Good day, and welcome to the Ideal Power’s Third 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 Third 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 wire this afternoon at 4 P.M. Eastern today and is available on the Company’s Web site, idealpower.com. Following management’s prepared comments, we will open up 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 Web site 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. The commercialization strategy for our Power Packet Switching Architecture has been to focus first on the matter side are enabled by the broad market trend in the energy industry and the markets created by the declining cost of energy storage. These markets include standalone energy storage, the conversion for solar and storage, as well as other markets such as microgrids and the adoption of electric vehicles. Today, I’ll provide an update on the first two target market for our PPSA technology, which includes standalone energy storage and the combined use of solar and storage. We will also touch briefly on the next markets we intend to target. And I’ll provide an update on some excited developments with our proprietary bi-directional switch development efforts. Our initial target market, standalone energy storage, is anticipated to be a multi-billion dollar global market opportunity addressing utility, commercial, industrial, and residential customers, largely due to the dynamics of rapidly declining battery cost and the rising cost of peak electricity generation. Our efforts have been directed at developing innovative products based on our PPSA technology and capturing the domestic and international system integration partners and battery suppliers who will create and grow this market over the long-term with a particular focus on the commercial and industrial market segment. While the opportunity for energy storage remains great, 2016 has been a challenging year, particularly in the commercial and industrial, and residential segments due to the significant disruption in the California incentive market in February of this year. Our third quarter results were well below our expectations, we firmly believe it’s simply of question of when, not yet, the U.S. energy storage market begins meaningful growth and we’re seeing times that now that things are progressing. This year demonstrated how bigger wall, state incentives and…

Thank you, Dan. I will run through the third quarter 2016 financial results. Total product revenue for the third quarter was $439,000, or a decrease of 51%, compared to $895,000 in product revenues for the third quarter of 2015. The decrease in revenue was driven by the delays in the SGIP that 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 and we diversify into other more established target markets, we would expect much of this quarter-over-quarter variability, providing more stable revenue base. Looking forward, we expect the resolution of the SGIP delays and favorable changes in the SGIP along with the roll-out of SunDial, the expansion of addressable markets outside of California and our entry into new geographical markets to drive revenue growth. Excluding the one-time $329,000 inventory charge related to the discontinuation of our legacy first generation IBC-30 battery converter, which we introduced in 2012, our Q3 2016 gross margins were 6.8%. Our next generation 30 kilowatt PCS launched in the second quarter of 2015 is replacing the IBC-30 as it offers enhanced features and functionality. Including the one-time inventory charge, gross margins were negative 63% in the third quarter of 2016 compared to 5.9% gross margin in the third quarter of 2015. To offset the inventory charge, we aggressively focused on identifying and implementing opportunities to reduce our Q3 operating expenses. We were successful in these efforts and our net loss for the quarter was consistent with our expectations. Also, as we previously communicated, as we ship at low to moderate volumes, our quarter-to-quarter gross margins will have variability depending upon…

Thanks, Tim. It's been a challenging year for the energy storage market. And if the magnitude the opportunity to change, we’d have to reconsider our direction, priorities and expectations, but it hasn't. We believe the adoption of energy storage will fundamentally change the conventional approach to electrical generation, distribution and use. We see new large Fortune 500 companies launching system offerings, including entire energy storage business units to cash through the long-term opportunities. Large battery manufacturing capacity additions are already in progress as most major battery producers, essential to serve the expected demand but also key in driving down battery cost. Our partners, such as Sonnen, Gexpro, Sharp, Stem, and others, were all bringing financing to the space, a key enabler for the market. These aspects and others confirm for us the magnitude of the opportunity in the market. We appreciate the support of our shareholders and those who’ve done the diligence to appreciate the growth profile of this market and the reason why they both want and need to invest here. Our focus has been on executing the aspects of our business we can control, developing competitive differentiated products, capturing the system integrators and channel partners that will ultimately drive the global market in security industry certifications needed to expand beyond the initial market of California. By the pace of adoption for an early market can be sporadic, especially when events like the SGIP disruption occur, we believe the energy storage market is nearing a certain point. And that we’re well positioned to benefit from the broader trends in the market. The inbound interest we received in the last nine months for our 30 kilowatt, 125 kilowatt SunDial and B-TRAN products, which have turned into proposals, has never been higher than in any points since commercialization. Our pipeline of…

Thank you. [Operator Instruction] We will take our first question from Craig Irwin with ROTH Capital Partners.

Good evening and congratulations on that nice order from JLM. So Dan, first thing I wanted to ask about is B-TRAN. Can you maybe frame-out for us the number of customers that you are talking to about B-TRAN right now? Whether or not you have licensees that are potentially lined-up, or let's call it candidate licenses, and whether or not you have actually put early package units in the hands of any of these potential customers at this point?

We had request from a variety of players, General Motors, defense contractors, and others that want to get early devices for prototype testing. We will provide prototypes once we have done our initial testing. Those devices are at the package of being put into basically taking a silicon chip and putting it into a mounting system so they can be mounted to the circuit board. That’s going to be the first-step we’re going to be doing that here just in the coming weeks. Unless we have those initial results, we’ll know whether we want to provide prototypes to any of the people that have done requesting them or whether we want to do an iteration on the design to just enhance the performance before we take that step. We’ve actually already been approached to do a license for this technology, it's one the semiconductor fabricators that we’ve been working with that know the technology well and understand what it took to get it through the production process. We haven’t taken that to the point where we’re actually executing a license with them. We think we really want to understand the performance level of the devices first. And as a result of that we can figure out are they the right licensee or is there a different power semiconductor player that we think would be a better choice. So, one, this is really going to come as a results of some of the testing that we’re going to be doing here in the coming weeks.

That’s really good to hear. So to move on to the storage market, right, this is really what’s driving revenue right now. And I guess California is close to 50-times the size of any other market in the U.S., and the SGIP vacillation, let’s call it, hopefully that’s moved behind us. Can you comment whether or not you’re seeing monthly levels of revenues that are above the average that you saw from the third quarter? Are you starting to see an inflection up at this point, and would you expect that to continue into December?

We’re seeing actually just more broadly the level of activities picked-up. Now, the California have been the first market, and unfortunately it’s kind of a one that clearly the pain for the space. We’re actually pretty pleased with what we see happening, not just with California reengaging but markets outside of California that now starting to transact. So, it’s becoming a broader opportunity. We actually and we’re going to be announcing an order next week for Europe that Europe wasn’t really even on our plan for ’16. So, we’re seeing that markets beyond California are now benefiting from what’s happened to the cost of batteries and the fact that storage is becoming a more attractive option for a lot of markets, not just the California incentive drive market.

And then a couple of your customers have financing some of them announced, others not announced, where they can actually bring this financing to the customer and offer to help. Is the cost of installation maybe pushing the monthly payments, or shared benefit payments. Can you comment, whether or not, you’re seeing these financing options actually facilitate sales in the market with your products yet, or is it something that’s really just still developing and likely to contribute to momentum in ’17?

It’s a bit of mix depending on the customer. Some of them are more sophisticated at how they’re packaging up the financing option from a contracting basis, those that are more sophisticated becoming a driver for them. Others are still kind of going through, how do I leverage that financing to something that actually drives transactions. And I think it’s a lot of assumption of whether you’re coming from the state that’s related to this, like solar, or whether it’s relatively new area for you. I’ll use Mercedes as an example. Mercedes, while they’re working on their system offering, what they’re going to do from a contracting basis is I think really unclear yet to the market. Whereas others that are really coming from the solar space understand how the PPAs work, how the performance based contracts work. So there is a lot of that customer. I think it’s still very much in the education process for a lot of these folks, and their business units are really relatively new. Sharp is another example. Where Sharp -- while they’ve gone off to a slow start as they’ve got financing in place, we’re now actually seeing it drive activity for them. So, it’s really getting to the point where you not only have the financing lined-up but you understand how to leverage that contractually for the commercial investor customer.

And then if we could talk about financials a little bit, you’ve obviously got some really tight expense management, keeping cash consumption low. How should we think about things into the fourth quarter? Are we likely to see similar level of operating spend and margins, maybe a modest improvement, if revenue continues to pick-up the way it has?

Looking ahead to fourth quarter, SG&A should be relatively flat. We’ll try to see what we can do to maybe brand-down a little bit. But I would say a baseline expectation is to remain flat. R&D actually will be up a little bit in Q4. And that’s both due to some of the testing activities we’re doing around to B-TRANs and also trying to get first devices from the second semiconductor fab, as well as the SunDial launch. So there is going to be costs associated with that launch to run through R&D as well. So, there will be somewhat of an uptick in R&D in Q4.

Along the lines R&D, my last question before I hop back in the queue. Hopping around tradeshows the summer and fall, I guess, ES&A into solar SPI. I’ve had an opportunity to really engage with a number of your customers. It seems like there would be appetite for a larger unit than the 125 kilowatt. Can you share with us where you stand about the potential for maybe a 400 or 500 kilowatt unit, whether or not you consider this a sweet spot for your technology?

We’re actually going through product planning for what we’re doing after the cost reduce versions of the 30 kilowatt and 125 kilowatt. We’ll have better color on that on the next call. But we’re doing the same thing that people are, are wanting to see something that is bigger. There is as, they are asking about a product, as you compare them all a bunch of them together. But at some point it makes more sense to just have a larger unit. So as observed a lot of them the feedback we’re having from the partners and some market assessment work that we’re doing ourselves, we’ll lay-out what that roadmap looks like, and we’ll give people some visibility into it.

We’ll take our next question from Colin Rusch with Oppenheimer.

As you’re talking about these energy storage customers, is there a possibility for prepayments from some of these folks as they look for specific products and then volumes to be shipped out?

Lot of outsource is a function the customers itself, our track record with them. We had somewhere, we actually do get prepayments or we percentage down before we actually start to even make product for them, but it varies customer-by-customer.

And then obviously you’re working from probably low standpoint now. Ccould you talk about the preparedness of the supply chain to support your growth? Because it looks like, you’re reaching an inflection point where things could change very quickly?

We’ve actually spent quite a bit of time with several of the tier one contract manufactures to really understand what it takes to get of one of them up and running. Make sure we understand the capacity of our current contract manufacturer. And then also making sure that any parts that are relatively unique for us, we’ve got multiple sources. So, we think we’re actually pretty well positioned for that. And the last is a couple of parts they are relatively unique for us, are going to be going through qualification for multiple sources here, just in the coming month. So I think as business starts to ramp, I think we’ve got the supply chain piece pretty well in hand.

And then if you could talk a little bit about the competitive dynamics around B-TRAN. As we go forward, you get through testing. What are you seeing in terms of the potential competitors for that product and responses from some of the existing IGBT providers?

There is no, bi- directional AC switch out there that really compares directly. What most people do is they use combination of switches to do what we do with one device. When we look at some of the technologies that are out there that are coming to market, some of the silicon carbide based switches, some of the GaN based switches. When we start to look at what's the cost of the device and its performance improvement and use those two together, you really get almost in the order of magnitude cost performance benefit. So I think it's really going to be more a function of putting-in in our own product, so that we can show its use and then getting that right semiconductor fabricator who has the infrastructure around power semiconductors to bring it to market, because they’re going to want to bring a complete package device with driver circuitry and everything else.

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

Just wanted to start variable frequency drives, just an update there; I know you’ve completed the third-party testing. I believe the next step there is field trials. So maybe where that stands? And I mean is this still something where you’re targeting commercialization potentially in 2017 and then late 2017 when this might start to impact results?

Yes for the VFD, we did our demonstration this year where we actually showed that our technology, even at its current state without the use of the B-TRAN has better output harmonics. And output harmonics are the issue with VFD, that’s what basically destroys older motors that are really not inverter grade motors designed to be used with a VFD. We’ve been doing work on -- and actually getting some third-party help to really assess the markets that are out there, the players, the products that are out there, so we can see where is the right place to position the product. We actually have some units that have been provided to a VFD manufacturer. They want to get familiar with the technology itself. And then we’re going to work collaboratively with them, because we don’t share the vision as it's being a product that we’re going to bring as an Ideal Power labelled VFD to the market, it's going to be something that will be under somebody else’s label. And we’re going to work with partners to actually lay-out what the roadmap looks like. And then the other issue that we need to sort through is as we go through our product planning road map, does it make sense to do a VFD design right away, or does it make sense to do a larger storage based product, and then do a VFD incorporate it into B-TRAN. But that’ll all be part of that collaboration we do with the channel partner.

Maybe just flipping to SGIP, I mean it sounds like fourth quarter, you're seeing funds being released and things taking up somewhat, maybe doesn't show in results. I mean, is 2017 when that somewhat normalizes? And do you think the continuous submittal process. Is that something that can help quarter-to-quarter variability of the program?

Yes, I do think. We do see that relieved in 2017. And I think the continuous submittal process is going to be a big improvement. Because unfortunately what we've seen or looked at this program, historically, is if you missed the window or the opening of the program in a given year, basically everybody stops, because no one is going to wait -- no one is going to go forward with project that there is some potential to get as much as $0.50 on the dollar for incentive. So I think it will help to eliminate lot of the fits and start surrounding this program. So people have clear visibility to the incentive dollars, knowing whether they have them or not, knowing when they’re going to be available, because I think that program will probably get pretty fully subscribed relatively quickly, but not like it has been where in a matter of minutes the money is all taken out. So, I think it's going to be a significant improvement to have smoothing out what the transactions that are driven by the incentive programs look like.

Maybe last thing and I might have missed this. But relative to SunDial, is that something that you’re still planning potentially to start shipping in fourth quarter? And then also, I believe right now that’s a 30 kilowatt product. Could you come to market with a 125 kilowatt?

Yes. We actually already shipped uncertified units to several customers. It will actually be in production and in shipping in Q4. And yes, we very much could bring 125 kilowatt products to the market as well. We’ve actually been approached by someone to actually do a different priced product that we’re actually -- we’ve signed the term-sheet with them where they want to do a license for something that is a little different size, but 125 kilowatt would be -- something that would certainly be a consideration in our roadmap.

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

Dan, maybe just wanted to pick your brain a little bit, and dive down on the international side of things. And you guys mentioned a lot of different markets that you guys have irons and fire. And just kind of wondering, which one that may be excited the most, both in terms of the potential and then maybe just in terms of which one maybe from a near-term basis, you think you’ve gotten most traction on there?

We think that when you look at Europe, we think Germany is a particularly interesting market because Germany has already adopted storage into residential level. We have multiple partners that are either German by ownership or have a presence there. The order we’re going to be announcing is in Germany. So we think that’s the market that’s particularly interesting. Australia is another market that we think is particularly interesting, for all the same reasons. Storage in Australia has been focused around the residential applications, because of a lot of the issues they have surrounding just grid stability issues. But it's now becoming a commercial and industrial opportunity. We’ve worked with one of the utilities there, and the channel partner there who have encouraged us to bring the products. So we’re going to be doing that as well. And then South Korea actually kind of surprised us. We’ve been approached by multiple partners for South Korea. It is a smaller market. It's more like -- it's bigger than Australia. But certainly not as big as some of the opportunities that we see elsewhere. And then we think another one that is pretty interesting for the longer term is Japan. Japan looks like it is a particularly good opportunity for storage. We have partners like NEC and Sharp that I think could be good channels. And then maybe be others that we’ll explore, because we’re working with Panasonic and other Japanese companies as well. But if I had to put them sort of in order, I would say Australia and Germany first, then probably South Korea and then, Japan.

And then my only other question it was more on the financing side, and you guys mentioned various options you are assessing. And I guess maybe more on the strategic front of options. What kind of things are you guys looking at in terms of partners or structures? Just hoping to maybe get a little bit more detail to understand that it's a little bit of a fluid process as you guys evaluate opportunities there?

Yes, we’re evaluating our different options from a strategic front, I mean there is licensing opportunities or potentially come with upfront cash. There close to be a strategic equity investment. We’re just making sure that we’re exploring all alternatives to make sure we keep the balance sheet strong as we’re looking to really get some more of these large partners on-board like the NECs and potentially the Mercedes or the Panasonic. We need to make sure that they’re comfortable with our long-term viability and in the strength of our balance sheet to really support our warranty.

We’ll take our next question from Amit Dayal with Rodman & Renshaw.

Thank you. Most of my questions have been asked. The longer term catalyst looks pretty compelling guys. From a near-term revenue perspective, like just digging into the backlog a little bit. Is backlog right now primarily SGIP driven?

The reported September 30th number is pretty closely aligned with the SGIP program. As we’re looking at some of the orders closes, it's starting to come-in, and JLM is an example. We’re getting for orders that are outside of the SGIP program, whether it’s for microgrids or for just other markets that are opening up in United States.

And you may have given color on this. But what’s the timeline on JLM in terms of initiating the deliveries and completing them?

So we’ve actually shipped a limited number of units to them here already this quarter. Those deliveries are largely through roughly the first-half of 2017 into the third quarter.

And then going into early 2017, I guess, SGIP is going to be one revenue driver for you guys, the SunDial, et cetera. Could you just recap for us what the key revenue contributors could, comprise of, for the next one or two quarters?

For the next couple of quarters it's really still storage based. So, it's standalone storage, which will be in California, increasingly and other markets in the U.S., in Germany, as Dan had mentioned earlier. In Q1, we should also what we have revenue in Australia. The other thing that will drive revenue is introduction of the SunDial. So we’ll be starting shipping SunDial in about a month. I mean that Solar Plus storage product should also start contributing more meaningfully in the first quarter of 2017.

We will take our final question from John Girton with Girton Capital Management.

I have a question on the market size of the B-TRAN, and I wanted to maybe drilldown a little bit and see. You’re shipping these, or you have these units that you’re working on, and they’re double sided. And I was trying to get a sense of what the ASP might be on a product like that, if -- in the end marketplace, like would it be a $20 unit price, $40, general sense of that?

We’ll know that better after we get through the packaging pieces to understand what does it look like package with device drivers and everything else. So, if you ask me that again in next quarter, we’ll have an answer for you. We’re also going through the process of getting volume numbers from the semiconductor fabricators that have now successfully made the device, because now they are confident enough to what that process looks like, it's actually give us some volume projections. Because we need to be thinking about for our own use, so we need to understand what the cost points are going to be.

Yes, I was just trying to get a sense. What would IGBTs be, like let’s say you took may be a fixed IGBT, and some switches and you put it all together. How much would that cost? And then maybe I could get it that way.

If you want, John, we could actually put the numbers together for you, that go take what we’re currently buying compared to what we think that projection number would look like.

And the reason I am going that way is, if it's a $30 chip or $20 chip, you could ship a lot larger volumes than if it were like a $100 chip. So I’m just trying to get a sense of that. So if you do talk about volumes, unit volumes, I’m curious what kind of -- is this something that can ship tens of thousands of unit a year? Is it something that you think eventually could ship millions of units? Do you have any sense of that?

The device itself, we think of us in the context of what we plan to use it for as a bi-directional switch. What we have been finding as we’re engaging with players that want to use them is we think of the power semiconductor market as kind of its defined today. But in discussions with General Motors, in discussions with defense contractors, it’s how incremental use. It’s all new applications that you can actually do practically with the conventional power semiconductor. So I think how the market is relative to the current state of the art is probably going to look different. We think it’s going to be a high volume device; because of new applications, like electric vehicles; because of power converter applications; not just our own but conventional power convertors can use it as a one directional switch, rather than going to something like silicon carbides that would be even higher cost. So we think it’s really going to take some work with the licensees to figure out what it the market look like going forward since it enables new market opportunities to new applications. They just can’t do today because of the lack of our good bi-directional AC switch.

It sounds like you could go into a number of markets, like electric vehicles, power convertors. As you said awfully you mentioned variable frequency drives that you were thinking of designing in there, and that’s quite a large volume market too, right?

Yes, exactly.

So sounds like it could be something that eventually could work in the millions of units. I was curious, how many units have do you actually made now? I mean I was thinking have you made in the tens of unit, hundreds or thousands. Just a few wafer, or what’s the -- how many have you made so far, roughly?

Yes, we’ve made tens of them and that’s with also the packager to sliced up and put in with the connections to make it, label them out to a circuit board.

And -- but you can probably ramp up to thousands fairly quickly if necessary?

Yes. I mean the challenge has been learning how to make the actual double sided device. How do you process a wafer that has the; what you need on from a circuitry standpoint; how do you get a good bond to a second wafer; handle that and flip it over and process the other side; tuning it down to the right thickness. So, it’s really been the manufacturing processes, and how to make a double-sided device that have really been the learning, not so much the things that are unique about the B-TRAN itself.

And then in terms of the testing of this, do you think this is going to take may be the six months to get it tested, and do burn-in testing, and do lots of pushing the part to its limits. Would you expect to see that done may be by middle of 2017?

We’ll probably be doing lots of testing on an ongoing basis, because one thing you really want to do is cycle these devices a lot, see what their performance is over the long-term. But we’re going to have pretty good indication on the basic performance level of device pretty quickly.

And with no further questions, at this time, I’d like to turn the call back over to Dan Brdar for any additional or closing remarks.

Thank you everybody for joining us today. And we look forward to updating you on future calls. Now that we see the storage market activity picking back-up again, and as we start to enter some of the new market that we’re targeting, and hopefully with some pretty good order announcements in near-term. Thanks everybody.

And this does conclude today’s conference. Thank you for your participation and you may now disconnect.