The following is a reconciliation of the major classes of line items constituting loss fromon discontinued operations to loss fromon discontinued operations shown in the Statement of Operations:

Note 4 – Intangible Assets

Intangible assets, net consisted of the following:

Amortization expense amounted to $23,110 and $68,456 for the three and nine months ended September 30, 2020, respectively, and $21,554 and $57,563 for the three and nine months ended September 30, 2019, respectively, and $16,323 and $48,534 for the three and nine months ended September 30, 2018, respectively. Amortization expense for the succeeding five years and thereafter is $21,771 (2019)$23,179 (2020), $87,084 (2020-2023)$92,714 (2021-2024) and $936,428$934,447 (thereafter).

At September 30, 20192020 and December 31, 2018,2019, the Company had capitalized $339,020$255,041 and $354,427,$335,224, respectively, for costs related to patents that have not been awarded.

Note 5 – Lease

The Company leases 14,782 square feet of office and laboratory space located in Austin, Texas. OnIn April 20, 2018, the Company entered into an amendment to its existing operating lease which extended the lease term from May 31, 2018 to May 31, 2021. The annual base rent in the first year of the lease extension was $184,775 and increases by $7,391 in each succeeding year of the lease extension. In addition, the Company is required to pay its proportionate share of operating costs for the building under this triple net lease. The lease does not contain renewal or termination options.

On January 1, 2019, the Company adopted ASC 842 utilizing a modified retrospective approach with a date of initial application at the beginning of the period of adoption. At adoption, the Company recognized a right of use asset of $422,819 and lease liability of $427,131. As the discount rate implicit in the lease was not readily determinable and the Company did not have any outstanding indebtedness, the Company utilized market data, giving consideration to remaining term of the lease, to estimate its incremental borrowing rate at 8% per annum for purposes of calculating the right of use asset and lease liability.

Future undiscounted minimum payments under the lease, as amended, are as follows:

For the three and nine months endedIn September 30, 2019, operating cash flows for lease payments totaled $48,042 and $141,045 and the operating lease cost, recognized on a straight-line basis, totaled $48,488 and $145,463. At September 30, 2019, the remaining lease term was 20 months.

On September 19, 2019, the Company entered into a sublease with CE+T Energy pursuant to which the Company subleases approximately seventy-five (75%) percent of its Austin, Texas facility to CE+T Energy. Under the sublease, CE+T Energy is obligated to make monthly payments equal to 75% of all sums due under the master lease and 100% of any maintenance and repair costs related to the subleased premises. The sublease replaced a temporary agreement between the Company and CE+T Energy, effective July 22, 2019, that contained similar payment obligations by CE+T Energy for utilization of the subleased premises. Consistent with the master lease, the sublease terminates on May 31, 2021. During the three and nine months ended September 19, 2019,30, 2020, CE+T Energy made payments of $38,949$51,459 and $154,383, respectively, to the Company related to the subleased premises. The payments included CE+T Energy’s prorated share of rent as well as its prorated and proportionate share of operating costs for the building under the master lease. The Company recognized these payments as a reduction in general and administrative expenses.

Future minimum payments under the lease, as amended, are as follows:

For the three and nine months ended September 30, 2020, operating cash flows for lease payments totaled $49,889 and $146,588, respectively. For the three and nine months ended September 30, 2019, operating cash flows for lease payments totaled $48,042 and $141,045, respectively. For both the three and nine months ended September 30, 2020 and 2019, operating lease cost, recognized on a straight-line basis, totaled $48,488 and $145,463, respectively. At September 30, 2020, the remaining lease term was 8 months.

Note 6 – Commitments and Contingencies

License Agreement

In 2015, the Company entered into licensing agreements which expire onin February 7, 2033. Per the agreements, the Company has an exclusive royalty-free license associated with semiconductor power switches which enhances its intellectual property portfolio. The agreements include both fixed payments, all of which were paid prior to 2017, and ongoing variable payments. The variable payments are a function of the number of associated patent filings pending and patents issued under the agreements. The Company will pay $10,000 for each patent filing pending and $20,000 for each patent issued within 20 days of December 21^st of each year of the agreements, up to a maximum of $100,000 eachper year (i.e. five issued patents).

In April 2019, a patent associated with these agreements was issued and the Company recorded, as a non-cash activity, an intangible asset and a corresponding other long-term liability of $232,367, representing the estimated present value of future payments under the licensing agreements for this issued patent. Through September 30, 2019, a total of2020, three patents associated with the agreements were issued. TheAt September 30, 2020 and December 31, 2019, the other long-term liability for the estimated present value of future payments under the licensing agreements is shown on the Balance Sheet as other long-term liabilities while the capitalized licensing agreement assets are shown on the Balance Sheet as intangible assets.was $607,974 and $595,802, respectively. The Company is accruing interest for future payments related to the issued patents associated with these agreements.

Indemnification ObligationsLegal Proceedings

The Company may be subject to litigation from time to time in the ordinary course of business. The Company is not currently party to any legal proceedings that it believes would reasonably have a material adverse impact on its business, financial results and cash flows.

COVID-19 Pandemic

In connection withMarch 2020, the saleWorld Health Organization declared the outbreak of its power conversion systems division,COVID-19 as a pandemic, which continues to spread throughout the United States and the rest of the world. The ultimate extent of the impact of COVID-19 on the financial performance of the Company entered intowill depend on future developments, including, among other things, the duration and spread of COVID-19, governmental restrictions in response to the COVID-19 pandemic, and the overall economy, all of which are highly uncertain and cannot be predicted. The outbreak of COVID-19 has already caused significant disruptions to the global financial markets which may impact the Company’s ability to raise additional capital, on acceptable terms or at all. If the financial markets and/or the overall economy are impacted for an Asset Purchase Agreement with CE+T Energy that contains mutual indemnification obligations for breaches of representations, warrantiesextended period, the Company's operating results may be materially and covenants and for certain other matters, including indemnification by the Company for assets and liabilities excluded from the sale and by CE+T Energy for liabilities assumed in the sale.adversely affected.

Note 7 – Common and Preferred Stock

OnPrivate Placement

In November 2019, the Company entered into a securities purchase agreement with certain institutional and accredited investors, including Dr. Lon E. Bell, former Chairman of the Board and Chief Executive Officer, for a private placement of the Company’s common stock and warrants to purchase common stock for aggregate gross proceeds of $3.5 million and net proceeds of $3.1 million (the “2019 Offering”). The 2019 Offering closed on November 13, 2019. In the 2019 Offering, the Company issued an aggregate of (i) 544,950 shares of common stock at $2.4763 per share and (ii) pre-funded Series B warrants to purchase 868,443 shares of common stock that are immediately exercisable and have no expiration date, at a price of $2.4763 less a nominal exercise price of $0.001 per pre-funded warrant. The Company also issued to the investors Series A warrants to purchase up to an aggregate of 1,766,751 shares of common stock at an exercise price of $2.32 per share that are immediately exercisable and will expire five years from the issuance date. As compensation to the placement agent in the 2019 Offering, in addition to a cash fee for its services, the Company also issued to the placement agent a warrant to purchase up to 70,670 shares of common stock, with an exercise price of $2.9716 per share. The other terms of the placement agent warrant are substantially the same as the investor warrants.

Preferred Stock

The Company is authorized to issue 10,000,000 shares of preferred stock.

In February 21, 2019, a shareholder converted 708,430 shares of preferred stock to 70,843 shares of common stock. On December 12, 2019, a shareholder converted 810,000 shares of preferred stock to 81,000 shares of common stock. At September 30, 2020 and December 31, 2019, there was no preferred stock outstanding.

On March 7, 2019 and following an initial notice of non-compliance from Nasdaq on September 7, 2018,Stock Issuance

In April 2020, the Company received a notice letter from Nasdaq indicating that it had not regained compliance with the minimum bid price requirement of $1 per share, as set forth in Nasdaq Listing Rule 5550(a)(2). However, Nasdaq determined that the Company was eligible for an additional 180-day period, or until September 3, 2019, to regain compliance based on the fact that it met the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, with the exception of the minimum bid price requirement, and it had provided written notice to Nasdaq of its intent to cure the deficiency during this second compliance period, by effecting a reverse stock split, if necessary.

On August 15, 2019, after receipt of stockholder and Board approval, the Company filed a Certificate of Amendment to the Certificate of Incorporation of Ideal Power Inc. to effect a one-for-ten (1:10) reverse stock split of all issued and outstanding26,316 unregistered shares of the Company’s common stock. The Company’s common stock, began trading onvalued at $50,000 at the Nasdaq Capital Market ontime of issuance, to a split-adjusted basis when the market opened on August 20, 2019. The par value of the Company’s common stock remained unchanged at $0.001 per share after the reverse stock split.

The reverse stock split reduced the number of shares of the Company’s common stock outstanding from 14,722,840 to 1,474,001, inclusive of full shares receivedthird-party vendor as compensation for fractional interests. The number of shares of the Company’s common stock issuable upon conversion of the outstanding shares of the Company’s preferred stock was reduced from 810,000 shares to 81,000 shares. The number of authorized shares of the Company’s common stock was not changed by the reverse stock split.services performed.

The reverse stock split proportionately affected the number of shares of the Company’s common stock available for issuance under the Company’s equity incentive plans. The number of shares of the Company’s common stock subject to all options, warrants and stock awards of the Company outstanding immediately prior to the reverse stock split were proportionately adjusted in accordance with their terms.

On September 4, 2019, the Company received a notice letter from Nasdaq that the Company had regained compliance with the minimum bid price requirement and the matter was closed.

On August 21, 2019, the Company was notified by the Nasdaq Listing Qualifications Department that the Company was not in compliance with the minimum stockholders’ equity requirement under Nasdaq Listing Rule 5550(b)(1) for continued listing on the Nasdaq Capital Market because the Company’s stockholders’ equity was below the required minimum of $2.5 million, and, as of the date of the notification, the Company did not meet the alternatives of market value of listed securities or net income from continuing operations. In accordance with Nasdaq Listing Rules, the Company had 45 calendar days, or until October 3, 2019, to submit a plan to regain compliance. The Company submitted a plan of compliance on October 3, 2019 addressing how it intends to regain compliance with Nasdaq Listing Rule 5550(b). On October 31, 2019, Nasdaq notified the Company of approval of the compliance plan, and Nasdaq granted the Company an extension through November 30, 2019 to take action to evidence compliance with Nasdaq Listing Rule 5550(b), which will require, among other things, that the Company demonstrate compliance within its periodic report for the fiscal year ending December 31, 2019. If the Company does not regain compliance, the Company may be subject to delisting.

Note 8 – Equity Incentive Plan

OnIn May 17, 2013, the Company adopted the 2013 Equity Incentive Plan (the(as amended and restated, the “Plan”) and reserved shares of common stock for issuance under the Plan.Plan, which was amended effective June 16, 2020. As a result of the amendment, the number of shares authorized for issuance under the Plan increased by 350,000 shares and the Plan will now terminate on June 16, 2030, unless sooner terminated or extended by the Board. The Plan is administered by the Compensation Committee of the Board.

On April 4, 2019, the Company entered into Award Forfeiture Agreements (“Forfeiture Agreements”) with certainCompany’s Board of the Company’s executives and members of its Board. Pursuant to the Forfeiture Agreements, these individuals voluntarily forfeited their equity award grants with a grant date prior to January 1, 2018. The forfeitures included 49,584 stock options and 11,900 performance stock units issued under the Plan, and 25,000 stock options not issued under the Plan. In April 2019, the Company accelerated the recognition of $80,492 of stock compensation expense in connection with the unvested, forfeited awards.

Directors. At September 30, 2019, 116,6632020, 226,461 shares of common stock were available for issuance under the Plan.

A summary of the Company’s stock option activity and related information is as follows:

During the nine months ended September 30, 2019,2020, the Company granted 23,40052,791 stock options to the independent directorsBoard members, 93,400 stock options to executives and 1,0003,000 stock options to employees under the Plan. The estimated fair value of these stock options, calculated using the Black-Scholes option valuation model, was $353,072, of which $326,421 was determined to be $65,386 and $2,999, respectively.recognized during the nine months ended September 30, 2020.

A summaryIn April 2020, the Board approved a modification of a stock option grant to Dr. Lon E. Bell in connection with his retirement as Chief Executive Officer and President. The modification accelerated the Company’s restrictedvesting of Dr. Bell’s October 2019 stock unit activity is as follows:

The Company had 0 and 11,900 performance stock units outstanding atoption grant with full vesting effective immediately prior to the end of Dr. Bell’s term on the Board in June 2020. During the nine months ended September 30, 2019 and December 31, 2018, respectively.2020, the Company recognized $79,444 of expense related to this grant subsequent to the modification.

At September 30, 2019,2020, there was $19,033$76,097 of unrecognized compensation cost related to non-vested equity awards granted under the Plan. That cost is expected to be recognized over a weighted average period of 0.40.9 years.

Note 9 – Warrants

Early Warrant Exercise Transaction

On July 31, 2020, the Company entered into letter agreements with certain of the Company’s Series A warrant holders (the “Series A Warrant Holders”), who were previously issued warrants (the “Original Warrants”) to purchase shares of common stock of the Company pursuant to a securities purchase agreement with certain institutional and accredited investors dated as of November 7, 2019. The Series A Warrant Holders agreed to the early exercise of Series A warrants pursuant to the letter agreements (the “Early Warrant Exercise Transaction”). The transaction closed on August 5, 2020. The Company had 684,095raised net proceeds of $2.5 million in the Early Warrant Exercise Transaction.

Pursuant to the letter agreements and 713,652in consideration of the Series A Warrant Holders exercising Series A warrants outstanding at September 30, 2019 and December 31, 2018, respectively,to purchase an aggregate of 1,176,137 shares of common stock, the Company issued to the Series A Warrant Holders new Series C warrants to purchase up to an aggregate of 705,688 shares of common stock with a weighted averagean exercise price of $25.37 and $26.19$8.90 per share respectively. Duringand an expiration date of August 4, 2025. The estimated fair value of the threeSeries C warrants was $3.7 million on the date of issuance and was recognized as a non-cash warrant inducement expense within other expenses in the statement of operations.

To the extent that a Series A Warrant Holder’s exercise of Original Warrants would result in such holder exceeding beneficial ownership of 9.99% of the outstanding common stock of the Company, such excess warrant shares will be held in abeyance for the benefit of such Series A Warrant Holder until such time as its right thereto would not result in the holder exceeding this limitation. The term of the abeyance shall extend no later than May 12, 2025. At September 30, 2020, 803,300 excess warrant shares were held in abeyance.

A summary of the Company’s warrant activity and related information is as follows:

Excluding the Early Warrant Exercise Transaction and during the nine months ended September 30, 2019, 19,3552020, warrant holders exercised 175,934 warrants and 29,557300,350 pre-funded warrants expired, respectively. for proceeds to the Company of $424,431.

At September 30, 2019,2020, all warrants are exercisable, although the warrants held by each of the Company’s twofour largest beneficial owners may be exercised only to the extent that the total number of shares of common stock then beneficially owned by these shareholderssuch shareholder does not exceed 9.99% of the outstanding shares of the Company’s common stock. 

Note 10 – Legal ProceedingsLoans

On April 11, 2019, the Company entered into an asset purchase agreement (the “APA”) with Pathion Holdings, Inc., a Delaware corporation, and Pathion, Inc., a Delaware corporation (together “Pathion”) to sell certain assets (the “PPSA Assets”) related to the Company’s PPSA™ / Power Conversion Systems business (“PPSA Business”). The purchase price consisted of $500,000 in cash and 150,000 shares of the common stock of Pathion Holdings, Inc. Pursuant to the APA, Pathion would also assume certain liabilities relating to the PPSA Business.

On June 13, 2019, the Company filed a petition in the district court of the 250^th Judicial District in Travis County (the “Court”), naming Pathion and certain Pathion officers as defendants. The petition asserts breach of the APA and the related Sublease Agreement for failure by Pathion to pay any cash amounts due thereunder, and fraudulent inducement as Pathion and the individual defendants misrepresented Pathion’s financial position and its stock value. The petition also requested a declaratory judgment that Pathion has no rights to the PPSA Assets.

On July 15, 2019, Pathion filed a general denial to the Company’s petition.

On July 22, 2019, the Company filed a motion for partial summary judgment on its declaratory judgment action and for severance. Pathion responded to the motion for summary judgment on August 6, 2019. That same day, Pathion filed a counterclaim, and requested injunctive relief and a declaratory judgment.

On August 13, 2019, the Court conducted a hearing on the Company’s motion for summary judgment. On August 23, 2019, the Court issued an order granting the Company’s motion for summary judgment and fees and severing judgment from remaining claims. Under this order, the Court declared and decreed that Pathion has no rights to the PPSA Assets and awarded the Company $24,800 in legal fees. On October 15, 2019, the Court issued a writ of garnishment against Pathion’s bank to enable collection of these legal fees.

On October 14, 2019, the Court granted Pathion’s counsel’s motion to withdraw. Ten days later, a new lawyer appeared for the Pathion Defendants, and the next day, October 25, 2019, the Court issued a scheduling order requiring Pathion to produce documents and appear for deposition in December 2019. The Court set trial to begin on August 31, 2020.

At this time, the Company is unable to estimate the possible gain or loss, if any, related to this proceeding.

Note 11 – Subsequent Events

On October 28, 2019, the Company granted 94,000 stock options to executives, the fair value of which was determined to be $184,689.

On November 7, 2019,In May 2020, the Company entered into a securities purchase agreementLoan Agreement and Promissory Note (collectively the “PPP Loan”) with BBVA USA pursuant to the Paycheck Protection Program (the “PPP”) under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration. The Company received total proceeds of $91,407 from the unsecured PPP Loan. The PPP Loan is scheduled to mature on May 4, 2022 and has an interest rate of 1.00% per annum and is subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. The PPP Loan may be prepaid by the Company at any time prior to its maturity with no prepayment penalties.

The PPP Loan contains customary events of default relating to, among other things, payment defaults and breaches of representations and warranties. Subject to certain institutionalconditions, the PPP Loan may be forgiven in whole or in part by applying for forgiveness pursuant to the CARES Act and accredited investors,the PPP. The amount of loan proceeds eligible for forgiveness is based on a formula based on a number of factors, including Dr. Lon E. Bell, Chief Executive Officerthe amount of loan proceeds used by the Company during the 24-week period after the loan origination for certain purposes, including payroll costs, rent payments on certain leases and Chairmancertain qualified utility payments, provided that, among other things, at least 60% of the Board,loan amount is used for a private placementeligible payroll costs, the employer maintaining or rehiring employees and maintaining salaries at certain level. In accordance with the requirements of the Company’s common stockCARES Act and warrants to purchase common stock for aggregate gross proceeds of $3.5 million and estimated net proceeds of $3.1 million (the “Offering”). The Offering closed on November 13, 2019. In the Offering,PPP, the Company issued an aggregate of (i) 544,950 shares of common stock and (ii) pre-funded warrants to purchase 868,443 shares of common stock that are immediately exercisable and have no expiration date, in each case at a price of $2.4763 per share (or pre-funded warrant).used the proceeds from the PPP Loan primarily for payroll costs. The Company also issuedintends to apply for forgiveness of the investors warrants to purchase up to an aggregatePPP Loan during the fourth quarter of 1,766,751 shares2020. There can be no assurance that the Company will be granted forgiveness of common stock at an exercise price of $2.32 per share that are immediately exercisable and will expire five years from the issuance date. As compensation to the placement agentPPP Loan in the Offering,whole or in addition to a cash fee for its services,part.

In April 2020, the Company also issued to the placement agentreceived a warrant to purchase up to 70,670 shares of common stock, with an exercise price of $2.9716 per share. The other terms of the placement agent warrant are substantially the same as the investor warrants. For his investment of $500,000, Dr. Bell received 201,914 shares of common stock and 252,393 warrants in the Offering. Pursuant$5,000 advance related to a registration rights agreement, theU.S. Small Business Administration Economic Injury Disaster Loan. The Company expects to repay this advance and has agreed to file a registration statement with the SEC to register the resale of the shares of common stock and the shares of common stock issuable upon exercise of the warrants issued in the Offeringincluded it within 30 days of the closing of the Offering.accrued expenses.

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, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended.amended, or the Exchange Act. 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:

The forward-looking statements are based upon management’s beliefs and assumptions and are made as of the date of this report. We undertake no obligation to publicly update or revise any forward-looking statements included in this report. You should not place undue reliance on these forward-looking statements.

Unless otherwise stated or the context otherwise requires, the terms “Ideal Power,” “we,” “us,” “our” and the “Company” refer to Ideal Power Inc.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q as well as our audited 20182019 financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2018.2019. In addition to historical information, the discussion and analysis here and throughout this Form 10-Q contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited, to those set forth under “Risk Factors” in Part II, Item 1A of this report.

Overview

Ideal Power Inc. is located in Austin, Texas. Prior toUntil April 2018, we were primarily focused on the design, marketing and sale of electrical power conversion products using our proprietary technology called Power Packet Switching Architecture™, or PPSA™. PPSA™ is a power conversion technology that improves upon existing power conversion technologies in key product metrics, such as size and weight while providing built-in isolation and bi-directional and multi-port capabilities. PPSA™ utilizes standardized hardware with application specific embedded software. Our products were designed to be used in both on-grid and off-grid applications with a focus on solar + storage, microgrid and stand-alone energy storage applications. The principal products of the Company were 30-kilowatt power conversion systems, including 2-port and multi-port products.

OnIn April 16, 2018, we realigned into two operating divisions: Power Conversion Systems, to continue the commercialization of our PPSA™ technology, and B-TRAN, to develop our Bi-directional bi-polar junction TRANsistor (B-TRAN™) solid state switch technology.

OnIn January 2, 2019, our Board of Directors approved a strategic shift to focus on the commercialization of our B-TRAN™ technology and a plan to suspend further power converter system, or PPSA™, development and sales while we located a buyer for our power conversion systems division and PPSA™ technology. OnIn September 19, 2019, we closed on the sale of our power conversion systems division and are now solely focused on the further development and commercialization of our B-TRAN™ technology. Prior to the sale of our PPSA™ business and technology in September 2019, we classified this division as held for sale. We show this division as a discontinued operation in our financial statements.

To date, operations have been funded primarily through the sale of common stock.stock and warrants. Total revenue generated from inception to date as of September 30, 20192020 amounted to $14.9$15.1 million with approximately $12.4 million of that revenue from discontinued operations and the remainder from grant revenue for bi-directional power switch development. Grant revenue was $147,787 and $154,302, respectively, for the three and nine months ended September 30, 2020. We did not have revenue from continuing operations in the three and nine months ended September 30, 2019 and 2018.2019. We mayexpect to pursue additional research and development grants, if and when available, to further develop and/or improve our B-TRAN™ technology.

SaleCOVID-19 Impact

In March 2020, the World Health Organization declared the outbreak of Power Conversion Systems DivisionCOVID-19 as a pandemic, which continues to spread throughout the United States and the rest of the world. The ultimate extent of the impact of COVID-19 on the financial performance of the Company will depend on future developments, including, among other things, the duration and spread of COVID-19, governmental restrictions in response to the COVID-19 pandemic, and the overall economy, all of which are highly uncertain and cannot be predicted. The outbreak of COVID-19 has already caused significant disruptions to the global financial markets which may impact the Company’s ability to raise additional capital, on acceptable terms or at all. If the financial markets and/or the overall economy are impacted for an extended period, the Company's operating results may be materially and adversely affected.

Recent Developments - Early Warrant Exercise Transaction

On September 19, 2019,August 5, 2020, we closed on the sale of our power conversion systems division to CE+T Energy Solutions, Inc. (“CE+T Energy”) The consideration consisted of $200,000 in cash, received at closing, and 50 shares of CE+T Energy’s common stock, to be issued within 90 days of closing, which represented a 5% ownership interest in CE+T Energy as of the closing date. We did not record any value of the equity consideration obtained in the sale as there is not currently a market for such shares and we do not have access to current financial information and future financial projections of CE+T Energy. CE+T Energy also assumed certain liabilities of the power conversion systems division in connection with the sale. The net cash proceeds from the sale were $23,587.

On September 19, 2019, we entered into a sublease with CE+T EnergyEarly Warrant Exercise Transaction (as defined below), pursuant to which we sublease approximately seventy-five (75%) percentcertain holders of our Austin, Texas facility to CE+T Energy. Under the sublease, CE+T Energy is obligated to make monthly payments equal to 75% of all sums due under the master lease and 100% of any maintenance and repair costs related to the subleased premises. The sublease replaced a temporary agreement between us and CE+T Energy, effective July 22, 2019, that contained similar payment obligations by CE+T Energy for utilization of the subleased premises. Consistent with the master lease, the sublease terminates on May 31, 2021.

Private Placement of Common Stock and Warrants

On November 7, 2019, we entered into a securities purchase agreement with certain institutional and accredited investors, including Dr. Lon E. Bell, our Chief Executive Officer and Chairman of the Board, for a private placement of our common stock andoutstanding Series A warrants exercised warrants to purchase common stock for aggregate gross proceeds of $3.5 million and estimated net proceeds of $3.1 million (the “Offering”). The Offering closed on November 13, 2019. In the Offering, we issued an aggregate of (i) 544,9501,176,137 shares of common stock, and (ii) pre-funded warrants to purchase 868,443 shares of common stock that are immediately exercisable and have no expiration date, in each case at a price of $2.4763 per share (or pre-funded warrant). We alsowe issued to the investorssuch holders new Series C warrants to purchase up to an aggregate of 1,766,751 shares of common stock at an exercise price of $2.32 per share that are immediately exercisable and will expire five years from the issuance date. As compensation to the placement agent in the Offering, in addition to a cash fee for its services, we also issued to the placement agent a warrant to purchase up to 70,670705,688 shares of common stock with an exercise price of $2.9716 per share. The other terms of the placement agent warrant are substantially the same as the investor warrants. We intend to use the net proceeds from this Offering for working capital and general corporate purposes.

Reverse Stock Split

On August 15, 2019, we effected a reverse stock split of the outstanding shares of our common stock by a ratio of one-for-ten, and our common stock began trading on the Nasdaq Capital Market on a split-adjusted basis on August 20, 2019. The par value of our common stock remained unchanged at $0.001$8.90 per share after the reverse stock split. All share amounts, per share data, share prices, exercise prices and conversion rates have, where applicable, been adjusted retroactively to reflect the reverse stock split.

Nasdaq Listing Compliance

Onan expiration date of August 21, 2019, we were notified by the Nasdaq Listing Qualifications Department that we were not in compliance with the minimum stockholders’ equity requirement under Nasdaq Listing Rule 5550(b)(1) for continued listing on the Nasdaq Capital Market because our stockholders’ equity was below the required minimum4, 2025. We raised net proceeds of $2.5 million and, as of the date of the notification, we did not meet the alternatives of market value of listed securities or net income from continuing operations. In accordance with Nasdaq Listing Rules, we had 45 calendar days, or until October 3, 2019, to submit a plan to regain compliance. We submitted a plan of compliance on October 3, 2019 addressing how we intended to regain compliance with Nasdaq Listing Rule 5550(b). On October 31, 2019, Nasdaq notified us of approval of the compliance plan, and Nasdaq granted us an extension through November 30, 2019 to take action to evidence compliance with Nasdaq Listing Rule 5550(b), which will require, among other things, that we demonstrate compliance within our periodic report for the fiscal year ending December 31, 2019. As a result of the Offering, we believe we now satisfy the minimum $2.5 million stockholders’ equity requirement for continued listing on the Nasdaq Capital Market. If we do not regain compliance, we may be subject to delisting.

Critical Accounting Policies

On January 1, 2019, we adopted ASC 842 utilizing a modified retrospective approach with a date of initial application at the beginning of the period of adoption. At adoption, we recognized a right of use asset of $422,819 and lease liability of $427,131. As the discount rate implicit in the lease was not readily determinableEarly Warrant Exercise Transaction. See “Liquidity and we did not have any outstanding indebtedness, we utilized market data, giving consideration to remaining term of the lease, to estimate our incremental borrowing rate at 8% per annumCapital Resources—Early Warrant Exercise Transaction” below for purposes of calculating the right of use asset and lease liability.

There have been no other significant changes during the nine months ended September 30, 2019 to the critical accounting policies disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

additional information.

Results of Operations

Comparison of the three months ended September 30, 20192020 to the three months ended September 30, 20182019

Grant Revenues. Grant revenues for the three months ended September 30, 2020 were $147,787. The grant revenues relate to a $1.2 million subcontract with Diversified Technologies, Inc. (DTI) to supply B-TRAN™ devices as part of a two-year contract awarded to DTI by the United States Naval Sea Systems Command (NAVSEA) for the development and demonstration of a B-TRAN™ enabled high efficiency direct current circuit breaker. We expect the grant revenue related to this subcontract to continue over the next two years with a majority of the revenue to be recognized over the first twelve to fifteen months of the subcontract.

Cost of Grant Revenues. Cost of grant revenues for the three months ended September 30, 2020 was $147,787. The cost of grant revenues relates to the subcontract discussed above and are equal to the associated grant revenues resulting in no gross profit.

Research and Development Expenses.   Research and development expenses decreasedincreased by $75,960,$243,775, or 23%97%, to $494,548 in the three months ended September 30, 2020 from $250,773 in the three months ended September 30, 2019 from $326,7332019. The increase was due to higher stock compensation expense of $127,295, contract labor of $65,688, semiconductor fabrication costs of $41,319 and consulting costs of $26,469, partly offset by lower other B-TRAN™ development spending of $16,996. We expect lower research and development expenses for the fourth quarter of 2020.

General and Administrative Expenses.   General and administrative expenses increased by $206,695, or 44%, to $677,967 in the three months ended September 30, 2018. The decrease was due primarily to lower stock compensation expense. We expect higher research and development expenses in the fourth quarter of 2019 due to the timing of B-TRAN™ development spending related to the fabrication of prototype engineering samples for evaluation by potential partners.

General and Administrative Expenses.   General and administrative expenses decreased by $440,491, or 48%, to2020 from $471,272 in the three months ended September 30, 2019 from $911,763 in2019. The increase was due to higher bonus expense of $191,841, stock compensation expense of $64,626 and other costs of $5,047, partly offset by lower legal fees of $54,819. We expect lower general and administrative expenses for the fourth quarter of 2020.

Other Expenses.    Other expenses were $3,722,224 for the three months ended September 30, 2018. The decrease was due primarily2020 compared to lower legal fees of $294,171, stock compensation expense of $54,100, sublease income of $38,949 and other net cost savings. General and administrative expenses were impacted by our cost reduction plan, inclusive of reduced headcount, and the sale of our power conversion systems division. We expect relatively flat general and administrative expenses in the fourth quarter of 2019 exclusive of the impact of any equity award grants.

Interest (Income) Expense, Net.   Net interest expense was $2,763 for the three months ended September 30, 2019 compared2019. The increase in other expenses was due to net interestnon-cash warrant inducement expense of $112 for the three months ended September 30, 2018.$3,720,866 as discussed below under Liquidity and Capital Resources: Early Warrant Exercise Transaction.

Loss from Continuing Operations.  Our loss from continuing operations for the three months ended September 30, 20192020 was $724,808$4,894,739, or 41% lower575% higher than the $1,238,608$724,808 loss from continuing operations for the three months ended September 30, 2018, for2019 due to non-cash warrant inducement expense of $3,720,866 and the reasonsincreases in research and development expenses and general and administrative expenses discussed above.

Loss from Discontinued Operations.   Our loss from discontinued operations for the three months ended September 30, 2019 was $78,796, or 92% lower than the $1,011,315$78,796. As we sold our power conversion systems division in September 2019, we did not have a loss from discontinued operations for the three months ended September 30, 2018. The loss from discontinued operations was significantly lower than the comparative prior year period as we suspended operations of our power conversion system division on January 4, 2019, including the implementation of a significant reduction-in-force, and closed on the sale of these operations on September 19, 2019.2020.

Loss on Sale of Discontinued Operations.   Our loss on sale of discontinued operationoperations for the three months ended September 30, 2019 was $9,107.

Net Loss.   Our net loss for the three months ended September 30, 20192020 was $812,711,$4,894,739, or 64% lower,502% higher, as compared to a net loss of $2,249,923$812,711 for the three months ended September 30, 2018, as a result of2019, for the reasons discussed above.

Comparison of the nine months ended September 30, 20192020 to the nine months ended September 30, 20182019

Grant Revenues. Grant revenues for the nine months ended September 30, 2020 were $154,302. The grant revenues relate to a $1.2 million subcontract with DTI to supply B-TRAN™ devices as part of a two-year contract awarded to DTI by NAVSEA for the development and demonstration of a B-TRAN™ enabled high efficiency direct current circuit breaker. We expect the grant revenue related to the NAVSEA subcontract to continue over the next two years with a majority of the revenue to be recognized over the first twelve to fifteen months of the subcontract.

Cost of Grant Revenues. Cost of grant revenues for the nine months ended September 30, 2020 was $154,302. The cost of grant revenues relates to the subcontract discussed above and are equal to the associated grant revenues resulting in no gross profit. We expect no gross profit under the subcontract with DTI.

Research and Development Expenses.   Research and development expenses increased by $61,246,$356,796, or 8%44%, to $1,161,537 in the nine months ended September 30, 2020 from $804,741 in the nine months ended September 30, 2019 from $743,4952019. The increase was due to higher semiconductor fabrication costs of $136,772, stock compensation expense of $119,414, bonus expense of $79,519 and other B-TRAN™ development spending of $21,091.

General and Administrative Expenses.   General and administrative expenses increased by $253,290, or 17%, to $1,773,615 in the nine months ended September 30, 2018. The increase was due primarily to higher personnel costs as we hired a Senior Development Engineer in early 2019.

General and Administrative Expenses.   General and administrative expenses decreased by $1,076,849, or 41%, to2020 from $1,520,325 in the nine months ended September 30, 2019 from $2,597,1742019. The increase was primarily due to higher bonus expense of $215,522, stock compensation expense of $158,484 and other costs of $14,313 as well as fees incurred in connection with the search for our new chief executive officer of $137,459, partly offset by lower legal fees of $196,269 and facilities costs of $76,219.

Other Expenses.   Other expenses were $3,723,346 for the nine months ended September 30, 2018. The decrease was due primarily2020 compared to lower stock compensation expense of $418,491, lower personnel costs of $350,680, lower legal fees of $138,425, lower contract labor costs of $104,060 and other net cost savings. General and administrative expenses were impacted by our cost reduction plan, inclusive of reduced headcount, and an absence of annual grants in recent years to tenured executives.

Interest (Income) Expense, Net.    Net interest expense was $3,072 for the nine months ended September 30, 2019 compared2019. The increase in other expenses was due to net interest incomenon-cash warrant inducement expense of $36,817 for the nine months ended September 30, 2018. Net interest income in the nine months ended September 30, 2018 included late fees awarded$3,720,866 as discussed below under Liquidity and paid to us upon the conclusion of a legal proceeding.Capital Resources: Early Warrant Exercise Transaction.

Loss from Continuing Operations.  Our loss from continuing operations for the nine months ended September 30, 20192020 was $2,328,138$6,658,498 or 30% lower186% higher than the $3,303,852$2,328,138 loss from continuing operations for the nine months ended September 30, 2018, for2019 due to non-cash warrant inducement expense of $3,720,866 and the reasonsincrease in research and development expenses and general and administrative expenses discussed above.

Loss from Discontinued Operations.   Our loss from discontinued operations for the nine months ended September 30, 2019 was $768,047 or 72% lower than the $2,724,679and included a $405,000 impairment of assets held for sale. As we sold our power conversion systems division in September 2019, we did not have a loss from discontinued operations for the nine months ended September 30, 2018. The loss from discontinued operations was significantly lower than the comparative prior year period as we suspended operations of our power conversion system division on January 4, 2019, including the implementation of a significant reduction-in-force, and closed on the sale of these operations on September 19, 2019. Loss from discontinued operations for the nine months ended September 30, 2019 includes a $405,000 impairment of assets held for sale to write-down these assets to the expected net proceeds from the anticipated sale.2020.

Loss on Sale of Discontinued Operations.   Our loss on sale of discontinued operationoperations for the nine months ended September 30, 2019 was $9,107.

Net Loss.   Our net loss for the nine months ended September 30, 20192020 was $3,105,292,$6,658,498, or 48% lower,114% higher, as compared to a net loss of $6,028,531$3,105,292 for the nine months ended September 30, 2018, as a result of2019, for the reasons discussed above.

Liquidity and Capital Resources

We currently do not generate revenue.grant revenue only. We have funded our operations primarily through the sale of common stock.stock and warrants.

At September 30, 2019,2020, we had cash and cash equivalents of $769,833. Our$3,769,225 and net working capital andof $3,356,205.

Our long-term debt at September 30, 2019 were $347,2512020 was $91,407. As discussed below, in May 2020, we received a PPP Loan (as defined below) to temporarily subsidize our payroll and $0, respectively.facilities costs in a business landscape impacted by the COVID-19 pandemic.

Operating activities in the nine months ended September 30, 2020 resulted in cash outflows of $2,303,639, which were due to the loss from continuing operations for the period of $6,658,498, partly offset by warrant inducement expense of $3,720,866, stock-based compensation of $434,782, depreciation and amortization of $86,368, stock issued for services of $50,000 and patent impairment charges of $18,235 and favorable balance sheet timing of $44,608. Operating activities in the nine months ended September 30, 2019 resulted in cash outflows of $2,433,236, which were due to the loss from continuing operations for the period of $2,328,138 and cash used in operating activities related to discontinued operations of $557,096 partly offset by non-cash items, including depreciation and amortization and stock-based compensation, of $239,795 and favorable balance sheet timing of $212,203. Operating activities in the nine months ended September 30, 2018 resulted in cash outflows of $4,344,000, which were due to the loss from continuing operations for the period of $3,303,852, cash used in operating activities related to discontinued operations of $2,076,842, partly offset by stock-based compensation of $645,349, favorable balance sheet timing of $270,627, depreciation and amortization of $109,845 and patent impairment charges of $10,873. We expect a further reduction inflat to modestly higher cash outflows from operating activities due tofor the eliminationfourth quarter of cash flows from discontinued operations now that a sale of these operations has been completed.2020. 

Investing activities in the nine months ended September 30, 20192020 and 20182019 resulted in cash outflows of $55,008$48,243 and $136,866,$78,595, respectively, primarily for the acquisition of intangible assets and fixed assets. InThe sale of our power conversion systems division resulted in a cash inflow of $23,587 from discontinued operations in the nine months ended September 30, 2019, cash outflows from investing activities included a cash inflow of $23,587 related to discontinued operations for the net proceeds from the sale of our power conversion systems business. In the nine months ended September 30, 2018, cash outflows from investing activities included $49,865 in cash outflows related to discontinued operations.2019.

Financing activities in the nine months ended September 30, 2019 and 20182020 resulted in cash outflowsinflows of $0$3,063,425 and $2,616, respectively.included net proceeds from the exercise of warrants of $2,972,018 and proceeds from loans of $91,407. For the nine months ended September 30, 2019, financing activities resulted in no cash inflows or outflows.

The Company’s independent registered public accounting firm, in its report on the Company’s 2019 financial statements, raised substantial doubt about the Company’s ability to continue as a going concern. On November 7, 2019, we entered into a securities purchase agreement with certain institutional and accredited investors, including Dr. Lon E. Bell, our Chief Executive Officer and Chairman ofAugust 5, 2020 the Board, for a private placement of our common stock and warrants to purchase common stock for aggregate gross proceeds of $3.5 million and estimatedCompany completed the Early Warrant Exercise Transaction raising net proceeds of $3.1 million. The Offering closed on November 13, 2019. In$2.5 million, thereby alleviating the Offering, we issued an aggregate of (i) 544,950 shares of common stock and (ii) pre-funded warrantssubstantial doubt about the Company’s ability to purchase 868,443 shares of common stock that are immediately exercisable and have no expiration date, in each casecontinue as a going concern for at a price of $2.4763 per share (or pre-funded warrant). We also issued toleast the investors warrants to purchase up to an aggregate of 1,766,751 shares of common stock at an exercise price of $2.32 per share that are immediately exercisable and will expire five yearsnext twelve months from the date of issuance date. As compensation to the placement agent in the Offering, in addition to a cash fee for its services, we also issued to the placement agent a warrant to purchase up to 70,670 shares of common stock, with an exercise price of $2.9716 per share. The other terms of the placement agent warrant are substantially the same as the investor warrants.this report.

As our B-TRAN™ technology is in the development stage and has not yet been commercialized, we may be required to obtain additional financing in the future to continue our operations and execute our business plan. We may not be able to obtain such financing on commercially reasonable terms or at all.all, especially in light of the market volatility and uncertainty as a result of the COVID-19 outbreak. If we are unable to obtain such financing if orand when needed, we will be required to reduce operating costs, which could jeopardize future strategic initiatives and business plans, or cease operations. In addition, there can be no assurances that the Companywe will be able to successfully commercialize itsour technology and develop profitable operations.

PPP Loan

On May 4, 2020, we entered into a Loan Agreement and Promissory Note (collectively the “PPP Loan”) with BBVA USA pursuant to the Paycheck Protection Program (the “PPP”) under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration. We received total proceeds of $91,407 from the unsecured PPP Loan. The PPP Loan is scheduled to mature on May 4, 2022 and has an interest rate of 1.00% per annum and is subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. The PPP Loan may be prepaid by us at any time prior to its maturity with no prepayment penalties.

The PPP Loan contains customary events of default relating to, among other things, payment defaults and breaches of representations and warranties. Subject to certain conditions, the PPP Loan may be forgiven in whole or in part by applying for forgiveness pursuant to the CARES Act and the PPP. The amount of loan proceeds eligible for forgiveness is based on a formula based on a number of factors, including the amount of loan proceeds used by us during the 24-week period after the loan origination for certain purposes, including payroll costs, rent payments on certain leases, and certain qualified utility payments, provided that, among other things, at least 60% of the loan amount is used for eligible payroll costs, the employer maintaining or rehiring employees and maintaining salaries at certain level. In accordance with the requirements of the CARES Act and the PPP, we used the proceeds from the PPP Loan primarily for payroll costs. We intend to apply for forgiveness of the PPL Loan during the fourth quarter of 2020. It is our expectation that the PPP Loan will be forgiven but no assurance can be given that we will be granted forgiveness of the PPP Loan in whole or in part.

Private Placement 

On November 13, 2019, we closed on a private placement of our common stock and warrants to purchase common stock for aggregate gross proceeds of $3.5 million and net proceeds of $3.1 million. We have been utilizing, and expect to continue to utilize, the net proceeds from this private placement to fund commercialization and development of our B-TRAN™ semiconductor technology and for working capital and general corporate purposes.

Early Warrant Exercise Transaction 

On July 31, 2020, we entered into letter agreements (the “Letter Agreements”) with certain of our Series A warrant holders (the “Series A Warrant Holders”), who were previously issued warrants (the “Original Warrants”) to purchase shares of our common stock pursuant to that certain securities purchase agreement between us and the other parties thereto, dated as of November 7, 2019. The Series A Warrant Holders agreed to the early exercise of their Original Warrants pursuant to the Letter Agreements (the “Early Warrant Exercise Transaction”). The transaction closed on August 5, 2020. We raised net proceeds of $2.5 million in the Early Warrant Exercise Transaction. We intend to utilize the net proceeds from the Early Warrant Exercise Transaction to fund commercialization and development of our B-TRAN™ semiconductor technology and general corporate and working capital purposes.

Pursuant to the Letter Agreements, in consideration of the Series A Warrant Holders exercising Original Warrants to purchase an aggregate of 1,176,137 shares of common stock, we issued to the Series A Warrant Holders new Series C warrants (the “New Warrants”) to purchase up to an aggregate of 705,688 shares of common stock, which is equal to 60% of the shares underlying the Original Warrants included in the Transaction. The New Warrants have an exercise price of $8.90 per share and an expiration date of August 4, 2025. The estimated fair value of the New Warrants was $3.7 million on the date of issuance and was recognized as a non-cash warrant inducement expense within other expenses in our statement of operations.

Critical Accounting Policies

Revenue Recognition

We recognize revenue and related cost of revenue in accordance with FASB ASC 606, Revenue from Contracts with Customers (ASC 606) and, as applicable, with the guidance issued by the FASB in June 2018 for the recipients of grants.

Currently, we recognize grant revenue and cost of grant revenue only. Government contracts, including grants, are agreements that generally provide us with cost reimbursement for certain types of development activities over a contractually defined period. Grant revenue is 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.

For the nine months ended September 30, 2020, we recognized $154,302 of grant revenue and cost of grant revenue. The grant revenue relates to a $1.2 million subcontract with Diversified Technologies, Inc. (DTI), signed in June 2020, to supply B-TRAN™ devices as part of a two-year contract awarded to DTI by the United States Naval Sea Systems Command (NAVSEA) for the development and demonstration of a B-TRAN™ enabled high efficiency direct current circuit breaker. We account for this subcontract as an exchange transaction under applicable guidance. No grant revenue was recognized in the nine months ended September 30, 2019. Unbilled grant receivables were $28,623 at September 30, 2020 and were included in accounts receivable, net on our balance sheet.

There have been no other significant changes during the nine months ended September 30, 2020 to the critical accounting policies disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Off-Balance Sheet ArrangementsTransactions

As of September 30, 2019,2020, we did not have any material off-balance sheet arrangements.transactions.

Trends, Events and Uncertainties

There are no material changes from trends, events or uncertainties disclosed in our 2018 Annual Report on Form 10-K.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, we are not required to provide this information.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We conducted an evaluation (pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), under the supervision and with the participation of management, including our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial and accounting officer), of the effectiveness of our disclosureDisclosure controls and procedures (as defined in Rule 13a-15(e)) as of September 30, 2019.

These disclosure under the Exchange Act) include, without limitation, controls and procedures are designed to ensure that information required to be disclosed in ourthe Company’s reports that are filedit files or submittedsubmits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’sSecurities and Exchange Commission’s rules and forms. OurThe Company’s disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that this information is accumulated and communicated to management, including itsthe principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Based on The Company conducted an evaluation (pursuant to Rule 13a-15(b) of the evaluation, ourExchange Act), under the supervision and with the participation of its Chief Executive Officer (principal executive officer) and its Chief Financial Officer (principal financial and accounting officer) of the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2020 and has concluded that, as of September 30, 2019, our2020, the Company’s disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There have been no material changes in our internal controls over financial reporting that occurred during the quarter ended September 30, 20192020 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Limitations on the Effectiveness of Controls

Control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems’ objectives are being met. Further, the design of any system of controls must reflect the fact that there are resource constraints, and the benefits of all controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of error or mistake. Control systems can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

PART II-OTHER INFORMATION

On April 11, 2019, we entered into an asset purchase agreement (the “APA”) with Pathion Holdings, Inc., a Delaware corporation, and Pathion, Inc., a Delaware corporation (together “Pathion”) to sell certain assets (the “PPSA Assets”) related to our PPSA™ / Power Conversion Systems business (“PPSA Business”). The purchase price consisted of $500,000 in cash and 150,000 shares of the common stock of Pathion Holdings, Inc. Pursuant to the APA, Pathion would also assume certain liabilities relating to the PPSA Business.ITEM 1. LEGAL PROCEEDINGS

On June 13, 2019, we filed a petitionWe may be subject to litigation from time to time in the district courtordinary course of the 250^th Judicial District in Travis County (the “Court”), naming Pathion and certain Pathion officers as defendants. The petition asserts breach of the APA and the related Sublease Agreement for failure by Pathionbusiness. We are not currently party to pay any cash amounts due thereunder, and fraudulent inducement as Pathion and the individual defendants misrepresented Pathion’s financial position and its stock value. The petition also requestslegal proceedings that we believe would reasonably have a declaratory judgment that Pathion has no rights to the PPSA Assets.

On July 15, 2019, Pathion filed a general denial to our petition.

On July 22, 2019, we filed a motion for partial summary judgment on its declaratory judgment action and for severance. Pathion responded to the motion for summary judgment on August 6, 2019. That same day, Pathion filed a counterclaim, and requested injunctive relief and a declaratory judgment.

On August 13, 2019, the Court conducted a hearingmaterial adverse impact on our motion for summary judgment. On August 23, 2019, the Court issued an order granting our motion for summary judgmentbusiness, financial results and fees and severing judgment from the remaining claims. Under this order, the Court declared that Pathion has no rights to the PPSA Assets and awarded us $24,800 in legal fees. On October 15, 2019, the Court issued a writ of garnishment against Pathion’s bank to enable collection of these legal fees.cash flows.

On October 14, 2019, the Court granted Pathion’s counsel’s motion to withdraw. Ten days later, a new lawyer appeared for the Pathion Defendants, and the next day, October 25, 2019, the Court issued a scheduling order requiring Pathion to produce documents and appear for deposition in December 2019. The Court set trial to begin on August 31, 2020.

At this time, we are unable to estimate the possible gain or loss, if any, related to this proceeding.

You should carefully considerITEM 1A. RISK FACTORS

There are no material changes from the risk factors discusseddisclosed in Part I, Item 1A. “Risk Factors” in our 2019 Annual Report on Form 10-K for the year ended December 31, 2018, which could materially affect our business, financial condition, cash flows or future results. There have been no material changes in our risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2018. The risk factors described herein and in our Annual Report on Form 10-K for the year ended December 31, 2018 are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant, has duly, caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.