IDEAL POWERINC.

Statements of Stockholders’Stockholders’ Equity

For the ThreeThree-Month Periods during the Nine Months Ended March 31,September 30, 2023 and 2022

(unaudited)

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The accompanying notes are an integral part of these condensed financial statements.

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IDEAL POWER INC.Ideal Power Inc.

ITEM 2. MANAGEMENT’SMANAGEMENT’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 Form10-Q as well as our audited 2022 financial statements and related notes included in our Annual Report on Form10-K for the year ended December31, 2022. In addition to historical information, the discussion and analysis here and throughout this Form10-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”“Risk Factors” in PartI,Item 1A of our Annual Report on Form10-K for the year ended December31, 2022.

Overview

Ideal Power Inc. is located in Austin, Texas. We are solely focused on the further development and commercialization of our Bidirectional bipolar junction TRANsistor (B-TRAN™) solid-state switch technology.

To date, operations have been funded primarily through the sale of common stock and we have generated $3.7 million in grant revenue and $100,000 in development revenue for bidirectional power switch development. Grant revenueRevenue was $664$1,557 and $125,008$137,388 in the three and nine months ended September 30, 2023, respectively, and $10,675 and $186,661 in the three and nine months ended September 30, 2022, respectively. Revenue for the three months ended March 31,September 30, 2023 related to a development agreement. Revenue for the nine months ended September 30, 2023 related to a development agreement and a government grant. Revenue for the three and nine months ended September 30, 2022 respectively.related to government grants. We mayexpect to pursue additional researchdevelopment agreements and developmentgovernment grants, if and when available, to further develop, improve and/or improvecommercialize our technology. We are in the process of commercializing our B-TRAN™ technology.

Product Launch

In January 2023, we launched our first commercial product, the SymCool™ Power Module. This multi-die B-TRAN™ module is designed to meet the very low conduction loss needs of the solid-state circuit breaker (SSCB) market. We expect fabricationinitial SymCool™ sales to commence as early as late 2023, depending on the ultimate date that this initial product is fabricated and available for commercial sale.

In September 2023, we launched our second commercial product, the SymCool™ IQ Intelligent Power Module. The SymCool™ IQ builds on the bidirectional B-TRAN™ multi-die packaging design of our SymCool™ power module and adds an integrated intelligent driver optimized for bidirectional operation. This product targets several markets including renewable energy, energy storage, EV charging and UPS systems for data centers. We expect initial sales of this product later in 2023.to commence next year.

Development Agreement

During the fourth quarter of 2022, we announced, and began Phase 1 of, a product development agreement with a top 10 global automaker for a custom B-TRAN™ power module for use in the automaker’s electric vehicle (EV) drivetrain inverters in its next generation EV platform. In Phase I1 of the program, we will provideprovided packaged B-TRAN™ devices, driverstest kits and technical data to the top 10 global automaker for their evaluation. Our expectation is that a successful Phase 1 will lead to us securingDuring the third quarter of 2023, we secured, and began Phase 2 of, thethis program. Assuming we secureIn Phase 2 of the program, we will collaborateare collaborating with a packaging company selected by the automaker that will fabricate the custom B-TRAN™ modules. In Phase 3, the final development phase under the program, the custom B-TRAN™ power module is expected to be tested and certified in accordance with automotive codes and standards. The delivery of production-ready B-TRAN™-based modules is targeted for 2025. We recorded all of the revenue under Phase 1 of this agreement in the nine months ended September 30, 2023. We expect to record modest revenue underfor Phase 2 of this agreementprogram in 2023.the next one to two quarters.

Test and Evaluation Agreements

Since the middle of 2021, we announced several test and evaluation agreements with prospective customers, including a second top 10 global automaker, a top 10 global provider of power conversion solutions to the solar industry, atwo global diverse power management market leader,leaders, a tier 1 automotive supplier and a commercial EV manufacturer and an EV charging company.global power conversion supplier. These companies, along with other current and future participants in our test and evaluation program, intend to test and evaluate the B-TRAN™ for use in their applications. We expect to incorporate the feedback from these customers into our future commercial products. We began B-TRAN™ customer shipments to program participants in June 2023.

Results of Operations

Comparison of the three months ended March 31,September 30, 2023 to the three months ended March 31,September 30, 2022

Grant Revenue. Grant Revenue for the three months ended September 30, 2023 and 2022 was $1,557 and $10,675, respectively. Revenue for the three months ended September 30, 2023 consisted of development revenue (see Development Agreement above). Revenue for the three months ended September 30, 2022 consisted of grant revenue.

The grant revenue for the three months ended March 31, 2023 andSeptember 30, 2022 was $664 and $125,008, respectively. The grant revenue in the three months ended March 31, 2023 relatesrelated to a $1.2 million subcontract with Diversified Technologies, Inc. (DTI)(“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)(“NAVSEA”) for the development and demonstration of a B-TRAN™ enabled high efficiency direct current solid statesolid-state circuit breaker (SSCB)(“SSCB”). We completed our work under the subcontract in the second quarter of 2023.

We launched our first commercial product in January 2023 and expect initial sales of this product to commence as early as late 2023, depending on the ultimate date that this initial product is fabricated and available for commercial sale. We launched our second commercial product in September 2023 and expect initial sales of this product to commence next year. We also expect to pursue additional development agreements, including Phase 3 of the development agreement discussed above, as well as government funding opportunities that may result in additional development and/or grant revenue in the future.

Cost of Revenue. Cost of revenue for the three months ended September 30, 2023 and 2022 was $2,787 and $10,675, respectively. The program started in late June 2020. Incost of revenue for the three months ended September 30, 2023 relates to Phase 1 of the development agreement. The cost of revenue for the three months ended September 30, 2022 NAVSEA approved two 6-month extensionsrelates to the program. No additionalsubcontract with DTI. For the subcontract with DTI, cost of grant revenue is equal to the associated grant revenue resulting in no gross profit.

Gross Profit (Loss). Gross profit (loss) for the three months ended September 30, 2023 was associated with these extensions.a gross loss of $1,230. Gross profit (loss) for the three months ended September 30, 2022 was $0. The gross loss in the three months ended September 30, 2023 relates to the development agreement. We recorded no gross profit for the DTI subcontract in the three months ended September 30, 2022 and expect no gross profit from government grants that we are pursuing or may pursue in the future.

Research and Development Expenses. Research and development expenses increased by $910,387, or 117%, to $1,690,538 in the three months ended September 30, 2023 from $780,151 in the three months ended September 30, 2022. The increase was due to higher semiconductor fabrication costs of $552,721, stock-based compensation expense of $284,871, engineering services, primarily device packaging costs, of $71,379, personnel costs of $60,671, partly offset by lower search and placement fees of $53,823 and other B-TRAN™ development spending of $5,432.

In the three months ended September 30, 2023, higher semiconductor fabrication costs included wafer runs at a high-volume production foundry and the start of qualification of a second high-volume production foundry. In the three months ended September 30, 2023, stock-based compensation expense included $207,776 related to performance stock units granted in December 2022 with a derived service period of 0.89 years.

Research and development expenses will be subject to quarterly variability due primarily to the number, size and timing of semiconductor fabrication runs and their associated cost as well as the timing and cost of other major development activities.

General and Administrative Expenses. General and administrative expenses increased by $85,068, or 11%, to $854,025 in the three months ended September 30, 2023 from $768,957 in the three months ended September 30, 2022. The increase was due to higher stock-based compensation expense of $93,470, investor relations spending of $43,158 and personnel costs of $31,736, partly offset by lower consulting costs of $69,550 (relating to our compensation benchmarking study in the three months ended September 30, 2022) and other net costs of $13,746. In the three months ended September 30, 2023, stock-based compensation expense included $66,056 related to performance stock units granted in December 2022 with a derived service period of 0.89 years.

We expect relatively flat general and administrative expenses, exclusive of stock-based compensation, in the fourth quarter of 2023 as compared to the third quarter of 2023.

Sales and Marketing Expenses. Sales and marketing expenses increased by $86,520, or 42%, to $293,963 in the three months ended September 30, 2023 from $207,443 in the three months ended September 30, 2022. The increase was due to higher personnel costs of $57,131, legal fees for commercial contracts of $13,970, stock-based compensation expense of $13,772 and other net spending of $1,647. We expect relatively flat sales and marketing expenses in the fourth quarter of 2023 as compared to the third quarter of 2023.

Loss from Operations. Our loss from operations for the three months ended September 30, 2023 was $2,839,756, or 62% higher, than the $1,756,551 loss from operations for the three months ended September 30, 2022 for the reasons discussed above.

Interest Income, Net. Net interest income was $99,275 for the three months ended September 30, 2023 compared to $52,781 for the three months ended September 30, 2022 due to the impact of higher interest rates on our money market account.

Net Loss. Our net loss for the three months ended September 30, 2023 was $2,740,481, or 61% higher, as compared to a net loss of $1,703,770 for the three months ended September 30, 2022, for the reasons discussed above.

Comparison of the nine months ended September 30, 2023 to the nine months ended September 30, 2022

Revenue. Revenue for the nine months ended September 30, 2023 and 2022 was $137,388 and $186,661, respectively. Revenue for the nine months ended September 30, 2023 included development revenue of $100,000 and grant revenue of $37,388. Revenue for the nine months ended September 30, 2022 consisted of grant revenue.

The grant revenue for the nine months ended September 30, 2023 and 2022 related primarily to the $1.2 million subcontract with DTI discussed above. We completed our work under this subcontract in the second quarter of 2023. For the nine months ended September 30, 2022, grant revenue also included revenue related to a second subcontract with DTI. In late 2021, we entered into and began work under a $50,000 subcontract with DTI under a Phase I Small Business Innovation Research (SBIR) grant from the U.S. Department of Energy to develop a B-TRAN™-driven low loss alternating current SSCB. We completed our work under this worksubcontract in the first quarter of 2022. The grant revenue in the three months ended March 31, 2022 relates to both the NAVSEA and SBIR programs.

We expect the remaining grant revenue of $36,724 related to the NAVSEA program to be recognized in the second quarter of 2023. We also expect to pursue additional government funding that may result in additional grant revenues in the future.

We entered into a development agreement in late 2022 and launched our first commercial product in January 2023. As a result, we expect to generate initial commercial revenue later in 2023.

Cost of Grant Revenue. Cost of grant revenue for the threenine months ended March 31,September 30, 2023 and 2022 was $664$114,188 and $125,008,$186,661, respectively. The cost of grant revenuesrevenue relates to the development agreement and the NAVSEA subcontract with DTI for the nine months ended September 30, 2023 and the subcontracts with DTI discussed above andfor the nine months ended September 30, 2022. For the subcontracts with DTI, cost of grant revenue is equal to the associated grant revenue resulting in no gross profit.

Gross Profit. Gross profit for the nine months ended September 30, 2023 and 2022 was $23,200 and $0, respectively. The gross profit in the nine months ended September 30, 2023 related to the development agreement. We recorded no gross profit for the DTI subcontracts in the nine months ended September 30, 2023 and 2022 and expect no gross profit under the subcontract with DTI related to the NAVSEA program or from othergovernment grants that we are pursuing or may pursue in 2023.the future.

Research and Development Expenses. Research and development expenses increased by $611,481,$2,000,173, or 74%86%, to $1,440,028$4,337,254 in the threenine months ended March 31,September 30, 2023 from $828,547$2,337,081 in the threenine months ended March 31,September 30, 2022. The increase was due to higher stock-based compensation expense of $280,829,$851,265, semiconductor fabrication costs of $214,971 and$674,098, personnel costs of $121,203, partly$286,767, engineering services, primarily device packaging, of $258,812 and other B-TRAN™ spending of $4,390, slightly offset by lower other B-TRAN™contract labor costs of $75,159.

In the nine months ended September 30, 2023, higher semiconductor fabrication costs included wafer runs at a high-volume production foundry and the start of qualification of a second high-volume production foundry. In the nine months ended September 30, 2022, semiconductor fabrication costs included only fabrication costs incurred at development spendingfoundries. In the nine months ended September 30, 2023, stock-based compensation expense included $623,329 related to performance stock units granted in December 2022 with a derived service period of $5,522. We expect higher research and development expenses in the remainder of 2023 as compared to 2022 as we continue development of our B-TRAN™ technology.0.89 years.

General and Administrative Expenses. General and administrative expenses increased by $41,984,$326,408, or 5%14%, to $894,933$2,682,951 in the threenine months ended March 31,September 30, 2023 from $852,949$2,356,543 in the threenine months ended March 31,September 30, 2022. The increase was due to higher stock-based compensation expense of $84,143,$271,083 and personnel costs of $60,170 and professional fees of $47,914,$138,027, partly offset by services paid in stocklower consulting costs of $69,550 (relating to our compensation benchmarking study in the threenine months ended March 31, 2022 of $100,100, lower board of directors’ fees and expenses of $49,000September 30, 2022) and other general and administrative spendingnet costs of $1,143. We expect relatively flat general and administrative expenses, exclusive of$13,152. In the nine months ended September 30, 2023, stock-based compensation expense included $198,168 related to performance stock units granted in the remainderDecember 2022 with a derived service period of 2023 as compared to 2022.0.89 years.

Sales and Marketing Expenses. Sales and marketing expenses increased by $84,897,$210,165, or 39%32%, to $304,326$870,189 in the threenine months ended March 31,September 30, 2023 from $219,429$660,024 in the threenine months ended March 31,September 30, 2022. The increase was due to higher personnel costs of $129,303, search and placement fees of $43,750 personnel costs of $21,730,and stock-based compensation expense of $13,188 and$40,733, slightly offset by lower other net spending of $6,229. We expect higher sales and marketing expenses in the remainder of 2023 as compared to 2022 as we engage more broadly with prospective customers and launch our second commercial product in the second half of 2023.$3,621.

Loss from Operations. Our loss from operations for the threenine months ended March 31,September 30, 2023 was $2,639,287,$7,867,194, or 39%47% higher, as compared tothan the $1,900,925$5,353,648 loss from operations for the threenine months ended March 31,September 30, 2022 for the reasons discussed above.

Interest Income, (Expense), Net. Net interest income was $111,302$318,922 for the threenine months ended March 31,September 30, 2023 compared to net interest expense of $3,716$55,243 for the threenine months ended March 31,September 30, 2022 as the result ofdue to the impact of higher interest rates on our money market account.

Net Loss. Our net loss for the threenine months ended March 31,September 30, 2023 was $2,527,985,$7,548,272, or 33%42% higher, as compared to a net loss of $1,904,641$5,298,405 for the threenine months ended March 31,September 30, 2022, for the reasons discussed above.