Good day, and welcome to the Ideal Power Third Quarter 2017 Results 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'd like to thank you all for taking time to join us for Ideal Power's third quarter 2017 conference call. Your hosts today are Mr. Dan Brdar, Chief Executive Officer, as well as Mr. Tim Burns, the company's Chief Financial Officer. Dan will provide a business update, which will cover partner announcements and product updates, while Tim will discuss the financial results. A press release detailing these results crossed the wires this afternoon at 4 PM 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'd 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 may be 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. The third quarter of 2017 was highlighted by the completion of UL 1741 SA certification testing for our next generation 30 kilowatt Stabiliti and SunDial series, and the NX-15 version of our SunDial product developed for NEXTracker. These new versions of the products incorporate the newest standards for grid modernization that complement our new strategic initiative in the solar-plus-storage and microgrid markets. This new certification adds significant capabilities for dealing with grid disturbances, and is currently being required by many utilities for new equipment installed in their service territory. For those of you not familiar with UL 1741 SA certification, this is a product safety standard, that lays out the manufacturing, including firmware, and product testing requirements with the goal of producing power converters more capable of riding through grid instabilities and adding the capability to provide grid support functions for things such as voltage support, ramp-rate control for solar and other functions that enhance grid reliability. Up to this point, traditional utility interconnection requirements have dictated that PV systems disconnect from the grid during departures from normal grid operations. As solar penetration increases across the country, it may no longer be desirable to have a PV system to disconnect from the grid entirely as this could exacerbate grid instability. However, power converters with UL 1741 SA certification can provide rapid power and essential component for balancing power delivery and stabilizing the grid. By certifying our entire product line, our products are compliant with the latest standards required by utilities as they deal with increasing amounts of intermittent renewable generation. Official UL listing is expected in the coming days. Before we discuss our market verticals, I want to provide some additional clarity surrounding two issues on the policy front that have been causing some concern among industry…

Thank you, Dan. I'll run through the third quarter 2017 financial results. Revenue for the third quarter remained unchanged at $0.4 million compared to the third quarter of 2016. In the third quarter, our revenue was from the sale of the company's 30 kilowatt Stabiliti products, primarily for solar-plus-storage in microgrid applications. Due to delays in NEXTracker's launch of the NX Fusion Plus product incorporating our 30 kilowatt products. We now anticipate our revenue growth will begin in 2018. Over the next several quarters we expect our revenue mix to be heavily weighted to the solar-plus-storage market and to a lesser extent the microgrid and standalone storage markets. Gross margins were 6% in the third quarter of 2017 compared to negative 68% gross margins in the third quarter of last year. Last year third quarter gross margins were negative due to excess and obsolete inventory charges and an unfavorable warranty adjustment both related to our discontinued first generation battery converter products. As we mentioned last call, we expect short-term downward pressure on gross margins when we launch new products, and prior to achieving scale on production. As we're largely through the initial launch of our next generation products during most of the third quarter, our gross margins again turn positive on modest revenue highlighting the low manufacturing overhead inherent to our contract manufacturing based business model. Research and development expenses decreased 13% in the third quarter 2017 to $1.1 million from $1.2 million in the third quarter of 2016. The decrease was due primarily to lower personnel costs in connection with our cost reduction activities. Our research and development spending has now focused entirely on our 30 kilowatt product families, and our development efforts of the few months will be focused on second generation, more efficient and further cost reduced…

Thanks, Tim. As we closed last quarter 2017, we're focused on supporting the net energy metering testing and early customer opportunities being pursued by NEXTracker and to our newly signed master purchase agreement for the solar-plus-storage market. We shift initial units to NEXTracker and its battery partner for NX Fusion Plus development and system integration and to be used for UL testing of net energy metering schemes recently approved by PG&E. During the quarter, they expanded their sales team and our focused on bringing a DC close-coupled integrated system to market as a value-added solution for their customers. With respect to our next generation 30 kilowatt Stabiliti and SunDial series, now the UL 1741 SA testing is complete, it was expect to listing in the coming days, our position to meet the standards required by HODs in North America as well as California Public Utility Commission as an amendment to the Rule 21 tariff. By certifying our entire product line, our products meet the latest requirements of the utilities, who must improve the interconnection system to the grid. Our key customers such as Sharp and now JLM Energy, they have secured project financing or ordering and deploying our new product design. The slow pace of projects on the SGIP program is driving system integrators to develop other approaches to close business, and the ability to bring non-recourse project financing is facilitating the progress. The testing of our initial B-TRAN packages and their design and progress on fabricating a simplified B-TRAN device are expected to provide important information and validating the proof-of-concept of our switch technology. Despite our muted financial performance in the third quarter, we're focusing our development and commercialization efforts on those areas that we believe represent the best opportunities for growth. There was stable balance sheet, no debt, significantly reduced cash use, an asset-light operating model, strong intellectual property, best-in-class integration partners and disruptive technologies in the R&D stage advancing toward validation for new markets such as power semiconductors. At this time, I'd like to open up the call to questions from our listeners. Operator?

Thank you. [Operator Instructions] And we'll go to Craig Irwin, Roth Capital Partners. Craig, you may be on mute. And, Craig Irwin, your line is open. We're unable to hear you at this time. And moving on, we'll go to Eric Stine, Craig-Hallum.

Yeah, hi, Dan, it's Aaron Spychalla on for Eric. Thanks for taking the questions.

Hi, Aaron.

Hi, Aaron.

Maybe first on NEXTracker, I mean, can you just kind of talk a little bit more about that? Are you still expecting kind of the first commercial order and shipments here in the fourth quarter? And then, any kind of way you can quantify what that pipeline might look like, and then also on the certification side of things you mentioned what's going on in California. Are there any other kind of certifications you need on that product before it goes to market?

With NEXTracker it's really difficult to say when they actually close their first order. I mean, they've been telling us for quite a while what their pipeline looks like, who their target customers are. We're personally frustrated that it's taking them this amount of time to get their first orders closed. We understand that when you got a system offering, you got to educate the customer about it. But I think we're all expecting, we would have already had that first order by now. I think they were too. I think they are feeling a lot of internal pressure to get their first opportunities closed. But we don't know whether that's going to be tomorrow or weeks from now or when it's going to happen. We just know the pipeline that they built looks impressive. It's really now them getting these things across the finish line. As far as additional certifications, we have - we've done all the ones that we need to serve the markets where they're going after so there is nothing additional that we need to do now that these - the certification testing is done. The work that we're going to be doing at NEXTracker site with UL, it doesn't actually result in a certification. It just ends up being a formal validation letter that comes from UL to share with utilities like PG&E that the battery can't be charged by anything other than solar.

Okay. Good, thanks for the color there. And then maybe on the microgrid side of things, good to see the deployments in the quarter, can you just talk about the pipeline there and any engagement with other customers that you think can scale? And then maybe just touch on, it's been a while since you've heard anything about Boeing. Are there anything on next steps there?

Yeah, microgrids, the folks we have already done projects with like CivicSolar and Azimuth and others, are leveraging the projects that we've already done. What it does do also is it gives us validation to be able to point to projects that are already installed and operating as we tracked other partners, because we got quite a few players that we're engaged with that are looking to bring microgrids to the market to respond to some of the things that have happened here recently on the hurricanes like in Houston and in the Caribbean. In fact, the site at Saint Croix actually went through the hurricane and our units actually did well despite the fact that they had troubles, keeping some of the solar panels themselves in place. So we're really using the success of these projects and the partners we work with to attract others. As it relates to Boeing, Boeing is a case where the technology that you want to bring to market, they seemed to have a corporate mandate to demonstrate long-term operability and that seems to be what's kind of driving what they're doing. Our units that we've installed out there have operated well as best we know. I think they have to prove for the fuel cell that they want to bring to market to their management team, that the life associated with the fuel cell is going to be sufficient for them. They'd be able to stand behind the fuel cell life, the stack for guarantees. And that just takes accumulating operating hours.

Understood. And then maybe last for me, I guess, is there any - couple of quarters ago, you mentioned kind of Bosch, Johnson Controls, Eaton and some others that they may be out looking for initial orders there. Can you just provide an update on that?

We are actually in engagement with one of the players you named already on agreement. Hope we'll be able to announce our next steps with them in an agreement and initial orders here in the coming weeks. And the others, we're all engaged with and moving things along. It's really a matter of how quickly some of these bigger companies can move. But the opportunities are all active with the names that you mentioned.

And we'll go next to Jim Kennedy, Marathon Capital.

Hi, Dan.

Hi.

Hi, a question for you. Would you educate me a little bit about the ability to retrofit versus new-build? What do those two markets look like and what are the advantage and disadvantage there?

Sure, one of the things that we learned in our discussions with NEXTracker and some of the other folks that are looking at solar and storage is, when solar projects are put in they typically are 20-year-life projects. The power converters, I mean, the solar panels are - they have 20-year-life designs, the same with the racking systems. The power convertors are typically a 10-year warranty that comes on them. So what we're discovering is we're working with folks like NEXTracker and others that are in their space is power purchase agreements that were done 10 years are now kind of underperforming, because the power converters themselves are reaching end of life. The cost of a power converter 10 year ago was several times what it is today. So what is happening is, there is an opportunity to come back in and not just replace the power converter that was originally put in with one that is significantly lower cost and much higher performing, but also now brings the ability to do things like, couple it with storage to make the solar a firm generating asset rather than they can actually be bid for capacity and can be bid in the day ahead markets. So it's a cost reduction that happened around the power converter. It's lower cost of the batteries that really makes a retrofit opportunity something that is viable to take an old power purchase agreement and make it actually not just attractive again, but potentially even more valuable, because it has more capability.

So if we look out a couple of years from now, would you anticipate a very small percentage of your revenue from retrofit or can it be a larger part of the story?

I will share with you what we've heard from the players that are looking to deploy systems. And they think that it can be a pretty significant opportunity because the cost of solar in general has just declined so much over the last five to 10 years that they think, there is a way of repowering is coming to replace the old power converters. But the think that what's going on with batteries and power converter cost and performance, it's also like going to be a pretty significant percentage of the facilities that they've got repowered. So it's one and what even on our radar screen when we first are working with NEXTracker on this, but I think it figures pretty strategically and the opportunities that they're going after.

Okay. Very good. Thank you.

You're welcome.

And we'll next go to Sameer Joshi, H.C. Wainwright.

Good afternoon, Dan.

Hi, Sam.

My question relates to the NEXTracker sales team expansion, you mentioned that expanding the sales team, but is that dedicated to the products that would involve Ideal Power of products?

Yes. Our understanding is they've added several people that are focused on nothing, but selling the storage-plus-solar solution. That is their only responsibility is to build the pipeline of projects and drive those first projects to closer.

And just follow-up on the previous caller question on the PG&E acceptance, do you know what the timeline on that testing is?

The testing is beginning later this month, so we expect the testing in its total, assuming that everything goes well. It's really only matter of few days to a week at the most. So our expectation would be, as we come out the end of November, the testing is done.

Okay. Moving on to the B-TRAN development, I know, you're working with two different packaging allowances and working on canes [ph]. But are you also looking at cost implications of those and yields of the systems that you would be producing?

For the package design themselves - they're really focusing more on what are the differing schemes that can be used to validate the devices. There is one that is clearly designed much more as a high volume manufacturing approach than the other. But the alternative that we're looking at is really want to just sort of stimulate creativity of the volume manufacturer. So we're not so focused on the cost of the packages, it's ultimately going to be relatively small percentage of what the overall product is going to cost - our focus is really going to be what's the cost of the semiconductor device itself. And then, how do we drive that lower as we work at the semiconductor fabricators to optimize the device, reduce a number of process steps that are doing it, and start to roll things out.

Okay. And then, one last question for me related to, Tim mentioned 13% reduction in R&D cost and also said that it doesn't affect any of your main programs. But what are the kinds of programs that you put sort of on the backburner, while you go through this cost saving measures?

So it relates to the simplification efforts we did to the roadmap, we're now exclusively at least for the time being focused on the 30 kilowatt product. So we discontinued our first generation 125 kilowatt product. The other thing, we've done as we focused now here on North America. So we're currently not pursuing any international certifications and we're also now looking at any other applications outside of solar-plus-storage microgrids and standalone energy storage. So it's a combination of those three things.

Okay. So just a follow-up on that. So when do you think, these programs will be revisited and - yeah, revisited basically?

Yeah, so we're looking to our longer term roadmaps and product roadmap now. We know that there is a lot of interest from customers such as NEXTracker in different international locations for instance. We'll continue to monitor that, we're actually going through that process internally now to really flush out next couple of years, in terms of our product roadmap based on that feedback receiving from customers.

Okay. Thanks, Tim. Thank, Dan.

You're welcome.

We'll next go to Colin Rusch, Oppenheimer.

Thanks so much. Guys, with the B-TRAN are you seeing incremental interest from potential licenses on that technology and how quickly do you think maybe the covert one of those new approach this testing process?

We're seeing advantages some people to want devices that's probably what we see first, when people are looking at what are their alternatives for switches for things like metrics converter or people that are looking at what are their alternatives for switches for things like metrics converter or people that look at [why didn't get] [ph] material devices is being too expensive, we're not commercially viable yet. It's really more of the application side that we're hearing interest from - we know that based on some discussion we have with other semiconductor players that it's really much a case of all, look, see our data looks like. So we want to be able to have customers with sample devices with, we want to be able to have test data, because we think that really drives a more interesting discussion with the potential licenses for the device itself. And it's really going to be a function of having that real tests that we've got the proof-of-concept, we've shown you the key parameters like breakdown voltage, switching speed those sort of things, it's going to take us some time to get that data to get in front of them. So I think, it's going to be things - best things focused on getting both the simplified version, we can get off the sample and continue to develop our work on the full feature device here, because that really shows the magnitude of the performance improvement that's possible with the technology.

Okay. That's clearly helpful. And then, just in terms of the gross margin improvement, I mean, you've done of a low work around the product design. How much of that that products margin was really driven by the design process you've gone through?

So on that front, we did also drop the selling price of the units, in terms of overall margin contribution to actually probably pretty similar to where we were a couple of years ago their legacy product, I think, when you're talking about revenues that are modest as ours were here in the third quarter. What it really shows to be a positive margin and it's very well manufacturing over in, right. Our costs outside of the direct cost we pay CN [ph] pretty minimum. So what that will really translate is, as we skill a lot of pretty rapid increase in our gross margins just needed the fact that doesn't have to cover overhead that all drops to the gross profit line.

All right. Thanks so much, guys.

[Operator Instructions] And we'll go to Carter Driscoll, FBR Capital Markets.

Good afternoon, guys.

Hi, Carter.

How are you doing?

We're - maybe, Dan, for SGIP, so many positive directionally, but maybe disappointing in terms of what promise was program. You characterized, whether you have any expectations of program really facilitates promise and is the fundamental problem still just to the design program, where there is no user-listed date? And then, I can follow-up.

I think the program itself really have some design issues, and real hit on the issue. Is there's nothing the drive, the urgency to use those dollars before they become loss. Some of the player that we work with, particularly those that are really focusing on getting third-party financing, we're seeing increasingly, they're not even going to put projects in, because the view that we're getting from some folks is the time, the energy, the reporting, the process, just isn't worth it. So think there is an opportunity for the regulators in California to really look at how would they make that program more meaningful and actually drive more adoption than the way the thing is currently designed.

Do you anticipate that is in fact the second reboot, potentially could occur?

To answer you, I don't know. The level of frustration with that program is so high it could possibly happen. But I think what people are actually doing is rather than waiting for the state to go do something, they're just finding out the ways to get their projects done.

Fair enough. Could you address the Bill Alexander and the termination, whether you have an internal replacement or whether you look at externally to replace as well.

Yeah, in both case, we're really disappointed to find that, while Bill was an officer and a director he had actually pledged shares to secure a personal loan. And that is actually an explicit violation of both our insider trading policy and code of conduct. And it actually resulted in him being in violation of terms of his employment agreement. So from a governance perspective, we didn't really have much choice and we really got to make sure that we're doing the things that are appropriate for good governance. And Bill's role, I mean, it's been diminishing over time. I mean, he was a director and he was an officer. And he's come out of those roles, nobody reports to him or reported to him. The technical team was run by our VP of Engineering, Uwe Uhmeyer. So Bill was really a technical consultant for a lot of the things that are going on as it relates to the PPSA technology and B-TRAN. The B-TRAN work is being done by third-parties, the semiconductor fabricators, the packaging houses are - are the co-inventor of the B-TRAN, Dr. Richard Blanchard, who's actually owned some of the originally patents, still very much engaged with the company and is under an agreement with us. So we had that expertise that's still available to us. And on the simplified version of the B-TRAN, Bill actually wasn't involved in it at all. It's all been done by third-party. So it's disappointing…

From a product development perspective you don't see any negative consequences from this termination?

No, we don't. I mean, the engineering team is really picking up what's been going on with the products for quite some time now. And they're often running. The things that we did on the new form-factor for the products, driving major cost reductions, those are really done by the core engineering team that's here. Bill, like I say, he is a consultant if they run into technical questions, but he wasn't leading or driving any of those activities.

Okay, if you had to - I mean, this might be a bit difficult question and answer. But if you had to guesstimate what kind of the installed cost, let's say for a solar-plus-storage project would be today, chose a size or in the size, and again I really morph it. What do you think the installed cost would be today for a NX Fusion Plus?

Boy, I actually know what the answer is. I don't think the NEXTracker folks would appreciate me say that.

I had to make an attempt. I appreciate it, guys. Thanks a lot.

That's it. All right.

We'll go next to Craig Irwin, Roth Capital Partners.

Hi, first I need to apologize for my technical difficulties earlier. So I just - I wanted to avoid the inconvenience of things like that. So I apologize.

No problem, Irwin.

So, I'm sure, most of the questions have been asked. But what I did have on mind is NEXTracker. And while we were visiting with them at SPI, they indicated, people in the booth indicated that there is a 5-megawatt order that goes out starting at the beginning of this year and is implemented next year, where it is expected that Ideal Power will participate on this order. But they were not able to clarify to me sort of what the terms were or who is going to manufacture the product, so if this is a license field or a direct commercial sale. So I just - that's my information. I don't know what you're able to confirm or not confirm. But can you maybe say if you have an MOU around a specific order for NEXTracker? Do you have a component of backlog related to material project from NEXTracker? And would you expect something like that if you don't already have it in hand to be delivered before you start commercial implementation.

We can't really talk much to specific opportunities that are in their pipeline. We do not have that order that you were talking to them about. They do not have that order yet. We are eager to see them get their first significant order in place. Anything that they want to do certainly for delivery in the first half of 2018 will be product that we will provide, because the license of Flextronics, even if they will try and go implement it tomorrow it takes a good six months to bring a contract manufacturer onboard. So would need to actually get product from us. So we're all really eagerly waiting them getting their first firm order closed. And I know that like I mentioned earlier, they've got a lot of pressure to get that done as well.

Excellent. Well, we've got our fingers crossed and congratulations on the continued progress.

Thanks, Craig.

And there are no additional questions at this time. I would now like to turn the call over to Dan Brdar, Chief Executive Officer for any additional or closing remarks.

Okay, I just want to thank everybody for joining us today on the call. And we're eager to get a couple of these things that we've all been eagerly waiting for us to cross the finish line. It's certainly time to see some of these relationships begin to produce and we appreciate your patience. Thank you very much everybody.

And that does conclude today's conference call. We thank you all for joining us.