loss of $6,900,219 for the year ended December 31, 2014, an increase of
$3,540,424.
Liquidity and Capital Resources
We currently do not generate enough revenue to sustain our operations. Our revenues in the year ended December 31, 2015 are solely
generated from sales of our products. We have primarily funded our operations through the sale of common stock and, prior to our initial
public offering, the issuance of convertible debt.
As of December 31, 2015 and 2014, we had cash and cash equivalents of $15,022,286 and $7,912,011, respectively. Our net working
capital increased to $14,260,603 as of December 31, 2015 from $7,658,720 as of December 31, 2014 due primarily to the net cash proceeds
of $15,924,405 from our follow-on offering in May 2015.
Operating activities in the year ended December 31, 2015 resulted in cash outflows of $8,046,217, which were primarily due to the net
loss for the period of $10,440,643, offset by stock-based compensation of $1,384,763, favorable balance sheet timing of $395,021,
depreciation and amortization of $232,852 and the write-off of fixed assets and patents of $199,546. Operating activities in the year ended
December 31, 2014 resulted in cash outflows of $5,469,550, which were primarily due to the net loss for the period of $6,900,219, offset by
stock-based compensation of $944,102, stock compensation paid for services of $180,183, favorable balance sheet timing of $150,965 and
other non-cash items of $155,419.
Investing activities in the years ended December 31, 2015 and 2014 resulted in cash outflows of $1,421,741 and $760,502,
respectively. Cash outflows for the acquisition of fixed assets in the years ended December 31, 2015 and 2014 were $791,605 and
$342,247, respectively, and cash outflows for the acquisition of intangible assets in the years ended December 31, 2015 and 2014 were
$630,136 and $418,255, respectively. Cash outflows for the acquisition of fixed assets increased as we purchased equipment and
improvements, including electrical upgrades, for our development lab to support current and future products and cash outflows for the
acquisition of intangible assets increased as we expanded our intellectual property portfolio.
Financing activities in the year ended December 31, 2015 resulted in cash inflows of $16,578,233, related primarily to the issuance of
2,225,825 shares of common stock shares at a public offering price of $7.75. Net cash proceeds after offering-related expenses were
$15,924,405. In addition, we received $653,828 in net proceeds from the exercise of options and warrants. In the year ended December 31,
2014, we received $4,966 in net proceeds from the exercise of stock options and warrants.
On December 1, 2014, we filed a Form S-3 shelf registration statement with the Securities and Exchange Commission. The registration
statement allows us to offer up to an aggregate $75 million of common stock, preferred stock, warrants to purchase common stock or
preferred stock or any combination thereof and provides us with the flexibility over three years to potentially raise additional equity in a
public or private offering on commercial terms. After the May 2015 follow-on offering, $58 million is available to the Company under the
registration statement.
Off-Balance Sheet Transactions
We do not have any off-balance sheet transactions.
Trends, Events and Uncertainties
Research and development of new technologies is, by its nature, unpredictable. Although we will undertake development efforts with
commercially reasonable diligence, there can be no assurance that our working capital of $14,260,603 as of December 31, 2015 will be
sufficient to enable us to develop our technology to the extent needed to create future sales to sustain operations as contemplated herein. If
our working capital is insufficient for this purpose, we will consider other options to continue our path to commercialization, including, but
not limited to, additional financing through follow-on stock offerings, debt financing, co-development agreements, curtailment of
operations, suspension of operations, sale or licensing of developed intellectual property, or other alternatives.
We cannot assure you that our technology will be adopted, that we will ever earn revenues sufficient to support our operations, or that
we will ever be profitable. Furthermore, since we have no committed source of financing, we cannot assure you that we will be able to raise
money as and when we need it to continue our operations. If we cannot raise funds as and when we need them, we may be required to
severely curtail, or even to cease, our operations.
Other than as discussed above and elsewhere in this report, we are not aware of any trends, events or uncertainties that are likely to
have a material effect on our financial condition.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company we are not required to provide this information.
23
ITEM 8:
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Ideal Power Inc.
We have audited the accompanying balance sheets of Ideal Power Inc. (the “Company”) as of December 31, 2015 and 2014, and the related
statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2015. The
Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of
December 31, 2015 and 2014, and the results of its operations and its cash flows for each of the years in the two-year period ended
December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.
/s/ Gumbiner Savett Inc.
March 30, 2016
Santa Monica, California
24
IDEAL POWER INC.
Balance Sheets
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories, net
Prepayments and other current assets
Total current assets
Property and equipment, net
Intangible assets, net
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued expenses
Total current liabilities
Commitments
Stockholders’ equity:
Common stock, $0.001 par value; 50,000,000 shares authorized; 9,549,544 and 7,048,235 shares
issued and outstanding at December 31, 2015 and 2014, respectively
Additional paid-in capital
Treasury stock
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2015
2014
15,022,286 $
872,874
648,009
296,355
16,839,524
925,899
1,466,811
17,920
19,250,154 $
7,912,011
446,521
251,338
263,605
8,873,475
374,376
1,012,964
17,920
10,278,735
1,338,828 $
1,240,093
2,578,921
441,636
773,119
1,214,755
9,550
50,757,414
(2,657)
(34,093,074)
16,671,233
19,250,154 $
7,048
32,712,020
(2,657)
(23,652,431)
9,063,980
10,278,735
$
$
$
$
The accompanying notes are an integral part of these financial statements.
25
IDEAL POWER INC.
Statements of Operations
Revenues:
Products
Grants
Total revenue
Cost of revenues:
Products
Grant research and development costs
Total cost of revenue
Gross profit (loss)
Operating expenses:
Research and development
General and administrative
Sales and marketing
Total operating expenses
Loss from operations
Interest income
Net loss
Net loss per share – basic and fully diluted
Weighted average number of shares outstanding – basic and fully diluted
For the Year Ended
December 31,
2015
2014
$
4,259,909 $
—
4,259,909
1,215,015
579,079
1,794,094
3,872,672
—
3,872,672
387,237
5,521,390
3,693,450
1,644,512
10,859,352
(10,472,115)
31,472
(10,440,643) $
(1.23) $
8,495,735
1,545,671
643,421
2,189,092
(394,998)
2,340,227
2,993,131
1,199,578
6,532,936
(6,927,934)
27,715
(6,900,219)
(0.98)
7,016,872
$
$
The accompanying notes are an integral part of these financial statements.
26
IDEAL POWER INC.
Statement of Stockholders’ Equity
For the Years Ended December 31, 2015 and 2014
Common Stock
Common Stock
Issuable
Additional Paid-In
Capital
Treasury
Stock
Accumulated
Deficit
Total Stockholders’
Equity (Deficit)
Balances at December 31, 2013
Common stock issued for services
Warrants issued for consulting services
Exercise of options and warrants
Stock-based compensation
Net loss for the year ended December 31,
2014
Balances at December 31, 2014
Shares issued in offering, net of issuance
costs
Warrants issued for consulting services
Exercise of options and warrants
Issuance of restricted stock
Stock-based compensation
Net loss for the year ended December 31,
2015
Balances at December 31, 2015
Shares
6,931,968 $
38,903
—
77,364
—
Amount Shares Amount
6,932 32,525 $ 151,665 $
39 (32,525) (151,665)
—
—
—
—
—
77
—
—
—
31,431,220 $ (2,657) $ (16,752,212) $
—
—
—
—
201,630
130,179
4,889
944,102
—
—
—
—
—
7,048,235 $
—
7,048
2,225,825
—
265,484
10,000
—
2,226
—
266
10
—
—
9,549,544 $
—
9,550
—
— $
—
—
—
—
—
—
— $
—
— $
—
—
—
—
—
—
— $
—
(6,900,219)
32,712,020 $ (2,657) $ (23,652,431) $
—
15,922,179
84,900
653,562
(10)
1,384,763
—
—
—
—
—
—
—
—
—
—
—
(10,440,643)
50,757,414 $ (2,657) $ (34,093,074) $
—
14,834,948
50,004
130,179
4,966
944,102
(6,900,219)
9,063,980
15,924,405
84,900
653,828
—
1,384,763
(10,440,643)
16,671,233
The accompanying notes are an integral part of these financial statements.
27
IDEAL POWER INC.
Statements of Cash Flows
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Allowance for doubtful accounts
Write-down of inventory
Depreciation and amortization
Write-off of fixed assets
Write-off of capitalized patents
Stock-based compensation
Fair value of warrants issued for services
Common stock issued for services
Decrease (increase) in operating assets:
Accounts receivable
Inventories
Prepaid expenses and other assets
Increase (decrease) in operating liabilities:
Accounts payable
Accrued expenses
Net cash used in operating activities
Cash flows from investing activities:
Purchase of property and equipment
Acquisition of intangible assets
Net cash used in investing activities
Cash flows from financing activities:
Net proceeds from issuance of common stock
Exercise of options and warrants
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
For the Year Ended
December 31,
2015
2014
$
(10,440,643) $
(6,900,219)
97,344
—
232,852
53,855
145,691
1,384,763
84,900
—
(523,697)
(412,698)
(32,750)
897,192
466,974
(8,046,217)
(791,605)
(630,136)
(1,421,741)
15,924,405
653,828
16,578,233
7,110,275
7,912,011
15,022,286 $
24,775
62,851
67,793
—
—
944,102
130,179
50,004
(218,890)
205,468
(50,030)
(97,509)
311,926
(5,469,550)
(342,247)
(418,255)
(760,502)
—
4,966
4,966
(6,225,086)
14,137,097
7,912,011
$
The accompanying notes are an integral part of these financial statements.
28
Ideal Power Inc.
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 develops power conversion solutions with an initial focus on stand-alone commercial and industrial grid storage,
combined solar and storage, and microgrid applications. The principal products of the Company are 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 primarily through the sale of common stock and, prior to its initial public offering, the issuance of
convertible debt.
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.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Accounts Receivable
Trade accounts receivable are stated net of an allowance for doubtful accounts. The Company performs ongoing credit evaluations of
its customers’ financial condition. In limited instances, the Company may require an upfront deposit and, in most cases, the Company does
charge interest on past due amounts. Management estimates the allowance for doubtful accounts based on review and analysis of specific
customer balances that may not be collectible, customer payment history and any other customer-specific information that may impact the
evaluation of the specific customer’s credit. Accounts are considered for write-off when they become past due and when it is determined
that the probability of collection is remote. The allowance for doubtful accounts was $15,145 and $24,775 at December 31, 2015 and 2014,
respectively.
Inventories
Inventories are stated at the lower of cost (first in, first out method) or market value. Inventory quantities on hand are reviewed
regularly and a write-down for excess and obsolete inventory is recorded based primarily on an estimated forecast of product demand,
market conditions and anticipated production requirements in the near future. There was a $4,274 and $40,703 reserve for excess and
obsolete inventory at December 31, 2015 and 2014, respectively, related to component parts not anticipated to have a future use.
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
Machinery and equipment
Furniture, fixtures and computers
Intangible Assets
Shorter of lease term or useful life
5 years
3 – 5 years
The Company’s intangible assets are primarily composed of patents, which are recorded at cost. The Company capitalizes third party
legal costs and filing fees, if any, associated with obtaining patents or other intangible assets. Once the intangible 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.
Impairment of Long-Lived Assets
The long-lived 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. Management has determined
that there was an impairment in the value of long-lived assets in the amount of $199,546 during the year ended December 31, 2015. There
were no impairments in the value of long-lived assets in the year ended December 31, 2014.
29
Fair Value of Financial Instruments
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 Company’s financial instruments primarily consist of cash and cash equivalents, accounts receivable and accounts payable. 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 maturities of these instruments. The Company did not identify
any other non-recurring assets and liabilities that are required to be presented in the balance sheets at fair value.
Revenue Recognition
Revenue from product sales is recognized when the risks of loss and title pass to the customer, as specified in (1) the respective sales
agreements and (2) other revenue recognition criteria as prescribed by Staff Accounting Bulletin (“SAB”) No. 101 (SAB 101), “Revenue
Recognition in Financial Statements,” as amended by SAB No. 104, “Revenue Recognition”. The Company generally sells its products
FOB shipping and recognizes revenue when products are shipped.
In prior years, the Company received payments from government entities in the form of government grants. Government grants are
agreements that generally provide the Company with cost reimbursement for certain types of research and development activities over a
contractually defined period. Revenues from government grants are recognized in the period during which the Company incurs the related
costs, provided that the Company has incurred the cost in accordance with the specifications and work plans determined between the
Company and the government entity. Costs incurred related to the grants are recorded as grant research and development costs. At
December 31, 2014, the Company had recognized all grant revenues related to the ARPA-E grant and no grant revenue was recognized in
the year ended December 31, 2015. Grant receivables were $132,227 at December 31, 2014 and were included in accounts receivable.
Product Warranties
The Company generally provides a ten year limited warranty on its products. Accruals for product warranties are estimated based upon
limited historical warranty experience, engineering experience and judgment, and third party assessments of the reliability of the
Company’s 30kW products. Accruals for product warranties are recorded in cost of revenues at the time revenue is recognized in order to
match revenues with related expenses. The Company assesses the adequacy of its estimated warranty liability quarterly and adjusts the
reserve, included in accrued expenses, as necessary. Although any such adjustments were not material in the years ended December 31,
2015 and 2014, any such adjustments could be material in the future if estimates differ significantly from actual warranty experience.
Research and Development
Grant research and development are costs incurred solely related to grant revenues, and are classified as a line item under cost of
revenues.
Other research and development costs are presented as a line item under operating expenses and are expensed as incurred. Total
research and development costs incurred during the years ended December 31, 2015 and 2014 amounted to $5,521,390 and $2,983,648,
respectively, of which $643,421 was included in cost of revenues in the year ended December 31, 2014.
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, 2015 and 2014, 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 stock options and warrants using
the treasury stock method. In periods with a net loss, no common share equivalents are included because their effect would be anti-dilutive.
At December 31, 2015 and 2014, potentially dilutive shares outstanding amounted to 2,846,325 and 2,932,155, respectively.
Stock Based Compensation
The Company applies FASB ASC 718, “Stock Compensation,” when recording stock based compensation. The fair value of each stock
option award is estimated on the date of grant using the Black-Scholes option valuation model.
30
The Company uses a Monte Carlo simulation pricing model to determine the fair value of performance stock units (“PSUs”). A typical
Monte Carlo exercise simulates a distribution of stock prices to yield an expected distribution of stock prices during and at the end of the
performance period. The simulations are repeated many times in order to derive a probabilistic assessment of stock performance. The
stock-paths are simulated using assumptions which include expected stock price volatility and risk-free interest rate.
The Company accounts for stock issued to non-employees in accordance with the provisions of FASB ASC 505-50 “Equity Based
Payments to Non-Employees.” FASB ASC 505-50 states that equity instruments that are issued in exchange for the receipt of goods or
services should be measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is
more reliably measurable. The measurement date occurs as of the earlier of (a) the date at which a performance commitment is reached or
(b) absent a performance commitment, the date at which the performance necessary to earn the equity instruments is complete (that is, the
vesting date).
The Company issues common stock upon exercise of equity awards and warrants.
Presentation of Sales Taxes
Certain states impose a sales tax on the Company’s sales to nonexempt customers. The Company collects that sales tax from customers
and remits the entire amount to the states. The Company’s accounting policy is to exclude the tax collected and remitted to the states from
revenues and cost of revenues.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash
equivalents and accounts receivable. The Company maintains its cash with a major financial institution located in the United States.
Balances are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company maintains balances in excess of federally
insured limits. The Company has not experienced losses in such accounts and believes it is not exposed to significant credit risk regarding
its cash and cash equivalents.
The Company encounters a certain amount of risk as a result of a concentration of revenue from a few significant customers. Credit is
extended to customers based on an evaluation of their financial condition. In limited instances, the Company may require an upfront deposit
and, in most cases, the Company does charge interest on past due amounts. The Company performs ongoing credit evaluations of its
customers and records an allowance for potential bad debts based on available information.
The Company had revenue from four customers that accounted for 66% of net revenue for the year ended December 31, 2015, and
from a government entity and three customers that accounted for 76% of net revenue for the year ended December 31, 2014. The Company
had an accounts receivable balance from three customers that accounted for 66% of trade receivables at December 31, 2015, and three
customers that accounted for 92% of trade receivables at December 31, 2014.
Reclassifications
Certain items in prior financial statements have been reclassified to conform to current year presentation. These changes did not impact
total revenue, loss from operations or net loss.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09 (ASU 2014-09),
Revenue from Contracts with Customers. ASU 2014-09 will require that companies recognize revenue based on the value of transferred
goods or services as they occur in the contract. ASU 2014-09 also will require additional disclosure about the nature, amount, timing and
uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and
assets recognized from costs incurred to obtain or fulfill a contract. Based on the FASB’s Exposure Draft Update approved in July 2015,
Revenue from Contracts With Customers (Topic 606): Deferral of the Effective Date, ASU 2014-09 is now effective for reporting periods
beginning after December 15, 2017, with early adoption permitted only as of annual reporting periods beginning after December 15, 2016,
including interim reporting periods within that reporting period. Entities will be able to transition to the standard either retrospectively or as
a cumulative-effect adjustment as of the date of adoption. The adoption of ASU 2014-09 is not expected to have any impact on the
Company’s financial statement presentation or disclosures.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15 (ASU 2014-15), Presentation of Financial Statements –
Going Concern (Subtopic 205-10). ASU 2014-15 provides guidance as to management’s responsibility to evaluate whether there is
substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Substantial doubt about
an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is
probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements
are issued (or available to be issued). ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual
periods and interim periods thereafter. Early application is permitted. The adoption of ASU 2014-15 is not expected to have any impact on
the Company’s financial statement presentation or disclosures.
In November 2015, the FASB issued Accounting Standards Update No. 2015-17 (ASU 2015-17), Income Taxes (Topic 740): Balance
Sheet Classification of Deferred Taxes. ASU 2015-17 require that deferred tax liabilities and assets be classified as noncurrent in a
classified statement of financial position. ASU 2015-17 is effective for financial statements issued for annual periods beginning after
December 15, 2016, and interim periods within those annual periods. Earlier application is permitted as of the beginning of an interim or
annual reporting period. The adoption of ASU 2015-17 is not expected to have an impact the Company’s financial statement presentation
or disclosures.
31
Management does not believe that any other recently issued, but not yet effective, accounting standards, if adopted, will have a material
effect on the financial statements.
Note 3 — Accounts Receivable
Accounts receivable, net consisted of the following:
Trade receivables
Grant receivables
Other receivables
Allowance for doubtful accounts
Note 4 — Inventories
Inventories, net consisted of the following:
Raw materials
Finished goods
Reserve for obsolescence
Note 5 — Prepayments and Other Current Assets
Prepayments and other current assets consisted of the following:
Prepaid insurance
Prepaid software
Other
Note 6 — Property and Equipment
Property and equipment, net consisted of the following:
Machinery and equipment
Building leasehold improvements
Furniture, fixtures, software and computers
Accumulated depreciation and amortization
Note 7 — Intangible Assets
Intangible assets, net consisted of the following:
Patents
Other intangible assets
Accumulated amortization
December 31,
2015
2014
803,599 $
—
84,420
888,019
(15,145)
872,874 $
231,412
132,227
107,657
471,296
(24,775)
446,521
December 31,
2015
2014
124,498 $
527,785
652,283
(4,274)
648,009 $
143,289
148,752
292,041
(40,703)
251,338
December 31,
2015
2014
168,481 $
59,874
68,000
296,355 $
158,400
4,557
100,648
263,605
December 31,
2015
2014
676,881 $
362,300
195,497
1,234,678
(308,779)
925,899 $
263,142
48,280
183,237
494,659
(120,283)
374,376
December 31,
2015
2014
1,313,269 $
211,394
1,524,663
(57,852)
1,466,811 $
1,040,219
—
1,040,219
(27,255)
1,012,964
$
$
$
$
$
$
$
$
$
$
32
Amortization expense amounted to $30,597 and $14,204 for the years ended December 31, 2015 and 2014, respectively. Amortization
expense for the succeeding five years and thereafter is $47,277 (2016); $47,277 (2017); $47,277 (2018); $47,277 (2019); $47,277 (2020);
and $618,520 (thereafter).
At December 31, 2015 and 2014, the Company had capitalized approximately $612,000 and $746,000, respectively, for costs related to
patents that have not been awarded.
On July 24, 2015 and December 21, 2015, the Company entered into licensing agreements which expire on February 7, 2033. The
agreements provide the Company an exclusive royalty-free license associated with semiconductor power switches which enhances its
intellectual property portfolio. The Company recorded legal and acquisition costs of $211,394 associated with the licensing agreements as
intangible assets and will amortize the cost over the 17-year term of the agreements.
Note 8 — Accrued Expenses
Accrued expenses consisted of the following:
Accrued compensation
Warranty reserve
Other
The changes in warranty reserve were as follows:
Balance, beginning of the year
Provisions for warranty and beta replacements
Warranty payments or beta replacements
Balance, end of the year
Note 9 — Common Stock
December 31,
2015
2014
616,029 $
358,296
265,768
1,240,093 $
548,953
143,364
80,802
773,119
2015
2014
143,364 $
235,377
(20,445)
358,296 $
113,078
76,671
(46,385)
143,364
$
$
$
$
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.
During the year ended December 31, 2015, the Company completed an underwritten follow-on offering of 2,225,825 shares, inclusive
of the underwriter’s overallotment of 290,325 shares, of its common stock. Gross proceeds were $17,250,144 before underwriting
discounts and offering expenses. Net cash proceeds were $15,924,405 after offering fees and expenses of $1,325,739, including the
underwriting discount of $1,035,008 and other costs of $290,731. In addition, common stock activity included the exercise of options and
warrants for an aggregate 265,484 shares of the Company’s common stock for net proceeds of $653,828. The Company also granted
10,000 restricted shares of common stock to an employee as a performance award.
During the year ended December 31, 2014, common stock activity consisted of the exercise of options and warrants for an aggregate
77,364 shares of the Company’s common stock for proceeds of $4,966 and the issuance of an aggregate 38,903 shares of the Company’s
common stock with a fair value of $201,669 for services, of which 32,525 shares of the Company’s common stock with a fair value of
$151,665 were issuable at December 31, 2013.
On December 1, 2014, the Company filed a Form S-3 shelf registration statement with the Securities and Exchange Commission. The
registration statement allows the Company to offer up to an aggregate $75 million of common stock, preferred stock, warrants to purchase
common stock or preferred stock or any combination thereof. After the May 2015 follow-on offering, $58 million is available to the
Company under the registration statement.
Note 10 — Stock Option 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 not to exceed a maximum of 839,983 shares. The Plan is administered by the Compensation Committee of the Company’s
Board of Directors. The persons eligible to participate in the Plan are employees (including officers), members of the Board of Directors,
consultants and other independent advisors and contractors who provide services to the Company. Options issued under the Plan may have
a term of up to ten years and may have variable vesting. The typical vesting schedule for stock options awarded under the Plan is a four
year annual vesting schedule for employees and a one year quarterly vesting schedule for Board members.
On May 26, 2015, the stockholders approved an amendment to the Plan which increased shares available for issuance under the Plan by
1,250,000 shares. Also, on August 27, 2015, the Compensation Committee approved a restatement of the Plan in order to clarify the types
of awards allowable under the plan to include restricted stock and PSUs. At December 31, 2015, there were 831,615 shares of common
stock available for issuance under the Plan.
33
During the year ended December 31, 2015, the Company granted 182,600 and 38,502 stock options to purchase shares of common
stock to employees and non-employee directors, respectively. The exercise price of the stock options issued to both employees and directors
was the closing price of the Company’s stock on the date of grant. The options granted to employees vest in equal annual installments over
4 years while the options granted to directors vested in equal quarterly installments in 2015. The options granted in 2015 were valued at
$974,329 using the Black-Scholes option pricing model. The compensation expense associated with these grants recognized during the
year ended December 31, 2015 amounted to $231,395.
During the year ended December 31, 2015, the Company granted an employee 10,000 shares of restricted stock. The fair value of the
restricted stock was $77,700 based on the closing market price of the Company’s stock on the date of grant, which will be recognized
ratably over the four-year vesting period. Stock compensation expense of $7,284 related to this grant was recognized during the year ended
December 31, 2015. Shares outstanding at December 31, 2015 include the 10,000 shares of unvested restricted stock.
During the year ended December 31, 2015, the Company also granted an employee 96,000 PSUs, which are subject to the satisfaction
of certain market-based and continued service conditions. The market-based vesting criteria are separated into four tranches and require that
the Company achieve certain stock price targets ranging from $9 per share to $15 per share during the four-year period following the grant
date. With certain limited exceptions, continued employment with the Company on the fourth anniversary of the grant date is required in
order for the PSUs to vest. The grant-date fair value of the PSUs was $405,997, or $4.23 per unit, using a Monte Carlo Simulation with a
four-year life, 60% volatility and a risk free interest rate of 1.3%. The fair value of the PSUs is being recognized over the vesting period
and $31,014 was recognized during the year ended December 31, 2015.
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:
Risk-free interest rate
Expected dividend yield
Expected life
Expected volatility
For the year ended December 31,
2015
1.54% to 1.95%
0%
2014
1.78 to 2.19%
0%
5.31 to 6.25 years
5.31 to 6.25 years
60%
60%
A summary of the Company’s stock option activity and related information is as follows:
Stock Options
Outstanding at January 1
Granted
Exercised
Forfeited/Expired/Exchanged
Outstanding at December 31
Exercisable at December 31
1,368,047 $
221,102 $
(201,389) $
(55,437) $
1,332,323 $
572,623 $
2015
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Life
(in years)
Stock Options
2014
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Life
(in years)
6.41
7.80
4.47
6.13
6.94
6.02
8.7
8.4
7.8
485,573 $
899,526 $
(10,500) $
(6,552) $
1,368,047 $
467,204 $
4.24
7.49
0.10
4.53
6.41
4.65
8.2
8.7
7.3
During the year ended December 31, 2015, option holders exercised 90,609 options on a cashless basis and received 49,987 shares of
common stock and 40,622 shares were used to cover the exercise price. In addition, option holders exercised 110,780 options and paid the
exercise price in cash. The Company received $553,871 in net cash proceeds for the exercise of options during 2015.
34
The following table sets forth additional information about stock options outstanding at December 31, 2015:
Range of Exercise Prices
$0.41 – $5.00
$5.01 – $7.50
$7.51 – $11.00
Options
Outstanding
226,645
477,928
627,750
1,332,323
Weighted Average
Remaining Life
(in years)
Weighted Average
Exercise Price
6.8 $
8.5 $
8.8 $
Options
Exercisable
208,395
228,203
136,025
572,623
4.05
7.00
7.95
The estimated aggregate pretax intrinsic value (the difference between the Company’s stock price on the last day of the year ended
December 31, 2015 and the exercises price, multiplied by the number of vested in-the-money options) is approximately $1,136,000. This
amount changes based on the fair value of the Company’s stock.
As of December 31, 2015, there was $3,082,439 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 2.8 years.
Note 11 — Warrants
During the year ended December 31, 2015, warrant holders exercised 127,340 warrants on a cashless basis and received 75,951 shares
of common stock and 51,389 shares were used to cover the exercise price. In addition, warrant holders exercised 28,766 warrants and paid
the exercise price in cash. The Company received $99,957 in net cash proceeds for the exercise of warrants during 2015.
During the year ended December 31, 2014, warrant holders exercised 94,376 warrants on a cashless basis and received 65,552 shares of
common stock and 28,824 shares were used to cover the exercise price. In addition, a warrant holder exercised 1,438 warrants and paid the
exercise price in cash. The Company received $4,972 in net cash proceeds for the exercise of warrants during 2014.
In 2013, the Company issued a warrant for the purchase of 84,000 shares of the Company’s common stock for consulting services, with
an exercise price of $6.25. The warrant shares vest in increments of 4,000 warrant shares at the end of each month beginning with
November 2013 and ending with October 2014 with the remainder vesting in increments of 3,000 warrant shares at the end of each month
beginning with November 2014 and ending with October 2015. The warrant was valued at $237,719 using the Black-Scholes option
pricing model. For the years ended December 31, 2015 and 2014, the Company recorded $84,900 and $130,179, respectively, in expense
related to vested warrant shares.
The shares underlying the warrants have not been registered.
A summary of the Company’s warrant activity and related information is as follows:
2015
Weighted
Average Exercise
Price
2014
Weighted
Average Exercise
Price
Warrants
—
3.72
—
4.48 1,659,922 $
—
(95,814) $
—
4.57 1,564,108 $
4.36
—
2.27
—
4.48
Warrants
1,564,108 $
—
(156,106) $
—
1,408,002 $
Outstanding at January 1
Granted
Exercised
Forfeited/Expired
Outstanding at December 31
No warrants were unvested at December 31, 2015.
Note 12 — Income Taxes
Income taxes are disproportionate to income due to net operating loss carryforwards, which are fully reserved. As of December 31,
2015, the Company has federal net operating loss carryforwards of approximately $23 million which will begin to expire in 2031.
Management has concluded that it is more likely than not that the Company will not have sufficient foreseeable taxable income within the
carryforward period permitted by current law to allow for the utilization of certain of the deductible amounts generating the deferred tax
assets; therefore, a full valuation allowance has been established to reduce the net deferred tax assets to zero at December 31, 2015 and
2014.
35
The following is a summary of the significant components of the Company’s net deferred income tax assets and liabilities as of
December 31, 2015 and 2014:
Current deferred income tax assets:
Inventory – uniform capitalization
Accrued compensation and other
Less: valuation allowance
Non-current deferred income tax assets and (liabilities):
Net operating loss
Research and development credit
Warranty reserve
Warrants issued for services
Depreciation and amortization
Exercise of options and warrants
Stock based compensation
Intangibles
Less: valuation allowance
Net non-current deferred tax assets
Year ended December 31,
2015
2014
$
$
$
$
75,000 $
199,000
(274,000)
— $
13,000
151,000
(164,000)
—
8,029,000 $
18,000
122,000
73,000
(12,000)
(46,000)
511,000
(548,000)
(8,147,000)
— $
4,886,000
18,000
49,000
44,000
(54,000)
—
191,000
(330,000)
(4,804,000)
—
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, 2015 and 2014, 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, 2015 and 2014, 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 state jurisdictions. The
Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before 2011. 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:
Statutory federal income tax rate
Stock based compensation
Other
Valuation allowance
Note 13 — Commitments and Contingencies
Lease
For the year ended December 31,
2015
2014
(34)%
(1)
2
33
—%
(34)%
—
5
29
—%
The Company has entered into a lease for 14,782 square feet of office and laboratory space located in Austin, Texas. The triple net
lease has a term of 48 months and commenced on June 1, 2014. The annual base rent in the first year of the lease was $154,324 and
increases by $3,548 in each succeeding year of the lease. In addition, the Company is required to pay its proportionate share of operating
costs for the building. The Company has a one-time option to terminate the lease on May 31, 2017 with a termination payment of
approximately $99,000 if it elects to exercise this option.
At December 31, 2015, the remaining annual base rent commitments under the lease, assuming no early termination, are as follows:
For the year ended December 31,
Amount
2016
2017
2018
Total
$
$
159,941
163,489
68,736
392,166
Rent expense incurred for the years ended December 31, 2015 and 2014 amounted to $212,397 and $137,559, respectively.
License Agreement
On July 24, 2015 and December 21, 2015, the Company entered into licensing agreements which expire on February 7, 2033. Per the
agreements, the Company has the exclusive royalty-free license which enhances its intellectual property portfolio related to semiconductor
power switches. The agreements include both fixed and variable payments. The Company capitalized the $211,394 of fixed payments as an
intangible asset and will amortize the asset over the life of the licensing agreements. 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 December 31, 2015, no patents associated with the agreements had been issued.
36
Note 14 — Retirement Plan
The Company has a defined contribution retirement plan covering all of its employees. Under the plan, the Company contributions are
discretionary. No discretionary contributions were made by the Company in the years ended December 31, 2015 and 2014.
Note 15 — Subsequent Events
The Company has been notified by legal counsel that a patent was issued on March 2, 2016 under the licensing agreement discussed
within Footnote 7 – Intangible Assets and Footnote 13 – Commitment and Contingencies. As per the agreement, if the counterparty does
not breach the agreement, the Company will be required to make a payment within 20 days of December 21, 2017 and each subsequent
year, through the term of the agreement, in the amount of $20,000.
37
ITEM 9:
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
ITEM 9A: CONTROLS AND PROCEDURES
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to
be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Act”) is
accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive
Officer (“CEO”), our principal executive officer, and our Chief Financial Officer (“CFO”), our principal financial and accounting officer,
of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report.
The evaluation was undertaken in consultation with our accounting personnel. Based on that evaluation, our CEO and our CFO concluded
that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file
or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in
the Securities and Exchange Commission’s rules and forms.
Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision
of, our CEO and CFO and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. Our management, under the supervision and with the participation of our CEO and CFO, conducted an evaluation of
the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations (COSO). Based on such evaluation, management concluded that our internal
control over financial reporting was effective as of December 31, 2015.
This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal
control over financial reporting. Management’s report was not subject to attestation requirements by our independent registered public
accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this
Annual Report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rule 13a-15(d)
or 15d-15(d) of the Act during the period covered by this Annual Report on Form 10-K that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our CEO and CFO, do not expect that our disclosure controls or our internal control over financial
reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not
occur or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The
design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls
effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or
deterioration in the degree of compliance with policies or procedures.
ITEM 9B: OTHER INFORMATION
Not applicable.
38
PART III
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table sets forth the names and ages of all of our directors and executive officers. Our officers are appointed by, and serve
at the pleasure of, the board of directors.
Name
R. Daniel Brdar
Timothy W. Burns, CPA
William C. Alexander
Ryan O’Keefe
Mark L. Baum, J.D.
Lon E. Bell, Ph.D.
David B. Eisenhaure
Age
56
41
60
48
43
75
70
Position
Chief Executive Officer, President and Chairman of the Board
Chief Financial Officer, Secretary and Treasurer
Chief Technology Officer and Director
Senior Vice President, Business Development
Director
Director
Director
The remaining information required by this item is incorporated herein by reference from our Definitive Proxy Statement, involving the
election of directors, to be filed pursuant to Regulation 14A with the SEC not later than 120 days after the end of the fiscal year covered by
this Form 10-K (or Definitive Proxy Statement).
ITEM 11: EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from our Definitive Proxy Statement.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
SHAREHOLDER MATTERS
Securities Authorized for Issuance under Equity Compensation Plans
The table below provides information, as of December 31, 2015, regarding our 2013 Equity Incentive Plan (the “Plan”) under which our
equity securities are authorized for issuance to officers, directors, employees, consultants, independent contractors and advisors.
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
Weighted-average exercise
price of outstanding options,
warrants and rights
(b)
Number of securities remaining
available for future issuance
under equity compensation plans
(excluding securities reflected in
column (a))
(c)
1,428,323(1) $
6.94
831,615(2)
Plan category
Equity compensation plans
approved by security
holders
(1) This amount includes performance stock units (“PSU”) granted to employees.
(2) This amount will not be subject to future increases, absent shareholder approval of an increase in the securities authorized for issuance
under the Plan.
The rest of the information required by this item is incorporated by reference from our Definitive Proxy Statement.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference from our Definitive Proxy Statement.
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference from our Definitive Proxy Statement.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibits
The exhibits filed as part of this Annual Report on Form 10-K are listed in the Exhibit Index immediately preceding the exhibits. We
have identified in the Exhibit Index each management contract and compensation plan filed as an exhibit to this Annual Report on Form 10-
K in response to Item 15(a) (3) of Form 10-K.
39
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Austin, State of Texas, on this 30th day of March, 2016.
SIGNATURES
IDEAL POWER INC.
By:
/s/ R. Daniel Brdar
R. Daniel Brdar,
Chief Executive Officer
By:
/s/ Timothy Burns
Timothy Burns,
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Dated: March 30, 2016
Dated: March 30, 2016
Dated: March 30, 2016
Dated: March 30, 2016
Dated: March 30, 2016
Dated: March 30, 2016
/s/ R. Daniel Brdar
R. Daniel Brdar,
Chief Executive Officer
(principal executive officer) and Chairman
/s/ Timothy Burns
Timothy Burns,
Chief Financial Officer
(principal financial and accounting officer),
Secretary and Treasurer
/s/ William C. Alexander
William C. Alexander,
Chief Technology Officer and director
/s/ Lon E. Bell
Lon E. Bell, Ph.D., director
/s/ Mark Baum
Mark Baum, director
/s/ David B. Eisenhaure
David B. Eisenhaure, director
40
EXHIBIT INDEX
Exhibit No.
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.14.1
10.15
10.16
10.17
10.18
10.19*
Description of Document
Delaware Certificate of Conversion including Certificate of Incorporation (1)
Bylaws of Ideal Power Inc. (1)
Underwriter’s Warrant (1)
Form of Lock-Up Agreement (1)
Form of Warrant issued by the registrant to investors in the offering completed on July 17, 2012 (1)
Form of Warrant issued by the registrant to investors in the offering completed on August 31, 2012 (1)
Form of Replacement Warrant issued by the registrant to investors in the offering completed on August 31, 2012 (1)
Form of Warrant issued by the registrant to investors in the offering completed on November 21, 2012 (1)
Warrant issued to MDB Capital Group, LLC (MDB-1) dated November 21, 2012 (1)
Warrant issued to MDB Capital Group, LLC (MDB-2) dated November 21, 2012 (1)
Form of Warrant issued by the registrant to investors in the offering completed on July 29, 2013 (1)
Ideal Power Inc. 2013 Amended and Restated Equity Incentive Plan (6)
Addendum to Warrant issued to MDB Capital Group, LLC (MDB-1) dated July 10, 2013 (1)
Addendum to Warrant issued to MDB Capital Group, LLC (MDB-2) dated July 10, 2013 (1)
Form of Addendum to Stock Purchase Warrant (Series A) (1)
Form of Addendum to Stock Purchase Warrant (Series B) (1)
Employment Agreement between the registrant and R. Daniel Brdar (2) +
Amendment No. 1 to Employment Agreement between the registrant and R. Daniel Brdar dated September 16, 2014(4) +
Non-Qualified Stock Option Award Agreement issued to R. Daniel Brdar (2) +
Lease Agreement between the Company and Agellan Commercial REIT U.S. L.P. dated March 24, 2014 (3)
Employment Agreement between the Company and William Alexander dated September 16, 2014 (4) +
Employment Agreement between the registrant and Timothy W. Burns dated September 16, 2014 (4) +
Employment Agreement between the registrant and Ryan O’Keefe dated August 11, 2014
41
Exhibit No.
Description of Document
31.1
Certification of Principal Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities and Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2
Certification of Principal Financial and Accounting Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities and
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1
Certification of Principal Executive Officer and Principal Financial and Accounting Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
101.INS
XBRL Instance Document*
101.SCH XBRL Taxonomy Extension Schema*
101.CAL XBRL Taxonomy Extension Calculation Linkbase*
101.DEF XBRL Taxonomy Extension Definition Linkbase*
101.LAB XBRL Taxonomy Extension Label Linkbase*
101.PRE XBRL Taxonomy Extension Presentation Linkbase*
Included herein.
Indicates a contract with management.
*
+
(1) Incorporated by reference to the registrant’s registration statement on Form S-1, file no. 333-190414, originally filed with the Securities
and Exchange Commission on August 6, 2013, as amended.
(2) Incorporated by reference to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on
January 8, 2014.
(3) Incorporated by reference to the registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March
28, 2014.
(4) Incorporated by reference to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on
September 19, 2014.
(5) Incorporated by reference to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on
November 13, 2015.
42
EMPLOYMENT AGREEMENT
Exhibit 10.19
This EMPLOYMENT AGREEMENT (“Agreement”), which is dated August 11, 2014 (the “Effective Date”), is made
by and between Ideal Power Inc., a Delaware corporation, located at 4120 Freidrich Lane, Suite 100, Austin, Texas, 78744 and hereinafter
referred to as “Company”, and Ryan O’Keefe, whose address is 15505 Boulder Heights Austin, TX 78738, hereinafter referred to as
“Executive.” The purpose of this Agreement is to confirm the terms of the employment relationship between Company and Executive.
RECITALS
as its Senior Vice President of Business Development;
WHEREAS, Company wishes to retain the services of Executive, and Executive wishes to render services to Company,
has agreed to undertake on behalf of Company, and the responsibilities that Company will owe to Executive.
WHEREAS, Company and Executive wish to set forth in this Agreement the duties and responsibilities that Executive
Executive (who are sometimes individually referred to as a “Party” and collectively referred to as the “Parties”) agree as follows:
THEREFORE, in consideration of the foregoing and of the mutual promises contained in this Agreement, Company and
1. TERM.
AGREEMENT
Company hereby employs Executive as Senior Vice President of Business Development pursuant to the terms of this
Agreement and Executive hereby accepts employment with Company pursuant to the terms of this Agreement, which will continue until
terminated pursuant to Section 11 or 12 below.
2. GENERAL DUTIES.
Executive shall devote his entire productive time, ability, and attention to Company’s business during Executive’s
employment. Executive shall report to Company’s Chief Executive Officer and agrees to keep the Company’s CEO and Board of Directors
(the “Board”) fully informed with regard to critical issues affecting the value and reputation of Company. Furthermore, in his capacity as
Senior Vice President of Business Development, Executive shall be primarily responsible for creating and executing the Company’s
commercial strategy, revenue generation and all activities related to sales and customer service to drive business growth, market share and
shareholder value. Executive shall do and perform all services, acts, or things necessary or advisable to discharge his duties under this
Agreement, and such other duties as are commonly performed by an employee of his rank in a publicly traded corporation or which may,
from time to time, be prescribed by the Company through the Chief Executive Officer and Board of Directors. Executive agrees to
cooperate with and work to the best of his ability with Company’s management team, which includes the Board and the officers and other
employees, to continually improve Company’s reputation in its industry for quality products and performance.
1
3. NONSOLICITATION AND PROPRIETARY PROPERTY AND CONFIDENTIAL INFORMATION
PROVISIONS.
Agreement, the terms of which are included by reference into this Agreement.
As a condition of his employment with Company, Executive has executed a Proprietary Information and Inventions
4. COMPLIANCE WITH SECURITIES LAWS.
Executive acknowledges that he is subject to the provisions of Sections 10 and 16 of the Securities Exchange Act of 1934
and the rules and regulations promulgated thereunder. Executive acknowledges that Sections 10 and 16 and the rules and regulations
promulgated thereunder may prohibit Executive from selling or transferring his securities in Company. Executive agrees that he will
comply with Company’s policies that relate to securities laws, as stated from time to time.
5. COMPENSATION.
(a) Annual Salary. Company shall pay to Executive an annual base salary in the amount of $225,000. The salary
paid during Executive’s employment shall be referred to in this Agreement as the “Annual Salary”. The Annual Salary shall be subject to
any tax withholdings and/or employee deductions that are applicable. The Annual Salary shall be paid to Executive in equal installments in
accordance with the periodic payroll practices of the Company for its employees. The Annual Salary will be subject to review and
adjustment at the discretion of the Board no less frequently than annually.
(b) Bonus. At least annually, Executive and the Compensation Committee of the Board of Directors shall meet to
establish (i) performance standards and goals to be met by Executive and (ii) cash bonus targets based on the performance standards and
goals that are achieved. The standards and goals will support a cash bonus of 50% of Executive’s Annual Salary. The standards and goals
and the bonus targets shall be mutually agreed to by Executive and the CEO as approved by the Compensation Committee. Nothing in this
subsection (b) shall prevent Executive and the CEO, and approved by the Compensation Committee, from mutually agreeing to alternatives
to the computation of the bonus to be paid to Executive in accordance with this subsection (b) (the “Bonus”), which may be implemented
and paid to Executive in place of the Bonus described herein. The Bonus shall be subject to any applicable tax withholdings and/or
employee deductions.
(c) Cost of Living Adjustment. Commencing as of January 1, 2015, and on each January 1st thereafter, the then
effective Annual Salary shall be increased (but not decreased) by an amount which shall reflect the increase, if any, in the cost of living
during the previous 12 months by adding to the Annual Salary an amount computed by multiplying the Annual Salary by the percentage by
which the level of the Consumer Price Index for the Austin Metropolitan Area, as reported on January 1st of the new year by the Bureau of
Labor Statistics of the United States Department of Labor has increased over its level as of January 1st of the prior year.
2
(d) Participation In Employee Benefit Plans. Executive shall have the same rights, privileges, benefits and
opportunities to participate in any of Company’s employee benefit plans which may now or hereafter be in effect on a general basis for
executive officers or employees. During Executive’s employment, the Company shall provide, at Company’s sole expense, medical, dental
and vision benefits for Executive, his spouse and children. At the discretion of the Board, Company may also provide, at its sole expense (i)
disability insurance which, in the event of Executive’s disability, will replace no less than 60% of the Annual Salary being paid to
Executive at the time the disability occurred and (ii) life insurance in an amount to be agreed upon by the Board and Executive. Irrespective
of the foregoing, Company may change any benefits contractor, or discontinue any benefit without replacement, in its sole discretion, and
any such change or discontinuance will not be a breach of this Agreement. In the event Executive receives payments from the disability
insurer, Company shall have the right to offset such payments against the Annual Salary otherwise payable to Executive during the period
for which such payments are made.
6. EQUITY COMPENSATION.
In accordance with that certain offer letter dated August 5, 2014, Company will issue to Executive an option to purchase
70,000 shares of Company’s common stock. The per share exercise price is equal to the closing price of Company’s common stock on
September 8, 2014. The right to purchase the common stock will vest in equal increments over 4 years, on the anniversary of the grant date,
which is September 8, 2014. The term of the option is 10 years. The terms of the option will be governed by the 2013 Equity Incentive
Plan and the award agreement. During Executive’s employment and subject always to the discretion of the Compensation Committee of the
Board, Executive will be eligible to receive additional awards from the 2013 Equity Incentive Plan (or any other equity incentive plan
adopted by the Board).
7. REIMBURSEMENT OF BUSINESS EXPENSES.
Company shall promptly reimburse Executive for all reasonable business expenses incurred by Executive in connection
with the business of Company. However, each such expenditure shall be reimbursable only if Executive furnishes to Company adequate
records and other documentary evidence required by federal and state statutes and regulations issued by the appropriate taxing authorities
for the substantiation of each such expenditure as an income tax deduction.
8. PAID TIME OFF.
Executive shall be entitled to four weeks of paid time off each year; provided, however, failure to use paid time off by the
end of the year in which it is earned will prevent the accumulation of additional paid time off in excess of four weeks. Said four weeks
leave time includes sick leave time, vacation time and personal days off.
3
9. INDEMNIFICATION OF LOSSES.
So long as 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, Company shall indemnify and hold Executive harmless to the full extent of the law from any and all
claims, losses and expenses sustained by Executive as a result of any action taken by him to discharge his duties under this Agreement, and
Company shall defend Executive, at Company’s expense, in connection with any and all claims by stockholders or third parties.
10. PERSONAL CONDUCT.
Executive agrees promptly and faithfully to comply with all present and future policies, requirements, directions, requests
and rules and regulations of Company in connection with Company’s business. Executive further agrees to conform to all laws and
regulations and not at any time to commit any act or become involved in any situation or occurrence tending to bring Company into public
scandal, ridicule or which will reflect unfavorably on the reputation of Company.
11. TERMINATION FOR CAUSE.
The Board may terminate Executive for cause immediately, without notice, if Company reasonably concludes that
Executive has committed fraud, theft, embezzlement, misappropriation of Company funds or other property, or any felony. The Board may
also terminate Executive for cause for any of the following:
(a) Breach by Executive of any material provision of this Agreement;
(b) Violation by Executive of any statutory or common law duty of loyalty to Company; or
(c) A material violation by Executive of Company’s employment policies; or
(d) Commission of such acts of dishonesty, gross negligence, or willful misconduct as would prevent the effective
performance of Executive’s duties or which result in material harm to Company or its business.
The Board may terminate this Agreement for cause by giving written notice of termination to Executive, provided,
however, if the Board declares Executive to be in default of this Agreement under subsection (a) above because Executive fails to
substantially perform his material duties and responsibilities under this Agreement, the Board shall deliver a written demand for substantial
performance of such duties and responsibilities to Executive. Such demand must identify the manner in which the Board believes that
Executive has not substantially performed his duties, and Executive shall have a period of 30 days to correct the deficient performance.
Upon termination for cause, the obligations of Executive and Company under this Agreement shall immediately cease. Such termination
shall be without prejudice to any other remedy to which Company may be entitled either at law, in equity, or under this Agreement. If
Executive’s employment is terminated pursuant to this Section 11, Company shall pay to Executive (i) Executive’s accrued but unpaid
Annual Salary and the value of unused paid time off through the effective date of the termination; (ii) Executive’s accrued but unpaid
Bonus, if any; and (iii) business expenses incurred prior to the effective date of termination. Executive shall not be entitled to continue to
participate in any employee benefit plans except to the extent provided in such plans for terminated participants, or as may be required by
applicable law.
4
12. TERMINATION WITHOUT CAUSE.
obligations of Executive and Company under this Agreement shall immediately cease.
(a) Death. Executive’s employment shall terminate upon the death of Executive. Upon such termination, the
a period of 90 days, Executive is prevented from discharging his substantial or material duties due to any physical or mental disability.
(b) Disability. The Board reserves the right to terminate Executive’s employment upon 30 days written notice if, for
30 days written notice by Executive to the Board.
(c) Election By Executive. Executive’s employment may be terminated at any time by Executive upon not less than
30 days written notice by the Board to Executive.
(d) Election By Company. Executive’s employment may be terminated at any time by Company upon not less than
(e) Termination Due to a Change in Control. Executive’s employment may be terminated upon a Change in
Control. For purposes of this Agreement, the term “Change in Control” shall mean the sale or disposition by Company to an unrelated third
party of substantially all of its business or assets, or the sale of the capital stock of Company in connection with the sale or transfer of a
Controlling Interest in Company to an unrelated third party, or the merger or consolidation of Company with another corporation as part of
a sale or transfer of a Controlling Interest in Company to an unrelated third party. For purposes of this definition, the term “Controlling
Interest” means the sale or transfer of Company’s securities representing at least 50.1% of the voting power. It will be presumed that a
termination is a termination under this subsection (e) rather than a termination under subsection (d) (Election by Company) if Executive’s
employment is terminated during the period that begins when negotiations for the Change in Control begin and ends on the six month
anniversary of the closing of the Change in Control transaction and such termination is not a termination for cause pursuant to Section 11 or
a termination resulting from Executive’s death, disability or election pursuant to subsections (a), (b) or (c) of this Section 12.
If Executive’s employment is terminated pursuant to subsections (a), (b), or (c) of this Section 12, Company shall pay to
Executive (i) Executive’s accrued but unpaid Annual Salary and the value of unused paid time off through the effective date of the
termination; (ii) Executive’s accrued but unpaid Bonus, if any; and (iii) business expenses incurred prior to the effective date of
termination. Executive shall not be entitled to continue to participate in any employee benefit plans except to the extent provided in such
plans for terminated participants, or as may be required by applicable law.
If Executive’s employment is terminated pursuant to subsection (d) of this Section 12, Company shall pay to Executive (i)
Executive’s accrued but unpaid Annual Salary and the value of unused paid time off through the effective date of the termination; (ii)
Executive’s accrued but unpaid Bonus, if any; (iii) business expenses incurred prior to the effective date of termination; and (iv) severance
(the “Severance Payment”) consisting of six months of the Annual Salary, less legally required deductions. Company may elect in its sole
discretion whether to pay the Severance Payment in one lump sum or on regular pay days for the six months following termination of
Executive’s employment. For a termination under subsection (d), Executive shall be entitled to continue to participate in employee benefit
plans described in Section 5(d), at Company’s sole expense, for six months following termination of Executive’s employment.
5
If Executive’s employment is terminated pursuant to subsection (e) of this Section 12, Executive shall be entitled to
receive (i) Executive’s accrued but unpaid Annual Salary and the value of unused paid time off through the effective date of the
termination; (ii) Executive’s accrued but unpaid Bonus, if any; (iii) business expenses incurred prior to the effective date of termination;
and (iv) an amount equal to one-half the Annual Salary. In addition, any equity award that is scheduled to vest any time after the termination
of Executive’s employment will vest immediately upon the termination of Executive’s employment pursuant to subsection (e).
In the event of a termination of Executive’s employment pursuant to subsections (a), (b), (c) and (d) above, all other rights
Executive has under any benefit or stock option plans and programs shall be determined in accordance with the terms and conditions of
such plans and programs.
With the exception of the terms of this Section 12 and any obligations, duties and responsibilities Executive has under the
Proprietary Information and Inventions Agreement, upon termination of Executive’s employment the obligations of Executive and
Company under this Agreement shall immediately cease.
13. MISCELLANEOUS.
(a) Preparation of Agreement. It is acknowledged by each Party that such Party either had separate and
independent advice of counsel or the opportunity to avail itself or himself of same. In light of these facts it is acknowledged that no Party
shall be construed to be solely responsible for the drafting hereof, and therefore any ambiguity shall not be construed against any Party as
the alleged draftsman of this Agreement.
(b) Cooperation. Each Party agrees, without further consideration, to cooperate and diligently perform any further
acts, deeds and things and to execute and deliver any documents that may from time to time be reasonably necessary or otherwise
reasonably required to consummate, evidence, confirm and/or carry out the intent and provisions of this Agreement, all without undue
delay or expense.
(c) Interpretation.
(i) Entire Agreement/No Collateral Representations. Each Party expressly acknowledges and agrees that
this Agreement, including all exhibits attached hereto: (1) is the final, complete and exclusive statement of the agreement of the Parties with
respect to the subject matter hereof; (2) supersedes any prior or contemporaneous agreements, promises, assurances, guarantees,
representations, understandings, conduct, proposals, conditions, commitments, acts, course of dealing, warranties, interpretations or terms
of any kind, oral or written (collectively and severally, the “Prior Agreements”), and that any such prior agreements are of no force or effect
except as expressly set forth herein; and (3) may not be varied, supplemented or contradicted by evidence of Prior Agreements, or by
evidence of subsequent oral agreements. Any agreement hereafter made shall be ineffective to modify, supplement or discharge the terms
of this Agreement, in whole or in part, unless such agreement is in writing and signed by the Party against whom enforcement of the
modification or supplement is sought.
6
(ii) Waiver. No breach of any agreement or provision herein contained, or of any obligation under this
Agreement, may be waived, nor shall any extension of time for performance of any obligations or acts be deemed an extension of time for
performance of any other obligations or acts contained herein, except by written instrument signed by the Party to be charged or as
otherwise expressly authorized herein. No waiver of any breach of any agreement or provision herein contained shall be deemed a waiver
of any preceding or succeeding breach thereof, or a waiver or relinquishment of any other agreement or provision or right or power herein
contained.
exclude any other remedies to which such Party may be lawfully entitled.
(iii) Remedies Cumulative. The remedies of each Party under this Agreement are cumulative and shall not
(iv) Severability. If any term or provision of this Agreement or the application thereof to any person or
circumstance shall, to any extent, be determined to be invalid, illegal or unenforceable under present or future laws effective during the term
of this Agreement, then and, in that event: (A) the performance of the offending term or provision (but only to the extent its application is
invalid, illegal or unenforceable) shall be excused as if it had never been incorporated into this Agreement, and, in lieu of such excused
provision, there shall be added a provision as similar in terms and amount to such excused provision as may be possible and be legal, valid
and enforceable, and (B) the remaining part of this Agreement (including the application of the offending term or provision to persons or
circumstances other than those as to which it is held invalid, illegal or unenforceable) shall not be affected thereby and shall continue in full
force and effect to the fullest extent provided by law.
specifically disavow any desire or intention to create any third party beneficiary obligations, and specifically declare that no person or
entity, other than as set forth in this Agreement, shall have any rights hereunder or any right of enforcement hereof.
(v) No Third Party Beneficiary. Notwithstanding anything else herein to the contrary, the parties
(vi) Headings; References; Incorporation; Gender. The headings used in this Agreement are for convenience
and reference purposes only, and shall not be used in construing or interpreting the scope or intent of this Agreement or any provision
hereof. References to this Agreement shall include all amendments or renewals thereof. Any exhibit referenced in this Agreement shall be
construed to be incorporated in this Agreement. As used in this Agreement, each gender shall be deemed to include the other gender,
including neutral genders or genders appropriate for entities, if applicable, and the singular shall be deemed to include the plural, and vice
versa, as the context requires.
7
(d) Enforcement.
(i) Applicable Law. This Agreement and the rights and remedies of each Party arising out of or relating to
this Agreement (including, without limitation, equitable remedies) shall be solely governed by, interpreted under, and construed and
enforced in accordance with the laws (without regard to the conflicts of law principles thereof) of the State of Texas, as if this agreement
were made, and as if its obligations are to be performed, wholly within the State of Texas.
shall be filed in and heard and litigated solely before the state courts of Texas within Travis County.
(ii) Consent to Jurisdiction and Venue. Any action or proceeding arising out of or relating to this Agreement
substantially prevailing or successful Party shall be entitled to an award of the reasonable and necessary expenses of litigation, including
reasonable attorneys’ fees.
(iii) Attorneys’ Fees. If court proceedings are required to enforce any provision of this Agreement, the
(e) No Assignment of Rights or Delegation of Duties by Executive. Executive’s rights and benefits under this
Agreement are personal to him and therefore (i) no such right or benefit shall be subject to voluntary or involuntary alienation, assignment
or transfer; and (ii) Executive may not delegate his duties or obligations hereunder.
(f) Notices. Unless otherwise specifically provided in this Agreement, all notices, demands, requests, consents,
approvals or other communications (collectively and severally called “Notices”) required or permitted to be given hereunder, or which are
given with respect to this Agreement, shall be in writing, and shall be given by: (A) personal delivery (which form of Notice shall be
deemed to have been given upon delivery), (B) by private overnight delivery service (which forms of Notice shall be deemed to have been
given upon confirmed delivery by the delivery agency), or (C) by mailing in the United States mail by registered or certified mail, return
receipt requested, postage prepaid (which forms of Notice shall be deemed to have been given upon the 5th business day following the date
mailed). Notices shall be addressed to the address hereinabove set forth in the introductory paragraph of this Agreement, or to such other
address as the receiving Party shall have specified most recently by like Notice, with a copy to the other Parties hereto. Any Notice given to
the estate of a Party shall be sufficient if addressed to the party as provided in this subsection.
(g) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original,
and all of which together shall constitute one and the same instrument, binding on all parties hereto. Any signature page of this Agreement
may be detached from any counterpart of this Agreement and reattached to any other counterpart of this Agreement identical in form hereto
by having attached to it one or more additional signature pages.
(h) Execution by All Parties Required to be Binding: Electronically Transmitted Documents. This Agreement
shall not be construed to be an offer and shall have no force and effect until this Agreement is fully executed by all Parties hereto. If a copy
or counterpart of this Agreement is originally executed and such copy or counterpart is thereafter transmitted electronically by facsimile or
similar device, such facsimile document shall for all purposes be treated as if manually signed by the Party whose facsimile signature
appears.
8
IN WITNESS WHEREOF, the parties have executed this Agreement.
Company:
IDEAL POWER INC.
By:
/s/ R. Daniel Brdar
Its:
CEO and Chairman
Executive:
/s/ Ryan K. O’Keefe
Ryan K. O’Keefe
9
Exhibit 31.1
I, R. Daniel Brdar, certify that:
1.
I have reviewed this annual report on Form 10-K of Ideal Power Inc.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15-d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 30, 2016
/s/ R. Daniel Brdar
R. Daniel Brdar
Chief Executive Officer (Principal Executive Officer)
Exhibit 31.2
I, Timothy Burns, certify that:
1.
I have reviewed this annual report on Form 10-K of Ideal Power Inc.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15-d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 30, 2016
/s/ Timothy Burns
Timothy Burns
Chief Financial Officer
(Principal Financial and Accounting Officer)
CERTIFICATION
Exhibit 32.1
In connection with the periodic report of Ideal Power Inc. (the “Company”) on Form 10-K for the year ending December 31, 2015 as
filed with the Securities and Exchange Commission (the “Report”), we, R. Daniel Brdar, Chief Executive Officer (Principal Executive
Officer) and Timothy Burns, Chief Financial Officer (Principal Financial and Accounting Officer) of the Company, hereby certify as of the
date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of our knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of
1934, and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company at the dates and for the periods indicated.
Date: March 30, 2016
/s/ R. Daniel Brdar
R. Daniel Brdar
Chief Executive Officer
(Principal Executive Officer)
/s/ Timothy Burns
Timothy Burns
Chief Financial Officer
(Principal Financial and Accounting Officer)