Ideal Power Inc.

IDEAL POWER INC.

Notes to Financial Statements

Note 1 –** Organization and Description of Business**

Ideal Power Inc. (the “Company”) was incorporated in Texas in May 2007 under the name Ideal Power Converters, Inc. The Company changed its name to Ideal Power Inc. and re-incorporated in Delaware in July 2013. With headquarters in Austin, Texas, the Company is focused on the further development and commercialization of its Bidirectional bipolar junction TRANsistor (B-TRAN®) solid-state switch technology.

Since its inception, the Company has financed its research and development efforts and operations primarily through the sale of common stock and pre-funded warrants. The Company’s continued operations are dependent upon, among other things, its ability to obtain adequate sources of funding through future revenues, follow-on stock offerings, issuances of warrants, debt financing, co-development agreements, government grants, sale or licensing of developed intellectual property or other alternatives.

Note 2 –** Summary of Significant Accounting Policies**

Basis of Presentation

The accompanying unaudited condensed financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for Form 10-Q. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The balance sheet at December 31, 2025 has been derived from the Company’s audited financial statements included in its Annual Report on Form 10-K filed with the SEC on March 27, 2026.

In the opinion of management, these financial statements reflect all normal recurring, and other adjustments, necessary for a fair presentation. These financial statements should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2025. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year or any other future periods.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Segment Information

Operating segments are defined as components of an entity for which separate financial information is available and that is regularly reviewed by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources to an individual segment and in assessing performance. The Company’s Chief Executive Officer is the Company’s CODM. The CODM reviews financial information presented on a company-wide basis for purposes of making operating decisions, allocating resources, and evaluating financial performance. As such, the Company has determined that it operates asone operating segment. The Company has concluded that net income (loss) is the measure of segment profitability. The CODM assesses performance for the Company, monitors budget versus actual results and determines how to allocate resources based on net income (loss) as reported in the condensed statements of operations. There are no other expense categories regularly provided to the CODM that are not already included in the condensed financial statements herein.

During the six months ended June 30, 2026 and 2025, the Company did not generate material international revenues. At June 30, 2026, the Company had $132,160 and $1,612 in property and equipment, net located in Asia and Europe, respectively.

Net Loss Per Share

In accordance with Accounting Standards Codification (“ASC”) 260, shares issuable for little or no cash consideration are considered outstanding common shares and included in the computation of basic net loss per share. As such, for the three and six months ended June 30, 2026 and 2025, the Company included pre-funded warrants to purchase shares of common stock in its computation of net loss per share. The pre-funded warrants were issued in May 2026, February 2026, March 2024 and November 2019 with an exercise price of $0.001. See Note 8.

In periods with a net loss, no common share equivalents are included in the computation of diluted net loss per share because their effect would be anti-dilutive. At June 30, 2026 and 2025, potentially dilutive shares outstanding amounted to 1,238,553 and 1,287,558 shares, respectively, and exclude pre-funded warrants to purchase shares of common stock.

Recent Accounting Pronouncements

In November 2024, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2024-03,Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures, which mandates enhanced disclosure of specific costs and expenses within the notes to the financial statements. In January 2025, the FASB issued ASU 2025-01 to clarify the effective date of ASU 2024-03. The guidance is effective for annual reporting periods beginning after December 15, 2026, and interim periods within annual reporting periods beginning after December 15, 2027. Early adoption is permitted, and the amendments may be applied prospectively to reporting periods after the effective date or retrospectively to all periods presented in the financial statements. The Company is currently evaluating the impact that this ASU will have on the presentation of its financial statements.

Note 3 –** Intangible Assets, Net**

Intangible assets, net consisted of the following:

At June 30, 2026 and December 31, 2025, the Company capitalized $616,940 and $723,156, respectively, for costs related to patents that have not been awarded. Cost related to patents that have not yet been awarded are not amortized until patent issuance.

Amortization expense amounted to $56,883 and $113,283 for the three and six months ended June 30, 2026, respectively, and $54,699 and $109,399 for the three and six months ended June 30, 2025, respectively. Amortization expense for the succeeding five years and thereafter is $114,977 (remaining six months of 2026), $229,955 (2027-2030) and $884,837 (thereafter).

In the three months ended June 30, 2026, the Company conducted an evaluation and rationalization of its patent portfolio and recorded a non-cash impairment charge of $215,133. The impairment charge is included in general and administrative expenses.

Costs related to indefinite life trademarks are not amortized but are subject to evaluation for potential impairment.

Note 4 –** Lease**

In April 2024, the Company entered into a first amendment and relocation agreement (the “Amended Lease”) with its landlord. The Amended Lease is for 5,775 square feet of office and laboratory space and, upon occupancy, replaced the 4,070 square feet of office and laboratory space previously leased by the Company. The term of the Amended Lease expires sixty-two (62) months from July 1, 2024, the commencement date. The annual base rent for the first year of the Amended Lease was $118,388 and the annual base rent increases approximately 2.75% each year during the lease term. The Company is required to pay its proportionate share of operating costs for the building under this triple net lease.

The Company recognized a right of use asset of $524,025 and a corresponding lease liability for the Amended Lease on the commencement date. For purposes of calculating the right of use asset and lease liability, the Company estimated its incremental borrowing rate at 8.5% per annum.

Future minimum payments under the Amended Lease are as follows:

At June 30, 2026, the remaining lease term was 38 months.

For the three months ended June 30, 2026 and 2025, operating cash flows for lease payments totaled $30,406 and $29,597, respectively, and for the six months ended June 30, 2026 and 2025, operating cash outflows for lease payments totaled $60,811 and $59,194, respectively. For both the three months ended June 30, 2026 and 2025, operating lease cost, recognized on a straight-line basis, totaled $30,856 and for both the six months ended June 30, 2026 and 2025, operating lease cost, recognized on a straight-line bases, totaled $61,712.

Note 5 –** Commitments and Contingencies**

License Agreements

In 2015, the Company entered into a licensing agreement which expires in February 2033. Per the agreement, the Company has an exclusive royalty-free license, included in intangible assets, associated with semiconductor power switches which enhances its intellectual property portfolio. The Company pays $100,000 annually under this agreement.

In 2023, the Company amended a 2021 license agreement which expires in February 2034. Per the agreement, the Company has an exclusive royalty-free license, included in intangible assets, associated with semiconductor drive circuitry which enhances its intellectual property portfolio. The Company pays $50,000 annually under this agreement.

At June 30, 2026, the estimated present value of future payments under the licensing agreements was $974,559 with $150,000 due and payable in the next twelve months ($824,559 recognized in other long-term liabilities, $125,000 in accrued expenses and $25,000 in accounts payable). The Company is accruing interest for future payments related to these agreements.

Legal Proceedings

The Company is subject to litigation from time to time. While the Company believes that any current or threatened legal proceedings are without merit and not material, there can be no assurance that such matters will not have a material adverse effect on its business, financial condition or results of operations in the future.

Indemnification Obligations

The employment agreements of Company executives include an indemnification provision whereby the Company shall indemnify and defend, at the Company’s expense, its executives so long as an executive’s actions were taken in good faith and in furtherance of the Company’s business and within the scope of the executive’s duties and authority.

Note 6—** Common Stock**

In May 2026, the Company issued and sold 3,220,961 shares of its common stock at a price of $5.67 per share and 2,070,044 pre-funded warrants to purchase shares of common stock at a price of $5.669 per pre-funded warrant in a registered direct offering (the “May 2026 Offering”). The pre-funded warrants have an exercise price of $0.001 per share, are immediately exercisable, and have no expiration date. The net proceeds to the Company from the May 2026 Offering were $27.7 million.

In February 2026, the Company issued and sold 3,505,855 shares of its common stock at a price of $2.75 per share and 952,881 pre-funded warrants to purchase shares of common stock at a price of $2.749 per pre-funded warrant in an underwritten public offering, and also sold 631,332 pre-funded warrants to purchase shares of common stock at a price of $2.749 per pre-funded warrant in a concurrent private placement (taken together, the "February 2026 Offering”). The shares of common stock underlying the pre-funded warrants issued in the concurrent private placement were subsequently registered for resale on the Registration Statement on Form S-1 (File No. 333-294696) declared effective on April 3, 2026. The pre-funded warrants have an exercise price of $0.001 per share and no expiration date. The net proceeds to the Company from the February 2026 Offering were $12.6 million.

Note 7 —** Equity Incentive Plan**

In May 2013, the Company adopted the 2013 Equity Incentive Plan (as amended and restated, the “Plan”) and reserved shares of common stock for issuance under the Plan, which was last amended in June 2026. The Plan is administered by the Compensation Committee of the Company’s Board of Directors (the “Board”). At June 30, 2026,892,022 shares of common stock were available for issuance under the Plan.

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

All outstanding stock options were exercisable at June 30, 2026.

A summary of the Company’s restricted stock unit (“RSU”) and performance stock unit (“PSU”) activity is as follows:

During the six months ended June 30, 2026, the Company granted 90,910 RSUs to Board members,20,000 RSUs and 20,000 PSUs to executives and 131,253 RSUs and 50,000 PSUs to employees under the Plan. The estimated fair value of these equity grants was $1,284,260, of which $274,915 was recognized in stock-based compensation expense totaling $1,635,526 for the six months ended June 30, 2026.

At June 30, 2026, there was $2,975,451 of unrecognized compensation cost related to non-vested equity awards. That cost is expected to be recognized over a weighted average period of 1.1 years.

Note 8 —** Pre-Funded Warrants**

At June 30, 2026 and December 31, 2025, the Company had 3,410,086 and 653,827 pre-funded warrants outstanding, respectively, with an exercise price of $0.001 per share and no expiration date.

During the six months ended June 30, 2026, a warrant holder exercised 266,666 pre-funded warrants for exercise proceeds of $267 and a warrant holder exercised 631,332 pre-funded warrants on a cashless basis, receiving 631,192 shares of the Company’s common stock with 140 shares of the Company’s common stock forfeited to cover the exercise price.

At June 30, 2026, all pre-funded warrants were exercisable, although the pre-funded warrants may be exercised only to the extent that the total number of shares of common stock then beneficially owned by such warrant holder does not exceed 9.99% of the outstanding shares of the Company’s common stock immediately after giving such effect to such exercise.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION CONTAINED IN THIS REPORT

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements include, but are not limited to, statements regarding our future financial performance, liquidity, business condition and results of operations, expectations regarding future expenses and gross margins, future business plans, and expectations regarding design wins and other business developments. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. You can find many (but not all) of these statements by looking for words such as “approximates,” “believes,” “hopes,” “expects,” “anticipates,” “estimates,” “projects,” “intends,” “plans,” “would,” “should,” “could,” “may” or other similar expressions in this report. In particular, these include statements relating to future actions, prospective products, applications, customers, technologies, future performance or results of anticipated products, expenses, and financial results. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

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

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