As filed with the Securities and Exchange Commission on August 6, 2013
 
Registration No. 333-_________
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
 
IDEAL POWER INC.
(Exact name of registrant as specified in its charter)
 
Delaware
     
14-1999058
(State or other jurisdiction of
 
(Primary Standard Industrial
 
(I.R.S. Employer
incorporation or organization)
 
Classification Code Number)
 
Identification No.)
 
5004 Bee Creek Road, Suite 600
Spicewood, Texas 78669
(512) 264-1542
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
Paul Bundschuh
Chief Executive Officer
Ideal Power Inc.
5004 Bee Creek Road, Suite 600
Spicewood, Texas 78669
(512) 264-1542
 (Name, address, including zip code, and telephone number, including area code, of agent for service)
 
Copies to:
Kevin Friedmann, Esq.
Richardson & Patel LLP
The Chrysler Building, 49th Floor
405 Lexington Avenue
New York, New York 10174
Telephone: (212) 561-5559
Fax: (917) 591-6898
Scott Bartel, Esq.
Eric Stiff, Esq.
Locke Lord LLP
500 Capitol Mall, Suite 1800
Sacramento, California 95814
Telephone:  (916) 930-2500
Fax:  (916) 930-2501

As soon as practicable after the effective date of this Registration Statement.
(Approximate date of commencement of proposed sale to the public)
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. [   ]
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [   ]
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [   ]
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [   ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
 
Large accelerated filer [   ]
 
Accelerated filer [   ]
Non-accelerated filer [   ]
 
Smaller reporting company [X]
(Do not check if a smaller reporting company)
   
 
 

 
 
CALCULATION OF REGISTRATION FEE
  
   
Amount to be
Registered
(1)
   
Proposed
Maximum
Offering
Price Per
Share
   
Proposed
Maximum
Aggregate
Offering
Price
   
Amount of
Registration
Fee
 
Title of Each Class of Securities to be Registered
                       
Common Stock, $0.001 par value per share(2)
   
2,875,000
   
$
5.00
   
$
14,375,000
   
$
1,960.75
 
Underwriter Warrant (3)(4)
         
$
     
$
1,000
   
$
0.14
 
Common Stock underlying Underwriter's Warrant
   
287,500
   
$
6.25
   
$
1,796,875
   
$
245.09
 
Total
                 
$
16,172,875
   
$
2,205.98
 

(1)
Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended, for the public offering and Rule 457(a) for the offering by the security holder.
(2)
Includes 375,000 shares of common stock representing 15% of the shares offered to the public that the underwriter has the option to purchase to cover over-allotments, if any.
(3)
No registration fee required pursuant to Rule 457(g) under the Securities Act of 1933.
(4)
Represents a warrant granted to the underwriter to purchase shares of common stock in an amount up to 10% of the number of shares sold to the public in this offering.
 
    The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment, which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 
 

 
 
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
 
 SUBJECT TO COMPLETION, DATED AUGUST 6, 2013
 
 PRELIMINARY PROSPECTUS
 
2,500,000 Shares of Common Stock
 

 
    We are offering 2,500,000 shares of our common stock, $0.001 par value, in a firm commitment offering, which share number reflects our proposed one for 2.381 reverse stock split (the “reverse stock split”) described in this prospectus.  After the effectiveness of the registration statement, of which this prospectus is a part, and concurrently with the pricing of the offering, we will effect the reverse stock split.

    This is an initial public offering of our common stock.  We expect the public offering price to be $5.00 per share (assuming the reverse stock split).  There is presently no public market for our common stock.  We intend to apply for listing of our common stock on the Nasdaq Capital Market under the symbol “IPWR,” which listing we expect to occur upon consummation of this offering.  No assurance can be given that our application will be approved.  If our application to the Nasdaq Capital Market is not approved, or if we do not raise at least $10 million in this offering, we will not complete the offering or effect the reverse stock split.
 
    We are an “emerging growth company” under the federal securities laws and will have the option to use reduced public company reporting requirements.  Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 9 for a discussion of information that should be considered in connection with an investment in our securities.

    Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete.  Any representation to the contrary is a criminal offense.
  
    MDB Capital Group, LLC is the underwriter for our initial public offering.  If we sell all of the common stock we are offering, we will pay to MDB Capital Group, LLC $1,250,000, or 10%, of the gross proceeds of this offering and non-accountable expenses equal to $187,500.  For a more complete discussion of the compensation we will pay to the underwriter, please see the section of this prospectus titled “Underwriting”.  In connection with this offering, we have also agreed to issue to MDB Capital Group, LLC a warrant to purchase shares of our common stock in an amount up to 10% of the shares of common stock sold in the public offering, with an exercise price equal to 125% of the per-share public offering price.
 
   
Per Share
   
Total
 
Public offering price
 
$
5.00
   
$
12,500,000.00
 
Underwriting discounts and commissions
 
$
0.50
   
$
  1,250,000.00
 
Proceeds to us (before expenses) (1)
 
$
4.50
   
$
11,250,000.00
 

(1)
Does not include a non-accountable expense allowance equal to $187,500 payable to MDB Capital Group, LLC, the underwriter.  See “Underwriting” for a description of compensation payable to the underwriter.
 
    The underwriter may also purchase an additional 375,000 shares of our common stock (assuming the reverse stock split) amounting to 15% of the number of shares offered to the public, within 45 days of the date of this prospectus, to cover over-allotments, if any, on the same terms set forth above.
 
    The underwriter expects to deliver the shares on or about _____________________, 2013.
 
MDB Capital Group, LLC
 
The date of this prospectus is _______________, 2013.
 
 
 

 

TABLE OF CONTENTS
 
   
Page
PROSPECTUS SUMMARY
 
1
SUMMARY SELECTED FINANCIAL INFORMATION
 
8
RISK FACTORS
 
9
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION CONTAINED IN THIS PROSPECTUS   20
BUSINESS
 
21
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
31
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
37
EXECUTIVE COMPENSATION
 
40
DESCRIPTION OF CAPITAL STOCK
 
42
MARKET FOR OUR COMMON STOCK, DIVIDEND POLICY AND OTHER STOCKHOLDER MATTERS
 
46
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
46
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
49
CHANGES IN ACCOUNTANTS   53
UNDERWRITING
 
53
USE OF PROCEEDS
 
57
CAPITALIZATION
 
57
DILUTION
 
59
LEGAL MATTERS
 
60
EXPERTS
 
60
WHERE YOU CAN FIND MORE INFORMATION
 
60
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
 
60
 
Unless otherwise stated or the context otherwise requires, the terms “IPWR,” “we,” “us,” “our” and the “Company” refer to Ideal Power Inc.
 
You should rely only on the information contained in this prospectus.  We have not authorized anyone to provide you with additional or different information.  The information contained in this prospectus is accurate only as of the date on the front cover of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.
 
No dealer, salesperson or any other person is authorized in connection with this offering to give any information or make any representations about us, the securities offered hereby or any matter discussed in this prospectus, other than those contained in this prospectus and, if given or made, the information or representations must not be relied upon as having been authorized by us.  This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any security other than the securities offered by this prospectus, or an offer to sell or a solicitation of an offer to buy any securities by anyone in any circumstance in which the offer or solicitation is not authorized or is unlawful.

 
 

 

Prospectus Summary
 
    This summary highlights selected information contained elsewhere in this prospectus and does not contain all of the information that you need to consider in making your investment decision.  You should carefully read this entire prospectus, as well as the information to which we refer you, before deciding whether to invest in our common stock.  You should pay special attention to the “Risk Factors” section of this prospectus to determine whether an investment in our common stock is appropriate for you.
 
    This registration statement, including the exhibits and schedules thereto, contains additional relevant information about us and our securities.  With respect to the statements contained in this prospectus regarding the contents of any agreement or any other document, in each instance, the statement is qualified in all respects by the complete text of the agreement or document, a copy of which has been filed or incorporated by reference as an exhibit to the registration statement.
 
About Ideal Power Inc.
 
    We design and develop technologies that aim to improve key performance characteristics of electronic power converters and inverters, including manufacturing cost, installation cost, weight, efficiency, reliability and flexibility.  Our Power Packet Switching Architecture™ (PPSA) is an entirely new power conversion topology that uses software switching and 100% indirect power transfer.  With PPSA, all of the power flows into and is temporarily stored in an AC link magnetic storage component.  This allows PPSA-enabled products to provide isolation (which enables grounding) and still be significantly smaller than both transformer-based inverters and transformer-less inverters.

    We believe that our technology can allow owners and operators of systems with a wide variety of power conversion needs to benefit from reduced costs and increased efficiency, reliability and flexibility.  In addition, PPSA can reduce the compliance burden faced by users of transformer-less power converters.  (Transformer-less converters are smaller than transformer-based converters, but they do not provide isolation, so they need significant additional protections to meet United States safety regulations.)

    Our initial target markets will be the PV inverter, electrified vehicle DC charging, and distributed storage markets.

    We were incorporated in Texas on May 17, 2007.  We converted to a Delaware corporation on July 15, 2013.  The address of our corporate headquarters is 5004 Bee Creek Road, Suite 600, Spicewood, Texas 78669 and our telephone number is (512) 264-1542.  Our website can be accessed at www.idealpower.com.  The information contained on, or that may be obtained from, our website is not, and shall not be deemed to be, a part of this prospectus.

The Industry

    Recent trends in the sources and uses of energy are driving demand for electronic power converters.  These trends include the migration toward intermittent renewable resources, an increased consumer demand for electrified vehicles, and a growing need to improve grid reliability and enable low cost off-grid renewable power systems in remote locations.  However, the power electronics systems used in these markets have limitations in size, weight, cost, safety, efficiency, flexibility and reliability.  We believe PPSA can improve upon existing technology on all of these parameters.

    Currently, isolated power conversion requires several bulky, inflexible devices.  These include bulk capacitors, power switches, line reactors and isolation transformers.  These components are heavy and expensive.  In addition, they are often custom-built for fixed functions, making them inflexible and not scalable.  This process also imposes high electrical and thermal stresses, which can create safety and reliability issues.

 
-1-

 
 
Our Proprietary Technology
 
    With PPSA, power flows through, and is temporarily stored in, an AC link magnetic storage component.  The power therefore moves like a packet, and the switching of that packet through the stages of the PPSA process is what gives Power Packet Switching Architecture its name.  Critically, this means that the entire process of isolated power conversion can take place in a single PPSA enabled device.  A brief outline of the process is as follows:

Stage One:  The AC Link is charged from the input


Stage Two:  The AC Link stores electrical energy and switches (rotates) the input voltage/current to match the output voltage/current requirements


Stage Three: The AC Link releases power to the output

 
    This process has several benefits.  Many of these stem from the fact that PPSA requires fewer hardware components than conventional designs:

·
Improved power-to-weight ratio.  This is another way of saying that PPSA can deliver the same power as a traditional inverter in a much smaller form factor and lower weight.  Lower weight using standard materials can lower material and manufacturing costs, as well as logistic costs of shipping, installation and maintenance.  For example, Power One (one of the leaders in the power conversion space) currently offers a 27.6 kW transformer-less inverter that weighs 168 lbs., for a power-to-weight ratio of approximately 6.09 lbs./kW.  (Please note that transformer-less inverters do not provide isolation; one of the key benefits they provide over traditional inverters is that they are smaller.)  Our 30 kW inverter weighs only 97 lbs., for a power-to-weight ratio of approximately 3.23 lbs./kW.

·
Best-of-class safety without significant additional safeguards.  Stage Two of the PPSA process above provides electrical isolation between the input and the output without a transformer.  This isolation means that PPSA systems can be grounded, so they achieve the same safety profile as transformer-based inverters.  Transformer-less inverters, which cannot be grounded can only achieve that level of safety by integrating other safeguards, increasing system expense.

·
Greater efficiency.  PPSA delivers efficiencies above 96%.  The efficiency of competing systems varies significantly depending on the application, but in some of our target applications, our PPSA solution has half the power losses of conventional solutions.

 
-2-

 
 
·
Greater scalability/flexibility.  The electronic power converter market is fragmented.  PPSA can use a common hardware design with different embedded software to address different markets.  PPSA’s flexibility enables uses below 10 kW to over 1 MW.

·
Greater reliability.  Because PPSA uses no electrolytic capacitors, it eliminates many points of failure of conventional systems.  We believe this and other design features will lead to increased reliability.
 
    We are continuing to develop and extend the PPSA platform.  This includes development work focused on bi-directional insulated gate bipolar transistors (BD-IGBTs).  Using BD-IGBTs in our PPSA solution should yield further improvements in power density, manufacturing cost, and efficiency.  The Department of Energy awarded us a $2.5 million ARPA-e grant to develop and commercialize BD-IGBT power switches to improve the performance of our solutions.

Our Business Model
 
    Our business model is to license PPSA to original equipment manufacturers (OEMs).  Our goal is to have OEMs sell our product to end users and share in the overall economic benefit; we expect this approach will allow us to save on staffing and working capital requirements.  To serve the goal of licensing PPSA, we are building reference products that demonstrate the capabilities of PPSA to OEMs.  We have already designed and built our first two reference products:  a 30 kW photovoltaic (PV) inverter and a 30kW battery converter.  These products have met rigorous industry standards and have been purchased by leading commercial and government customers, including Johnson Controls, Sharp Labs of America, the U.S. Navy, the National Renewable Energy Laboratory (NREL) and National Aeronautics and Space Administration (NASA). We are in the process of developing two more reference products:  a 30kW 3-port hybrid converter and a 30kW micro-grid converter.  Based on our research and testing, we believe our technology can scale down to 10 kW and up to 1 MW.

Our Target Markets
 
    We believe there are dozens of markets that could benefit from PPSA’s unique method of isolated transformer-less power conversion.  Our initial focus will be on three strategic markets: solar photovoltaic (PV), distributed storage and electrified vehicle DC charging.  We have chosen these initial markets based on their size and growth, the strength of the PPSA value proposition for those markets, and our time-to-market.

·
PV inverter market:  The PV inverter market is already large and still growing; industry analysts estimate it at $7.1 billion in 2013, with growth in the installed base from 30 GW in 2012 to over 58 GW in 2017 (a CAGR of 13.8%).  Much of this growth is due to a rapid decline in the cost of solar cells.  Operators who are trying to remove more cost from these systems have therefore now begun to turn to “balance of system” costs, as these now represent a larger percentage of total installation expense.

Our 30kW PV inverter weighs 97 pounds compared to 1200 pounds from a typical transformer-based PV inverter.  It also weighs about half as much as typical transformer-less PV inverters, which do not provide isolation and therefore need additional safeguards to meet US regulatory guidelines.  This reduced weight means that our 30kW PV inverter can be cheaper to manufacture than the competition; it also means that it is cheaper to ship and install.

Our reference product for this market is our 30kW PV inverter.  As of March 31, 2013, this product had already been sold to 11 different PV inverter installation companies.

·
Distributed storage market:  This market is also growing extremely fast; industry analysts estimate that the U.S. market will grow from 1.4 MW of PV systems with integrated storage in 2012 to 900 MW in 2017, a CAGR of 264%.

Our 30kW battery converter is our first reference product for this market.  It is suitable for several emerging storage applications, including peak demand reduction.  Our early customers for this application include Johnson Controls, Sharp and Powin Energy.  We have also made commercial off the shelf (COTS) sales to NREL, the U.S. Navy and NASA.

 
-3-

 
 
Our next reference product for this market will be our 3-port hybrid converter, which will integrate PV with grid storage.  We also plan to develop a 3-port micro-grid converter (expected Q4 2014) that will provide new embedded firmware capabilities supporting micro-grids.  We expect this product will allow our customers to use our systems to lower the cost of combined PV and batteries for emergency backup power or to operate them in remote off-grid installations.

·
Electrified vehicle DC charging market:  The DC charging market is sometimes called the fast-charging market, as it can reduce charge time for a standard electric vehicle from 8 hours to 30 minutes.  This market is growing extremely fast, spurred on by EV manufacturers such as Tesla and Nissan; industry analysts estimate that it will grow from $713 million in 2013 to $3.8 billion in 2020 (a CAGR of 27.1%), as the number of DC chargers grows from about 9,000 to about 98,000 over the same time period.

Our 30 kW battery converter is our first reference product for this market, and is already installed at NREL in Colorado. We believe the efficiency, flexibility and cost benefits of PPSA will contribute to the spread of DC charging stations.  Our partners in establishing early market leadership include the U.S. Department of Defense and NRG Energy.

Our next reference product for this market (expected Q1 2014) will be a 30 kW hybrid converter that will exploit the multi-port capabilities of PPSA; it will have the ability to integrate DC charging with PV or stationary battery storage.

·
Other markets:  We plan to continue to evaluate new markets for PPSA based on their size and growth, the strength of the PPSA value proposition for those markets, and our time-to-market.  We are studying PPSA’s applicability to markets such as variable frequency drives (VFDs) for AC motors, uninterruptible power supply (UPS), utility dispatchable PV, and solid state transformers.

Reverse Stock Split and Offering Requirements
 
    We will close this offering only if our listing application is approved by the Nasdaq Capital Market and only if we raise a minimum of $10 million in gross proceeds.  If we are unable to meet either of these requirements, we will terminate the offering.
 
    On June 13, 2013, our Board of Directors, and on July 5, 2013, stockholders holding a majority of our outstanding voting power, approved resolutions authorizing our Board of Directors to effect a reverse split of our common stock at an exchange ratio of between one-for-two and one-for-ten, with our Board of Directors retaining the discretion as to whether to implement the reverse split and which exchange ratio to implement.  The reverse stock split is intended to allow us to meet the minimum share price requirement of The Nasdaq Capital Market.  During August 2013, our Board of Directors determined that following the effectiveness of the registration statement, of which this prospectus is a part, and prior to the closing of this offering, the Board of Directors will effect the reverse stock split at a ratio of 1 share for each 2.381 shares.
 
    Except as otherwise indicated and except in our financial statements, all information regarding share amounts of common stock and prices per share of common stock contained in this prospectus assume the consummation of the reverse stock split to be effected following effectiveness of the registration statement, of which this prospectus forms a part, and prior to the closing of this offering.

Status as an Emerging Growth Company
 
    We are an “emerging growth company” as that term is defined in the Jumpstart Our Business Startups Act (the “JOBS Act”).  Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Securities Exchange Act) are required to comply with the new or revised financial accounting standard.  The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable.  We have irrevocably elected to opt out of the transition period, and we have not utilized any provisions of the JOBS Act to date.

 
-4-

 
 
Ability to Continue our Operations

We experienced net losses of $4,647,219 and $1,750,939 for the years ended December 31, 2012 and 2011, respectively.  At December 31, 2012, our net loss from inception was $7,200,514.  Net loss for the quarter ended March 31, 2013 was $1,824,503, which increased the accumulated net losses to $9,025,017 as of March 31, 2013.

We will need financing to continue our operations, particularly for the support of our research and development efforts.  We have no committed sources of capital and do not know whether additional financing will be available when needed on terms that are acceptable, if at all.  The failure to satisfy our capital requirements will adversely affect our business, financial condition, results of operations and prospects.
 
Unless we raise funds in this offering, we will not have sufficient capital to continue our operations for the next 12 months.  Even if we raise funds in this offering, they may be insufficient to sustain our operations for the next 12 months if our costs are higher than projected or unforeseen expenses arise.

Convertible Promissory Notes

We have issued $750,000 in senior secured convertible promissory notes that must be paid or converted into shares of our common stock on or before July 29, 2014, $4 million in senior secured convertible promissory notes that must be paid or converted into shares of our common stock on or before November 21, 2013, $1.142 million in convertible promissory notes that must be paid or converted into shares of our common stock on or before December 31, 2013, and we expect to issue an additional $213,394 in convertible notes to our legal counsel for services rendered in connection with this offering.  Collectively, we refer to these promissory notes as the “Convertible Notes” in this prospectus.  If we raise at least $10 million in this offering, all of the Convertible Notes will be converted into shares of our common stock.  We do not plan to consummate this offering unless we raise at least $10 million, so our disclosures in this prospectus assume full conversion of the Convertible Notes into 1,682,606 shares of our common stock.

Risks Related to Our Business
 
Our business is subject to a number of risks.  You should understand these risks before making an investment decision.  If any of these risks actually occurs, our business, financial condition or results of operations would likely be materially adversely affected.  In such case, the trading price of our common stock would likely decline, and you may lose all or part of your investment.  Below is a summary of some of the principal risks we face.  The risks are discussed more fully in the section of this prospectus below titled “Risk Factors.” 

·
We have a limited operating history and it is uncertain whether we will ever be profitable.  We anticipate future losses and negative cash flow, which may limit or delay our ability to become profitable.

·
We may raise additional financing by issuing new securities that may have terms or rights superior to those of our shares of common stock, which could adversely affect the market price of our shares of common stock and our business.

·
If we do not receive additional financing when and as needed in the future, we may not be able to continue our research and development efforts or accelerate the commercialization of our technology and materials.

·
If we are unable to keep up with rapid technological changes, our technology may become obsolete.

·
We may be unable to protect our intellectual property.

·
We may not be able to reach production scales that are required to maintain manufacturing costs low enough to become profitable.

·
We may not be able to convince customers to buy or to license our products due to our limited history.

·
We may have significant reliability problems with our products, requiring extensive recalls and repair costs.

·
We will face extensive competition from better-established power converter manufacturers.
 
 
-5-

 
 
THE OFFERING
 
The following summary contains basic information about our initial public offering and our common stock and is not intended to be complete.  It does not contain all of the information that may be important to you.  For a more complete understanding of our common stock, please refer to the section of this prospectus titled “Description of Capital Stock.”
 
Issuer
 
Ideal Power Inc., a Delaware corporation.
     
Common Stock Offered By Us
 
2,500,000 shares of common stock, par value $0.001 per share.
     
Over-allotment Option
 
We have granted an option to our underwriter to purchase up to an additional 375,000 shares of common stock within 45 days of the date of this prospectus in order to cover over-allotments, if any.
     
Common Stock Outstanding Prior To This Offering
 
1,480,262 shares of common stock (1)
     
Common Stock Outstanding After This Offering
 
5,688,038 shares of common stock (1)(2)(3)
     
Use of Proceeds
 
We intend to use the net proceeds from our sale of common stock in this offering as follows: approximately $1.5 million will be used for new product research and development, approximately $5 million will be used for existing product development and commercialization, approximately $1 million will be used for the protection of our intellectual property, approximately $1 million will be used for the purchase of equipment and software, and the balance of the funds will be used for general corporate purposes.  See “Use of Proceeds” and “Plan of Operation” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information.
     
Market And Trading Symbol For The Common Stock
 
There is currently no market for our common stock.  We intend to apply for listing of our common stock on the Nasdaq Capital Market under the symbol “IPWR”.
     
Underwriter Common Stock Purchase Warrant
 
In connection with this offering, we have also agreed to sell to MDB Capital Group, LLC and its designees a warrant to purchase up to 10% of the shares of common stock sold in this offering.  If this warrant is exercised, each share may be purchased by MDB Capital Group, LLC at $6.25 per share (125% of the price of the shares sold in this offering.)

 
-6-

 
 
Lock-Up Agreements
 
Our officers, directors and employees, and 5% or greater holders of our equity securities as determined pursuant to Rule 13d-3 of the Securities Exchange Act of 1934, as amended, will have the securities they own locked up until the first anniversary of the Underwriting Agreement we will enter into with MDB Capital Group, LLC in conjunction with this offering (the “One Year Lock-Up”).  The purchasers of our senior secured convertible promissory notes, including MDB Capital Group, LLC, are subject to lock-up requirements for periods that may last no more than 180 days following the date of this prospectus (the “Six Month Lock-Up”).  The number of currently outstanding shares of common stock subject to the One Year Lock-Up totals 1,262,792 shares and the number of shares underlying options, warrants, and convertible promissory notes subject to the One Year Lock-Up totals 453,441 shares.  The number of shares of common stock to be issued to, or that may be acquired by, the holders of our senior secured convertible promissory notes and MDB Capital Group, LLC that will be subject to the Six Month Lock-Up totals 2,455,231 shares.  For more information about the lock-up agreements and requirements, see the section titled “Underwriting - Lock-Up Agreements” in this prospectus.
 
Offering Termination
 
If we fail to obtain approval from The Nasdaq Stock Market to list our common stock on the Nasdaq Capital Market or if we fail to raise at least $10 million of gross proceeds in this offering, we will not complete the offering.
     
(1)
The number of shares of our common stock to be outstanding both before and after this offering is based on the number of shares outstanding as of June 30, 2013 and excludes:
   
 
158,108 shares of our common stock reserved for issuance under outstanding option agreements and 352,270 shares of our common stock reserved for issuance under option agreements that have been approved by the Compensation Committee of the Board of Directors but have not yet been issued;
 
 
 
 
487,713 shares of our common stock reserved for future issuance under our 2013 Equity Incentive Plan;
 
1,519,095 shares of our common stock reserved for issuance under outstanding warrant agreements; and
 
 
250,000 shares of our common stock issuable upon exercise of the warrant issued to MDB Capital Group, LLC.
 
 
Unless otherwise specifically stated, information throughout this prospectus assumes that none of our outstanding options or warrants to purchase shares of our common stock are exercised.
(2)
Unless otherwise indicated, the number of shares of common stock presented in this prospectus excludes shares issuable pursuant to the exercise of the underwriter’s over-allotment option.
(3)
This number includes 2,500,000 shares of common stock that will be issued in this offering, 1,682,606 shares of common stock that will be issued to the holders of the Convertible Notes upon the completion of this offering, and 25,170 shares of common stock to be issued to our independent directors as compensation for their services.
  
 
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SUMMARY SELECTED FINANCIAL INFORMATION
 
The table below includes historical selected financial data for each of the years ended December 31, 2012 and 2011, derived from our audited financial statements included elsewhere in this prospectus.  The table below also includes historical financial data for the three-month periods ended March 31, 2013 and 2012, derived from our unaudited financial statements included elsewhere in this prospectus.
 
You should read the historical selected financial information presented below in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and our financial statements and the notes to those financial statements included elsewhere in this prospectus.  Historical results are not necessarily indicative of the results that may be expected for any future period. 

   
For the Years Ended December 31,
   
For the Quarters Ended March 31, (unaudited)
 
   
2012
   
2011
   
2013
   
2012
 
STATEMENT OF OPERATIONS:
                       
Revenue
  $ 1,126,907     $ 860,771     $ 380,135     $ 132,182  
Costs of goods sold
    957,641       757,393       366,989       87,577  
Gross Profit
    169,266       103,378       13,146       44,605  
Operating expenses
    3,207,573       1,616,060       754,220       652,331  
Loss from operations
    (3,038,307 )     (1,512,682 )     (741,074 )     (607,726 )
Interest expense, net
    (1,608,912 )     (238,257 )     (1,083,429 )     (103,549 )
Net loss
  $ (4,647,219 )   $ (1,750,939 )   $ (1,824,503 )   $ (711,275 )
Basic and diluted net loss per share
    (1.33 )     (0.53 )     (0.52 )     (0.20 )
Weighted average number of basic and diluted common shares outstanding
    3,489,963       3,282,520       3,524,505       3,477,050  
                                 
   
December 31, 2012
   
December 31, 2011
   
March 31, 2013 (unaudited)
         
BALANCE SHEET DATA:
                               
Cash and cash equivalents
  $ 1,972,301     $ 100,675     $ 1,215,986          
Working capital (deficit)
    528,603       (61,437 )     (1,274,681 )        
Total assets
    3,207,003       579,853       2,325,766          
Total liabilities
    3,308,397       1,750,750       4,196,841          
Total stockholders’ deficit
    (101,394 )     (1,170,897 )     (1,871,075 )        
 
 
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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 prospectus.
 
If any of the events described in the following risk factors actually occurs, or if additional risks and uncertainties that are not presently known to us or that we currently deem immaterial later materialize, 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, 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; therefore we have a limited operating history that makes it difficult to evaluate our business.  We have been granted patents by the United States of America and we have currently pending patent applications with the United States Patent and Trademark Office and equivalent offices in the European Union, India, Malaysia, Singapore, the Philippines, South Korea, China, Brazil and Canada for a power converter topology and our methods of operating said topology, as well as various improvements on and applications of our basic power converter design.  We have also had our designs validated by UL certifications from Intertek (a Nationally Recognized Test Laboratory), the California Energy Commission, and several PV inverter installations.  However, we have only recently begun sales of our products, and we cannot say with certainty when we will begin to achieve profitability.  No assurance can be made that we will ever become profitable.

We have incurred losses in prior periods and expect to incur losses in the future.  We may never be profitable.

Our independent registered public accounting firm has issued an unqualified opinion with an explanatory paragraph to the effect that there is substantial doubt about our ability to continue as a going concern.  This unqualified opinion with an explanatory paragraph could have a material adverse effect on our business, financial condition, results of operations and cash flows.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” and Note 2 to our financial statements included elsewhere in this prospectus.

Since our inception on May 17, 2007 through December 31, 2012, we sustained $7,200,514 in net losses and we had net losses at December 31, 2012 and 2011 of $4,647,219 and $1,750,939, respectively.  We expect to continue to sustain losses for the foreseeable future.  Net loss for the three months ended March 31, 2013 was $1,824,503, which increased the accumulated net losses to $9,025,017 as of March 31, 2013.

We began product sales in 2011 and shipped 14 units for $165,000.  In 2012 we shipped 25 units for $266,000.  In the first quarter of 2013, we shipped 15 units for $122,000.  We also sold $10,000 in ancillary equipment, PV combiners made by SolarBOS.  As sales of our products have generated minimal operating revenues, we have relied on sales of our debt securities to continue our operations.  If we are unable to raise funds through sales of our securities, there can be no assurance that we will be able to implement our business plan, generate sustainable revenue or ever achieve profitable operations.  We expect to have operating losses until such time as we develop a substantial and stable revenue base.  We cannot assure you that we can achieve or sustain profitability on a quarterly or annual basis in the future.

 
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To date we have had a limited number of customers.  We cannot assure you that our customer base will increase.

Two customers, the Department of Energy (ARPAE) and Lockheed Martin, accounted for 75% of net revenue for the year ended December 31, 2012.  Two customers, Lockheed Martin and Meridian Solar, accounted for 85% of net revenues for the year ended December 31, 2011.  The loss of one of these customers could cause an adverse effect on our operations.  72% of the Company’s accounts receivable balance at December 31, 2012 was from the Department of Energy and 100% of accounts receivable at December 31, 2011 was from Lockheed Martin.  Separate from the work for the Department of Energy and Lockheed Martin, the Company sold its product to eleven customers in 2012.

We may not be able to meet our product development and commercialization milestones.
 
Product development and testing are 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.  Our plans and ability to achieve profitability depend on acceptance of our technology and our products by key market participants, such as vendors and marketing partners, and potential end-users of our products.  We continue to educate designers and manufacturers about our solar PV inverters, grid-battery converters, and electric vehicle charging infrastructure.  More generally, the commercialization of our products may also be adversely affected by many factors not within our control, including:
 
·
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.

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 the 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.

 
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The prototype of our new 3-port hybrid converter may not provide the results we expect, may prove to be too expensive to produce and market, or may uncover problems of which we are currently not aware, any of which could harm our business and prospects.

We are currently building a prototype of a 3-port hybrid converter, which is an integrated solar PV inverter and battery charger/inverter, based on improvements to our current PV inverter products.  We do not yet know if the prototype will produce positive results consistent with our expectations.  The prototype may also cost significantly more than expected, and the prototype design and construction process may uncover problems of which we are currently not aware.  These and other 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.

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.

Ultimately, our goal is to license our technology to our customers.  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.

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.
 
To date, we have sold only our solar PV inverter and battery converter products and, even after adding industry veterans to our staff, we continue to experience a learning curve in the marketing and sale of products on a commercial basis.  We expect that the marketing and sale of these products will continue to be conducted by a combination of independent manufacturers’ representatives, third-party strategic partners, distributors, or OEMs.  Consequently, commercial success of our products will depend to a great extent on the efforts of others.  We have entered and intend to continue entering into strategic marketing and distribution agreements or other collaborative relationships to market and sell our solar PV inverter, battery converter and other value added products.  However, we may not be able to identify or establish appropriate relationships in the near term or in the future.  We can give no assurance that these distributors or OEMs will focus adequate resources on selling our products or will be successful in selling them.  In addition, third-party distributors or OEMs 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 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 manufacturers.  Our failure to manage our suppliers and 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 produce our products.  There can be no assurance that key suppliers and 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 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.

 
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We may in the future add production capabilities that would subject us to numerous additional risks and could adversely affect our business, financial condition, results of operations and prospects.

We currently rely on third parties to produce our products, but we may in the future add production capabilities and produce products ourselves.  Adding production to our operations would subject us to numerous additional risks, including:
 
·
the need to use significant capital resources for equipment purchases;
 
·
increases to our operating expenses to add personnel and expertise to effectively and efficiently manufacture products;
 
·
inaccurate estimates of customer demand for our products and the resources needed to meet customer demand; and
 
·
diversion of management’s attention from other aspects of our business.

If we expand our business to produce our own products, we cannot assure you that we will be able to produce our products in a profitable manner or at all.  If we add production capabilities and any of the risks above are realized, our business, financial condition, results of operations and prospects could be materially and adversely affected.

Our business is dependent upon our ability to obtain financing.  If we do not obtain such financing, we may have to cease our activities and investors could lose their entire investment.

There is no assurance that we will operate profitably or generate positive cash flows in the future.  We will require additional financing in order to sell our current products and to continue the research and development required to produce our next generation of products.  We anticipate that we will need approximately $5 million during the next 12 months to sustain our business operations, including our research and development activities.  We may not be able to obtain financing on commercially reasonable terms or at all.  If we do not obtain such financing, our business could fail and investors could lose their entire investment.

In conjunction with an award we received through the State of Texas, we have granted the Office of the Governor, Economic Development and Tourism (“OOGEDT”), a security interest in all of our assets.  If we breach the award agreement and do not repay the award funds, the OOGEDT will be entitled to exercise its right to foreclose on our assets.  If that were to happen, your investment would become worthless.

On October 1, 2010, we received a Texas Emerging Technology Fund Award in the amount of $1 million through the Office of the Governor, Economic Development and Tourism (“OOGEDT”).  If we are in breach of the terms of the award because, for example, we move our operations to a jurisdiction other than Texas, we fail to continue our business, or because the Office of the Governor finds that we made false or misleading statements to the OOGEDT to induce that office to make the award, the OOGEDT may demand repayment of the award funds that have been disbursed, which currently total $1,152,690 as of March 31, 2013.  The OOGEDT has taken a security interest in our assets to secure the repayment of the funds in the event that we breach the terms of the award.  If we breach the terms of the award and fail to repay the award funds, the OOGEDT would be entitled to exercise its right to foreclose on our assets.  If that were to happen, your investment would become worthless.

The economic downturn in the United States has adversely affected, and is likely to continue affecting, our ability to raise capital, which may potentially impact our ability to continue our operations.

As a company that is still in the process of developing its technology, we must rely on raising funds from investors to support our research and development activities and our operations.  The economic downturn in the United States has resulted in a tightening of the credit markets, which has made 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.

 
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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 certain cases where our end customers utilize contract manufacturers or distributors, our accounts receivable risk may lie with the contract manufacturer or distributor and may not be guaranteed by the end customer.  In addition, in connection with the growth of the renewable energy market, we are gaining a substantial number of 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 seen an increasing amount of bankruptcies and reorganizations as the availability of financing has diminished.
 
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 conditions 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 power converters and we expect to offer a warranty with each of our future product applications.  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, such as backup power.  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 devices 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 certain 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 Paul Bundschuh (Chief Executive Officer) and William Alexander (Chief Technology Officer).  If we lose the services of either of these persons, we would likely be forced to expend significant time and money in the pursuit of replacements, which 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 either of these executives.

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.

 
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Risks Relating to the Industry

Our industry is intensely competitive.  We cannot guarantee you that we can compete successfully.

Our business is highly competitive.  We will be competing against providers of power converter systems that are highly established and have substantially greater manufacturing, marketing, management and financial resources including very substantial market position and name recognition. The competitors for our PV inverter products include ABB, Advanced Energy, Satcon, SMA and Chint Solar.  All aspects of our business, including pricing, financing and servicing, as well as the general quality, efficiency and reliability of our products, are significant competitive factors.  Our ability to successfully compete with respect to each of these factors is material to the acceptance of our products and our future profitability.  In addition, the solar power industry may tend to be resistant to change and to new products from suppliers that are not major names in the field.  Our competitors will use their established position to their competitive advantage.  If our innovations are successful, our competitors may seek to adopt and copy our ideas, designs and features.  Our competitors may develop or offer technologies and products that may be more effective or popular than our products and they may be more successful in marketing their products than we are in marketing ours.  Pricing competition could result in lower margins for our products.

We expect to compete on the basis of our products’ significantly lower cost, smaller footprint, and higher efficiency.  Technological advances in alternative energy products or other power converter technologies may negatively affect the development of our products or make our products non-competitive or obsolete prior to commercialization or afterwards.

We cannot assure you that we will be able to compete successfully in our markets, or compete effectively against current and new competitors as our industry continues to evolve.

The reduction or elimination of government subsidies and economic incentives for energy-related technologies could harm our business.

We believe that near-term growth of energy-related technologies, including power converter technology, relies on the availability and size of government and economic incentives and grants (including, but not limited to, the U.S. federal 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 delay the development of our technology and harm our business.

Changes to the National Electrical Codes could adversely affect our technology and products.

Our products are installed by system integrators that must meet National Electrical Codes, including using equipment that meets industry standards such as UL1741.  The NEC standards address the safety of these systems.  The NEC standards, as well as 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 solar PV inverter devices, including our current products for which we have patents and pending patent applications, 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 converter technology, our business would be adversely affected and we will have to revise our plan of operation.

 
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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 inverter products (such as photovoltaic systems), 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 photovoltaic 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.

The industries in which we compete are subject to volatile and unpredictable cycles.

As a supplier to the solar, grid storage, electrified vehicle charging infrastructure, wind, electric motor and related industries, we are subject to business cycles, the timing, length, and volatility of which can be difficult to predict.  These industries historically have been 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 have affected 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.

Risks Related to this Offering and Owning Our Common Stock
 
Prior to the completion of our initial public offering, there was no public trading market for our common stock.
 
The offering under this prospectus is an initial public offering of our securities.  Prior to the closing of the offering, there will have been no public market for our common stock.  While we plan to list our common stock on the Nasdaq Capital Market, we cannot assure you that our listing application will be approved, and that a public market for our common stock will develop.  If our Nasdaq listing application is not approved, we will not complete the offering.

 
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We are an "emerging growth company" under the JOBS Act of 2012 and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”), and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.  At present, we do not intend to take advantage of these exemptions, other than as they apply to all other “smaller reporting companies,” though we may do so at some point in the future.  We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions.  If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

We will remain an “emerging growth company” for up to five years, although we will lose that status sooner if our revenues exceed $1 billion, if we issue more than $1 billion in non-convertible debt in a three year period, or if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30.

Our status as an “emerging growth company” under the JOBS Act of 2012 may make it more difficult to raise capital as and when we need it.

Because of the exemptions from various reporting requirements provided to us as an “emerging growth company,” we may be less attractive to investors and it may be difficult for us to raise additional capital as and when we need it.  Investors may be unable to compare our business with other companies in our industry if they believe that our reporting is not as transparent as other companies in our industry.  If we are unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially and adversely affected.

If a public market for our common stock develops, it 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.
 
If a market for our common stock develops, the market price for the shares may be significantly affected by factors such as variations in quarterly and yearly operating results, general trends in the alternative energy industry, 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, if a market for it develops.
 
Conversion of the Convertible Notes together with the exercise of outstanding warrants will result in substantial dilution to the investors in this offering.

Prior to the completion of this offering, we will have outstanding approximately $6.1 million in Convertible Notes with interest accrued, for the purpose of this discussion, through March 31, 2013.  The Convertible Notes will be paid with 1,682,606 shares of our common stock.  An additional 1,519,095 shares of our common stock may be purchased through the exercise of warrants and a right to purchase issued to the Office of the Governor, Economic Development and Tourism, in conjunction with the award we received from the Texas Emerging Technology Fund.  Conversion of the notes and, if it occurs, exercise of all of the warrants, will result in substantial dilution to the investors in this offering.

 
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We are required to register the shares of common stock underlying our senior secured convertible promissory notes and the warrants that were issued with them.  The sale of these shares could cause the market price of our common stock to decline.

We have granted registration rights to the holders of our senior secured convertible promissory notes.  Registration of the 1,370,267 shares of common stock underlying our senior secured convertible promissory notes and the 791,080 shares of common stock underlying the warrants issued with them could have the effect of driving down the price of our common stock in the market.

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 immediate 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 adversely reduce the voting rights and powers of the common stock and the portion of the Company’s 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 the common stock we are offering. 
 
Management of our Company is within the control of the board of directors and the officers. You should not purchase our common stock unless you are willing to entrust management of our Company to these individuals.
 
All decisions with respect to the management of the Company will be made by our board of directors and our officers, who, before this offering, beneficially own 56.8% of our common stock, as calculated in accordance with Rule 13d-3 promulgated under the Securities Exchange Act of 1934.  After the issuance of our common stock in this offering and the conversion of the Convertible Notes, management will beneficially own 17.7% of our common stock, as calculated in accordance with Rule 13d-3.  Holders of the common stock who purchase in this offering will not obtain majority control of the Company.  Therefore, management will retain significant influence in electing a majority of the board of directors who shall, in turn, have the power to appoint the officers of the Company and to determine, in accordance with their fiduciary duties and the business judgment rule, the direction, objectives and policies of the Company including, without limitation, the purchase of businesses or assets; the sale of all or a substantial portion of the assets of the Company; the merger or consolidation of the Company with another corporation; raising additional capital through financing and/or equity sources; the retention of cash reserves for future product development, expansion of our business and/or acquisitions; the filing of registration statements with the Securities and Exchange Commission for offerings of our capital stock; and transactions that may cause or prevent a change in control of the Company or its winding up and dissolution.  Accordingly, no investor should purchase the common stock we are offering unless such investor is willing to entrust all aspects of the management of the Company to such individuals.

 
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We have options for the purchase of 510,378 shares of our common stock outstanding and we may issue additional options in the future to employees, officers, directors, independent contractors and agents. Sales of the underlying shares of common stock could adversely affect the market price of our common stock.
 
We currently have outstanding options for the purchase of 510,378 shares of common stock.  Of this amount, options for the purchase of 207,604 shares are held by non-affiliates.  Once our common stock is publicly traded, non-affiliate holders may sell these shares in the public markets from time to time, without limitations on the timing, amount or method of sale.  If our stock price rises, the holders may exercise their options and sell a large number of shares.  This could cause the market price of our common stock to decline.
 
We will incur significant increased costs as a result of becoming a public company that reports to the Securities and Exchange Commission and our management will be required to devote substantial time to meet compliance obligations.
 
As a public company reporting to the Securities and Exchange Commission, we will incur significant legal, accounting and other expenses that we did not incur as a private company.  We will be subject to reporting requirements of the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002, 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.  In addition, on July 21, 2010, the Dodd-Frank Wall Street Reform and Protection Act was enacted.  There are significant corporate governance and executive compensation-related provisions in the Dodd-Frank Act that are expected to increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and may also place undue strain on our personnel, systems and resources.  Our management and other personnel will need to devote a substantial amount of time to these new compliance initiatives.  In addition, we expect these rules and regulations to make it more difficult and more expensive 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.  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.

Failure to build our finance infrastructure and improve our accounting systems and controls could impair our ability to comply with the financial reporting and internal controls requirements for publicly traded companies.

As a public company, we will operate in an increasingly demanding regulatory environment, which requires us to comply with applicable provisions of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act, and the related rules and regulations of the Securities and Exchange Commission, expanded disclosure requirements, accelerated reporting requirements and more complex accounting rules.  Company responsibilities required by the Sarbanes-Oxley Act include establishing corporate oversight and adequate internal control over financial reporting and disclosure controls and procedures.  Effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent financial fraud.  We will need to hire or outsource additional finance personnel and build our financial infrastructure as we transition to operating as a public company, including complying with the applicable requirements of Section 404 of the Sarbanes-Oxley Act.  We may be unable to do so on a timely basis.  Until we are able to expand our finance and administrative capabilities and establish necessary financial reporting infrastructure, we may not be able to prepare and disclose, in a timely manner, our financial statements and other required disclosures or comply with the applicable provisions of the Sarbanes-Oxley Act or existing or new reporting requirements.  If we cannot provide reliable financial reports or prevent fraud, our business and results of operations could be harmed and investors could lose confidence in our reported financial information.

Assuming a market for our common stock develops, shares eligible for future sale may adversely affect the market for our common stock.
 
To date we have issued approximately $5.9 million in principal amount of convertible promissory notes and we expect to issue an additional $213,394 in convertible notes to our legal counsel for services.  If we raise gross proceeds of at least $10 million in this offering, the convertible promissory notes and those expected additional convertible notes will be converted into shares of our common stock either at the price per share in this offering or at a discount to the price per share in this offering.  We do not plan to consummate this offering unless we raise at least $10 million.  Therefore, assuming an offering price of $5.00 per share, the principal and interest accrued through March 31, 2013 under the promissory notes will be converted into 1,621,249 shares of our common stock and the expected additional convertible notes will convert into an additional 61,357 shares of common stock upon the consummation of this offering.  We have also issued warrants for the purchase of 1,519,095 shares of our common stock.  We have agreed to register for resale 1,370,267 shares of common stock together with 791,080 shares of common stock underlying the warrants issued in conjunction with our senior secured convertible promissory notes.

 
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Furthermore, from time to time after we become subject to the reporting requirements of section 13 or section 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) for at least 90 days, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act, subject to certain limitations.  In general, pursuant to Rule 144, non-affiliate stockholders may sell freely after six months subject only to the current public information requirement (which disappears after one year).  Of the 1,480,262 shares of our common stock outstanding as of June 30, 2013, approximately 509,094 shares are held by “non-affiliates” and will be freely tradable without restriction pursuant to Rule 144, although 217,471 shares of common stock held by non-affiliates will be subject to a one year lock-up that will end on the first anniversary of the execution of the underwriting agreement entered into in connection with this offering.

Any substantial sale of our common stock pursuant to Rule 144 or pursuant to any resale prospectus (including sales by investors of securities acquired in connection with this offering) may have a material adverse effect on the market price of our common stock.

We may allocate the net proceeds from this offering in ways that differ from the estimates discussed in the section titled "Use of Proceeds" and with which you may not agree.
 
The allocation of net proceeds of the offering set forth in the “Use of Proceeds” section below represents our estimates based upon our current plans and assumptions regarding industry and general economic conditions, and our future revenues and expenditures.  The amounts and timing of our actual expenditures will depend on numerous factors, including market conditions, cash generated by our operations, business developments and related rate of growth.  We may find it necessary or advisable to use portions of the proceeds from this offering for other purposes.  Circumstances that may give rise to a change in the use of proceeds and the alternate purposes for which the proceeds may be used are discussed in the section entitled “Use of Proceeds” below.  You may not have an opportunity to evaluate the economic, financial or other information on which we base our decisions on how to use our proceeds.  As a result, you and other stockholders may not agree with our decisions.  See “Use of Proceeds” for additional information.
 
You will experience immediate dilution in the book value per share of the common stock you purchase.
 
Because the price per share of our common stock being offered is substantially higher than the book value per share of our common stock, you will experience substantial dilution in the net tangible book value of the common stock you purchase in this offering.  Based on an assumed offering price of $5.00 per share, if you purchase shares of common stock in this offering, you will experience immediate and substantial dilution of $2.92 per share in the net tangible book value of the common stock at March 31, 2013.  See the section titled “Dilution” below for a more detailed discussion of the dilution you will incur if you purchase common stock in this offering.

Our charter documents and Delaware law may inhibit a takeover that stockholders consider favorable.
 
Upon the closing of this offering, provisions of our Certificate of Incorporation (“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.
 
 
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In addition, once we become a publicly traded corporation, 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.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION
CONTAINED IN THIS PROSPECTUS
 
This prospectus contains forward-looking statements.  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 prospectus.  These statements may be found under the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” included in this prospectus, as well as in this prospectus generally.  In particular, these include statements relating to future actions, prospective products, applications, customers, technologies, future performance or results of anticipated products, expenses, and financial results.  These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections.  Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:
 
 
our limited cash and a history of losses;

 
our ability to achieve profitability;

 
our limited operating history;

 
emerging competition and rapidly advancing technology;

 
customer demand for the products and services we develop;

 
the impact of competitive or alternative products, technologies and pricing;

 
our ability to manufacture any products we develop;

 
general economic conditions and events and the impact they may have on us and our potential customers;

         ●      
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;

 
our ability to obtain adequate financing in the future;

 
our ability to continue as a going concern;

 
our success at managing the risks involved in the foregoing items; and

 
other factors discussed in the “Risk Factors” section of this prospectus.
 
The forward-looking statements are based upon management’s beliefs and assumptions and are made as of the date of this prospectus. We undertake no obligation to publicly update or revise any forward-looking statements included in this prospectus or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise, except to the extent required by federal securities laws.  Actual future results may vary materially as a result of various factors, including, without limitation, the risks outlined under the section entitled “Risk Factors” and matters described in this prospectus generally.  In light of these risks and uncertainties, we cannot assure you that the forward-looking statements contained in this prospectus will in fact occur.  You should not place undue reliance on these forward-looking statements.

 
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BUSINESS

Our Company

We are leaders in the development of an innovative electronic power conversion technology called Power Packet Switching Architecture (PPSA).  PPSA is a radically new universal power conversion topology intended to improve upon current power conversion technology in key product metrics, such as weight, size, cost, efficiency and flexibility.  PPSA utilizes standardized hardware with customizable software.  We have already placed significant patent protections on PPSA, and are continuing to build an intellectual property portfolio around it.

Electronic power converters change the form of electrical energy to optimize generation, distribution, consumption or storage.  This conversion may include changing between direct circuit (DC) and alternative current (AC) forms of electricity or changing the voltage and current.

The change in sources and uses of energy is driving a need for new energy infrastructure and technology. Renewables in particular are driving the need for significant change, for example, they create a need for power storage near the source of generation.  Distributed power conversion plays a central role in this new infrastructure.  Renewables require distributed power conversion to allow battery charging and voltage conversion to match grid characteristics.  Inverters are used to convert DC power from renewable solar and wind generators to AC power.  Bi-directional inverters/chargers are needed for large-scale battery storage and fast electrified vehicle charging.  Distributed power conversion can also improve grid reliability and create remote micro-grids to bring distributed power systems to remote communities without power grids. In short, power converters play a crucial role in ensuring the most efficient form of power is available across the electricity spectrum from generation through distribution to storage and ultimately consumption.

In the marketplace, there are currently two main varieties of large-scale inverters:  traditional inverters and transformer-less inverters.  Traditional inverters rely on transformers, which are big and heavy.  Thus, inverters with transformers are costly to ship, install and manufacture.

Alternatively, transformer-less inverters are lighter, smaller and more efficient than transformer-based inverters.  The main problem with transformer-less inverters is that they do not provide electrical isolation.  This means the system cannot be grounded, which creates additional safety concerns compared with non-grounded systems such as typical PV arrays. The US National Electrical Code prohibited the use of non-grounded systems until 2005, and still imposes stringent regulation for systems with transformer-less inverters.  These regulations may require installers to use double jacketed PV wire, overcurrent protection, and disconnect devices on both the positive and negative conductors.  These additional requirements raise the system cost.

PPSA enables a size and weight profile even smaller than a transformer-less inverter while simultaneously providing isolation.  Consequently, PPSA has the potential to impact several fast-growing markets.

Though we intend to ultimately generate revenues primarily by licensing our technology to partners, we have begun by developing and selling our reference products to demonstrate the capabilities of our technology to these future partners.  Our primary business strategy is (1) to search for and evaluate licensing and partnership agreements with key players in the verticals for which we have developed PPSA reference products; (2) to develop new PPSA reference products that extend our capabilities and address additional market sectors; and (3) to further develop the PPSA technology platform.   Our first efforts are focused on the photovoltaic (PV) inverter, distributed storage and electrified vehicle DC charging markets.  We have completed reference products for the PV inverter and distributed storage markets, and are working to develop one for the electrified vehicle DC charging market.

We believe our reference product for the PV inverter market is the only technology capable of offering a transformer-less inverter with isolation. We have also developed a bi-directional battery converter reference product ideal for several emerging grid storage solutions.

We are also evaluating related market applications for PPSA.  We believe the combination of our technological leadership and intellectual property position enables us to partner with key players in our target markets and share in the economic benefits our technology can unlock.  We also believe that our unique technology will allow us to deliver high value solutions to new high-growth emerging markets before competitors, enabling us to capture early market leadership in these markets.

 
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Our Technology

In our PPSA topology, power flows through and is temporarily stored in an AC link magnetic storage component.  This power packet switching is the heart of our technology.  After the AC link is charged, it is disconnected from both input and output, providing isolation without a transformer.

Figure 1:  Schematic of PPSA Process


Traditional inverter technology uses several magnetic components and capacitors that are heavy and expensive, have custom hardware for fixed functions that are inflexible and costly, and have high electrical and thermal stresses that significantly increase failure rates and reduce efficiency.  Our technology eliminates the majority of the passive components of traditional power converters, including transformers, inductors and capacitors.  PPSA technology can provide isolated power conversion in a single device, which provides clear advantages over traditional topologies.  Among them are:

· Weight: PPSA architecture reduces weight by eliminating passive components such as transformers, inductors and bulk capacitors. Our 30kW PV inverter weighs 97 pounds.  By contrast, competing 30kW PV inverters with transformers weigh approximately 1,200 pounds, and transformer-less inverters (which do not provide isolation) weigh around 170 pounds.

Figure 2:  PPSA Weight Comparison


· Cost: Reduced weight results in lower manufacturing costs.  PPSA technology uses off-the-shelf components and standard materials.  In addition, lighter weight components save end customers on 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.

 
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· Efficiency: In the California Energy Commission (CEC) weighted efficiency test, our 30kW PV inverter efficiency is 96.5% as measured by Intertek, a leading Nationally Recognized Testing Laboratory (NRTL).  This is one of the highest PV inverter efficiencies shown on the CEC website for approved PV inverters.  In addition, our battery converter has achieved efficiencies of over 96%, which is superior to industry-standard.

Figure 3:  PPSA Efficiency Comparison


· Scalability/Flexibility: PPSA technology uses standardized hardware with application specific software, thus providing more scalability that we believe will allow us, and our licensees, to rapidly develop products for new applications.  PPSA’s flexibility enables uses below 10 kW to over 1 MW.

· Reliability: The end result of our technology is a simplified product that eliminates several common of failure modes.  Our products use no electrolytic capacitors.  We believe that this design feature, together with our other design improvements, increases overall reliability.

We are currently working on a next generation Bidirectional Insulated Gate Bipolar Transistor (BD-IGBT) with funds from a U.S. Department of Energy’s $2.5 million ARPA-E (Advanced Research Projects Agency-Energy) grant.  If successful, we believe these new BD-IGBTs will further improve our key technology metrics. We have two leading research universities and commercial vendors working on this project under our direction.

Business Strategy

Our business strategy is to promote and expand the uses of our PPSA platform technology through licensing and partnership agreements and to further develop our technology and its applications.

Licensing Approach:  We are focused on licensing our proprietary power conversion PPSA technology to Original Equipment Manufacturers (OEMs).  We will seek license fees and royalties from OEMs based on the sales of their products integrating PPSA technology. We believe that OEMs could achieve higher margins by providing unique products (based on PPSA) to system integrators. We are targeting leading OEMs in the PV inverter, distributed storage converter, and electrified vehicle DC charging markets as potential commercial licensees of our PPSA technology.  We believe partnerships with key licensees will enable us to reap the benefits of our technology much faster than by manufacturing, distributing or installing products ourselves.  This business model will also allow us to concentrate our efforts and resources on projects more in line with our expertise. As we develop new applications for our technology, we expect to target new partnerships in different market sectors.

Reference Products:  Our reference products demonstrate the advantages of our technology for potential OEM partners.   As noted above, we have completed development of our first two reference products, a 30kW photovoltaic inverter (for the PV market) and a 30kW battery converter (for the distributed storage market).  At Intertek, these products have passed UL1741, a rigorous set of performance and safety tests required for connection to the power grid in the U.S. and several other countries.

 
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Our next planned reference product is a 30kW 3-port hybrid converter, intended for integrating PV, grid storage, and DC charging systems with greater energy and cost-efficiency than conventional solutions. After that, we intend to develop a 30kW micro-grid converter that will add new capabilities to support off grid and emergency back-up power applications.

Figure 4:  Planned Product Pipeline
 
We are focusing our future development efforts on our next-generation Bidirectional Insulated Gate Bipolar Transistor (BD-IGBT).  Uni-directional IGBTs are widely used in power converters.  Conventional power converters and IGBT power switches conduct and block current in a single direction.  Currently, we successfully use these standard uni-directional IGBTs in our PPSA systems.  Once we move to bi-directional switches that conduct and block current in both directions, however, we will be able reduce the number of components in our system, which will reduce material costs and improve efficiency even further.  Our BD-IGBT development effort is being funded partially with funds from the U.S. Department of Energy’s $2.5 million ARPA-E (Advanced Research Projects Agency-Energy) grant.  If successful, this project would enhance several key metrics of the PPSA platform.

Figure 5:  Incremental Benefits of BD-IGBT Implementation
 

*Expected date for BG-IGBT to be developed.

We intend to pursue upgrades to the PPSA platform to continuously improve the value proposition of our technology.

Intellectual Property:  As a company primarily focused on licensing, we expect that our most valuable asset will be our intellectual property. This includes U.S. and foreign patents, patent applications and know-how. We are pursuing an aggressive intellectual property strategy.  Thus far we have identified more than 50 specific inventions we believe to be novel and patentable.  We are pursuing a proven ideation process to enhance and continue these discoveries.

We have 17 issued U.S. patents and 41 additional pending U.S. patents and provisional patent applications. We have 12 pending foreign patent applications which, barring unforeseen problems, are expected to provide patent protection in 45 additional countries including the European Union, China, India, Korea, Malaysia, the Philippines, Singapore and Brazil.  We expect to file a significant number of additional patent applications as our technology matures.

 
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Our background research has not identified any public information, such as patents or published articles, relating to our technology that would affect our freedom to operate.

We rely on a combination of patent filings, 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, which  makes it very difficult for potential patent infringers to reverse-engineer our products.

Target Markets

We believe that our PPSA technology has the potential to transform large global markets that currently rely upon high-power electronic power converters, including photovoltaic inverters, electrified vehicle charging infrastructure, grid-storage battery converters and micro-grids.  Several of these are already multi-billion dollar global markets and others are projected to grow at more than one hundred percent annually for the next several years.  We are carefully selecting which market segments to participate in based on time-to-market for our PPSA platform, market size/growth rate, and the size of the customer benefit that we expect to deliver.  We are currently targeting the following three market segments.

PV Inverter Market

The U.S. Energy Information Administration forecasts solar capacity to grow by more than 1000% from 2011 to 2040, representing an increase in power production of 46GW.  Industry analysts estimated the global PV inverter market at approximately $7.1 billion in 2013.  Analysts also forecast significant growth in the installed base of PV inverters, from 30 GW in 2012 to over 58 GW in 2017, representing a CAGR of 13.8%.

The rapid growth in solar installations is due to a mix of declining system prices, subsidies and increasing environmental initiatives.  Since 2008, module prices have fallen by 80%. Balance of system costs — which include PV inverters, installation cost, shipping cost, regulatory costs, and cabling and wiring systems — are becoming more important as their proportional share of total overall cost has risen over the years.

Our reference product for the PV market is a 30kW PV inverter.  We believe that it is the only technology capable of offering a transformer-less inverter with isolation at reasonable economics.  We believe our PV inverter product validates our unique technology in one of its simplest implementations.  We believe PPSA-based converters provide the following advantages:

·  Lighter weight and smaller size, reducing logistics and installation cost as well as footprint

·  Higher efficiencies, thereby increasing energy production
 
·  Flexibility of installation

·  Electrical isolation

Our current 30kW PV inverter with electrical isolation weighs 97 pounds compared to about 1,200 pounds for typical PV inverters that provide comparable electrical isolation.  The product supports standard grounded PV arrays (with both unipolar and bipolar configurations) without requiring an internal or external transformer.  Its small, lightweight design allows simple installation indoors or outdoors.  The PV inverter completed industry certifications in May 2012.  This product has industry standard features and as of March 31, 2013, initial production units have been sold to 11 different PV inverter installation companies with installations in Texas, California, Oregon and Colorado.

 
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Figure 6:  Seven of our 30kW PV Inverter in use at the University of Texas- Austin
 
Distributed Storage Market

One key reason some customers have been slow to adopt renewable sources is that power is not necessarily produced when customers need it.  PV only produces energy when the sun is shining, and wind turbines only when the wind is blowing.  Consequently, customers who cannot use the power produced at those times may waste the excess power.  This hurts the value proposition of using renewables.

Some utility jurisdictions have a “net metering” policy, which allows customers to sell their excess electric power to the utility and then purchase it back when needed at the same price.  In effect, the local utility and power grid act as a remote battery system for energy consumers in these jurisdictions.  As the penetration of renewables increases, utilities will be under financial pressure to reduce or discontinue net metering policies, as they receive no compensation for this service.   Thus, we believe that utilities will seek to reduce or discontinue net-metering policies, and by doing so, create market demand for local energy storage systems.In the United States, a key driver for the use of energy storage is to reduce utility demand charges.  Peak demand charges can account for a significant portion of the electricity bill for commercial and industrial customers.  Therefore, it may be financially attractive for commercial buildings, for example, to reduce peak loads in order to limit peak demand charges.

In the United States, avoiding peak demand charges can make installation of commercial energy storage systems financially attractive with 2013 utility rate schedules.  In many cases the payback time for the end user can be quicker than with grid-connected residential or utility-scale systems.  Therefore, there is great potential for suppliers to target combined commercial-scale PV and grid storage systems in the US.

The Americas are predicted to remain the largest market for energy storage in grid-connected commercial PV systems over the next five years, increasing from an estimated 1.4MW of PV systems with installed storage in 2012 to 900MW in 2017, a CAGR of 264%.

This is one of the high value, high growth markets that we are targeting with our PPSA reference products.  We have achieved early design wins from leading customers with our 2-port battery converter.

Our reference product for this market is a 30 kW battery converter.  It is suitable for several emerging grid storage applications including commercial peak demand reduction, utility load shifting buffering high power electrified vehicle DC chargers and bidirectional DC chargers.

The battery converter for this usage completed industry certification in January 2013.  As of March 31, 2013, this product has been sold to 8 different customers in California, Colorado, Washington, Wisconsin, Ohio, and Oregon.  Commercial sales have been made to Johnson Controls, Sharp, Powin Energy and others.  Commercial Off The Shelf (COTS) government sales have been made to the National Renewable Energy Laboratory, the U.S. Navy, and NASA.

 
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We plan to migrate early customer designs from our 2-port battery converter to our 3-port hybrid converter when it becomes available.  This will allow a lower cost, more efficient integrated solution for supporting both commercial-scale grid storage and PV inverter functions.  We plan to further develop a 3-port microgrid converter that will use similar hardware to the hybrid converter but will also provide new embedded firmware microgrid capabilities.  This will allow our customers to add emergency backup power capabilities to these systems or operate them in remote off-grid installations.

Figure 7:  Our 30kW battery converter used for containerized grid storage undergoing testing at the Bonneville Power Authority, Washington

DC Charging Market

Alternatives to gas-powered cars have historically comprised a small portion of the overall automotive market.  We believe this is changing rapidly.  Based on industry reports, consumers will soon have a greater selection of both plug-in hybrid electric vehicles (PHEV) and fully electric vehicles (EV) from car manufacturers.

A major limitation of electrified vehicles is their limited driving range on batteries and the recharging time to extend this range.  EVs and PHEVs have an on-board charger that converts the low voltage AC power in a home to the DC power needed for charging EV batteries.  The on-board charger is typically small and light, to enable it to fit inside the car.  Because of these limitations, the charger takes about 8 hours for a full charge (which provides a driving range of about 100 miles).

A DC charger or fast charger contains a high-powered charger located outside the car.  This off-board charger has the potential to fully charge a car in about 30 minutes.  EV fast chargers are used to extend the driving range without the long charging time of low power on-board chargers and can also improve charging efficiency. Navigant Research (2013) forecasts the market for EVSE (electric vehicle supply equipment) to be $713 million in 2013 and to reach $3.8 billion by 2020, a CAGR of 27.1%, with shipments of DC Chargers increasing from 9,000 in 2013 to 98,000 in 2020.

DC chargers create high peak loads when charging a vehicle and no loads when not charging.  This duty cycle can create high demand charges, creating high operating costs for DC charging stations.  A typical 50kW DC charger in Southern California can fully charge a Nissan Leaf for less than $4 per vehicle, but the utility peak demand charges on the installation can be more than $1000/month.

We have a 30KW battery charger for this market that exhibits the characteristics of our PPSA technology. Our PPSA-based battery charger is 95% efficient.  Competing chargers have 90% efficiency, which means that they waste twice as much energy as our products do.

 
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Our hybrid converter product will be a disruptive technology that we believe could have a major impact on the DC charging market by integrating efficient buffer battery storage to reduce demand charges, and PV to allow efficient charging directly from distributed resources.  We expect the efficiency, flexibility, and cost benefits of our technologies to contribute to the spread of DC charging stations; as such, we are seeking to establish early leadership in the DC fast charging infrastructure market with our early partners including NRG and the U.S. Department of Defense.  We are also working with NREL to demonstrate next generation DC charger features, including vehicle-to-grid (V2G) solutions that allow EVs to provide power back to the utility grid.

We are currently developing a 30kW 3-port hybrid converter, which is our reference product for this market.  This will be our first product to exploit the single-stage multi-port capabilities of our technology.  This product will include two DC ports and one AC grid port that will combine the capabilities of our existing PV inverter and battery converter and, if the product performs as planned, should perform at lower cost and higher efficiency than other hybrid converters.

Figure 8:  Our 30kW battery converter used for bi-directional DC charging at the National Renewable Energy Laboratory, Colorado


Other Markets

As mentioned above, our technology may be applicable to a wide variety of power conversion needs.  This may include, among others, the VFD motor drive market, uninterruptible power supply (UPS) market, or the solid-state transformer market.  We will continue to evaluate new markets on their fit with the criteria we outlined above:  time-to-market for our PPSA platform, market size/growth rate, and the size of the customer benefit that we expect to deliver.

Early Development Partnerships

PPSA has gained early validation from licensing and development arrangements with leading partners in both the private and public sectors.

Lockheed Martin: We received approximately $1.3 million in early revenues from Lockheed Martin Corporation (LMC) from a License Agreement and a Subcontractor Development Agreement, both of which were entered into in December 2009.  We received approximately $1.1 million from a subcontract project to develop hardware and provide technical support for LMC’s Hybrid Intelligent Power development contract from the U.S. Army Communications-Electronics Research, Development and Engineering Center.  We completed this work in early 2012 and do not expect additional revenues for subcontract development.
 
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Pursuant to the License Agreement, LMC has the exclusive right to use our initial patents for government applications and the non-exclusive right to use our initial patents for mobile applications.  Mobile applications are defined in the License Agreement as “products contained in an air, ground, water or space vehicle or that are intended to be transported from time to time from one location to another.”  We retain the right to sell COTS products to any customer, including the U.S. Department of Defense.

LMC is required to pay us a royalty of 3% on sales of any products that leverage our technology.  Additionally, LMC is required to pay us minimum annual royalties in order to retain its exclusive rights for government applications. The minimum annual royalty for exclusive government applications increases to $200,000 in 2014, and thereafter by an additional $100,000 each year, until it reaches $500,000 per year.  LMC may choose not to pay the minimum annual royalty, in which case it would lose the exclusive rights to our technology for government applications. We have earned $0.16 million in annual licensing revenues from LMC through March 2013.

Department of Energy: We have been awarded two significant grants from the U.S. Department of Energy (DOE).  We have received approximately $1.0 million in revenue from these grants.  These grants provided funding for long-term research and next generation product development. We expect to receive additional revenue from these grants until they are completed.  We plan to apply for additional government grants in the future.

We have received an award of $2.5 million from ARPA-E (Advanced Research Projects Agency – Energy).  This award will be used to reimburse costs we incur on a three-year project that began in January 2012.  This award is being used to develop and commercialize a new type of semiconductor power switch called a silicon bi-directional integrated gate bipolar transistor (BD-IGBT).  While we currently successfully use commodity silicon IGBT and diode components in our products, we are developing BD-IGBT components that we believe could significantly improve the efficiency, weight, and manufacturing costs of our products.  Two leading research universities, Rensselaer Polytechnic Institute and Virginia Tech, in addition to several commercial vendors are working under our direction and are receiving the majority of the ARPA-E program funding.

Our second DOE award was a $150,000 Phase I SBIR (Small Business Innovation Research) grant.  This grant has been used to develop early prototypes of a 3-port hybrid converter.  We completed this project in May 2013.  We are applying for a $1 million Phase II grant to fund further development of this concept.  We hope to include advanced converter capabilities for micro-grids into a Phase II program, if awarded.

National Renewable Energy Laboratory: On May 13, 2013 we announced a Cooperative Research and Development Agreement (CRADA) to use our topology to develop and test next generation electric vehicle DC charging infrastructure solutions.  The goal of the partnership is to create standard reference designs using our patented topology in the 3-port hybrid converter that can readily be adopted by commercial and municipal EV fleets, military installations, and public infrastructure.  These reference designs seek to improve the cost, efficiency and reliability of power conversion between electrified vehicles, solar panels, storage batteries and electric grid, as well as provide grid storage and emergency backup power capabilities.

Competition

We compete against well-established incumbent power conversion technologies.  We believe that, for the markets we have identified, our technology provides significant competitive advantages, however, we do not currently have a significant competitive presence in our industry.

Transformer Based Topologies:  They are the conservative choice as they have been in the market longer than any other system.  They provide isolation but are big and heavy.  There have been significant improvements in efficiencies over the years but we believe further improvements are limited because of the transformer requirements.  The major suppliers in this market include: SMA, Advanced Energy, and Schneider Electric.

Transformer-Less Topologies: Transformer-less inverters are the norm in the European market for photovoltaic applications; they are lighter and more efficient than transformer based inverters.  They have been obtaining market share in the U.S. market because of these characteristics. The drawback of transformer-less inverters is that they provide no electrical isolation. SMA, Power One (acquired by ABB), REFUsol (acquired by Advanced Energy), Kaco, and Fronius compete in this market.

 
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Inverter with High Frequency Transformers: These inverters provide isolation without the weight of a transformer-based inverter.  However, high frequency (HF) inverters lose competiveness as they scale-up in power.  This is because in contrast to traditional inverters, HF inverters do not become more efficient or less costly per amount of power they convert.  Power One and SMA are the key suppliers in this market.

Micro Inverters: In a string of PV modules connected to a string inverter, if one of the modules is in the shade, that one low-performing module constrains the output of the whole string. The problem is resolved by using micro inverters connected to each module.  However, large arrays of microinverters are expensive to produce and install, which mainly relegates their use to the residential market.  The leader in micro inverters is Enphase.

Research and Development Costs

During the years ended December 31, 2012 and December 31, 2011, we incurred $1,127,192 and $914,851 in research and development expense.  During the quarters ended March 31, 2013 and March 31, 2012, we incurred $256,348 and $352,841 in research and development expense.

Manufacturing

We currently use a subcontractor to assemble and test our product from our designs using commodity materials and components.

Employees
 
As of August 5, 2013, we had 10 full-time employees, two full-time contract employees and two part-time contract employees.  None of these employees are covered by a collective bargaining agreement, and we believe our relationship with our employees is good.  We also employ consultants, including technical advisors, on an as-needed basis to supplement existing staff.  Consultants and technical advisors provide us with expertise in mechanical engineering, electrical engineering, and other specialized areas of engineering and science.

Industry Certifications

Industry certifications are generally required for our products.  The main certification requirement is UL1741, which tests and guarantees grid safety and product safety for distributed generation sources including PV inverters, battery converters, and bi-directional electrified vehicle chargers.  A National Recognized Testing Laboratory (NRTL) must complete the certification before our customers may install and use our products in the United States.

We have worked with Intertek, a leading NRTL, for these certifications and have successfully completed testing and received authorization to use their ETL mark on our 30kW PV inverter and 30kW battery converter.  While we have been able to rapidly and timely complete these certifications, which we believe is indicative of our commitment to the development of our technology, we may not be as successful in completing certification in a timely manner on future products, such as our 3-port hybrid converter, which could limit our ability to bring such products to market.

Europe and Japan have different certification test procedures, but generally test for similar capabilities.  We do not have familiarity with these other grid safety certifications; however, such certifications are likely to be required to sell our products in these regions.  Geographic regions outside of North America, Europe and Japan generally do not have specific certification requirements, but may require one or more of the other regional certifications before products are approved for sale.

Government Regulation
 
Government approval is not required for us to sell our products.  However government support for renewable energy, improved grid efficiency, and EVs will impact growing markets that we service.  Utility regulations and support for these markets may also impact these end markets.  Government and utility support for these markets is generally required near term for these markets to grow and changes in policy by governments or utilities may limit the market opportunities for our products.

 
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Properties
 
Our principal office is located at 5004 Bee Creek Road, Suite 600, Spicewood, Texas 78669.  We currently lease approximately 4,000 square feet of office and laboratory space under a triple net lease that is due to expire in May 2014. The rent is approximately $3,200 per month.
 
Legal Proceedings
 
We are not a party to any pending legal proceedings.

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 section of this prospectus titled “Summary Selected Financial Information” and our financial statements and related notes appearing elsewhere in this prospectus.  In addition to historical information, this discussion and analysis here and throughout this prospectus 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” and elsewhere in this prospectus.
 
OVERVIEW
 
We are located near Austin, Texas.  We were formed to develop and commercialize our Power Packet Switching Architecture (PPSA) technology that improves the performance, size, weight and manufacturing cost of electronic power converters for several large vertical markets.

We were founded on May 17, 2007.  To date, our operations have been funded through the sale of our common stock and convertible debt, through technology licensing revenue, and through U.S. Department of Energy grants.  Our total revenue generated from inception to date as of March 31, 2013 is $2,770,813, with the majority of that revenue coming from non-recurring events such as engineering fees and government grants.  This non-recurring revenue has been successfully applied for research and product development, reducing our capital requirements.

We have completed development and industry certification of our first two products, a 30kW PV inverter and a 30kW battery converter, both using the same Universal Power Converter hardware design with different embedded firmware.  We are currently developing our third product, which is a 30kW 3-port hybrid converter.

These are reference design products that we plan to use to promote long term licensing opportunities for the Company.  As a result, we believe the revenue from our early product sales is not the most important metric of our growing success.  We believe the quality and the level of interest from prospective strategic customers and potential licensees is the most important metric, although we cannot provide any assurance that such prospective customers and potential licensees will materialize for us.

We are currently focused on three vertical markets – PV inverters, distributed energy storage, and electrified vehicle DC charging.  The PV inverter market is the largest and most mature, but it is also in a hypercompetitive state with slow growth and an increasing number of suppliers.  Our initial PV inverter product is highly innovative and was developed as the first implementation of PPSA in order to validate our technology.  We continue to leverage the PV inverter market for valuable product refinement feedback, including feature and performance requirements as well as improving the quality and robustness of our product reference designs.  We plan to integrate our proven PV inverter functionality with grid storage and/or DC charging functionality to create high value hybrid and micro-grid systems.

The distributed energy storage market is a new evolving market.  We believe that this market will grow quickly, but is currently limited by the lack of commercially available, certified solutions.  We believe our battery converter is highly competitive in this market.  We have won several design wins with strategic customers that we believe can generate product sales and may be converted to licensing agreements longer term.  Most of our initial battery converter sales have been to potential licensees as they evaluate our converters for possible integration into their commercial grid storage market offering.  We are currently negotiating a strategic supplier agreement with an industry leader in this market, although we cannot provide any assurance that this potential agreement will be consummated.  We believe our ability to negotiate attractive licensing terms would improve if high market demand is established for our reference design products.

 
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We believe the electrified vehicle DC charging market may be our fastest growing market opportunity.  Our approach to this market offers features to reduce installation costs, operational costs, and create new value-added capabilities.  Similar to the distributed energy storage market, we are working with several strategic customers to achieve design wins and help them integrate our product into their solution.  Our initial focus is on the California DC charging market and we believe we can achieve design wins and ecosystem partners in this space.

We also continue to develop next generation products including our 3-port hybrid converter and new power switch components that we believe will further extend the differentiation and value of our reference design products.  We believe that we are offering a long term solutions roadmap for our selected customers and markets that can establish our PPSA technology as the market leading solution.

We have released and are selling our first two commercial products, which have generated limited revenue to date.   We expect these products to generate additional revenues; however, in the near term, these revenues may not be adequate to cover the costs of our operations.

Our financial statements contemplate the continuation of our business as a going concern.  We are subject to the risks and uncertainties associated with a new business, including lack of operating capital, lack of personnel and lack of demand for our products.  We have no established source of capital, we have limited commercial product revenue and we have incurred significant debt and significant losses from operations since inception.  These matters raise substantial doubt about our ability to continue as a going concern.
 
Plan of Operation

Our strategy is to continue to commercialize our technology though the development of a variety of products and licensing.  We have completed development of our first two products, we are developing additional products and we will continue making improvements to all of our products based on customer feedback from system installations.  Our goal is to have these products validate our technology and lay the foundation for licensing our technology platform into applications across the global power converter marketplace.

We expect to use the net proceeds received from this offering to continue our product research and development, protect our intellectual property, and explore market opportunities, as well as for working capital and other general corporate purposes.  The net proceeds from this offering are anticipated to be approximately $10.5 million, which is expected to be sufficient to fund our activities for the next two years following the offering.  Our anticipated costs include employee salaries and benefits, compensation paid to consultants, capital costs for research and other equipment, costs associated with development activities including travel and administration, legal expenses, sales and marketing costs, general and administrative expenses, and other costs associated with an early stage, publicly-traded technology company.  We anticipate increasing the number of employees by up to approximately 15-25 employees; however, this is highly dependent on the nature of our development efforts.  We anticipate adding employees in the areas of research and development, sales and marketing, and general and administrative functions required to support our efforts.  We expect to incur consulting expenses related to technology development and other efforts as well as legal and related expenses to protect our intellectual property.  We expect capital expenditures to be approximately $1.0 million during the two years following this offering, but these are highly dependent on the nature of the operations where co-development activities are ongoing.  We also have issued $4 million in senior secured convertible promissory notes that must be paid on November 21, 2013, $750,000 in senior secured convertible promissory notes that must be paid on July 29, 2014, and $1.142 in convertible promissory notes that must be paid on December 31, 2013, if the notes are not converted to shares of our common stock prior to their maturity dates.
 
The amounts that we actually spend for any specific purpose may vary significantly and will depend on a number of factors including, but not limited to, the pace of progress of our commercialization and development efforts, actual needs with respect to product testing, development and research, market conditions, and changes in or revisions to our marketing strategies.  In addition, we may use a portion of any net proceeds to acquire complementary products, technologies or businesses; however, we do not have plans for any acquisitions at this time.  We will have significant discretion in the use of any net proceeds.  Investors will be relying on the judgment of our management regarding the application of the proceeds of any sale of our common stock.

 
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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, our management uses their 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.

Basis of Presentation.  Our financial statements have been prepared in conformity with accounting principles generally accepted in the United States, which contemplate continuation of the Company as a going concern.  However, we are subject to the risks and uncertainties associated with a new business, we have limited sources of revenue, and we have incurred significant losses from operations since inception.  Our operations are dependent upon it raising additional capital.  These matters raise substantial doubt about our ability to continue as a going concern.  The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that could result from the outcome of this uncertainty.

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”.  We generally sell our products freight-on-board (FOB) shipping and recognize revenue when products are shipped.  Revenue from service contracts is recognized using the completed-performance or proportional-performance method depending on the terms of the service agreement.  When there are acceptance provisions based on customer-specified subjective criteria, the completed-performance method is used.  For contracts where the services performed in the last series of acts is very significant, in relation to the entire contract, performance is not deemed to have occurred until the final act is completed.  Once customer acceptance has been received, or the last significant act is performed, revenue is recognized.  We use the proportional-performance method when a service contract specifies a number of acts to be performed and we have the ability to determine the pattern and value in which service is provided to the customer.
 
Royalty income is recognized as earned based on the terms of the contractual agreements.

Research and Development.  The cost of research and development is expensed as incurred. 

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.  The costs of all employee stock options, as well as other equity-based compensation arrangements, are reflected in the financial statements based on the estimated fair value of the awards on the grant date.  That cost is recognized over the period during which an employee is required to provide service in exchange for the award.  Stock compensation for stock granted to non-employees is determined as the fair value of the consideration received or the fair value of equity instruments issued, whichever is more reliably measured.

 
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Convertible Promissory Notes and Warrants.  The warrants and embedded conversion feature of convertible promissory notes are classified as equity under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 815-40 “Derivatives and Hedging – Contracts in Entity’s Own Equity.” The Company allocates the proceeds of the convertible promissory notes between convertible promissory notes and the financial instruments related to warrants associated with convertible promissory notes based on their relative fair values at the commitment date.  The fair value of the financial instruments related to warrants associated with convertible promissory notes is determined using the Black-Scholes option pricing model and the respective allocated proceeds to the warrants is recorded in additional paid-in capital.  The embedded beneficial conversion feature associated with convertible promissory notes is recognized and measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital in accordance with ASC Topic 470-20 “Debt – Debt with Conversion and Other Options”.  The portion of debt discount resulting from the allocation of proceeds to the financial instruments related to warrants associated with convertible promissory notes is being amortized over the life of the convertible promissory notes.  For the portion of debt discount resulting from the allocation of proceeds to the beneficial conversion feature, it is amortized over the term of the notes from the respective dates of issuance.

RESULTS OF OPERATIONS

Comparison of the three months ended March 31, 2013 to the three months ended March 31, 2012

Revenues.  Revenues for the first quarter of 2013 of $380,135 were $247,953 higher than the $132,182 we earned in revenues for the first quarter of 2012.  The increase in revenue was due to a $160,956 increase in grant revenues, the majority of which came from our Department of Energy grant.  In the first quarter of 2012, revenue from the sale of products and services was $45,900 and was attributed to work performed for Lockheed Martin.  In the first quarter of 2013, revenue from the sale of products, which consisted of 5 battery units, 10 inverters and 16 combiners, was $132,897.

Cost of Revenues.  As a result of the increase in sales of our products, cost of revenues increased for the three months ended March 31, 2013, to $366,989 from $87,577 for the quarter ended March 31, 2012, an increase of $279,412 or approximately 319%.

Gross profit.  Gross profit for the first quarter of 2013 and 2012 was $13,146 and $44,605, respectively.  The first quarter of 2012 benefited from higher margins received on contract services for Lockheed Martin.  The margin in the first quarter of 2013 was low because grant expense was in excess of grant revenue.

Operating Expenses.  Operating expenses consist of general and administrative activities, research and development, and sales and marketing, which increased by $101,889 during the three months ended March 31, 2013, to $754,220 as compared to operating expenses of $652,331 for the three months ended March 31, 2012.  While general and administrative costs increased by $181,472, research and development expense of $256,348 for the first quarter of 2013 was $96,493 lower than the $352,841 incurred in the first quarter of 2012.  The research and development costs in the first quarter of 2012 were higher due to increased expenses from certification testing that was performed during that quarter on our inverter product.

Loss from Operations.  Due to the increase in our operating expenses, our loss from operations for the first quarter of 2013 of $741,074 was $133,348 or 21.9% higher than the $607,726 loss from operations for the quarter ended March 31, 2012.

Interest Expense.  Interest expense increased from $103,549 in the first quarter of 2012 to $1,083,429 in the first quarter of 2013, an increase of $979,880, of which $959,956 was due to an increase in amortization of debt discount.

Net Loss.  Primarily as a result of the increase in our operating expenses and interest expense, our net loss for the quarter ended March 31, 2013, was $1,824,503 as compared to a net loss of $711,275 for the quarter ended March 31, 2012, an increase of $1,113,228.

 
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Comparison of Years Ending December 31, 2012 and 2011

Revenues.  During 2012 and 2011, our revenues totaled $1,126,907 and $860,771, respectively, an increase of $266,136 or approximately 31%.  Revenues from grants totaled $707,357 and $26,581 in 2012 and 2011, respectively.  Of the $707,357 of grant revenue received in 2012, $693,938 was from the Department of Energy.  Revenues from royalty income totaled $100,000 and $20,000 in 2012 and 2011, respectively, pursuant to the minimum licensing fees required by our licensing agreement with Lockheed Martin.  Revenues from the sale of product and services totaled $319,550 and $814,190 in 2012 and 2011 respectively.  The sale of product and services included contract revenues from Lockheed Martin of $53,900 and $649,440 in 2012 and 2011, respectively.  The contract revenue from Lockheed Martin declined in 2012, since the project required lower levels of our services. Sales of converter products totaled $265,650 for 25 units in 2012 and $164,750 for 14 units in 2011.

Cost of Revenues.  As a result of the increase in sales of our products, cost of revenues increased for the year ended December 31, 2012, to $957,641 from $757,393 for the year ended December 31, 2011, an increase of $200,248 or approximately 26%.  Gross margin increased from 12% to 15% in 2012, largely due to an additional $80,000 in royalty income received in 2012.

Operating Expenses.  Operating expenses, consisting of general and administrative expenses, research and development, and sales and marketing, increased by $1,591,513 during the year ended December 31, 2012, to $3,207,573 as compared to operating expenses of $1,616,060 for the year ended December 31, 2011.  The most significant increase was related to the increase in professional services, which totaled $1,139,886 for the year ended December 31, 2012, as compared to $147,356 for the year ended December 31, 2011.  This increase resulted primarily from the payment for business consulting and legal services.  Both research and development and general and administrative expense also increased as a result of an increase in full time equivalent employees from 6.5 during the year ended December 31, 2011, to 9 during the year ended December 31, 2012.  If our operations grow as expected, we anticipate that the number of our employees will continue to increase.
  
Loss from Operations.  Due to the increase in our operating expenses, our loss from operations increased during 2012 by $1,525,625 or approximately 100%, to $3,038,307 for the year ended December 31, 2012, as compared to $1,512,682 for the year ended December 31, 2011.
  
Interest Expense.  Interest expense increased from $238,257 in 2011 to $1,608,912 in 2012 due to an increase of $1,295,920 in amortization of the debt discount.

Net Loss.  Primarily as a result of the increase in our operating expenses and interest expense, our net loss for the year ended December 31, 2012, was $4,647,219 as compared to a net loss of $1,750,939 for the year ended December 31, 2011, an increase of $2,896,280.

Liquidity and Capital Resources
 
Although our revenues have increased every year from the date of our inception, we do not generate enough revenue to sustain our operations.  Our revenues are derived from sales of our products and from grants we have received for the development of our technology.  We have funded our operations through the sale of our common stock, preferred stock (later converted to common) and debt securities.

As of March 31, 2013, and December 31, 2012, we had cash and cash equivalents of $1,215,986 and $1,972,301, respectively.

Our net working capital decreased from a positive $528,603 as of December 31, 2012, to a negative $1,274,681 as of March 31, 2013, mainly due to the increase in our current portion of long term debt from $1,313,146 to $2,350,532, due to the amortization of the debt discount, as well as due to the cash expended for operating activities. 

Operating activities in the first quarter of 2013 resulted in cash outflows of $717,133, which were due primarily to the net loss for the quarter of $1,824,503 offset by amortization of total debt discount in the amount of $1,037,386.
 
 
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Investing activities during quarters ended March 31, 2013 and 2012 resulted in cash outflows of $59,182 and $63,614, respectively, for development of patents and acquisition of fixed assets.
 
During the quarter ended March 31, 2013, we did not raise any additional funds.  In the quarter ended March 31, 2012, we raised $202,704 in gross proceeds from the sale of convertible promissory notes and $52,000 from the sale of stock.

During the year ended December 31, 2012, we raised $4 million in gross proceeds from the sale of our senior secured convertible promissory notes, $695,000 in other convertible promissory notes, and $52,000 from the sale of stock.  We have no committed sources of financing and, in the near term, we do not expect to earn enough revenues from the sale of our products to support our operations.  The report from our independent registered public accounting firm states that there is a substantial doubt about the Company’s ability to continue as a going concern.
   
At December 31, 2012 and 2011, we had $1,972,301 and $100,675 in cash and cash equivalents, respectively.   Our net working capital increased $590,040 in 2012 from a negative $61,437 as of December 31, 2011, to a positive $528,603 in December 31, 2012, due to debt financing.
 
Operating activities in 2012 resulted in cash outflows of $2,251,489, which were due primarily to the loss for the year of $4,647,219 offset by amortization of debt discount in the amount of $1,472,904 and the fair value of warrants issued for consulting services in the amount of $670,947.
  
Investing activities during 2012 and 2011 resulted in cash outflows of $309,035 and $150,811, respectively, for the development of patents and acquisition of fixed assets.
 
Financing activities during 2012 and 2011 generated $4,432,150 and $1,363,376, respectively, in net cash from the issuance of debt and common stock.

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 the net proceeds from this offering 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 the net proceeds from this offering are 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 or other 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 prospectus, we are not aware of any trends, events or uncertainties that are likely to have a material effect on our financial condition.

 
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DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
The following table sets forth the names and ages of all of our directors and executive officers.  The Company's board of directors plans to fill a vacancy on the board of directors by appointing an additional independent director prior to our listing on the Nasdaq Capital Market.  Our officers are appointed by, and serve at the pleasure of, the board of directors.
 
Name
 
Age
 
Position
Paul Bundschuh
  51  
Chief Executive Officer and Chairman of the board of directors
William C. Alexander
  57  
Chief Technology Officer
Christopher P. Cobb
  43  
President, Chief Operating Officer and Director
Barry Loder
  56  
Chief Financial Officer
Charles De Tarr
  56  
Vice President, Finance and Secretary
Mark L. Baum
  40  
Director
Lon E. Bell, Ph.D.
  72  
Director

Biographical information with respect to our executive officers and directors is provided below.  There are no family relationships between any of our executive officers or directors.

Paul Bundschuh, Chief Executive Officer and Chairman of the Board

Mr. Bundschuh joined Ideal Power in May 2009.  Since September 2012, he has been Chief Executive Officer and Chairman of our board of directors.  In this role, he has guided our business strategy and overseen our fundraising and sales/marketing efforts.  From May 2009 through September 2012, Mr. Bundschuh was Vice President of Business Development, where he focused on financing activities, including obtaining various grants and industry awards and securing customers.  Prior to joining our company, Mr. Bundschuh was a renewable energy technology and marketing consultant from September 2008 through May 2009, during which time he consulted with various renewable energy firms on their marketing and business development efforts.  From January 2008 through July 2008, Mr. Bundschuh was Vice President of Marketing and Technology for Electromagnetic Power Solutions, an inverter company start-up leveraging IP licensed from Virginia Tech University.  Mr. Bundschuh developed the business and marketing plans for the company and identified potential investors.  From October 2000 through March 2007, Mr. Bundschuh was Vice President of Sales and Marketing of the Semi & Licensing division of Waves Audio, where he began a new division for audio IP licensing and custom semiconductor solutions to the consumer audio OEM market.  Prior to Waves Audio, Mr. Bundschuh held various roles with Motorola Semiconductor and Advanced Micro Devices.  Mr. Bundschuh has a Master of Business Administration from the University of Texas at Austin, a Masters of Engineering in Computer and Systems Engineering as well as a Bachelor of Science in Electrical Engineering from Rensselaer Polytechnic Institute.  Mr. Bundschuh’s extensive knowledge of renewable energy technology and his experience in marketing and business development, particularly for start-up companies, led us to believe that he should serve as a director.

Christopher Cobb – President, Chief Operating Officer and Director

Mr. Cobb joined Ideal Power in May 2012 as Chief Executive Officer and a director.  In this capacity, he focused on business strategy and obtaining funding for our operations. In September 2012, Mr. Cobb transitioned to President and Chief Operating Officer, where he focuses on our operations, strategy for development of our business and the implementation of that strategy.  From December 2011 through May 2012, Mr. Cobb was an independent consultant to businesses of varying sizes, providing guidance on business strategy and organizational development.  Mr. Cobb served as President, Director and Chief Financial Officer of HEIT, Inc. from September 2010 through November 2011, where he focused on finance, mergers and acquisitions and the integration of HEIT with Simpler-Webb, Inc.  Mr. Cobb left HEIT after the firm was sold to Computer Services Inc. (OTCQX: CSVI).  From February 2009 through September 2010, Mr. Cobb was CEO and Director of Simpler-Webb Inc., and was responsible for overall company strategy and management.  He led the effort to merge with HEIT and subsequently led the integration effort of those two firms.  Mr. Cobb was CFO and director of Simpler-Webb from April 2002 through February 2009. Prior to April 2002, Mr. Cobb held various positions at United Airlines, McKinsey and Company and Andersen Consulting.  Mr. Cobb holds a Master of Business Administration from the Kellogg Graduate School of Management and a Bachelor of Science in Mechanical Engineering from the University of Texas at Austin.  Mr. Cobb’s experience as a consultant providing guidance on business strategy and organizational development and as a member of the board of directors of Simpler-Webb led us to conclude that he should serve as a director.

 
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William C. Alexander, P.E. – Chief Technology Officer and Founder

Mr. Alexander founded Ideal Power in 2007 and joined us full time in January 2010 as the Chief Technology Officer.  Mr. Alexander oversees the technology development of all of our products and inventions.  Mr. Alexander is also the lead engineer working with clients to collaboratively develop solutions based on our technology.  Mr. Alexander was a director of Ideal Power from 2007 through 2012.  Prior to joining the company, Mr. Alexander was a Principal Engineer II for BAE Systems in Austin, Texas from June 1999 through January 2010.  Mr. Alexander was the lead engineer developing various weapons systems including LIDAR seekers for air-to-air and air-to-ground applications.  Before BAE, Mr. Alexander held various technology and engineering roles with Symtx, Inc., Tracor Aerospace, Inc. and Croft and Company.   Mr. Alexander has 27 patents granted with over 50 patents pending.  He has a Master of Science in Mechanical Engineering and a Bachelor of Science in Mechanical Engineering from the University of Texas at Austin.

Barry Loder – Chief Financial Officer

Barry Loder was appointed as our Chief Financial Officer, on a part-time basis, in July 2013.  Mr. Loder will begin full-time duties with us following the completion of this offering.  Until he joins Ideal Power Inc., Mr. Loder is, and has been since March 2012, the Executive Vice President/Chief Operating and Financial Officer of Shield Air Solutions, Inc., a specialty manufacturer of industrial environmental control systems located in Houston, Texas.  At Shield Air Solutions, Mr. Loder is responsible for all manufacturing, sales, marketing, operational, procurement and financial matters for the company.  From April 2010 to March 2012, Mr. Loder was a principal at BCL Partners, a financial consulting company, that assisted small and mid-size companies in the areas of corporate growth strategies, initial public offerings, financings and merger and acquisition activities.  From October 2008 to April 2010, Mr. Loder was the Chief Executive Officer/Chief Financial Officer of Cyberwize, Inc., a Florida based direct marketing company.  Mr. Loder was Chief Financial Officer and founder of Republic Waste Industries, Inc. where he was responsible for all financial matters including merger and acquisition activities.  Mr. Loder has extensive experience in merger and acquisition transactions, corporate financings and initial public offerings.  Mr. Loder is a certified public accountant in Texas.  Mr. Loder received a Bachelor of Arts in Accounting/Finance from Walsh University and received a Master of Business Administration from Houston Baptist University.

Charles De Tarr – Vice President, Finance and Secretary

Charles De Tarr joined Ideal Power Inc. in May 2008 as our part-time Chief Financial Officer and Secretary and began providing services on a full-time basis in February 2013.  On July 10, 2013, Mr. De Tarr was appointed as Vice President, Finance.  Mr. De Tarr also served as a director on our Board of Directors from May 2008 through November 2012.  Prior to joining the Company on a full-time basis, Mr. De Tarr was Chief Financial Officer of Intevras Technologies, LLC from July 2009 through July 2010 when it was acquired by Layne Christensen Company.  Mr. De Tarr continued as the Financial Manager for the Intevras Division in a part-time capacity from July 2010 through January 2013.  Before joining Intevras, Mr. De Tarr was the founder, owner and Chief Executive Officer of BNC Communications, LLC, a telecommunications service provider, in Austin, Texas.  Mr. De Tarr managed that company’s operations from January 2004 through 2008.  Prior to BNC Communications, Mr. De Tarr held various management positions with a variety of firms, including C3 Communications, Inc., DataPult, LP, Chubb Security Systems, Inc. and Supreme Cable Company, Inc.  Mr. De Tarr holds a Bachelor of Science in Business Administration from Ithaca College, Ithaca, New York and a Master of Business Administration from the University of Texas at Austin.  In addition, Mr. De Tarr holds both a CPA and CVA designation from the Texas State Board of Public Accountancy and the National Association of Certified Valuation Analysis, respectively.

 
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Mark L. Baum, J.D., Director

Mark L. Baum joined our board of directors in November 2012.  Mr. Baum is also director, since December 2011, of Imprimis Pharmaceuticals, Inc., a publicly traded company, where he also serves as Chief Executive Officer effective April 1, 2012.  Mr. Baum has served as the principal of The Baum Law Firm, P.C. (now TBLF, LLC) since 1998, and has more than 15 years of experience in financing, operating and advising small capitalization publicly traded enterprises, with a particular focus on restructured or reorganized businesses. As a manager of capital, he has completed more than 125 rounds of financing for more than 40 publicly traded companies. As a securities attorney, Mr. Baum has focused his practice on U.S. securities laws, reporting requirements and public company finance-related issues that affect small capitalization public companies.  Mr. Baum has actively participated in numerous public company spin-offs, restructurings/recapitalizations, venture financings, private-to-public mergers, asset acquisitions and divestitures.  In addition to his fund management and legal experience, Mr. Baum has operational experience in the following industries: life science and diagnostics, closed door pharmacies, cleaner and renewable energy and retail home furnishings. Mr. Baum has served on numerous boards of directors of publicly traded companies, including Chembio Diagnostic Systems, Inc., Applied Natural Gas Fuels, Inc. (formerly AGAS), Shrink Nanotechnologies, Inc., You on Demand, Inc. and CoConnect, Inc., as well as boards of advisors for domestic and international private and public companies. Mr. Baum founded and capitalized the Mark L. Baum Scholarship, which has funded tuition grants to college students in Texas.  Mr. Baum is a published inventor and a licensed attorney in California and Texas. Mr. Baum’s years of public company executive experience, including knowledge of securities laws, reporting requirements and public company finance-related issues, led us to believe that he should serve as a director.
 
Lon E. Bell, Ph.D., Director
 
Dr. Bell joined our Board of Directors in November 2012.  He founded Amerigon Inc. (now Gentherm) in 1991. Dr. Bell has served many roles in Amerigon, Inc., including Chief Technology Officer until December 2010, Director of Technology until 2000, Chairman and Chief Executive Officer until 1999, and President until 1997. Dr. Bell served as the Chief Executive Officer and President of BSST LLC, a subsidiary of Amerigon from September 2000 to December 2010.  He served as a Director of Amerigon from 1991 to 2012.  Previously, Dr. Bell co-founded Technar Incorporated, which developed and manufactured automotive components, and served as Technar’s Chairman and President until selling majority ownership to TRW Inc. in 1986.  Dr. Bell continued managing Technar, then known as TRW Technar, as its President until 1991.  He co-founded Mahindra REVA Electric Vehicle Co Ltd. in 1994 and serves on its Board of Directors and Chairman of its Intellectual Property Committee.  He currently serves on the Board of Directors of ClearSign Combustion Corporation. He is a member of advisory boards at California Institute of Technology Mechanical Engineering Department since 2008, Michigan State University and University of Santa Barbra Energy Frontiers Research Centers since 2010 and Alphabet Energy since 2011.  Dr. Bell is a leading expert in the design and mass production of thermoelectric products.  He has authored more than 30 publications in the areas of thermodynamics of thermoelectric systems, automotive crash sensors, and other electronic and electromechanical devices.  Five of his inventions have gone into mass production and dominated their target markets.  Dr. Bell received a BSc. in Mathematics, an MSc. in Rocket Propulsion, and a Ph.D. in Mechanical Engineering from the California Institute of Technology.  Dr. Bell’s demonstrated ability to commercialize inventions led us to conclude that he should serve as a director.

Director Independence
 
Our board of directors has determined that Mark S. Baum and Lon E. Bell, Ph.D. are “independent directors” as such term is defined by Nasdaq Marketplace Rule 5605(a)(2).  We have established an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee.  Mr. Baum and Dr. Bell serve on all three committees.  The Company's board of directors plans to fill a vacancy on the board of directors by appointing an additional independent director prior to our listing on the Nasdaq Capital Market.
 
Involvement in Certain Legal Proceedings
 
To the best of our knowledge, none of our directors or executive officers has, during the past ten years, been involved in any legal proceedings described in subparagraph (f) of Item 401 of Regulation S-K.

 
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EXECUTIVE COMPENSATION
 
The following summary compensation table covers all compensation awarded to, earned by or paid to our principal executive officer and each of the other two highest paid executive officers, if any, whose total compensation exceeded $100,000 during the years ended December 31, 2012 and 2011.  These individuals are sometimes referred to in this prospectus as the “Named Executive Officers”.
 
Summary Compensation Table

Name and Principal 
 
Salary
Bonus
Stock 
Option 
All Other 
Total
Position
Awards (1)
Awards (2)
Compensation
               
Paul Bundschuh
2012
$
139,999
$
0
$
0
$
0
$
           0
$
139,999
Chief Executive Officer
2011
 
103,924
 
0
 
35,000
 
0
 
             0
$
138,924
                           
Christopher Cobb
2012
$
13,462
$
41,250
$
48,993
$
85,049
$
            0
$
188,754
President and Chief Operating Officer (Former Chief Executive Officer)
2011
 
0
 
0
 
0
 
0
 
                   -
$
0
                           
William Alexander
2012
$
238,253
$
0
$
0
$
0
$
0
$
238,253
Chief Technology Officer, founder
2011
 
160,294
 
 8,000
 
0
 
0
 
0
 
168,294
                           
Charles De Tarr
2012
$
 115,895
$
35,000
$
0
$
0
$
0
$
150,895
Former Chief Financial Officer
2011
 
84,455
 
0
 
0
 
0
 
0
 
84,455

(1) The amounts included in this column are the aggregate grant date fair value of stock awards computed by us in accordance with Accounting Standards Codification 718, Compensation-Stock Compensation, and includes amounts from stock awards granted in 2011 and 2012. For information on the valuation assumptions used in calculating these dollar amounts, see Notes 1 and 7 to our audited financial statements included elsewhere in this prospectus.
 
(2) This amount reflects the aggregate grant date fair value for this award and does not correspond to the actual value that may be recognized by the individual upon option exercise. T he assumptions used to determine the grant date fair value of the stock option is included in Note 11 to our audited financial statements included elsewhere in this prospectus.

Current and Future Compensation Practices
 
Currently, compensation for our employees consists of base salary, cash bonuses and awards of stock options or restricted stock through the Ideal Power Converters, Inc. 2013 Equity Incentive Plan.  We believe that a combination of cash, options for the purchase of common stock, or grants of restricted stock will allow us to attract and retain the services of individuals who will help us achieve our business objectives, thereby increasing value for our stockholders.  We believe that share ownership by our employees is an effective method to deliver superior stockholder returns by increasing the alignment between the interests of our employees and our stockholders.  No employee is required to own common stock in our Company.

 
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In setting the compensation for our officers, we look primarily at the person’s responsibilities, at the person’s experience and education and at our ability to replace the individual.  We expect the base salaries of our executive officers to remain relatively constant unless the person’s responsibilities are materially changed.  We also expect that we may pay bonuses in the future to reward exceptional performance or the achievement by the Company or an individual of targets to be agreed upon.  During 2011 and 2012, because we had limited cash resources, we periodically accrued salaries for our executive officers.  It is possible that we will again be unable to pay these salaries in a timely manner until we begin to generate cash from sales of our products or we arrange additional financing in the form of equity sales or debt instruments. 
 
Employment Agreements and Offer Letters
 
On May 7 and May 8, 2013, our executives, Paul Bundschuh, Christopher Cobb and William Alexander, entered into employment agreements with us.  With the exception of the annual compensation and the length of the term of the employment agreements, the material terms of the employment agreements are substantially the same.

The employment agreements entered into by Messrs. Bundschuh and Alexander have initial terms of two years, but will be renewed on an annual basis following the expiration of the initial term, unless otherwise terminated.  Mr. Cobb’s employment agreement includes an initial term of one year, and will be renewed for periods of six months following the expiration of the initial term, unless otherwise terminated.  Mr. Bundschuh is compensated at an annual rate of $200,000, Mr. Cobb is compensated at an annual rate of $175,000 and Mr. Alexander is compensated at an annual rate of $223,267.

Each executive will be entitled to receive a cost of living adjustment on January 1st of each year and will be entitled to participate in any employee benefit plans we offer.  Each executive is entitled to four weeks of paid time off each year.  Following the initial public offering of our common stock, each executive will become eligible for an annual bonus, in an amount to be determined by the Compensation Committee, based upon standards and goals agreed to by the Compensation Committee and the executive, and each executive may receive awards of stock grants or stock options at the discretion of the Compensation Committee.

Our board of directors may terminate the services of the executive for “cause,” as defined in the employment agreement or upon 30 days written notice to the executive.  The employment agreements may also be terminated by the executive’s death or disability, by the election of the executive or due to a change in control, as defined in the employment agreements.

If an executive is terminated as a result of death, disability or the executive’s election, he will receive his accrued but unpaid salary and the value of unused paid time off through the effective date of his termination, his accrued but unpaid annual bonus, if any, and his business expenses incurred prior to the effective date of his termination (the “Termination Payment”).  The executive will be entitled to continue to participate in any employee benefit plan to the extent provided for in the plan or as may be required by law.  If we terminate the executive’s employment other than for cause, the executive will receive the Termination Payment and severance consisting of the greater of (i) the salary that would be due to the executive if his employment had not been terminated or (ii) six months annual salary.  The executive will also be entitled to continue to participate in any employee benefit plan for a period of six months following the termination of his employment.  If an executive is terminated as a result of a change in control, he will receive the Termination Payment and severance in an amount equal to the annual salary due to the executive for the balance of the term.  In no event will this severance payment be less than the amount of the executive’s annual salary.

By letter dated June 20, 2013, we made an offer of employment to Barry Loder for the position of Chief Financial Officer.  Mr. Loder agreed to initially provide services on a part-time basis until the offering closes, at which time he will become a full-time employee.  During his part-time service, we agreed to pay Mr. Loder $200 per hour.  Upon his transition to a full time employee, we agreed to pay Mr. Loder an annual salary of $175,000 through the consummation of this offering and an annual salary of $200,000 thereafter.  Mr. Loder will be entitled to participate in any bonus plan that may be adopted by our board of directors and he may be entitled to receive grants of restricted stock, bonus stock or stock options, as determined by our board of directors.  Upon becoming a full time employee, Mr. Loder became eligible to participate in our employee benefit plans.

 
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Outstanding Equity Awards at December 31, 2012 
 
The following table sets forth certain information concerning outstanding equity awards for our Named Executive Officers at December 31, 2012. No options were exercised by our Named Executive Officers during the last two fiscal years. 
 
 
 
Name
 
Option
 
Number of securities underlying unexercised options (#) Exercisable
   
Awards
 
Number of securities underlying unexercised options (#)
Unexercisable
   
 
 
 
Option exercise price ($)
 
 
 
 
Option expiration date
                     
Paul Bundschuh
    1,228       --     $ 0.8133  
5/12/2022
Paul Bundschuh
    1,281       --     $ 0.7953  
8/25/2022
Paul Bundschuh
    9,817       1,963     $ 2.9715  
6/30/2020
Paul Bundschuh
    5,890       --     $ 2.9715  
9/30/2020
Paul Bundschuh
    5,890       --     $ 2.9715  
12/31/2022
                           
Christopher Cobb
    2,766       16,199     $ 6.3276  
5/21/2020
                           
Charles De Tarr
    26,743       --     $ 0.4155  
1/31/2022

Director Compensation
 
Members of our board of directors did not receive compensation for their service as directors for the year ended December 31, 2012.  On June 30, 2013, our board of directors approved compensation to be paid to the independent directors as follows: each of the independent directors will receive each calendar year $50,000 in cash and $50,000 in value of shares of common stock.  The cash component of the compensation will not begin to accrue until the registration statement, of which this prospectus is a part, is declared effective by the Securities and Exchange Commission.  All directors are reimbursed ordinary and reasonable expenses incurred in exercising their responsibilities.  At March 31, 2013, we reserved 12,465 shares of our common stock for the payment of compensation to our independent directors.
 
Insider Participation in Executive Compensation Decisions

Until November 28, 2012, our directors were also executive officers.  These individuals included William Alexander, Christopher Cobb and Paul Bundschuh.  Our board of directors currently consists of four members, two of whom are also executive officers.  The two remaining members of our board are independent within the meaning of the rules of the Nasdaq Capital Market.  On January 22, 2013, our board of directors established three committees, namely an Audit Committee, a Nomination and Governance Committee and a Compensation Committee.  Our independent directors are the sole members of each of these committees.

DESCRIPTION OF CAPITAL STOCK
 
The following is a brief description of our capital stock. This summary does not purport to be complete in all respects. This description is subject to and qualified entirely by the terms of our Certificate of Incorporation (the “Certificate of Incorporation”), and our bylaws, copies of which have been filed with the SEC and are also available upon request from us.
 
Authorized Capitalization
 
We have 60,000,000 shares of capital stock authorized under our Certificate of Incorporation, consisting of 50,000,000 shares of common stock and 10,000,000 shares of preferred stock, all with a par value of $0.001 per share. As of June 30, 2013, we had 1,480,262 shares of common stock outstanding (not including an additional 25,170  shares of common stock reserved for issuance as compensation through June 30, 2013, to our independent directors) and no shares of preferred stock outstanding.  Our authorized but unissued shares of common stock and preferred stock are available for issuance without further action by our stockholders, unless such action is required by applicable law or the rules of any stock exchange or automated quotation system on which our securities may be listed or traded.

 
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Common Stock
 
Holders of our common stock are entitled to such dividends as may be declared by our board of directors out of funds legally available for such purpose, subject to any preferential dividend rights of any then outstanding preferred stock.  The shares of common stock are neither redeemable nor convertible.  Holders of common stock have no preemptive or subscription rights to purchase any of our securities.
 
Each holder of our common stock is entitled to one vote for each such share outstanding in the holder’s name.  No holder of common stock is entitled to cumulate votes in voting for directors.
 
In the event of our liquidation, dissolution or winding up, the holders of our common stock are entitled to receive pro rata our assets, which are legally available for distribution, after payments of all debts and other liabilities and subject to the prior rights of any holders of preferred stock then outstanding.  All of the outstanding shares of our common stock are fully paid and non-assessable.  The shares of common stock offered by this prospectus will also be fully paid and non-assessable.
 
There is no public market for our common stock.  We intend to apply for listing of our common stock on the Nasdaq Capital Market, and listing on this exchange is a condition to the consummation of this offering.
 
Preferred Stock
 
Our Certificate of Incorporation permits us to issue up to 10,000,000 shares of preferred stock in one or more series and with rights and preferences that may be fixed or designated by our board of directors without any further action by our stockholders.  We currently have no shares of preferred stock outstanding.
 
Subject to the limitations prescribed in our Certificate of Incorporation and under Delaware law, our Certificate of Incorporation authorizes the board of directors, from time to time by resolution and without further stockholder action, to provide for the issuance of shares of preferred stock, in one or more series, and to fix the designation, powers, preferences and other rights of the shares and to fix the qualifications, limitations and restrictions thereof.  The issuance of preferred stock with certain voting, conversion and/or redemption rights could adversely affect the rights of holders of our common stock, including with respect to voting, dividends and liquidation.  Preferred stock could also be issued quickly with terms calculated to delay, defer or prevent a change in control of our Company or to make removal of management more difficult.  Additionally, the issuance of preferred stock may decrease the market price of our common stock.

Stock Options and Warrants
 
As of June 30, 2013, we have reserved the following shares of common stock for issuance pursuant to stock option and warrant agreements:
 
 
 
 
158,108 shares of our common stock are reserved for issuance under various outstanding option agreements, at a weighted average exercise price of $2.71631 per share;
 
 1,519,095  shares of our common stock, at a weighted average exercise price of $2.99 per share (assuming the sale of our common stock in this offering at a price of $5.00 per share), are reserved for issuance under various outstanding warrant agreements; and

 
487,713 shares of our common stock have been reserved for the issuance of awards under our 2013 Equity Incentive Plan.

On July 19, 2013, the Compensation Committee approved the grant of stock option awards from our 2013 Equity Incentive Plan covering 352,270 shares of our common stock.  The exercise price will equal the price at which shares of common stock are sold in this offering.

 
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Convertible Promissory Notes

We have defined “Convertible Notes” in this prospectus to mean, collectively, $750,000 in senior secured convertible promissory notes that must be paid or converted into shares of our common stock on or before July 29, 2014, $4 million in senior secured convertible promissory notes that must be paid or converted into shares of our common stock on or before November 21, 2013, $1.142 million in convertible promissory notes that must be paid or converted into shares of our common stock on or before December 31, 2013, and an additional $213,394 in convertible notes that we expect to issue to our counsel for legal services.  If we raise at least $10 million in this offering, all of the Convertible Notes will be converted into  1,682,606 shares of our common stock.  We do not plan to consummate this offering unless we raise at least $10 million.

Anti-Takeover Effects of Certain Provisions of Delaware Law and Our Charter Documents

The following is a summary of certain provisions of Delaware law, our Certificate of Incorporation and our bylaws. This summary does not purport to be complete and is qualified in its entirety by reference to the corporate law of Delaware and our Certificate of Incorporation and bylaws.

Effect of Delaware Anti-Takeover Statute.  We will be subject to Section 203 of the Delaware General Corporation Law, an anti-takeover law.  In general, Section 203 prohibits a Delaware corporation from engaging in any business combination (as defined below) with any interested stockholder (as defined below) for a period of three years following the date that the stockholder became an interested stockholder, unless:

·
prior to that date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder;

·
upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares of voting stock outstanding (but not the voting stock owned by the interested stockholder) those shares owned by persons who are directors and officers and by excluding employee stock plans in which employee participants do not have the right to determine whether shares held subject to the plan will be tendered in a tender or exchange offer; or

·
on or subsequent to that date, the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder.
 
Section 203 defines “business combination” to include the following:
 
·
any merger or consolidation involving the corporation and the interested stockholder;

·
any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder;

·
subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder;

·
subject to limited exceptions, any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or

·
the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation.

 
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In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation, or who beneficially owns 15% or more of the outstanding voting stock of the corporation at anytime within a three-year period immediately prior to the date of determining whether such person is an interested stockholder, and any entity or person affiliated with or controlling or controlled by any of these entities or persons.

Our Charter Documents.  Our charter documents include provisions that may have the effect of discouraging, delaying or preventing a change in control or an unsolicited acquisition proposal that a stockholder might consider favorable, including a proposal that might result in the payment of a premium over the market price for the shares held by our stockholders.  Certain of these provisions are summarized in the following paragraphs.
 
Effects of authorized but unissued common stock and blank check preferred stock.  One of the effects of the existence of authorized but unissued common stock and undesignated preferred stock may be to enable our board of directors to make more difficult or to discourage an attempt to obtain control of our Company by means of a merger, tender offer, proxy contest or otherwise, and thereby to protect the continuity of management.  If, in the due exercise of its fiduciary obligations, the board of directors were to determine that a takeover proposal was not in our best interest, such shares could be issued by the board of directors without stockholder approval in one or more transactions that might prevent or render more difficult or costly the completion of the takeover transaction by diluting the voting or other rights of the proposed acquirer or insurgent stockholder group, by putting a substantial voting block in institutional or other hands that might undertake to support the position of the incumbent board of directors, by effecting an acquisition that might complicate or preclude the takeover, or otherwise.
 
In addition, our Certificate of Incorporation grants our board of directors broad power to establish the rights and preferences of authorized and unissued shares of preferred stock.  The issuance of shares of preferred stock could decrease the amount of earnings and assets available for distribution to holders of shares of common stock.  The issuance also may adversely affect the rights and powers, including voting rights, of those holders and may have the effect of delaying, deterring or preventing a change in control of our Company.
 
Cumulative Voting.  Our Certificate of Incorporation does not provide for cumulative voting in the election of directors, which would allow holders of less than a majority of the stock to elect some directors.

No Stockholder Action by Written Consent.  Our Certificate of Incorporation expressly prohibits stockholders from acting by written consent.  This means that stockholders may only act at annual or special meetings.
 
Vacancies.  Our Certificate of Incorporation provides that all vacancies may be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum.
 
Special Meeting of Stockholders.  A special meeting of stockholders may only be called by the Chairman of the board of directors, the Chief Executive Officer, or the board of directors at any time and for any purpose or purposes as shall be stated in the notice of the meeting, and shall be called by the Secretary upon the written request of the holders of record of at least 25% of the outstanding shares of common stock.  This provision could prevent stockholders from calling a special meeting because, unless certain significant stockholders were to join with them, they might not obtain the percentage necessary to request the meeting.  Therefore, stockholders holding less than 25% of the issued and outstanding common stock, without the assistance of management, may be unable to propose a vote on any transaction that would delay, defer or prevent a change of control, even if the transaction were in the best interests of our stockholders.

Requirements for Advance Notification of Stockholder Nominations and Proposals.  Our Certificate of Incorporation and bylaws have advance notice procedures with respect to stockholder proposals and nominations of candidates for election as directors, other than nominations made by or at the direction of our board of directors or a committee of our board.  The business to be conducted at a meeting will be limited to business properly brought before the meeting, in accordance with our Certificate of Incorporation and bylaws.  Failure to follow the procedures set forth in our Certificate of Incorporation and bylaws will result in the chairman of the meeting disregarding the nomination or declaring that the proposed business will not be transacted.

 
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MARKET FOR OUR COMMON STOCK, DIVIDEND POLICY AND OTHER STOCKHOLDER MATTERS
 
There is no established public trading market for our common stock.  Of the 1,480,262 shares of our common stock outstanding as of August 5, 2013, approximately  509,094 shares are held by “non-affiliates” and, of that amount,  217,471 shares will be freely tradable without restriction pursuant to Rule 144 once we have been subject to the reporting requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934 for a period of at least 90 days and assuming we comply with the remaining requirements of Rule 144.  We also have outstanding options for the purchase of 158,108 shares of common stock, 352,270 shares of common stock reserved for option grants that were approved by the Compensation Committee on July 19, 2013, but have not yet been issued, warrants for the purchase of 1,519,095 shares of common stock and convertible promissory notes with interest accrued through March 31, 2013 that would require us to issue an additional 1,621,249 shares of common stock, and an additional 61,357 shares of common stock underlying convertible promissory notes that we expect to issue to our counsel for legal services.  We have also reserved a total of 25,170 shares of common stock that we intend to issue to our independent directors as part of their compensation for services provided through June 30 2013.  In addition, upon the closing of this offering, we will issue to the underwriter a warrant for the purchase of 250,000 shares of our common stock.  Any substantial sale of our common stock pursuant to Rule 144 or pursuant to any resale prospectus (including sales by investors of securities acquired in connection with this offering) may have a material adverse effect on the market price of our common stock.

We have never paid cash dividends on our securities and we do not anticipate paying any cash dividends on our shares of common stock in the foreseeable future.  We intend to retain any future earnings for reinvestment in our business.  Any future determination to pay cash dividends will be at the discretion of our board of directors, and will be dependent upon our financial condition, results of operations, capital requirements and such other factors as our board of directors deems relevant.
 
We intend to apply for the listing of our common stock on the Nasdaq Capital Market but we cannot assure you that our application will be approved. If our application is not approved, we may not complete the offering. 
 
As of August 5, 2013, we had 1,480,262 shares of common stock outstanding, held of record by 22 stockholders.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
We have set forth in the following table certain information regarding our common stock beneficially owned by (i) each stockholder we know to be the beneficial owner of 5% or more of our outstanding common stock, (ii) each of our directors and named executive officers, and (iii) all executive officers and directors as a group.  Generally, a person is deemed to be a “beneficial owner” of a security if that person has or shares the power to dispose or to direct the disposition of such security.  A person is also deemed to be a beneficial owner of any securities of which the person has the right to acquire beneficial ownership within 60 days pursuant to options, warrants, conversion privileges or similar rights.  Unless otherwise indicated, ownership information is as of August 5, 2013, and is based on 1,480,262 shares of common stock outstanding on that date.  The percentage ownership after the offering is based on 5,688,038 shares of common stock outstanding. 

 
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Names and Address of Beneficial Owner
 
Number of Shares Beneficially Owned
   
% of Shares Owned Prior to the Offering
   
% of Shares Owned After the Offering
 
                   
Directors and Officers:
                 
                   
Paul Bundschuh, Chief Executive Officer and Director
    75,703 (3)     5.0 %     1.3 %
Christopher Cobb, President, Chief Operating Officer and Director
    94,012 (4)     6.0 %     1.6 %
William C. Alexander, Chief Technology Officer
    487,295       32.9 %     8.6 %
Charles De Tarr, Vice President, Finance and Secretary
    210,135 (5)     13.4 %     3.6 %
Mark Baum, Director
    81,423 (6)     5.4 %     1.7 %(7)
Lon E. Bell, Director
    66,346 (8)     4.3 %     1.9 %(9)
                         
All Directors and Officers as a Group
    1,014,916       56.8 %     17.7 %
                         
5% Owners
                       
                         
Hamo Hacopian(10)
    262,495       17.7 %     4.6 %
Peter Appel
    506,435 (11)     25.5 %     12.4 %(12)
MDB Capital Group, LLC
    114,290 (13)     7.2 %     2.9 %(14)
Cindy Breed
    131,247       8.9 %     2.3 %
David Breed
    142,996 (15)     9.6 %     2.5 %
 
(1)
The address of each officer and director is 5004 Bee Creek Rd., Suite 600, Spicewood, Texas 78669
 

(2)
Beneficial ownership is determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended, and is generally determined by voting powers and/or investment powers with respect to securities. Unless otherwise noted, the shares of common stock listed above are owned as of July 20, 2013, and are owned of record by each individual named as beneficial owner and such individual has sole voting and dispositive power with respect to the shares of common stock owned by each of them.  In determining the number of shares that may be issued for the conversion of promissory notes, we have accrued interest through July 20, 2013.

(3)
Includes 44,780 shares of common stock, warrants for the purchase of 2,054 shares of common stock, 26,071 shares subject to an option to purchase common stock and, assuming a price of $5.00 per share in this offering, 2,799 shares of common stock that may be issued upon the conversion of a promissory note in the principal amount of $13,000.

(4)
Includes 14,094 shares of common stock, warrants for the purchase of 31,608 shares of common stock, 5,517 shares subject to an option to purchase common stock exercisable within 60 days of July 20, 2013, and 42,794 shares of common stock that may be issued upon the conversion of a promissory note in the principal amount of $200,000.

(5)
Includes 118,406 shares of common stock, warrants for the purchase of 23,706 shares of common stock, 26,743 shares subject to an option to purchase common stock exercisable within 60 days of July 20, 2013, and 41,280 shares of common stock that may be issued upon the conversion of a promissory notes in the principal amount of $150,000 and $40,000.

(6)
This amount includes 44,099 shares held in Mr. Baum’s name and 28,935 shares of common stock that may be acquired through the conversion of a senior secured convertible promissory note in the principal amount of $100,000 held by Series E-1 of Larren Smitty, LLC, of which Mr. Baum is the beneficial owner, and 8,390 shares of common stock which have been authorized but have not yet been issued for services Mr. Baum has provided as a director.  Not included in this amount are 14,383 shares of common stock issuable upon the exercise of warrants held by Series E-1 of Larren Smitty, LLC.

 
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(7)
Mr. Baum’s percentage ownership following the offering is based on 95,807 shares of common stock, which includes 81,423 shares from the conversion of senior secured convertible promissory notes issued to Series E-1 of Larren Smitty, LLC as well as 14,383 shares underlying warrants held by Series E-1 of Larren Smitty, LLC that will become exercisable upon the completion of this offering.
   
(8)
Lon E. Bell, Ph.D., a director, is a trustee of the Bell Family Trust that owns two senior secured convertible promissory notes, each in the principal amount of $100,000 which may be converted into 57,956 shares of our common stock.  This amount also includes 8,390 shares of common stock which have been authorized but have not yet been issued for services Dr. Bell has provided as a director.  Dr. Bell has sole voting and investment control with respect to the shares of common stock owned by the Bell Family Trust.  Not included in this amount are warrants for the purchase of 43,150 shares of common stock that will not be exercisable until this offering is complete.
 
(9)
Mr. Bell’s percentage ownership following the offering is based on 109,496 shares of common stock, which includes 66,346 shares from the conversion of senior secured convertible promissory notes and shares for services as well as 43,150 shares underlying the warrants that will become exercisable upon the completion of this offering.
   
(10)
Mr. Hacopian has sole voting and dispositive power with respect to his shares of common stock.
 
(11)
This amount includes 506,435 shares of common stock that may be acquired through the conversion of senior secured convertible promissory notes in the principal amounts of $100,000, $1,625,000 and $275,000.  Not included in this amount are warrants for the purchase of 302,049 shares of common stock that will not be exercisable until this offering is completed.  Mr. Appel has sole voting and dispositive power with respect to his shares of common stock. 
 
(12)
Mr. Appel’s percentage ownership following the offering is based on 808,484 shares of common stock, which includes 506,435 shares from the conversion of senior secured convertible promissory notes as well as 302,049 shares underlying the warrants that will become exercisable upon the completion of this offering.
   
(13)
The address for MDB Capital Group, LLC is 401 Wilshire Boulevard, Suite 1020, Santa Monica, California 90401. This amount includes 114,290 shares of common stock which may be acquired through the conversion of senior secured convertible promissory notes in the principal amount of $195,000 and $200,000.   Not included in this amount are warrants for the purchase of 350,698 shares of common stock that are not currently exercisable.  Warrants for the purchase of 56,814 shares of common stock will be exercisable after this offering is completed and warrants for the purchase of 293,884 shares of common stock will be exercisable 180 days following the completion of this offering.  Christopher A. Marlett has sole voting and dispositive power with respect to these shares of common stock.
 
(14) The percentage ownership of MDB Capital Group, LLC following the offering is based on 171,104 shares of common stock, which includes 114,290 shares from the conversion of senior secured convertible promissory notes as well as 56,814 shares underlying warrants that will become exercisable upon the completion of this offering.
   
 (15)
This amount includes 131,247 shares of common stock, 7,798 shares of common stock which may be acquired through the conversion of a convertible promissory note in the principal amount of $25,000, and warrants for the purchase of 3,951 shares of common stock exercisable within 60 days of July 20, 2013.

 
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

We intend to apply for the listing of our common stock on the Nasdaq Capital Market, therefore, our determination of the independence of directors is made using the definition of “independent” contained in the listing standards of the Nasdaq Stock Market. On the basis of information solicited from each director, the board has determined that each of Mr. Baum and Dr. Bell has no material relationship with the Company and is independent within the meaning of such rules.
 
SEC regulations define the related person transactions that require disclosure to include any transaction, arrangement or relationship in which the amount involved exceeds the lesser of $120,000 or one percent of the average of the Company’s total assets at year end for the last two completed fiscal years in which we were or are to be a participant and in which a related person had or will have a direct or indirect material interest. A related person is: (i) an executive officer, director or director nominee of the Company, (ii) a beneficial owner of more than 5% of our common stock, (iii) an immediate family member of an executive officer, director or director nominee or beneficial owner of more than 5% of our common stock, or (iv) any entity that is owned or controlled by any of the foregoing persons or in which any of the foregoing persons has a substantial ownership interest or control.
 
For the period from January 1, 2011, through the date of this prospectus (the “Reporting Period”), described below are certain transactions or series of transactions between us and certain related persons.

On October 16, 2011, Paul Bundschuh, our Chief Executive Officer, purchased 4,109 shares of stock in exchange for $26,000.

On March 24, 2011, we issued a $10,000 promissory note to William Alexander, our Chief Technology Officer and a beneficial owner of more than 5% of our common stock.  The note accrued simple interest at the rate of 6% per year and all principal and interest were due and payable on the maturity date, December 31, 2011.  On September 5, 2011 we repaid the loan along with $271.23 in accrued interest.

On March 25, 2011, we issued a promissory note in the principal amount of $20,000 to Dr. David Breed.  At the time the loan was made, Dr. Breed was a director and he is a beneficial owner of more than 5% of our common stock.  The note accrued simple interest at the rate of 6% per year.  On September 30, 2011, we repaid $10,000 of the principal amount together with $310.68 in interest.  On October 15, 2011 we paid the remaining $10,000 of the principal amount together with $335.34 in interest.

Between March 17, 2011 and March 25, 2011, we received three loans from Charles De Tarr totaling $60,000, which was the highest principal amount owed during the Reporting Period.  At the time the loans were made, Mr. De Tarr was a director and our Chief Financial Officer and he is a beneficial owner of more than 5% of our common stock.  The loans accrued simple interest at the rate of 6% per year.  On April 30, 2011, we repaid $20,000 of the principal amount.  On July 8, 2011, Mr. De Tarr advanced an additional $10,000 to us.  On October 9, 2011, we repaid $10,000 in principal amount in cash, paid interest in the amount of $1,623.45 and repaid the remaining $40,000 in principal amount with the convertible promissory note described below.

On October 9, 2011, we issued a $40,000 convertible promissory note to Mr. De Tarr.  The convertible note accrues simple interest at the rate of 6% per year and all principal and interest are due and payable on the earlier of (i) December 31, 2013, (ii) the closing of a firm commitment underwritten initial public offering that raises at least $10 million (an IPO), (iii) the closing of a Qualified Financing, as defined in the convertible promissory note, and (iv) an event of default.  The promissory note will automatically convert on an IPO at the price per share at which the common stock is offered to the public.  At Mr. De Tarr’s option, the promissory note may also be converted (A) upon a Non-Qualified Financing (as defined in the promissory note) at the lower of (i) the lowest per share or unit purchase price paid for Next Round Securities (as defined in the promissory note) or (ii) $2.65754 or (B) at any time prior to a Non-Qualified Financing or Qualified Financing at $6.3276.  During the Reporting Period, the highest principal amount owed pursuant to the promissory note was $40,000.  As of July 20, 2013, interest in the amount of $4,277.26 had accrued.  To date, no payments have been made toward the principal amount or accrued interest.

 
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On February 24, 2012, we issued a $25,000 convertible promissory note and a common stock purchase warrant to Dr. David Breed.  The convertible note accrues simple interest at the rate of 6% per year and all principal and interest are due and payable on its maturity date, December 31, 2013, unless earlier paid by the Company.  The promissory note may be converted at the lower of (i) the lowest per share purchase price paid in cash for Next Financing Securities (as defined in the convertible note) or (ii) $6.3276.  The promissory note will automatically convert upon an initial public offering of our common stock at the price per share at which the common stock is offered to the public.  At Dr. Breed’s option, he may convert the promissory note at any time at the rate of $6.3276.  During the Reporting Period, the highest principal amount owed pursuant to the promissory note was $25,000.  As of July 20, 2013, interest in the amount of $2,107 had accrued.  To date, no payments have been made toward the principal amount or accrued interest.  In conjunction with this promissory note, we issued a warrant to Dr. Breed.  The warrant has a term of seven years.  The number of shares subject to the warrant is determined by dividing the principal amount of the promissory note by the exercise price.  The exercise price is determined as follows:  if the convertible promissory note is converted in the Next Financing, the per share exercise price will be the price at which the note was converted, otherwise the per share exercise price will be $6.3276.

On April 12, 2012, we issued a $13,000 convertible promissory note and a common stock purchase warrant to Paul Bundschuh, our Chief Executive Officer.  The convertible note accrues simple interest at the rate of 6% per year and all principal and interest are due and payable on its maturity date, December 31, 2013, unless earlier paid by the Company.  The promissory note will automatically convert upon an initial public offering of our common stock at the price per share at which the common stock is offered to the public.  The promissory note may be converted (A) at the lower of (i) the lowest per share purchase price paid in cash for Next Financing Securities (as defined in the convertible note) or (ii) $6.3276 or (B) prior to the Next Qualified Financing (as defined in the convertible note) at $6.3276.  During the Reporting Period, the highest principal amount owed pursuant to the promissory note was $13,000.  As of July 20, 2013, interest in the amount of $993.23 had accrued.  To date, no payments have been made toward the principal amount or accrued interest.  In conjunction with this promissory note, we issued a warrant to Mr. Bundschuh.  The warrant has a term of seven years.  The number of shares subject to the warrant is determined by dividing the principal amount of the promissory note by the exercise price.  The exercise price is determined as follows:  if the convertible promissory note is converted in the Next Financing, the per-share exercise price will be the price at which the note was converted, otherwise the per share exercise price will be $6.3276.

On May 22, 2012, we issued convertible promissory notes together with common stock purchase warrants to Charles De Tarr and Christopher Cobb, respectively.  Mr. Cobb is our President and Chief Operating Officer, a member of our board of directors and a beneficial owner of more than 5% of our common stock.  The note issued to Mr. De Tarr was in the principal amount of $150,000 and included a series of advances made to us by Mr. De Tarr from February 28, 2012 through May 22, 2012.  The note issued to Mr. Cobb was in the principal amount of $200,000.  The convertible notes accrue interest at the rate of 6% per year and all principal and interest are due and payable on the maturity date, December 31, 2014, unless earlier paid by the Company.  The promissory notes will automatically convert upon an initial public offering of our common stock at the price per share at which the common stock is offered to the public.  The promissory notes may be converted (A) at the lower of (i) the lowest per share purchase price paid in cash for Next Financing Securities (as defined in the convertible notes) or (ii) $6.3276 or (B) prior to the Next Qualified Financing (as defined in the convertible notes) at $6.3276.  As of July 20, 2013, interest in the amount of $12,125.75 had accrued on the $150,000 note and interest in the amount of $13,969.01 had accrued on the $200,000 note.  To date, no payments have been made toward the principal amount or accrued interest of either note, therefore, during the Reporting Period, the highest principal amounts owed pursuant to the promissory notes were $150,000 and $200,000, respectively.  In conjunction with these promissory notes, we issued a warrant to each of Mr. De Tarr and Mr. Cobb.  The warrants have terms of seven years.  The number of shares subject to each warrant is determined by dividing the principal amount of the promissory note by the exercise price.  The exercise price is determined as follows:  if the convertible promissory note is converted in the Next Financing, the per share exercise price will be the price at which the note was converted, otherwise the per share exercise price will be $6.3276.

 
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On August 31, 2012, we closed an offering of $750,000 in principal amount of senior secured convertible promissory notes (the “August Notes”) together with warrants to purchase shares of our common stock.  On November 21, 2012, we closed an offering of $3.25 million in principal amount of senior secured convertible promissory notes (the “November Notes”) together with warrants to purchase shares of our common stock.  On July 29, 2013, we closed an offering of $750,000 in aggregate principal amount of senior secured convertible promissory notes (the “July Notes”) together with warrants for the purchase of our common stock.  The August Notes, the November Notes and the July Notes are collectively referred to in this discussion as the “Notes.”  The Notes accrue interest at the higher of (i) 1% per annum or (ii) or the lowest rate that may accrue without causing the imputation of interest under the Internal Revenue Code.  The principal amount of the August Notes and the November Notes, together with accrued interest, are due and payable on the earlier to occur of (i) November 21, 2013, (ii) an Event of Default (as defined in the Notes) or (iii) the closing of an IPO Financing (as defined in the Notes).  The principal amount of the July Notes, together with accrued interest, are due and payable on the earlier to occur of (i) July 29, 2014, (ii) an Event of Default (as defined in the Notes) or (iii) the closing of an IPO Financing (as defined in the Notes).  To date, we have made no payments toward the principal or accrued interest.  The warrants issued in conjunction with the Notes have a term of seven years (provided that if we consummate an initial public offering of our common stock after the fifth anniversary date of the issue date but prior to the expiration date, then the expiration date will be extended for an additional five years following the initial public offering) and an exercise price that will be determined as follows: (i) in the event of an IPO that occurs prior to the maturity dates of the Notes, the per-share exercise price will be equal to the lower of 0.70 times the IPO price or $3.47626; or (ii) in the event of a Private Equity Financing (as defined in the warrant agreement) that occurs prior to the maturity date of the Notes, the per-share exercise price will be equal to the lower of 0.70 times the Private Equity Financing Price or $3.47626; provided, however, that (A) if we undertake first, a Private Equity Financing and secondly, an IPO prior to the maturity date of the Notes and (B) the Private Equity Financing price is higher than the IPO price, then the per share exercise price will be adjusted to equal the number of shares of common stock and the exercise price calculated in accordance with subsection (i) above; or (iii) if we do not undertake either a Private Equity Financing or an IPO prior to the maturity date of the Notes, then the exercise price will be $3.47626 per share.  The number of shares of common stock that will be issued under the terms of the warrants issued in conjunction with the August Notes will be determined as follows: (i) in the event of an IPO that occurs prior to November 21, 2013, the principal amount of the August Note divided by the lower of 0.70 of the IPO Price or $3.47626 will determine the number of shares of common stock covered by the warrant while the per-share exercise price will be equal to the lower of 0.70 times the IPO Price or $3.47626; or (ii) in the event of a Private Equity Financing that occurs prior to November 21, 2013, the principal amount of the August Note divided by the lower of 0.70 of the Private Equity Financing Price or $3.47626 will determine the number of shares of common stock covered by the warrant, with a per-share exercise price equal to the lower of 0.70 times the Private Equity Financing Price or $3.47626; provided, however, that (A) if we undertake first, a Private Equity Financing and secondly, an IPO prior to November 21, 2013 and (B) the Private Equity Financing Price is higher than the IPO Price, then the number of shares of common stock covered by the warrant and the per share exercise price shall be adjusted to equal the number of shares of common stock and the exercise price calculated in accordance with subsection (i) above; or (iii) if we do not undertake either a Private Equity Financing or an IPO prior to November 21, 2013, then the number of shares of common stock covered by the warrant will equal the original principal amount of the August Note divided by $3.47626, and the exercise price will be $3.47626 per share.  The number of shares of common stock that may be purchased pursuant to the terms of the warrants issued in conjunction with the November Notes and the July Notes will be computed identically to the August Notes, except on one-half the principal amount.  The following officers, directors and beneficial owners of 5% of our common stock invested in these offerings:

August 31, 2012
     
       
Name and Title
 
Investment Amount
 
       
Lon Bell, director (Investment made through the Bell Family Trust dated 2/2/95)
  $ 100,000  
Peter Appel, beneficial owner of more than 5% of our common stock
  $ 100,000  
       
November 21, 2012
     
       
Lon Bell, director (Investment made through the Bell Family Trust dated 2/2/95)
  $ 100,000  
Mark Baum, director (Investment made through Series E-1 of the Larren Smitty, LLC)
  $ 100,000  
Peter Appel, beneficial owner of more than 5% of our common stock
  $ 1,625,000  
MDB Capital Group, LLC, beneficial owner of more than 5% of our common stock
  $ 395,000  
         
July 29, 2013
       
         
Peter Appel, beneficial owner of more than 5% of our common stock
  $ 275,000  
 
 
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On July 24, 2012, we entered into engagement agreements with MDB Capital Group, LLC (“MDB”) (the “Engagement Agreements”).  In exchange for services that were provided and pursuant to the terms of our Engagement Agreements, on November 21, 2012, we issued to MDB a warrant to purchase 200,393 shares of common stock and a warrant to purchase 93,491 shares of common stock.  The warrant to purchase 200,393 shares of common stock expires seven years from the date of issuance.  The warrant for the purchase of 93,491 shares of common stock expires seven years after the issue date, provided, however, if the Company closes an IPO after the fifth anniversary date of the issue date but prior to the expiration date, then the expiration date will be extended for an additional five years following the close of the IPO.  The exercise price of the warrant to purchase 200,393 shares of common stock will be determined as follows: (i) in the event of an IPO that occurs prior to the November 21, 2013, the per-share exercise price will be equal to the lower of 0.70 times the IPO price or $3.47626; or (ii) in the event of a Private Equity Financing (as defined in the warrant agreement) that occurs prior to November 21, 2013, the per-share exercise price will be equal to the lower of 0.70 times the Private Equity Financing Price or $3.47626; provided, however, that (A) if we undertake first, a Private Equity Financing and secondly, an IPO prior to November 21, 2013, and (B) the Private Equity Financing price is higher than the IPO price, then the per share exercise price will be adjusted to equal the number of shares of common stock and the exercise price calculated in accordance with subsection (i) above; or (iii) if we do not undertake either a Private Equity Financing or an IPO prior to November 21, 2013, then the exercise price will be $3.47626 per share.  The exercise price of the warrant to purchase 93,491 shares of common stock will be determined as follows:  (i) in the event of an IPO that occurs prior to November 21, 2013, the per-share exercise price will be equal to 125% of the lower of 0.70 times the IPO price or $4.345325; or (ii) in the event of a Private Equity Financing (as defined in the warrant agreement) that occurs prior to November 21, 2013, the per-share exercise price will be equal to 125% of the lower 0.70 times the Private Equity Financing Price or $4.345325; provided, however, that (A) if we undertake first, a Private Equity Financing and secondly, an IPO prior to November 21, 2013, and (B) the Private Equity Financing price is higher than the IPO price, then the per share exercise price will be adjusted to equal the number of shares of common stock and the exercise price calculated in accordance with subsection (i) above; or (iii) if we do not undertake either a Private Equity Financing or an IPO prior to November 21, 2013, then the exercise price will be $4.345325 per share.  The warrants will become exercisable, in whole or in part, 180 days after the completion of this offering.

During the years ended December 31, 2012 and 2011 and the quarter ended March 31, 2013, we incurred $50,069, $75,823 and $18,024,  respectively, for IT services and equipment provided by DataCorp, a company that is owned by Hamo Hacopian, a former director.

Certain of our current officers have executed employment agreements with us or have received shares of common stock or options to purchase common stock as compensation.  Our independent directors also receive compensation for their services to us.  See the section of this prospectus titled “Executive Compensation” for a discussion of these transactions.

 
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CHANGES IN ACCOUNTANTS

In January 2013, we dismissed Maxwell, Locke & Ritter (MLR) as our independent public accounting firm, because MLR is not registered with the Public Company Accounting Oversight Board.  On January 26, 2013, we engaged Gumbiner Savett Inc. (“Gumbiner”) as our new independent registered public accounting firm.  The decision to dismiss MLR and to retain Gumbiner was approved by our board of directors.

For the fiscal years ended December 31, 2010 and December 31, 2011, MLR’s reports on our financial statements did not contain an adverse opinion or a disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope, or accounting principles.  During the fiscal years ended December 31, 2010 and December 31, 2011 and through the date of MLR’s dismissal, there were no disagreements with MLR on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure that would have caused MLR to make reference to the subject matter of the disagreement in its reports.  During the fiscal years ended December 31, 2010 and December 31, 2011 and through the date of MLR’s dismissal, we did not experience any of the events set forth in paragraphs (A) through (D) of Item 304(a)(1)(v) of Regulation S-K.

During the fiscal years ended December 31, 2010 and December 31, 2011 and through the date that we retained Gumbiner, we did not consult Gumbiner regarding any of the matters set forth in paragraphs (i) and (ii) of Item 304(a)(2) of Regulation S-K.

UNDERWRITING
 
We are offering the shares of common stock described in this prospectus through the underwriter, MDB Capital Group, LLC, which is acting as lead managing underwriter of the offering.
 
We have agreed to enter into an underwriting agreement with the underwriter prior to the closing of this offering. Subject to the terms and conditions of the underwriting agreement, we will agree to sell to the underwriter, and the underwriter will agree to purchase, at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus, as it may be supplemented, shares of common stock.
 
The underwriter is committed to purchase all of the common shares offered by us, other than those covered by the option to purchase additional shares described below, if they purchase any shares.  The underwriting agreement provides that the underwriter’s obligations to purchase shares of our common stock are subject to conditions contained in the underwriting agreement.  A copy of the underwriting agreement has been filed as an exhibit to the registration statement of which this prospectus forms a part.
 
We have been advised by the underwriter that the underwriter proposes to offer shares of our common stock directly to the public at the public offering price set forth on the cover page of this prospectus and to certain dealers that are members of the Financial Industry Regulatory Authority (FINRA). Any securities sold by the underwriter to such securities dealers will be sold at the public offering price less a selling concession not in excess of $[___] per share. After the public offering of the shares, the offering price and other selling terms may be changed by the underwriter.
 
None of our securities included in this offering may be offered or sold, directly or indirectly, nor may this prospectus and any other offering material or advertisements in connection with the offer and sales of any of our common stock, be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons who receive this prospectus are advised to inform themselves about and to observe any restrictions relating to this offering of our common stock and the distribution of this prospectus. This prospectus is neither an offer to sell nor a solicitation of any offer to buy any of our common stock included in this offering in any jurisdiction where that would not be permitted or legal.
 
The underwriter has advised us that it does not intend to confirm sales to any accounts over which they exercise discretionary authority.

 
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Underwriting Discount and Expenses
 
The following table summarizes the underwriting discount and commission to be paid to the underwriter by us.
 
   
Without
Over-
Allotment
   
With
Over-
Allotment
 
Public offering price
  $ 12,500,000     $ 14,375,000  
Underwriting discount to be paid to the underwriter
    1,250,000       1,437,500  
Non-accountable expense allowance
    187,500       187,500  
Net proceeds, before other expenses
  $ 11,062,500     $ 12,750,000  

We estimate the total expenses payable by us for this offering to be approximately $2.03 million, which amount includes (i) the underwriting discount of $1,250,000 ($1,437,500 if the underwriter’s over-allotment option is exercised in full), (ii) reimbursement of the non-accountable expenses of the underwriter equal to $187,500 (none of which has been paid in advance), including the legal fees of the underwriter being paid by us, and (iii) other estimated expenses of approximately $595,500, which includes legal, accounting, printing costs and various fees associated with the registration and listing of our shares.  In no event will the aggregated expenses reimbursed to MDB Capital Group, LLC exceed $187,500.
 
Over-allotment Option
 
We have granted to the underwriter an option, exercisable not later than 45 days after the date of this prospectus, to purchase up to an additional 375,000 shares of our common stock (up to 15% of the shares firmly committed in this offering) at the public offering price, less the underwriting discount, set forth on the cover page of this prospectus. The underwriter may exercise the option solely to cover over-allotments, if any, made in connection with this offering. If any additional shares of our common stock are purchased pursuant to the over-allotment option, the underwriter will offer these additional shares of our common stock on the same terms as those on which the other shares of common stock are being offered hereby.
 
Determination of Offering Price
 
There is no current market for our common stock. Our underwriter, MDB Capital Group, LLC, is not obligated to make a market in our securities, and even if it chooses to make a market, can discontinue at any time without notice. Neither we nor the underwriter can provide any assurance that an active and liquid trading market in our securities will develop or, if developed, that the market will continue.
 
The public offering price of the shares offered by this prospectus has been determined by negotiation between us and the underwriter. Among the factors considered in determining the public offering price of the shares were:

·
our history and our prospects;

·
the industry in which we operate;

·
our past and present operating results;

·
the previous experience of our executive officers; and

·
the general condition of the securities markets at the time of this offering.
 
The offering price stated on the cover page of this prospectus should not be considered an indication of the actual value of the shares. That price is subject to change as a result of market conditions and other factors, and we cannot assure you that the shares can be resold at or above the public offering price.
 
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Underwriter Warrant
 
We have agreed to issue to MDB Capital Group, LLC and its designees a warrant to purchase shares of our common stock (up to 10% of the shares of common stock sold in this offering). This warrant is exercisable at $6.25 per share (125% of the price of the common stock sold in this offering), commencing on the effective date of this offering and expiring seven years from the effective date of this offering. The warrant and the shares of common stock underlying the warrant have been deemed compensation by FINRA and are therefore subject to a one year lock up pursuant to Rule 5110(g)(1) of FINRA. MDB Capital Group, LLC (or permitted assignees under the Rule) will not sell, transfer, assign, pledge, or hypothecate this warrant or the securities underlying this warrant, nor will it engage in any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of this warrant or the underlying securities for a period of one year from the effective date of the offering.
 
Pursuant to engagement agreements entered into on July 24,2012, with MDB Capital Group, LLC, we issued warrants to purchase an aggregate of 293,884 shares of our common stock on November 21, 2012.  The term for these warrants is 7 years and the warrants do not become exercisable until 180 days after the completion of this offering.  Upon the completion of this offering with aggregate gross proceeds in excess of $10 million, the exercise price for 200,393 shares of our common stock covered by these warrants will be the lower of 0.70 times the IPO price set forth on the cover page of this Prospectus or $3.47626, and the exercise price of the remaining warrant to purchase 93,491 shares of our common stock will be 125% of the lower of 0.70 times the IPO price set forth on the cover page of this Prospectus or $4.345325.  We issued these warrants to MDB Capital Group, LLC for advisory services and private placement agency services rendered on November 21, 2012.
 
In the private placement of our senior secured convertible promissory notes in November of 2012, MDB Capital Group purchased an aggregate of $395,000 in principal amount of our notes and received warrants to purchase shares of our common stock.  The term of this warrant is 7 years.  The calculation of the number of shares of our common stock covered by this warrant and the exercise price is determined by a formula.  The number of shares of our common stock covered by the warrant is determined by dividing 50% of the principal amount of the senior secured convertible notes purchased by the lower of 0.70 times the IPO price set forth on the cover page of this Prospectus or $3.47626 with an exercise price of the lower of 0.70 times the IPO price set forth on the cover page of this Prospectus or $3.47626.  Assuming that the offering covered by this prospectus closes with the IPO price set forth on the cover page of this prospectus and that we receive aggregate gross proceeds in excess of $10 million, the warrant would cover 56,814 shares of our common stock.  These warrants are not currently exercisable and will not become exercisable unless and until this offering closes or certain future events occur.  If this offering does not close or is abandoned, then this warrant will cover 56,814 shares of our common stock at an exercise price of $3.37626 per share and become exercisable on November 21, 2013, unless a private equity financing occurs prior to that date in which case the number of shares covered by this warrant and the exercise price will be determined by the price our shares are sold in the private equity financing.
 
Lock-Up Agreements
 
All of our officers, directors, employees, and stockholders beneficially owning 5% or more of our common stock have agreed that, until the later of the one year anniversary of the date of the Underwriting Agreement we will enter into in conjunction with this offering, they will not sell, contract to sell, grant any option for the sale or otherwise dispose of any of our equity securities, or any securities convertible into or exercisable or exchangeable for our equity securities, without the consent of MDB Capital Group, LLC, except for exercise or conversion of currently outstanding warrants, options and convertible debentures, as applicable; and exercise of options under an acceptable stock incentive plan.  This lock-up covers a total of 1,716,233 shares of common stock which includes 1,262,792 shares of our currently outstanding common stock and 453,441 shares of common stock underlying stock options, warrants and convertible promissory notes. The underwriter may consent to an early release from the lock-up period if, in its opinion, the market for the common stock would not be adversely impacted by sales and in cases of a financial emergency of an officer, director or other stockholder. We are unaware of any officer, director or stockholder who intends to ask for consent to dispose of any of our equity securities during the relevant lock-up periods.

Holders of our senior secured convertible promissory notes, including MDB Capital Group, LLC, have agreed that, until 180 days following the date of this prospectus, they will not sell, contract to sell, grant any option for the sale or otherwise dispose of any of our equity securities, or any securities convertible into or exercisable or exchangeable for our equity securities, without the consent of MDB Capital Group, LLC.  This lock-up covers a total of 2,455,231 shares of our common stock which includes 1,370,267 shares of common stock that will be issued upon the conversion of our senior secured convertible promissory notes, 791,080 shares of common stock underlying the warrants issued therewith, and 293,884 shares of common stock underlying warrants issued to MDB Capital Group, LLC.
 
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Indemnification
 
 
We will agree to indemnify the underwriter against certain liabilities, including certain liabilities arising under the Securities Act, and to contribute to payments that the underwriter may be required to make for these liabilities.
 
Short Positions and Penalty Bids
 
The underwriter may engage in over-allotment, syndicate covering transactions, and penalty bids or purchases for the purpose of pegging, fixing or maintaining the price of the common stock, in accordance with Regulation M under the Exchange Act.
 
 
Over-allotment involves sales by the underwriter of shares in excess of the number of shares the underwriter is obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by an underwriter is not greater than the number of shares that it may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriter may close out any short position by either exercising its over-allotment option and/or purchasing shares in the open market.
 
 
Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriter will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which it may purchase shares through the over-allotment option. If an underwriter sells more shares than could be covered by the over-allotment option, a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if an underwriter is concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering.
 
 
Penalty bids permit an underwriter to reclaim a selling concession from a syndicate member when the shares originally sold by the syndicate member are purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.
 
These syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of the common stock. As a result, the price of the common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on the NASDAQ Capital Market, and if commenced, they may be discontinued at any time.
 
Neither we nor the underwriter make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the common stock. In addition, neither we nor the underwriter make any representation that the underwriter will engage in these transactions or that any transaction, once commenced, will not be discontinued without notice.
 
Electronic Distribution
 
A prospectus in electronic format may be made available on the Internet sites or through other online services maintained by the underwriter, or by its affiliates. In those cases, prospective investors may view offering terms online and, depending upon the underwriter, prospective investors may be allowed to place orders online. The underwriter may agree with us to allocate a specific number of shares for sale to online brokerage account holders. Any such allocation for online distributions will be made by the underwriter on the same basis as other allocations.
 
Other than the prospectus in electronic format, the information on the underwriter’s website and any information contained in any other website maintained by the underwriter is not part of the prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or the underwriter in its capacity as underwriter and should not be relied upon by investors.

The underwriter’s compensation in connection with this offering is limited to the fees and expenses described above under “Underwriting Discount and Expenses.”

 
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USE OF PROCEEDS
 
Based on an assumed offering price of $5.00 per share, we estimate the gross proceeds from the sale of 2,500,000 shares of common stock, prior to deducting underwriting discounts and commissions and the estimated offering expenses payable by us, will be approximately $12.5 million (approximately $14.375 million if the over-allotment option granted to the underwriter is exercised in full).
 
We estimate that we will receive net proceeds of approximately $10.5 million, after deducting underwriting discounts and commissions and our underwriter’s expense allowance, and other estimated expenses of approximately $2.03 million, which includes legal, accounting, printing costs and various fees associated with the registration and listing of our shares.  If the underwriter exercises its right to purchase an additional 375,000 shares of common stock to cover over-allotments, we will receive an additional approximately $1,687,500, after deducting approximately $187,500 for underwriting discounts and commissions.
 
We currently intend to use the net proceeds of this offering as follows: approximately $1 million for patent filings and the protection of intellectual property, $1.5 million for new product research and development, $5 million for the development of existing products, including product and equipment purchases, $1 million for equipment and software, and $2 million for working capital and general corporate expenses.
 
The amounts and timing of our actual expenditures will depend on numerous factors, including market conditions, results from our research and development efforts, business developments and opportunities and related rate of growth, sales and marketing activities and competition. Accordingly, our management will have broad discretion in the application of the net proceeds, and investors will be relying on the judgment of our management regarding the application of the proceeds from this offering. We may find it necessary or advisable to use portions of the proceeds from this offering for other purposes. Circumstances that may give rise to a change in the use of proceeds and the alternate purposes for which the proceeds may be used include: 
 
the existence of unforeseen or other opportunities or the need to take advantage of changes in timing of our existing activities; 
 
the need or desire on our part to accelerate, increase, reduce or eliminate one or more existing initiatives due to, among other things, changing market conditions and competitive developments or interim results of research and development efforts; 
 
results from our business development and marketing efforts, including co-development and pilot site installation opportunities that may materialize; 
 
the effect of federal, state, and local regulation of potential customers in our identified industries; 
 
our ability to attract development funding or to license or sell our technology to industry sponsors or other interested organizations; and/or 
 
the presentation of strategic opportunities of which we are not currently aware (including acquisitions, joint ventures, licensing and other similar transactions). 
 
From time to time, we evaluate these and other factors and we anticipate continuing to make such evaluations to determine if the existing allocation of resources, including the proceeds of this offering, is being optimized. 

CAPITALIZATION
 
The following table sets forth our actual cash and cash equivalents and capitalization, each as of March 31, 2013:
 
on an actual basis; and
 
on a pro forma as adjusted basis to give effect to the issuance of the common stock offered hereby and the use of proceeds, as described in the section entitled “Use of Proceeds.”
 
 
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You should consider this table in conjunction with our financial statements and the notes to those financial statements included in this prospectus. 

   
As of March 31, 2013
 
                         
   
 
 
 
 
 
 
Actual
   
 
 
 
 
Actual with effect of reverse split
   
As adjusted for the effect of the reverse split, debt conversion and issuance of shares to directors
   
 
 
 
 
 
As adjusted for this offering (1)
 
                         
Total debt at face value, net of debt discount
                       
Convertible debt  less debt discount plus Texas Emerging Technology Fund
  $ 3,350,532     $ 3,350,532     $ 1,000,000     $ 1,000,000  
                                 
Stockholders’ equity
                               
Common stock, par value $0.001 per share – 50,000,000 shares of common stock authorized; 1,480,262 shares issued and outstanding as of March 31 giving effect to the reverse split; 5,688,308 shares issued and outstanding as adjusted (2)
  $        3,525     $        1,480     $        3,188     $        5,688  
Additional paid-in-capital
    7,109,741       7,111,786       10,601,465       21,101,465  
Additional paid-in-capital; stock to be issued to directors and for legal services (3)
    43,333       43,333       --       --  
Treasury stock
    (2,657 )     (2,657 )     (2,657 )     (2,657 )
Accumulated deficit
    (9,025,017 )     (9,025,017 )     (9,282,464 )     (9,282,464 )
Total stockholders’ equity (deficit)
    (1,871,075 )     (1,871,075 )     1,319,532       11,822,032  
                                 
Total capitalization
    1,479,457       1,479,457       2,319,532       12,822,032  
                                 
Stockholders’ equity (deficit) per share
    (0.53 )     (1.33 )     0.43       2.18  
 
(1)
 
 
 
 
(2)
 
 
 
(3)
Assumes that approximately $12.5 million of our common stock is sold in this offering at an offering price of $5.00 per share and that the net proceeds thereof are approximately $10.5 million after deducting underwriting discounts and commissions and our estimated expenses. If the underwriter’s over-allotment option is exercised in full, net proceeds will increase to approximately $12,187,500.
 
Convertible notes and interest of $5,980,214, including $750,000 raised after the second quarter of 2013, convert into 1,621,249 shares of common stock at the time of the offering.  Of the $5,980,214 in debt $2,791,325 is already accounted for in paid in capital as debt discount.
 
Management anticipates issuing 12,465 shares of common stock to our independent directors as compensation to March 31, 2013 with paid in capital of $43,333.  Management anticipates that the number of shares to be issued to the independent directors will increase to 25,710 shares by June 30, 2013; these shares are reflected in the last two columns.  Management anticipates that it will issue an additional convertible promissory note to Richardson & Patel LLP that will be converted into 61,357 unregistered shares of common stock at $3.47626 per share in payment of an anticipated $213,294 in additional legal expenses incurred during 2013 to complete this offering; these shares are reflected in the last two columns.

 
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DILUTION
 
Our net tangible book value as of March 31, 2013, was approximately $(1,871,075), or $(1.33) per share of our common stock. Our net tangible book value per share represents our total tangible assets less total liabilities divided by the number of shares of our common stock outstanding on March 31, 2013. If we had converted all the convertible debt as of March 31, 2013, our net tangible assets would have been $1,319,532 or $0.41 per share.  Assuming that we issue all of the shares of our common stock offered by us at the public offering price of $5.00 per share, after deducting the commissions and estimated offering expenses payable by us and converting the Convertible Notes net of debt discount already on the books, our net tangible book value as of March 31 2013, would have been approximately $11.8 million, or $2.08 per share of our common stock. This amount represents an immediate increase in net tangible book value of $1.67 per share to our existing stockholders and an immediate dilution in net tangible book value of $2.92 per share to new investors purchasing shares of our common stock in this offering.
 
We determine dilution by subtracting the adjusted net tangible book value per share after this offering from the public offering price per share of our common stock. The following table illustrates the dilution in net tangible book value per share to new investors: 
  
Public offering price per share
       
$
5.00 
 
Net tangible book value per share as of March 31, 2013 with conversion of debt
 
$
0.41
         
Increase per share attributable to new investors
 
$
1.67 
         
Adjusted net tangible book value per share after this offering
         
$
2.08 
 
Dilution in net tangible book value per share to new investors
         
$
2.92 
 
  
The following shares were not included in the above calculation:
  
 
 
 
158,108 shares of our common stock reserved for issuance under stock option agreements at a weighted average exercise price of $2.7163 per share and 352,270 shares of our common stock reserved for issuance under option agreements that have been approved by the Compensation Committee of the Board of Directors but have not yet been issued at an exercise price of $5.00;
 
 
1,519,095 shares of common stock reserved for issuance under various outstanding warrant agreements at a weighted average exercise price of $2.99 per share;

 
487,713 shares of our common stock reserved for future issuance under our 2013 Equity Incentive Plan; and

 
up to 250,000 shares of our common stock issuable upon exercise of the warrant issued to MDB Capital Group, LLC.
 
Unless otherwise specifically stated, information throughout this prospectus assumes that none of our outstanding warrants to purchase shares of our common stock are exercised.

 
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LEGAL MATTERS
 
Richardson & Patel LLP, with an office at 405 Lexington Avenue, 49th Floor, New York, New York 10174, will pass upon the validity of the shares of common stock offered by this prospectus. Richardson & Patel LLP has agreed to accept $300,000 in aggregate principal amount of convertible promissory notes as partial payment for legal services in connection with the initial public offering of our common stock, the registration statement of which this prospectus is a part, and the listing of our common stock on the Nasdaq Capital Market, which convertible promissory notes will convert into an aggregate of 82,192 shares of common stock upon completion of this offering.  The promissory notes will convert to common stock upon the consummation of this offering at the rate of $3.47626 per share.  Although Richardson & Patel LLP is not under any obligation to accept additional securities in payment for services, it may do so in the future.  Robert Groover, Esq., an attorney with Glast, Phillips & Murray, P.C., holds a warrant for the purchase of 6,300 shares of our common stock.  Glast, Phillips & Murray, P.C., with an office at 14801 Quorum Drive, Suite 500, Dallas, Texas 75254, has provided a legal opinion to the underwriter relating to the discussion included in this prospectus of our patents and patent applications.  Locke Lord LLP, with an office at 500 Capitol Mall, Suite 1800, Sacramento, California 95814, is legal counsel to MDB Capital Group, LLC.

EXPERTS
 
The financial statements of Ideal Power Inc. as of December 31, 2012 and 2011, and for the years ended December 31, 2012 and 2011, included in this prospectus and elsewhere in the registration statement have been audited by Gumbiner Savett Inc., independent registered public accounting firm (which contain an explanatory paragraph related to our ability to continue as a going concern as described in Note 2 to our financial statements) as set forth in their report. We have included these financial statements in the prospectus and elsewhere in the registration statement in reliance upon the report of Gumbiner Savett Inc., given on their authority as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION
 
We have filed with the SEC a registration statement on Form S-1 under the Securities Act that registers the shares of our common stock to be sold in this offering. Our SEC filings are and will become available to the public over the Internet at the SEC’s website at www.sec.gov.  You may also read and copy any document we file with the SEC at its public reference facilities at 100 F Street N.E., Washington, D.C. 20549. You can also obtain copies of the documents upon the payment of a duplicating fee to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities.
 
This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules thereto. Some items are omitted in accordance with the rules and regulations of the SEC. You should review the information and exhibits included in the registration statement for further information about us and the securities we are offering. Statements in this prospectus concerning any document we filed as an exhibit to the registration statement or that we otherwise filed with the SEC are not intended to be comprehensive and are qualified by reference to these filings. You should review the complete document to evaluate these statements.
 
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
 
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the Company, we have been informed that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

 
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2,500,000 Shares of Common Stock
 

 
Ideal Power Inc.
 
PROSPECTUS
 
 
MDB Capital Group, LLC


Until            , 2013, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus.  This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 13.  OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
 
The following table sets forth the various expenses to be incurred in connection with the sale and distribution of our common stock being registered hereby, all of which will be borne by us (except any underwriting discounts and commissions and expenses incurred for brokerage, accounting, tax or legal services or any other expenses incurred in disposing of the shares). All amounts shown are estimates except the SEC registration fee.
 
SEC Filing Fee
 
$
2001.38
 
FINRA Fee*
 
$
1,967.29
 
Underwriter’s Legal Fees and Expenses.
 
$
187,500.00
 
Nasdaq Fee*
 
$
50,000.00
 
Printing Expenses*
 
$
35,000.00
 
Accounting Fees and Expenses*
 
$
40,000.00
 
Legal Fees and Expenses*
 
$
450,000.00
 
Transfer Agent and Registrar Expenses*
 
$
15,000.00
 
Miscellaneous*
 
$
1,500.00
 
         
Total
 
$
782,968.67
 
  
*
Estimated.
 
ITEM 14.  INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
The following summary is qualified in its entirety by reference to the complete text of any statutes referred to below and the certificate of incorporation of Ideal Power Inc., a Delaware corporation.
 
Section 145 of the General Corporation Law of the State of Delaware (the “DGCL”) permits a Delaware corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person’s conduct was unlawful.
 
In the case of an action by or in the right of the corporation, Section 145 of the DGCL permits a Delaware corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees) actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses that the Court of Chancery or such other court shall deem proper.

 
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Section 145 of the DGCL also permits a Delaware corporation to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person’s status as such, whether or not the corporation would have the power to indemnify such person against such liability under Section 145 of the DGCL.
 
Article 13 of our Certificate of Incorporation states that our directors shall not be personally liable to us or to our stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director’s duty of loyalty to us or to our stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit.  If the Delaware General Corporation Law is amended after the date hereof to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of our directors shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended.

Article 14 of our Certificate of Incorporation states that each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a “proceeding”), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the Company or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans (hereinafter an “indemnitee”) shall be indemnified and held harmless by us to the fullest extent permitted by the Delaware General Corporation Law against all expense, liability and loss (including attorneys’ fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith.  Such indemnification shall continue as to an indemnitee who has ceased to be a director, officer, employee or agent, except as provided in subparagraph (b) hereof, we shall indemnify any such indemnitee seeking indemnification in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by our board of directors.  The right to indemnification conferred by Article 14 is a contract right and includes the right to be paid by us the expenses incurred in defending any such proceeding in advance of its final disposition (an “expense advancement”); provided, however, that, if the Delaware General Corporation Law so requires, the payment of such expenses incurred by an indemnitee in advance of the final disposition of a proceeding, shall be made upon delivery to us of an undertaking, by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that such indemnitee is not entitled to be indemnified.  We may, by action of our Board of Directors, provide indemnification to our employees and agents with the same scope and effect as the foregoing indemnification of directors and officers.  The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in Article 14 is not exclusive of any other right that any person may have or hereafter acquire under any statute, provision of our Certificate of Incorporation, bylaw, agreement, vote of stockholders or disinterested directors or otherwise.  We may maintain insurance, at our expense, to protect the Company and any of our directors, officers, employees or agents against any such expense, liability or loss, whether or not we have the power to indemnify such person.

ITEM 15.  RECENT SALES OF UNREGISTERED SECURITIES
 
During the past three years, we issued the following securities without registration under the Securities Act of 1933, as amended (the “Securities Act”).

On January 15, 2010, we entered into a Services Agreement with Dynamic Manufacturing Solutions LLC (“DMS”).  Pursuant to the Services Agreement, we agreed to pay $120,000 in invoices issued by DMS to us for manufacturing services with shares of our common stock.  DMS currently owns 40,382 shares of our common stock.  We relied on the exemption provided by Section 4(a)(2) of the Securities Act of 1933 to make the offering inasmuch as the investor was accredited and there was no form of general solicitation or general advertising relating to the offer.

 
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In September and October 2010, we sold a total of 27,299 shares of our common stock to two investors for proceeds of $81,120.  We relied on the exemption provided by Section 4(a)(2) of the Securities Act of 1933 to make the offering inasmuch as the investors were accredited and there was no form of general solicitation or general advertising relating to the offer.

On October 1, 2010, in conjunction with an award from the State of Texas Office of the Governor, Economic Development and Tourism (“OOGEDT”), we granted to the OOGEDT a right to purchase shares of our capital stock.  The purchase price per share is $0.002381 per share.  The number of shares that may be purchased shall be equal to the quotient obtained by dividing the total amount of the award together with accrued interest at the rate of 8% per annum disbursed to the date of exercise by either (i) the purchase price in the First Qualifying Financing Transaction (as defined in the award agreement) if such financing is closed before December 30, 2010; (ii) eight-tenths of the purchase price in the First Qualifying Financing Transaction if such financing is closed after December 30, 2010; or (iii) if no First Qualifying Transaction is closed 42 months after October 1, 2010 or the OOGEDT exercises the right to purchase before any such financing transaction, then $0.295072.  We expect that the OOGEDT to exercise this option to purchase our common stock.  As of March 31, 2013, the number of shares of common stock the OOGEDT has the right to purchase is 288,173.  We relied on the exemption provided by Section 4(a)(2) of the Securities Act of 1933 to make the offering inasmuch as the investor was a government entity and there was no form of general solicitation or general advertising relating to the offer.

On December 10, 2010, we completed an offering of 122,175 shares of our Series Seed Convertible Preferred Stock to Battery Ventures VIII, L.P. (“Battery”) for a price of $240,000.57.  We relied on the exemption provided by Rule 506 of Regulation D of the Securities Act of 1933 to make the offering inasmuch as the investor was accredited and there was no form of general solicitation or general advertising relating to the offer.  As a result of our achieving certain milestones, on or about August 4, 2011 the Series Seed Convertible Preferred Stock was converted into 51,312 shares of our common stock.  We relied on Section 3(a)(9) of the Securities Act of 1933 to issue the common stock.

Between April 26, 2011 and October 9, 2011, we undertook an offering of $360,000 in principal amount of convertible promissory notes to five investors.  The convertible notes have an annual interest rate of 6% and all principal and interest are due and payable on its maturity date, December 31, 2013, unless earlier paid by the Company.  The notes may be converted into shares of common stock at the lower of (i) the lowest per share purchase price paid in cash for Qualified Financing Securities (as defined in the convertible notes) or (ii) $6.3276.  In an amendment to the promissory notes, the holders agreed to a mandatory conversion in the event of an initial public offering at the per share price of the securities sold in the offering.  We relied on the exemption provided by Rule 506 of Regulation D of the Securities Act of 1933 to make the offering inasmuch as all of the investors were accredited and there was no form of general solicitation or general advertising relating to the offer.

Between October 12, 2011 and May 4, 2012, we sold a total of 42,670 shares of our common stock to a total of five accredited investors and one of our executive officers for proceeds totaling approximately $270,000.  We relied on the exemption provided by Section 4(a)(2) of the Securities Act of 1933 to make the offering inasmuch as the investors were accredited and there was no form of general solicitation or general advertising relating to the offer.

On November 5, 2011, our Board of Directors adopted the Ideal Power Converters, Inc. 2011 Stock Option/Stock Issuance Plan (the “2011 Plan”).  Pursuant to the 2011 Plan, we are able to issue awards of stock options and common stock to employees, directors and consultants and independent advisors who render services to us.  We reserved 371,000 shares of our common stock for issuance under the Plan.  We relied on Rule 701 promulgated under the Securities Act of 1933, as amended, to issue awards from the Plan.  On November 5, 2012, the awards we made from the Plan terminated.

 
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Between February 24, 2012 and July 17, 2012, we undertook an offering of $695,150.80 in principal amount of convertible promissory notes together with warrants.  The convertible notes have an annual interest rate of 6% and all principal and interest are due and payable on the maturity date, December 31, 2013, unless earlier paid by the Company.  The notes may be converted into shares of common stock at the lower of (i) the lowest per share purchase price paid in cash for Qualified Financing Securities (as defined in the convertible notes) or $6. 3276.  If the note is converted into shares issued in a Next Financing (as defined in the note), the exercise price of the warrant is equal to the lower of (i) the per share purchase price paid in the Next Financing or (ii) $6. 3276.  If the note is converted into shares of common stock or reaches its maturity date, then then exercise price of the warrant is equal to $6. 3276.  In an amendment to the promissory notes, the holders agreed to a mandatory conversion in the event of an initial public offering at the per share price of the securities sold in the offering.  The warrants have a term of seven years.  The number of shares subject to each warrant is determined by dividing the principal amount of the promissory note by the exercise price.  The exercise price is determined as follows:  if the convertible promissory note is converted in the Next Financing, the per share exercise price will be the price at which the note was converted, otherwise the per share exercise price will be $6. 3276.  We relied on the exemption provided by Rule 506 of Regulation D of the Securities Act of 1933 to make the offering inasmuch as all of the investors were accredited and there was no form of general solicitation or general advertising relating to the offer.
 
On August 31, 2012, we completed an offering of $750,000 in principal amount of our senior secured convertible promissory notes together with warrants.  If we proceed with an initial public offering of our securities, as defined in the Securities Purchase Agreement, then there will be a mandatory conversion of the notes at a 30% discount to the per share initial public offering price.  If we do not proceed with an initial public offering of our securities, the notes shall be paid in full on the maturity date.  If the notes are voluntarily converted into shares of common stock, including in connection with a Private Equity Financing or in the event of a Change of Control (as defined in the notes), each note shall be converted into that number of shares of common stock equal to the principal amount and accrued interest of the investor’s note divided by the lower of (i) 0.70 times the Private Equity Financing Price or share consideration paid in the event of a Change of Control or (ii) $7.643.  If we proceed with an initial public offering of our securities or a Private Equity Financing, the number of shares of common stock covered by the warrant shall be equal to the principal amount of the investor’s note divided by 0.70 times the initial public offering price or Private Equity Financing Price, as applicable, and the per share exercise price of the warrants will equal 0.70 times the initial public offering price or Private Equity Financing Price, as applicable.  If we do not undertake either an initial public offering or a Private Equity Financing, then the number of shares of common stock covered by the warrant shall be equal to the original principal amount of the investor’s note divided by $7.643 and the exercise price shall be $7.643 per share.  We relied on the exemption provided by Rule 506 of Regulation D of the Securities Act of 1933 to make the offering inasmuch as all of the investors were accredited and there was no form of general solicitation or general advertising relating to the offer.  In April 2013, we exchanged the outstanding senior secured convertible promissory notes and warrants with senior secured convertible promissory notes and warrants that mirrored the terms of the senior secured convertible promissory notes and warrants issued on November 21, 2012, as described below, except the calculation of the number of shares of common stock covered by these warrants is based on the full principal amount of the investor’s note.  We relied on the exemption provided by Section 4(a)(2) of the Securities Act of 1933 to make the offering inasmuch as all of the investors were accredited and there was no form of general solicitation or general advertising relating to the offer.

On November 21, 2012, we completed an offering of $3.25 million in principal amount of our senior secured convertible promissory notes together with warrants.  If we proceed with an initial public offering of our securities, as defined in the Securities Purchase Agreement, then there will be a mandatory conversion of the notes at a conversion price equal to the lower of a 30% discount to the per share initial public offering price or $3.47626.  In the event of a conversion for any reason other than the closing of an initial public offering of our securities or a Change of Control, as defined in the notes, each note shall be converted into a number of shares of common stock equal to the principal amount and accrued interest of the investor’s note divided by the lower of (i) $3.47626 or (ii) 0.70 of the per share consideration paid in the most recent Private Equity Financing.  If the notes are converted into shares of common stock in connection with an initial public offering of our securities or a Private Equity Financing, the number of shares covered by each warrant will be equal to one-half the principal amount of the investor’s note divided by the lower of (i) 0.70 times the initial public offering price or the Private Equity Financing Price, as applicable, or (ii) $3.47626, while the per-share exercise price will be equal to the lower of (i) 0.70 times the initial public offering price or the Private Equity Financing Price, as applicable, or (ii) $3.47626.  If the notes are not converted into shares of common stock in connection with an initial public offering of our securities or a Private Equity Financing, the number of shares covered by each warrant will be equal to one-half of the original principal amount of the investor’s note divided by $3.47626, and the per share exercise price of the warrants will equal $3.47626.  We relied on the exemption provided by Rule 506 of Regulation D of the Securities Act of 1933 to make the offerings inasmuch as all of the investors were accredited and there was no form of general solicitation or general advertising relating to the offers.

 
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In March 2013, we issued an unsecured convertible promissory note in the principal amount of $86,707 to Richardson & Patel LLP, our legal counsel, as payment for services rendered through December 31, 2012.  Interest accrues from the date of the note at the higher of: (i) the rate of 1% per annum, simple interest; or (ii) at the lowest rate that may accrue without causing the imputation of interest under the Internal Revenue Code.  Principal and interest is payable on the earlier to occur of (i) December 31, 2013 (the “Calendar Due Date”), (ii) the occurrence of an Event of Default (as defined in the promissory note) or (iii) the closing of an IPO Financing (as defined in the promissory note).  If, prior to the Calendar Due Date, we complete a firm commitment underwritten initial public offering of our common stock that raises at least $10 million (the “IPO Financing”), the promissory note must be repaid with shares of our common stock.  The conversion price will be equal to the lower of 0.70 times the IPO price or $3.47626.  We relied on the exemption provided by Section 4(a)(2) of the Securities Act of 1933 to make the offering inasmuch as the investor was an accredited investor and there was no form of general solicitation or general advertising relating to the offer.

On May 17, 2013, our Board of Directors adopted the Ideal Power Converters, Inc. 2013 Equity Incentive Plan (the “2013 Plan”).  Pursuant to the 2013 Plan, we are able to issue awards of stock options and common stock to employees, directors and consultants and independent advisors who render services to us.  We reserved 839,983 shares of our common stock for issuance under the Plan.  The Compensation Committee of our Board of Directors has approved the issuance of stock option grants covering a total of 352,270.

On July 29, 2013, we completed an offering of $750,000 in principal amount of our senior secured convertible promissory notes together with warrants.  If we proceed with an initial public offering of our securities, as defined in the Securities Purchase Agreement, then there will be a mandatory conversion of the notes at a conversion price equal to the lower of a 30% discount to the per share initial public offering price or $3.47626.  In the event of a conversion for any reason other than the closing of an initial public offering of our securities or a Change of Control, as defined in the notes, each note shall be converted into a number of shares of common stock equal to the principal amount and accrued interest of the investor’s note divided by the lower of (i) $3.47626 or (ii) 0.70 of the per share consideration paid in the most recent Private Equity Financing.  If the notes are converted into shares of common stock in connection with an initial public offering of our securities or a Private Equity Financing, the number of shares covered by each warrant will be equal to one-half the principal amount of the investor’s note divided by the lower of (i) 0.70 times the initial public offering price or the Private Equity Financing Price, as applicable, or (ii) $3.47626, while the per-share exercise price will be equal to the lower of (i) 0.70 times the initial public offering price or the Private Equity Financing Price, as applicable, or (ii) $3.47626.  If the notes are not converted into shares of common stock in connection with an initial public offering of our securities or a Private Equity Financing, the number of shares covered by each warrant will be equal to one-half of the original principal amount of the investor’s note divided by $3.47626, and the per share exercise price of the warrants will equal $3.47626.  We relied on the exemption provided by Rule 506 of Regulation D of the Securities Act of 1933 to make the offerings inasmuch as all of the investors were accredited and there was no form of general solicitation or general advertising relating to the offers.

 
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ITEM 16.                      EXHIBITS
 
Exhibit No.
 
Description of Document
1.1
 
Form of Underwriting Agreement**
3.1
 
Delaware Certificate of Conversion including Certificate of Incorporation.*
3.2
 
Bylaws of Ideal Power Inc.*
4.1
 
Underwriter’s Warrant**
5.1
 
Opinion of Richardson & Patel LLP regarding the validity of the common stock being registered**
10.1
 
Consulting Agreement dated July 24, 2012 between the registrant and MDB Capital Group, LLC*
10.2
 
Consulting Agreement dated August 8, 2012 between the registrant and MDB Capital Group, LLC*
10.3
 
Form of Lock-Up Agreement*
10.4
 
Form of Lock-Up Agreement executed by MDB Capital Group, LLC**
10.5
 
Form of Subscription and Stock Purchase Agreement by and between the registrant and investors for an offering completed in October 2010**
10.6
 
Form of Subscription Agreement and Stock Purchase Agreement by and between the registrant and investors for an offering completed on May 4, 2012**
10.7
 
Form of Convertible Promissory Note issued by the registrant to investors in the offering completed on October 9, 2011**
10.8
 
Form of Convertible Promissory Note issued by the registrant to investors in the offering completed on July 17, 2012**
10.9
 
Form of Warrant issued by the registrant to investors in the offering completed on July 17, 2012**
10.10
 
Form of Securities Purchase Agreement between the registrant and investors for an offering completed on August 31, 2012*
10.11
 
Form of Registration Rights Agreement between the registrant and investors for an offering completed on August 31, 2012*
10.12
 
Form of Senior Secured Convertible Promissory Note issued by the registrant to investors in the offering completed on August 31, 2012*
10.13
 
Form of Security Agreement between the registrant and investors for an offering completed on August 31, 2012*
10.14
 
Form of Warrant issued by the registrant to investors in the offering completed on August 31, 2012*
10.15
 
Form of Replacement Senior Secured Convertible Promissory Note issued by the registrant to investors in the offering completed on August 31, 2012*
10.16
 
Form of Replacement Warrant issued by the registrant to investors in the offering completed on August 31, 2012*
10.17
 
Form of Securities Purchase Agreement between the registrant and investors for an offering completed on November 21, 2012*
10.18
 
Form of Registration Rights Agreement between the registrant and investors for an offering completed on November 21, 2012*
10.19
 
Form of Senior Secured Convertible Promissory Note issued by the registrant to investors in the offering completed on November 21, 2012*
10.20
 
Form of Security Agreement between the registrant and investors for the offering completed on November 21, 2012*
10.21
 
Form of Warrant issued by the registrant to investors in the offering completed on November 21, 2012*
10.22
 
Texas Emerging Technology Fund Award and Security Agreement dated October 1, 2010*
10.23
 
Investment Unit issued on October 1, 2010 by the registrant to Office of the Governor Economic Development and Tourism of the State of Texas**
10.24
 
Subordination Agreement dated August 30, 2012 between the registrant and Office of the Governor Economic Development and Tourism of the State of Texas*
10.25
 
Lease Agreement between the Company and Texas Public Employees Association dated May 7, 2013**
10.26
 
Employment Agreement between the Company and William Alexander dated May 7, 2013*
10.27
 
Employment Agreement between the Company and Paul Bundschuh dated May 7, 2013*
10.28
 
Employment Agreement between the Company and Christopher Cobb dated May 8, 2013*
10.29
 
Form of Indemnification Agreement entered into in December 2010 between the Company and William Alexander, Charles De Tarr, David Breed and Hamo Hacopian**
10.30
 
Form of Securities Purchase Agreement between the registrant and investors for an offering completed on July 29, 2013*
10,31
 
Form of Registration Rights Agreement between the registrant and investors for an offering completed on July 29, 2013*
10.32
 
Form of Senior Secured Convertible Promissory Note issued by the registrant to investors in the offering completed on July 29, 2013*
10.33
 
Form of Security Agreement between the registrant and investors for the offering completed on July 29, 2013*
10.34
 
Form of Warrant issued by the registrant to investors in the offering completed on July 29, 2013*
10.35
 
Ideal Power Converters, Inc. 2013 Equity Incentive Plan*
10.36
 
Warrant issued to MDB Capital Group, LLC (MDB-1) dated November 21, 2012*
10.37
 
Addendum to Warrant issued to MDB Capital Group, LLC (MDB-1) dated July 10, 2013*
10.38
 
Warrant issued to MDB Capital Group, LLC (MDB-2) dated November 21, 2012*
10.39
 
Addendum to Warrant issued to MDB Capital Group, LLC (MDB-2) dated July 10, 2013*
10.40
 
Amendment No. 1 dated May 20, 2011 to the Investment Unit issued on October 1, 2010 by the registrant to Office of the Governor Economic Development and Tourism of the State of Texas**
10.41
 
Amendment No. 2 dated April 16, 2013 to the Investment Unit issued on October 1, 2010 by the registrant to Office of the Governor Economic Development and Tourism of the State of Texas**
14.1
 
Code of Business Conduct and Ethics*
23.1
 
Consent of Gumbiner Savett Inc., Independent Registered Public Accounting Firm*
23.2
 
Consent of Richardson & Patel LLP (included in Exhibit 5.1)**
24.1
 
Power of Attorney (included on the signature page)
 
*Filed herewith.
**To be filed by amendment.
 
 
-67-

 
 
ITEM 17.  UNDERTAKINGS
 
The undersigned registrant hereby undertakes:
 
(1)           To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
 
(i)           To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;
 
(ii)           To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement;
 
(iii)           To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.
 
(2)           That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
 
(3)           To remove from registration by means of a post-effective amendment any of the securities being registered that remain unsold at the termination of the offering.
 
(4)           That, for the purpose of determining liability of the registrant under the Securities Act to any purchaser in the initial distribution of the securities: The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser: (i) any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424; (ii) any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant; (iii) the portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and (iv) any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
 
(5)           To provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
 
(6)           For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus as filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
 
(7)           For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

(8)           Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

 
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SIGNATURES
 
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Spicewood, State of Texas, on this 6th day of August, 2013.  
  
 
IDEAL POWER INC.
       
 
By:   
/s/ Paul A. Bundschuh
 
   
Paul A. Bundschuh
 
   
Chief Executive Officer
 
 
Each person whose signature appears below constitutes and appoints Paul Bundschuh as his or her true and lawful attorneys-in-fact and agents, each acting alone, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any or all amendments (including post-effective amendments) to the Registration Statement, and to sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and all post-effective amendments thereto, and to file the same, with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
 
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
 
Dated: August 6, 2013
 
/s/ Paul A. Bundschuh
 
   
Paul A. Bundschuh
 
   
Chief Executive Officer and
Director
 
   
 (Principal Executive Officer)
 
       
Dated: August 6, 2013
 
/s/ Barry Loder
 
   
Barry Loder
 
   
Chief Financial Officer
 
   
(Principal Financial and
Accounting
 
   
Officer)
 
       
Dated: August 6, 2013
 
/s/ Christopher P. Cobb
 
   
Christopher P. Cobb
 
   
President and Director
 
       
Dated: August 6, 2013
 
/s/ Lon E. Bell
 
   
Lon E. Bell, Ph.D., Director
 

Dated: August 6, 2013
 
/s/ Mark S. Baum
 
   
Mark S. Baum., Director
 
 
 
-69-

 
 
Ideal Power Inc.
 
INDEX TO CONDENSED FINANCIAL STATEMENTS
 
   
Page No.
 
CONDENSED FINANCIAL STATEMENTS
     
       
Condensed Balance Sheets at March 31, 2013 (Unaudited) and December 31, 2012
  F-1  
Condensed Statements of Operations for the three months ended March 31, 2013 and 2012 (Unaudited)
  F-2  
Condensed Statement of Stockholders’ Deficit for the three  months ended March 31, 2013 (Unaudited)
  F-3  
Condensed Statements of Cash Flows for the three months ended March 31, 2013 and 2012  (Unaudited)
  F-4  
Notes to Condensed Financial Statements
  F-5  

ANNUAL FINANCIAL INFORMATION
     
       
Report of Independent Registered Public Accounting Firm
  F-17  
Balance Sheets at December 31, 2012 and 2011
  F-18  
Statements of Operations for the years ended December 31, 2012 and 2011
  F-19  
Statement of Stockholders’ Deficit for the years ended December 31, 2012 and 2011
  F-20  
Statements of Cash Flows for the years ended December 31, 2012 and 2011
  F-21  
Notes to Financial Statements
  F-23  

 
 

 
 
IDEAL POWER INC.
Condensed Balance Sheets
   
March 31,
   
December 31,
   
Pro Forma
Stockholders'
Deficit
as of
March 31,
2013
(unaudited)
 
   
2013
   
2012
    (Note 15)  
   
(unaudited)
             
ASSETS
                 
Current assets:
                 
Cash and cash equivalents
  $ 1,215,986     $ 1,972,301   $    
Accounts receivable, net
    303,890       485,674        
Inventories, net
    209,942       217,867        
Prepayments and other current assets
    27,254       28,468        
Prepaid offering costs
    12,398       -        
Total current assets
    1,769,470       2,704,310        
Property and equipment, net
    27,659       27,903        
    Patents, net
    528,637       474,790        
                       
Total Assets
  $ 2,325,766     $ 3,207,003   $    
                       
LIABILITIES AND STOCKHOLDERS’ DEFICIT
                     
Current liabilities:
                     
Current portion of long-term debt, net of debt discount of
                     
 $2,791,325 at March 31, 2013 and $3,828,711 at
                     
 December 31, 2012.
  $ 2,350,532     $ 1,313,146   $    
Accounts payable
    404,357       684,558        
Accrued expenses
    214,262       178,003        
Deferred revenue
    75,000       -        
Total current liabilities
    3,044,151       2,175,707        
Long-term debt
    1,152,690       1,132,690        
Commitments