Good day and welcome to the Ideal Power Inc. Third Quarter 2015 Earnings Conference Call. Today’s conference is being recorded. And at this time I would like to turn the conference over to Matt Hayden, Chairman of MZ North America. Please go ahead, sir.

Thank you very much. Good afternoon, everyone. I’d like to thank you for taking the time to join us today for Ideal Power’s third quarter conference call. Your hosts are Mr. Dan Brdar, Chairman and CEO, as well as Mr. Tim Burns, the company's Chief Financial Officer. Dan will provide a business update, including recent orders, partner announcements and product updates, while Tim will cover the financial results. A press release detailing the results crossed the wire this afternoon at 4 P.M. Eastern and is also available at the company’s Web site, idealpower.com. Following management’s prepared comments, we will open the floor to questions for those of you who are dialing in and also to those participants joining via webcast. Before we begin, I’d like to remind everyone that some statements on the call and the webcast including those regarding future financial results and industry prospects are forward-looking and maybe subject to a number of risks and uncertainties that could cause actual results to differ materially than those described in the conference call. Please refer to the company’s SEC filings for a list of associated risks. In addition, we encourage you to visit the company’s Web site for more supporting industry information as we update it frequently. At this time, I’d like to turn the call over to you, Dan. The floor is yours.

Thank you, Matt. Our focus this year has been primarily around three areas. First capturing the technology and system integration partners we believe will be the leaders in the commercial and industrial energy storage market as it develops and matures. Second is bringing out innovative highly differentiated products that will give or partners a superior rate for return for their projects. And third is continuing to innovate and advance the state of our technology and the intellectual property necessary to protect our competitive advantages. Executing on all three of these areas is essential for us to achieve the level of growth we are targeting in the coming years. We made strong progress on all three areas and as a result are positioned to enter 2016 looking at significant growth in our business. Before we look at 2016 in more detail, I am going to recap our progress and key activities for the recent quarter and have Tim review the financials. Similar to last quarter, we have a lot of information to share on today's call but the most important piece is the significant change in our backlog as a result of several recent orders. Our order backlog as of today is 22 megawatts compared to approximately 6 megawatts at the beginning of the year. With market pricing for our products at $0.25 to $0.30 per watt depending on the product, our current backlog translates into roughly $6.1 million. What is particularly exciting to us is that not only are we positioned for growth in 2016 but a large percentage of the order backlog is from new partners we signed and announced earlier this year. We believe this is a reflection of the strength and capability of the new system integration partners we are targeting and also an indication of the…

Thank you, Dan. I will turn through the third quarter and year-to-date financial results. Total revenue for the third quarter which consisted entirely of product revenues, was $895,000 or an increase of 210% compared to $289,000 in product revenues for the third quarter of 2014. As we have previously mentioned, revenues in our [only] market such as energy storage tend to be lumpy and our quarterly revenue was impacted by delivery timing of or 30 kilowatt battery converter to our customers and the timing of receiving certification for our 125 kilowatt product, resulting in a modest sequential decline in quarter-over-quarter revenue. Total revenue for the first nine months of 2015, which also consisted entirely of product revenue was $3.3 million or an increase of 291% compared to product revenue of $842,000 in the first nine months of 2014. We have seen a meaningful shift in our product mix. In the first half of the year, our revenue was largely from our 30 kilowatt battery converter and to a much lesser extent in the second quarter, our grid resilient 30 kilowatt 2-port and multiport power conversion systems. In the third quarter, our revenue consisted of sales of our 30-kilowatt battery converter, strong growth in sales of our grid resilient 30 kilowatt 2-port and multi-port power conversion systems and initial sales of our 125 kilowatt product. Total cost of revenue in the third quarter was $842,000, yielding positive gross margins of 6% compared to negative 22% gross margins in the third quarter last year. Our third quarter gross margins were negatively impacted by the initial low volume production of our new 125 kilowatt product with first shipments weighting the quarter. As we have mentioned previously, new product rollouts will yield temporary short-term reductions in gross margins, although these temporary reductions will become…

Thanks, Tim. For the balance of 2015, we will continue to focus on the key drivers that will fuel our growth in 2016 and beyond. We anticipate announcing additional system integration and market channel partners before year-end. We have several relationships that are well developed and are reaching the stage where we will be able to talk about them publicly. Some of these partners are bringing a pipeline of business that they have already developed and in some cases announced in that they are international in their view of the market opportunity. Year-to-date, we meaningfully expanded our customer channel partners including several with a global reach, including folks like Gexpro, LG Chem, Kaco, Sonnenbatterie and others. While each partner will move with their own pace, we are laying the foundation for long-term growth. Based on forecast from our partners, we anticipate further backlog increases in giving us better visibility into 2016. Accompanying this will be of course will be a growth in our top line with an increasing amount of our revenue coming from our new 125 kilowatt product. Looking at 2016, we expect to see not just significant growth in revenue but diversification on where that revenue comes from both geographically and market segments. While the California demand charge market for commercial and industrial customers has been the core of our orders and shipments this year, there is a broader market opportunity that we intend to pursue in 2016. We also expect to see some of the partners we announced this year and will be announcing by year-end move into volume orders to support their energy storage business. Working closely with our global channel partners, we are prioritizing our international efforts to support their energy storage business. We will be adding international product certifications to our products to accommodate…

[Operator Instructions] Our first question from Craig Irwin with ROTH Capital Partners. Please go ahead.

So, Dan, when I was at ESNA, I met with several of your customers and it was the Tuesday after Hawaiian changed its [indiscernible] regulations. They were all super excited about this, thinking this would make the Hawaiian market look a lot like the German market. Obviously, Germany has been a great market for battery backup. Self-generation, battery backup, storage systems. Can you maybe share with us whether or not this has translated into increased activity with certain customers and how you expect this to maybe play out.

Sure. It's definitely creating both additional players that are coming to the space and also it's part of the projection of what we are seeing from the forecast from our existing partners. Gexpro, for example, expects Hawaii to be a significant source of their activity in 2016 and because of what's happening in Hawaii and a couple of other locations, some of the new partners we are going to be announcing are really driven to capture a significant share of that business because they see it begin a pretty lucrative first market for the early movers in the space.

Great. Thank you for that. So then the second question that I had was, during the third quarter there was a certification, right. Your 125 kilowatt unit, if I am correct. Can you maybe discuss with us how you handle the expenses for these individual product certifications? I understand this contributes to some of the margin volatility. How would we normalize that to understand this more clearly?

Well, Tim will cover it in a little bit more detail but the margin volatility really relates to when we introduce a new product, it's in low volume. So that the cost to build products in small volumes obviously is higher. That’s the margin impact. The certification activity itself is actually an expense flow through the R&D line. Tim, you want to have a go?

Yes. So the development of certification cost for the 125 are one of the two main drivers for our increase in R&D this quarter, the other was been the engagement of the second fab on the B-TRAN. We had said that that number is expected to be about $0.5 million roughly for about three quarters of the B-TRAN effort. As we introduce new products, it's less than that. It's probably a couple of hundred thousand dollars that you will see hit the R&D line depending on the size of the product. It's more expensive to rollout a 125 versus a 30 kilowatt product, for instance. In terms of what actually hit the gross margin numbers, when we initially purchase units in very small volumes, there is a lack of economy of scale in purchasing and production, labor etcetera. So the first, probably couple of quarters really that we introduced a new product and till we get to a more normalized run rate, we will see downward pressures on margin. The one thing I would add to that is going forward is our revenue line in general grows and our margin in general grows. The impact of those new product introductions will not be as readily apparent in the numbers just because we will have more scale.

Great. And then next question is share related. So taking the numbers from Greentech Media, sort of looks like you have around 90% share in your addressable market. Do you expect that share to hold or maybe expand as you see traction to 125 out there. Either other things that you can do to maybe continue to expand that share of market and larger service offerings that you don’t address now that might contribute to revenue acceleration.

Yes. Good question. Part of what we are really focusing on for next year is now with 125 kilowatt product being out, we think there is really expanded market opportunity that we can go after. A lot of what has gone on in this past year has been filled with the 30 kilowatt products and a lot of it is tied to the availability of the Californian incentive dollars, the self-generation incentive rebate. Having the 125 allows us to participate in bigger projects that really have nothing to do with those incentive programs. They are activities that are responding to utility solicitations, they are markets that are outside of California. So the 125 for us really enables us to get into segments of the market that previously we just couldn’t credibly address and really gets us away from being tied strictly to the availability of incentive dollars.

At this time we will take a question from Eric Stine with Craig-Hallum.

This is Aaron Spychalla on for Eric Stine. Thanks for taking the question. So you provided a lot of great details. Maybe starting, I guess, on the 14.5 megawatt order. Can you just talk about, is that just with one customers across a handful of building. And talk a little bit more about the further growth potential with this customer and how close you might be to seeing additional orders of this size with additional customer.

Yes, it is primarily one customer and it's for multiple markets that they are going after. It's really them making about it themselves in terms of how quickly they are going to grow their business. If business grows at the rate I think they would hope, we could see more out of them in '16. I think more importantly what it does is, it sends a signal to the market that the competition is really heating up and one of the partners that we are going to be announcing here before year-end, part of what's got them moving more quickly we think is directly seeing how aggressively Gexpro is targeting rolling out product. So it's actually stimulating other larger companies to move quicker in terms of the partnering efforts with us.

Okay. Good. Thanks for the color. You know maybe second on Asia, can you just kind of talk about what the pipeline looks like they are in the near-term. I no longer term you said that it might rival the size of the U.S. market. What do you think in the near-term?

We think that '16 is not going to be the biggest percentage of our revenue. We think more importantly what it does is it creates the opportunity for us to do some partnerships with some new players that are really looking for a way to differentiate the storage offerings that they bring to the Asian markets, Japan in particular, because Japan is a market that really is still a largely untapped potential from storage but has a real need because of how strong of a push they have had for solar and the retiring of a lot of their nuclear capacity. So we think that Asia is going to probably be one of our bigger markets but it's going to take a couple of years for it to develop, at least for us. But we are really focused on making sure we capture partners that are going to have really -- drive brand recognition and moving out from them -- there will be names that you know and recognize.

Great, thanks. And then maybe last from me. I guess just on the licensing side of things. I know Kaco is going to be potential licensor. Is there anything new on the licensing front within the other potential partner?

We actually do have another licensing discussion going on with another player, completely different in terms of who they are, the kind of things they do. It's a little early to say whether we are going to actually conclude that arrangement or not but it's got a significant market opportunity behind this. So hopefully in coming quarters, we will have some visibility on what we think that arrangement is going to look like.

[Operator Instructions]

And, Tim, I want to turn it over to you for a minute just to review a few of those email questions that came in from shareholders. Okay. The first -- and this is actually a webcast question that came in. Can you elaborate on the potential licensing opportunities, the number of potential licensees? Any new markets that are related to the demo market previously discussed, where does that stand?

Licensing is really going to play a couple of different rules. One is it maybe a way that we enter in international markets. I think that actually is a two step process where the international partner would first pick up product from us, maybe white label it and then transition into a licensing arrangement. We don’t see any of those happening near term in terms of those kind of partners moving directly to a license for international opportunity. We see some other activities that we are engaged in to our players that want to go do something different. So it's not the traditional storage related application that we are doing but really the opportunity to license our technology for variations, products and solutions they are providing. And also now that we have put our white paper out there on B-TRAN, we are getting a lot of inbound enquiries from semiconductor fabricators what want to understand more about the technology and understand there is a licensing opportunity that we would be willing to pursue. Licensing is still going to be a critical part of our relationship and what we do going forward in the business. It just takes time to get there because you have got to demonstrate the viability of the technology itself first.

Okay. And what are some of the other likelihood applications of the PPSA technology that the company is considering pursuing. What timeframe?

The VFDs we think is the one that is probably the most promising simply because when you look at the $70 billion power conversion by 2020, about half of that is served by VFDs. So VFD is a really big addressable market for us. There are other parts of renewable energy that we could deploy products in. Things like wind. We could deploy our technology in applications like UPS. As we develop the bidirectional switches there are a whole variety of applications we can go after but we think that as a small company we got to be very focused and the next one that we think makes the most sense because of its scale and because of the lack of innovation that’s been in that space is the VFD market.

Okay. The next question, are any customers looking at a residential size power convertor for geographies like Australia?

Several of them are. But we think Australia is actually starting to open up in the commercial and industrial space as well. Both our existing partners and some new ones that we are going to be announcing view Australia as an important part of the market that they are going to go after. And when we look to the international certifications that we are going to pursue in 2016, Australia has its own requirements and they will be one of the first international certifications that we have secured.

Okay. And then an email question. Why did you decide to go with a new fab for the B-TRAN development instead of using the fab now working on the bidirectional IGBT?

It's really a function of the stack that the purpose of the semiconductor fabrication development work is learning the manufacturing processes. And we wanted to work with another fab that we focus almost exclusively on the B-TRAN because as we get further and further along, we are just more and more excited about the potential the B-TRAN represents for us, both in terms of its performance and in terms of the IP protection that we will have around that. So it was really a matter to keep the effort segregated and for us also to learn from both of those semiconductor fabricators. Sort of best practices, because there is going to be a lot of cross-pollination between the devices from manufacturing and production activity that we want to make sure that we get the best expertise that’s out there and available to us in the development.

Okay. And then a question specifically on the bidirectional IGBT. Can the company provide an update on when we can expect a prototype and the eventual commercialization?

A lot of this is a function of how quickly the semiconductor manufactures get through their -- little bit of a trial and error process and how to make a two sided device. We think now with there being a second semiconductor fabricator in play. It sort of puts pressure on the original fabricator to move a little faster, prioritize what they are doing. But we expect to be providing results for early next year talking about where we are and what we are doing to actually test and validate the first device that he is going to make. Matt, do you have any additional questions you have received via email?

That’s all for now, so we will go back into the queue. Thank you.

At this time we have a question from Colin Rusch with Oppenheimer.

As you guys look at going from testing early next year and bringing those B-TRAN or bidirectional IGBTs into your products, how long do you think that will pick?

Well, there is a couple of different paths. First is, we are going to validate the switches themselves. Once we have done that and we have packaged the switches, there are two different plays. One is the incorporation of them in our products and that will be something that we will build the prototypes and we will take them through long-duration testing. I don’t think we will see it in an actual version of products until '17 or likelihood. But once we have gone through the validation and done some optimization around the design and package the switches themselves, they are now actually available as a product in their own right. It doesn’t have to be used in our PPSA technology, particularly if we go the route of B-TRANS, it could be used in places of what's done today with conventional IGBT. So that’s when we will off pursuing licensing arrangements because we think there is a whole separate very high volume attractive market that we can go after just on the switches that don’t require us to make a product.

Okay. Great. And as you think about the product set in 2017, just separate from the switches being standalone and looking at your power converters. I mean do you think you will continue to sell 30 KW inverters or do you go to primarily to 60s or do you have some other device design in mind in terms of what the standard is going to be going forward?

We are going to see how the market develops. If we look at what's in our backlog right now. It's pretty evenly represented for our original 2.30 kilowatt product, our three port products that are microgrid resilient and the 125, but we do see the grid resilience, 50Hz, 60 Hz products really kind of taking over in that 30 kilowatt space. And then as we bring out the switches, since most of those applications require multiple units, we were in all likelihood going to up-rate the output capability of the 30 kilowatt, probably keep the 125 and potentially make a 250 kilowatt version out of the 125 using the bidirectional switches.

Great. And then as you look at the pipeline of activities, I know what you have seen from an order standpoint. Could you talk a little bit about how the pipeline looks now compared to where it was nine months ago and 12 months ago.

The pipeline actually looks very different and its mostly because of the new players that are coming into the space. We are seeing partners that are just bringing a lot more global reach, they are bringing a lot more capability in terms of being already in adjacent markets and having sales teams already built and having other things that they are offering along with storage. If you would ask me a year ago what our mix of revenue was going to be and where it was going to come from, that answer will look very different today. And that’s continuing to evolve. As we announce some of the new partners, there are going to be folks that have sufficient expertise and market presence. They are going to be doing a level of business that’s similar to or greater than Gexpro.

Great. We will take the rest of it offline. Thanks a lot guys.

That does conclude the Q&A session. Mr. Brdar, please make any concluding remarks.

I want to thank everybody for joining us. It certainly has been an eventful quarter for us in terms of getting the new products out there and certainly getting our backlog to the level that positions us to be successful in 2016. And we look forward to continuing to keep you apprised of our progress because we think 2016 is going to be a pretty exciting year for us. So thank you everybody for joining us.

That does conclude today's presentation and today's conference call. Thank you all for your participation.