Good day and welcome to the Ideal Power Inc. Second Quarter 2016 Conference Call and Webcast. Today’s conference is being recorded. At this time, I would like to turn the conference over to Chris Tyson, Managing Director of MZ North America. Sir, please go ahead.

Thank you and good afternoon. I would like to thank you all for taking the time to join us for Ideal Power’s Second Quarter 2016 Conference call. Your hosts today 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, which will cover partner announcements, product updates, while Tim will discuss the financial results. A press release detailing these results crossed the wires this afternoon at 4 P.M. Eastern today and is available on the company’s website, idealpower.com. Following management’s prepared comments, we will open the floor to questions for those of you who are dialing in for today’s call. Before we begin the formal presentation, I would like to remind everyone that statements made on the call and 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 from those described in the call. Please refer to the company’s SEC filings for a list of associated risks and we would also refer you to the company’s website for more supporting industry information. At this time, I’d like to turn the call over to Dan Brdar. Dan, the floor is yours.

Thank you, Chris. Our Power Packet Switching Architecture or PPSA has several unique attributes that make it well-suited for a variety of power conversion applications. PPSA provides electrical isolation without the use of bulky conventional transformers, resulting in products that are typically one fifth the size and weight of conventional power converters. It’s also software-enabled so the same hardware can be used for different applications and geographies these electrical systems may require different voltages or frequencies, compared to the U.S. PPSA is also inherently a bi-directional device, making it well suited for applications involving energy storage that have charging and discharging cycles. It also has low harmonics avoiding the electrical noise that is a challenge for conventional power converters for use in applications such as variable frequency drives for motors. And lastly, it is also multi-port capable, which allows multiple sources of generation such as solar and batteries to use a single power converter instead of multiple devices. These attributes create multiple opportunities for us to commercialize our PPSA technology. Our initial focus is on markets with a large macro driver supporting their development. And in particular are enable by the rapidly declining cost of batteries where we can bring a highly differentiated and competitive power converter solution, these initial markets including standalone energy storage for demand charge management, the convergence of solar and storage and these batteries and microgrids displacing engines in diesel fuel. Today, I’ll provide an update on the first two target markets for our PPSA technology and our progress in standalone energy storage and the combined use of solar and storage as we have exciting developments to announce in both areas. We’ll also touch briefly on the next two markets we’re addressing, microgrids and variable frequency drives. And I’ll provide an update on our proprietary bi-directional…

Thank you, Dan. I will run through the second quarter 2016 financial results. Total product revenue for the second quarter was $322,000 or a decrease of 73%, compared to $1.2 million in product revenues for the second quarter of 2015. The decrease in revenue was driven by the delays in the SGIP as Dan mentioned earlier. And we’ve noted on prior calls, our revenue and the revenue from the standalone storage market in general will likely be – won’t be in the short-term as it is still an early market. As the addressable market continues to mature and expand, we diversify into other more establish target markets we expect much of this quarter-over-quarter variability in the market to lessen, providing a more stable revenue base. Looking forward, we expect the resolution of the SGIP delays and changes in the SGIP program, along with the rollout of SunDial later this year to drive revenue growth. Gross margins were 7.2% in the second quarter, compared to 11.9% gross margins in the second quarter of 2015 and 0.4% gross margins in the first quarter of 2016. Quarter-over-quarter margins improved 682 basis points despite lower revenue as Q1 2016 margins were negatively impacted by the late 2015 introduction in initial small volume build of our 125-kilowatt product. As previously communicated, as we roll our new products, we would expect a temporary short-term reduction in gross margins. In the second quarter we shipped 125-kilowatt units from our first volume build in this product and realized and now expect normalized margins for 125-kilowatt product. Also as previously communicated, as we ship at low to moderate volumes our quarter-to-quarter gross margins will have variability depending upon the product mix and timing of new product introductions but we’re targeting gross margins of 30% to 40% of scale and…

Thanks, Tim. The resolution now bring changes to the SGIP funding in California the state and federal initiatives taking place, such as the new Massachusetts storage mandate and the federal investment tax credit for a new storage. The continuing decline in battery costs and the entrant of new large companies as system integrators and project financiers confirms the growing world of energy storage is going to play in our energy portfolio. With international markets such as Germany and Australia now begin to transact, as well we’re seeing the beginning of a global market take shape. While the stand-alone energy storage market will likely remain lumpy somewhat unpredictable for the near-term with long-term opportunities becoming clear. Energy storage addresses a number of key problems plugging today’s grid and large well-established companies entering the market are bringing the scale of resources necessary to drive growth. Our focus remains on bringing out state-of-the-art, highly differentiated and competitive products based on our PPSA technology that continue to make us the preferred power converse supplier to the system integrators like Stem, that are bringing storage solutions to the market. During the remainder of this year look for us to provide announcements our new partners entering the space, reengagement in order flow for the California market and adding capabilities and certifications necessary to open international storage markets. As our Solar Plus storage initiatives look for news from us on completing the certification of our SunDial product and its release for production, we also look for more information on new channel partners and potential licensees of the product, as well launch orders. We anticipate seeing product revenue from our SunDial product enter in our mix in Q4 with the first licensing revenues under our current and target licenses occurring early next year, as partners bring out their own branded offerings based on our product design. Last, but perhaps most importantly, look for announcement from us on B-TRAN bi-directional switch development efforts. With B-TRAN playing a significant role in the long-term competitive advantages of our PPSA products, as well as the new markets and licensing opportunities it creates for us realizing first devices from our semiconductor fabrication partners is a major milestone and we’re looking forward to being able to provide an update on achieving some major accomplishments in the development effort. In conclusion, the combination of upcoming milestones will lessen with new commercial partners and new macro tailwinds for energy storage, the release of our new storage plus solar product and licensing deals, as well as realization of our proprietary bi-directional switch technology, positions Ideal Power, as the leading power converter of technology for the renewable energy connected grid of tomorrow. At this time, I’d like to open up the call to questions from our listeners. Operator?

Thank you. [Operator Instructions] Now we will go first to Craig Irwin with ROTH Capital Partners.

Good afternoon and congratulations on the very strong positioning with Stem in California Dan. So they took another $100 million today that’s a great partner.

Thanks Craig.

I guess I have to say the same thing for NEXTracker. But I guess that congratulations really is for Dan. I wanted to ask your opinion about the shape of the rebound in the California market. Now everybody has read all the different articles out there about the gyration [ph] on the lease of the California SGIP money. My understanding is that projects are actually starting to re-accelerate right now, but are more likely to see elevated activity in the fourth quarter. Can you maybe confirm that and help us understand what this is likely to mean for revenue progression for Ideal Power in the third and the fourth quarters of this year?

Yes, the things we’re hearing are similar to what you’re hearing Craig. And the way the process works is projects that were approved basically by the SGIP’s program administrators are getting wider as we speak. Just notifying them of approval of their project and how much funding they’ve got and we’ve already talked to a couple of our partners that are already receiving those. Their next step is to go close the project with their end customers and that’s going to certainly vary a lot of customer by customer. But I would expect this is going to take them some period of time to start closing projects and then turn around an ordering cost [ph] to support that. So I think it’s really the significant bump in revenue that’s coming out of the SGIP is probably going to be really a more fourth quarter event. We’ll see some that are going to be pretty confident that we’ll order in advance of that. But I think your take on is pretty consistent with what we’re hearing.

Okay, great. And then when I was in Germany I had the opportunity to talk to both Samsung, SDI and LG about their new energy optimized cells. It seems that both of them are optimistic that they’ll have them shipping commercially by the end of the year, so people can see that product will step down and looking cost. Can you maybe talk about the availability of approximate timeline between the availability of cells of these very important OEMs and then in the rack cells and when these can actually end up against projects? And how this can actually impact progression of some of your medium size projects that you’re pursuing?

Yes, we can’t some of the specifics but one of those the two names you mentioned is a little further ahead in the certification process from the other. One is actually targeting having rack systems they are going to available at the end of the fourth quarter. I think really it’s going to be a function of – if you look at the lead time we’re going to see orders where our partners are going to older equipment. They’re going to have to integrate it with those battery racks when they show up in Q4 and then install in their system. So I think it’s not going to be a pleasing item for us. We did see a bit of an impact in the market though where because LG and Samsung were both very open about the new technologies that they were coming out with some system integration partners basically said, well I’m just going to wait till they are ready, I don’t want to order a product when there’s going to be something lower cost and higher performing that’s going to be out in a matter of months. So one of the partners is definitely on target they’re actually having rack systems by the end of the year, I think the other one is – they are working hard to catch up but they’re not quite there yet.

Okay, that’s fine. And then my third question is about B-TRAN. So you really validated the competitiveness of that technology the superior efficiency and overall performance of products that incorporate your technology. B-TRAN is obviously in advance versus what your fielding unit today. You’ve already achieved a very high market share in the storage product market. Can you talk about B-TRAN and potential customers for B-TRAN, potential licenses for B-TRAN? How far along are the discussions right now? How many different groups are you sharing the testing and preliminary device data with? And how does this take shape looking over the course of the next several quarters?

Sure. B-TRAN really has two step of rules, one is as it relates to our PPSA technology because we’re going to be the first users of the devices, because it really enables us to almost double the power density in our products. And while storage is a market that is not commoditize today, it will be at some point in the future. So it’s an important part of us staying at the leading edge from both performance and cost because when that cost pressure shows up, we need to make sure we’ve got a technology roadmap that allows us to maintain really good margins but can respond to the market demand. Now we’re seeing in terms of interest, we’ve actually seen interest from large automobile manufacturers, we’ve seen it from defense contractors where people are looking at using the device for other applications. And I’ll give you couple of examples. In the electric vehicle market the switch would actually enable some things like electronic transmissions where today it’s not a good practical solution to do it but with high-performing AC switch all of a sudden a truly electronic transmission in electric vehicle could be something that would be a very realistic thing to do. We’re seeing interest from defense contractors because things like the Navy ships are going to distribute electrification to make them less vulnerable to attack and lower no signatures and so you need very high-performance, compact ability to switch power on an AC level. So it’s really been a verity of different applications where we’re actually learning from some of the people that are approaching us, our ways of basically using device that we really haven’t even thought about. So one of the things that’s exciting to us is not just the fact that it can be used in applications like conventional power converters that would use an IGBT today. But what we’re seeing is it actually opening up new market opportunities because there really is not a good high-performance AC switch that enables the use of things like matrix converters that could really advance the state of a lot of technologies if they have that high-performing AC switch.

Thank you. And then my last question I wanted to ask is really a housekeeping question but the margins have been – this quarter actually they were very strong sequentially than in prior quarters’ margins have been impacted by your late of product qualifications in the quarter. Can you remind us what the qualifications are in the back half of the year? Maybe what you think could impact in third and fourth quarters as far as maybe driving up R&D or impacting gross margins as you shift increasing units of new products?

So first from the R&D perspective we actually had a pretty low spend in the second quarter and it was due entirely to timing. In both Q3 and Q4 we would expect an incremental spend, both related to the B-TRAN development and getting actual initial proto type devices completed with the two semiconductor fabs and also with the – largely in Q3, but also in Q4 with the first half of Q4 higher R&D spending for SunDial, as we roll that product out. From how that impacts margins, SunDial will impact our margins in particularly in Q4. And at anytime we introduce a new product, our first build, our first production build is a low volume build. So it’s at a higher cost per unit in weigher volume builds. So we’ll have that first production build impact Q4 and potentially Q1. We saw it actually effect few quarters with the 125 when we rolled it out in Q4 of 2015 in depressed margins in both Q4 of 2015 and Q1 of 2016. So that will be typical, it won’t be as noticeable as our revenue based gets larger, but as long as we lower our revenue levels it will be pretty apparent to gross margins when we introduce new product.

Thanks again for taking my questions and congratulations for both NEXTracker and of course Stem.

Thanks Craig.

Thanks Craig.

We will take our next question from Colin Rusch with Oppenhemer.

Thanks so much guys. Can you talk a little bit about the design cycles for some of these newer applications? Are you actually working with folks on these variable drives or some of the automotive applications now, looking at designs or is that something that will come after you complete testing with the fabricators?

That will come after we complete the testing of the fully packaged device, because I think probably what’s going to be important to get them really excited for the B-TRAN devices is to have a preview body [ph] of test data that we can go in show them how this device performs under whole variety of conditions. When we look at PPSA-based products it’s a little different, because it’s more mature. So for example, when we did the SunDial, we worked very closely with the NEXTracker team to identify what their product requirements are going to be that will process actually from the time we actually started working with them on specifications to one we’re going to get through the certification is probably about a year. So our design cycles to get through design and certification on products is actually pretty short compared to most companies. When I was General Electric typical design cycle was probably about 18 months.

Okay, great and then obviously you don’t want to license this technology as a featuring technology at some point. How mature are those conversations, as you get to this final legacy, obviously [ph]?

We actually have been getting quoted by one of our semiconductor fabricators already who understands that the power semiconductor market and have an interest in it. We really want to have the data on the package devices, because we think this enables us to drive a better deal. So we really want to make sure that we don’t do a deal with somebody that might actually prohibit us doing a better deal with a big power semiconductor player later. So we’re going to make sure that we do the right deal for the company and the shareholders rather than the first deal that comes along.

Perfect. And then my last question is just around your visibility into inventory on the energy storage side. You don’t actually have any number of customers and seen a bit of a slow ramp here with some of the demand. Are you – do you have a good feel for how much a product is still out on shelves waiting to be deployed as we see the revamp on that market.

Yes, it varies tremendously by partner. We have one that actually has quite a few units and unfortunately they are a partner that does not have project finance in place. Some of the other partners have very little to none. So it’s a partner by partner issue. And it’s been largely driven by the fact that their ability to actually either only the storage system will provide turkey financing for it. That seems to be the driver.

Okay. Awesome guys, thanks so much.

Thanks, Colin.

We’ll take our next question from Eric Stine with Craig-Hallum.

Hi Dan. Hi, Tim.

Hi, Eric.

Just related to SGIP and you may have said it early in the call but did you give your best estimate of the percent of projects and I know that some of the funding now and some to come but the percent of projects that you think your partners are involved in?

Well our partners are actually involved in I think in almost all of the projects. We think there’s probably more than 50% where they’re going to use us because some of the projects, for example, Sonnen had a bunch of projects in the SGIP that were residential, we’re not residential product. Stem has some that are going to use products bigger than what we make. So we think we’ve captured most of the players that are participating in that program in pretty meaningful way. The real issue is going to be we do our product for the particular project they’re going to do. That’s why when we look at it we go through a list of project by project, we think that there’s probably at least 50% of those that we’re going to be able to capture. The only exception to what’s in the queue is I don’t know how many Tesla actually has in there, but they would be the one that we haven’t captured yet.

Okay, got it. And just to confirm with Stem. Do you currently have or maybe you can quantify if you have any thing in backlog from Stem right now?

No, we do not, we will look to see get our first order quite a little bit later this year.

Got it, okay. May be just turning to well so GSA they’ve been making a lot of noise lately about looking at storage for federal building any thoughts on that program timing? And I would assume your partner, most of your partners if not all are heavily involved in that. Just thoughts on how might play out going forward.

Yes, assess that federal government has been doing for those who don’t know the federal government has been actually making a lot of noise recently about looking at the use of storage for federal buildings because obviously they would have the same benefits if they’re commercial customers. It’s not clear how they’re going to try and procure that yet. We’re going to rely on our partners to figure out how to go through the GSA qualification process and whatever they need to do to participate in any request or proposal to come out. We’ll get pulled in sort of by default. We’re not going to spend much time on our – on ourselves because it will be a system level offering that needs to be done.

Got it. Maybe last one for me just an update on KACO I know they were kind of in the process of choosing a battery supplier and a software supplier and just maybe where will expand?

Yes, they have done both of those, they are actually now in the process of actually doing their packaging design on what the system will actually look like now that they know who the battery provider is going to be. Now that they – they certainly know what our product looks like but they need to come up with sort of a skid mount design that puts all those things together and that’s the process they’re in right now. They’re actually also in the process of hiring some additional people for that part of the business because they view it as a pretty important opportunity for them going forward I was just speaking with their CEO just earlier this week. So I think they’re moving a little slower than I think they would have liked but they want to make sure that they bring out a product that really leverages what their own packaging expertise has been with some of the large solar projects that they have done.

Got it. I mean that it is – is it safe to say that would contribute to 2017.

Yes definitely. And they’re taking a role where they maybe well to do the packaging for some of the other partners that we have that don’t want to physically go through that process where they don’t either have the facilities or the access to do that. So they actually could end up being a provider in some fashion to some of their partners as well.

Okay, thank you.

Thanks, Eric.

We’ll take our next question from Jeff Grampp with Northland Capital Markets.

Afternoon, guys.

Hey, Jeff.

Question on the SunDial with the licensing going into 2017 I know it’s probably a bit difficult to talk with any specificity on numbers or anything, but just kind of from a big picture standpoint your conversations with NEXTracker, how do you guys kind of see that ramp playing out into 2017 and in terms of their marketing of SunDial?

Well they view it as part of an integrated offering that they’re making with their new racking system as part of their expansion into the commercial industrial space. They’re pretty much done, I think, with the design of their system. So I think it’s really a matter of getting the products through certification, getting Flextronics comfortable with the design itself because they’ll be obviously making it for NEXTracker. What they have told out is they’re targeting to do the initial deployments for that in Q1 as a product they would make. But what they have told us is they may actually have opportunities where they’re going to actually buy the products from us as part of getting some of their early demonstrations and launches done as early as Q4 of this year.

Okay, that’s helpful. And then with Sonnen and I think you mentioned in your prepared remarks looking at some potential options and getting into Europe with them. Give any kind of idea in terms of timing or any kind of additional color you can provide on how those conversations are going will be helpful.

Yes, sure. They actually surprised us, where they had some pretty significant activities going on in Europe and they came back and said we just basically pre-sold x number of your units for Europe. We have to go through that how to make sure that that works. So the kind of pleasant surprise you’re like get. I think they’ve to get through finalizing those opportunities that they teed up and sort of pre-ordered with their customers. But I would expect that’s going to happen and reasonably short order because they seem pretty excited about seeing the commercial market open up in Germany for them.

Okay, great.

[Indiscernible] on that in the next call.

Great. Looking forward to it. That will do for me, thanks for the time guys.

Thanks, Jeff.

[Operator Instructions]

Okay. It looks like we don’t have any more questions at this time. So I want to thank everybody for joining us. We appreciate you taking time out to get an update on what we’re doing and look forward to continue to brief you on our progress here especially as the California market now reengages and we can get back to focusing on growing the business. Thanks everybody.

This does conclude today’s call. Thank you for your participation. You may now disconnect.