Matt Hayden - Chairman, MZ North America Dan Brdar - Chairman and Chief Executive Officer Tim Burns - Chief Financial Officer.

Philip Shen - ROTH Capital Partners Eric Stine - Craig-Hallum Colin Rusch - Northland Capital Markets. Joe Pratt - Stifel Nicolaus Don McKiernan - Landolt Securities.

Good day, and welcome to the Ideal Power Inc. First Quarter 2015 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Matt Hayden with MZ Group. Please go ahead..

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 2015 first quarter results call. Your hosts for today are Mr. Dan Brdar, Chairman and CEO; as well as Mr. Tim Burns, the Chief Financial Officer.

Dan will provide a business update, including recent customer announcements, commercial orders and product updates, while Tim will discuss the financial results. A press release detailing the earnings crossed the wire this afternoon at 4 P.M. Eastern and is also available in the company’s website at idealpower.com.

Following management’s prepared comments, we will open the floor to your questions for those dialing in and also to those participants joining via webcast. You can see the question prompt button on your webcast screen.

Before we begin the formal presentation, I’d like to remind everyone that some 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 than those described in the conference call.

Please refer to the company’s SEC filings for a list of all associated risks. In addition, we encourage you to visit the company’s website for supporting company and industry information as we update it frequently. Thank you very much. At this time, I’d like to turn the floor over to you Dan..

Thank you, Matt, and thanks, everyone, for joining us today. This has been probably two months since our last call. I’ll recap briefly what's transpired since the beginning of the year and discuss a few significant deals which were recently announced and could have a meaningful impact on our business during the coming year.

After that, I'll turn the call over to our Chief Financial Officer, Tim Burns, to review the quarterly financials. Following Tim’s review with the financial data, I'll provide our outlook for the balance of 2015 and provide some metrics, so you can measure our progress.

During our last call, we indicated we felt the company and our business was at inflection point. We’re very pleased to report $1.2 million in product revenue for the first quarter, which equaled our total product revenue for all of 2014. In addition, we guided the gross margins would turn positive in the first half of 2015.

For the first quarter of this year, our gross margins were positive 15% compared to negative 22% for all of 2014, a 37 percentage point swing. This demonstrates both the scalability of our business model and the capital efficient nature of our company. Tim will talk more about revenue and product margins when he reviews the financials.

Before I dive into the specifics, I'd like to summarize our strategy and the disruptive nature of our technology platform for the benefit of our new shareholders. Ideal Power has developed and patented a completely new approach to power conversion.

Our Power Packet Switching Architecture is a technology platform that has broad applicability to many types of power conversion markets. Ideal Power’s PPSA technology offers the ability to perform power conversion with transformer-less isolation.

In practical terms, this means our PPSA technology can provide power conversion with electrical isolation that is one-fifth the size and weight of a conventional power converter at higher efficiency, higher reliability and at lower cost than conventional power conversion systems.

In my 25 years in the power generation business, I've never seen a technology that can positively move efficiency, cost and reliability at the same time. And this is the reason I'm so excited to be part of the team that’s building this company.

Power conversion is a large addressable market, comprised of both, old line and new dynamic applications, more than $50 billion per year by published estimates, projected to grow $70 billion a year by 2020.

Power conversion is used not just in energy storage, solar and other renewable energy markets, but also on automobiles, air-conditioning systems, computers and many applications and devices we rely on every day. As I have frequently articulated since going public, as a small company with a new technology, we must be focused.

We will focus on new fast growing markets without entrench players where we can prove ourselves with best-in-class differentiated products while driving meaningful revenue growth for the company.

Building on that success, we can then scale into larger, more mature market verticals that are typically growing more slowly and have entrenched players with established brands.

Due to the rapidly declining cost of batteries and increasing utility demand charges for commercial and industrial customers and the growing use of microgrids, there is a significant macro trend associated with energy storage. These are new markets without entrenched players and offering high growth rates, expected to be in excess of 100% per year.

As a result, we've chosen to focus on stand-alone storage applications, the combination of solar and storage, as these technologies increasingly are deployed together, and microgrid applications. Thus far we've been working with the most active players in the energy storage space.

Their sales pipeline and project installations are growing and this has been reflected through increasing orders for Ideal Power products. To-date, we've taken orders in this vertical from numerous customers with the greatest number of units going to the leading system integrators; CODA Energy, Green Charge Networks and Sharp.

Each company has created entire storage solution comprised of batteries, system software and controls and our power converters. They evaluate the customer’s energy bills, determine how much peak demand you should be eliminated to get the desired return on investment and then size the system accordingly.

These systems are being built using single or multiple 30 kilowatts and soon our 125 kilowatt unit to meet specific storage capacity. The system integrators also frequently bring customer financing and/or performance-based contracts enabling them to offer end-users money-down guaranteed savings storage solution.

This is expediting the sales cycle, lowering barriers to entry and providing good returns for both the financers and the customers. In California, where subsidies are in place, paybacks can be as low as 3.5 years, while in other markets like New York, four to five years is the norm. This is more favorable than solar.

And so one can imagine, if solar has been this successful, how far will energy storage go. Our focus on energy storage applications as our first market is seeing real validation in 2015.

Not only are our existing customers and system integrators partners like Sharp, CODA Energy and Green Charge Networks growing their businesses, but we’re seeing several new large and well-capitalized solar companies entering this space. SunEdison, SolarCity, SunPower and others, are bringing their well-developed solar business models to storage.

This confirms what we've been saying for quite sometime that the conversion to solar and storage is increasingly inevitable as these two complementary technologies become more and more economical.

While it's unlikely that any of these large entrants will rely on a single source of supply, we are engaged with many new entrants, either directly, or with our alliance partners, to bring them world-class solutions that utilize the unique benefits of our PPSA technology.

Being able to engage and develop relationships with these new entrants to the storage space is aided by our existing and productive relationships with strong global brands like Sharp and Boeing. Working with them helps bring visibility to Ideal Power and our technology, reinforcing our credibility in the market.

The new partners we’re working with, know and understand that global companies will not risk their brand image without extensive due diligence on us as a company and the capability and performance of our products. This is also helping us shorten the cycle of our partnering efforts.

Several of the largest solar providers coming into the storage market have indicated to us their desire to find and purchase, an integrated storage solution, rather than becoming system integrators themselves.

We think this is a sound strategy that lets them leverage their financing capability, existing customer base, sales and service infrastructure and performance contract models, without having to take on the added cost and complexity of being a system integrator.

As we discussed on the last call, we recently engaged with a major global electrical products distributor named Rexel and its subsidiary Gexpro, which is an evolution of the former GE Supply Company. With a network of 2,300 branches in 38 countries, they provide a massive global footprint to provide products and services to millions of customers.

I suggested that shareholders should expect further news on the evolution of this relationship, and I'm happy to report a major development. Gexpro’s goal is to enable solar providers to seamlessly enter the storage market by providing an integrated state-of-the-art storage system.

Gexpro significantly advanced this initiative by announcing it would be launching a fully-integrated energy storage solution, utilizing LG batteries, Ideal Power converters and Geli software. We are very excited that Gexpro has selected Ideal Power to be at the heart of this system. This builds on our existing alliances with both, Gexpro and LG Chem.

This announcement will now a multi-billion-dollar equipment provider to supply an integrated guaranteed storage system to the large solar companies entering the market, as well supply the smaller regional and local installers with our ready solution. This move gets us well positioned to grow alongside a global powerhouse.

The first integrated system is under testing and validation in our lab and the system will be formally launched by Gexpro later this month at the Energy Storage Association's Annual Conference in Dallas, Texas. Several people have observed that we are establishing relationships with companies that have global reach. It's an important observation.

Like many new energy technologies, the market and regulatory environment in developed countries often drives the early adoption of new technologies, but as their costs decline, global opportunities are created. Storage is no different. As battery costs and overall system costs decline, the global addressable market becomes very large.

We’re still at the very early stages of the storage market, but global opportunities are already opening and we’re working to position ourselves for participation.

Our existing partnerships and alliances such as Gexpro, Sharp and LG Chem have global reach, but we'll be adding several other partners, both large and small companies, that bring unique market access and expand our geographic reach. Later this month, we’ll be seeking one of our first 125 kilowatt units to China.

The unit was purchased by Powin Energy, is now owned by Shunfeng Photovoltaic International. Some of you may know Shunfeng as the company that acquired one of the world's largest solar providers Suntech. Through relationships with their parent-company, Powin Energy is very focused on becoming an early leader in the Chinese storage market.

They are very knowledgeable about our technology, and as a result of projects they've done in the U.S., we’re very pleased to be part of the growth strategy. We'll be talking more about our activities together in future calls. In addition to entering China, we’re also expanding our presence in North America.

We just signed a relationship with ONEnergy, which provides a growth conduit to energy source storage in the Canadian market. ONEnergy is a Toronto Ontario-based retailer of electricity and natural gas, with customers in Canada, and in Northeastern U.S.

ONEnergy has a strong focus on energy efficiency and renewables and is rolling out great resilient energy storage products for their growing customer base.

Through our existing and new strategic alliances in the pipeline, we're starting to get more visibility into our partners’ plans for launching energy storage in the markets outside of the U.S., particularly in Asia. We'll be providing more announcements and color on the expansion of our products into these geographies later this year.

In preparation for entering markets outside of the U.S., we’ve expanded the flexibility and capability of our products to accommodate the diverse mix of applications and market requirements and cater it around the world.

In addition to the great resilient and microgrid capabilities, we also made our product software configurable for voltage and frequency. In conventional power converters, the hardware for a 50 hertz unit for markets like Asia is different from the hardware for 60 hertz unit for markets like the U.S.

Due to the inherent flexibility of our PPSA technology, the market specific changes, such as voltage and frequency can be accommodated through the software that resides on the unit. This allows us to make the same product for all markets and aggregate volume across many markets and applications.

This will help us rapidly drive down the cost curve and reduce the time and cost intensive process of developing, testing, certifying and supporting many different product configurations for each application and market.

This new version of the product is a ramping up certification testing this week at our third-party testing agency and the UL certification will be issued and announced in a few weeks.

This high degree of product flexibility gives our global partners the ability to accommodate various applications and geographies using the same product, something that can't be done with conventional power converters.

This flexibility, in addition to our small size and weight, low-noise and high-efficiency continues to differentiate our products from other power conversion technologies.

Those declining battery costs are a key enabler for the market, part of our strategy has been to seek out and develop strong strategic relationships with the battery suppliers we see being well positioned to capture this burgeoning market opportunity.

Since our power conversion systems maximize the performance of their batteries, battery companies are logical partners and collaborators. On March 19, we announced a multi-year alliance with LG Chem, one of the largest global producers of lithium-ion battery.

This agreement creates a joint marketing initiative aimed at offering a paired and tested product combination, promotes commercial demand charge reduction and microgrid application.

System integrators have continued to voice their desire for a paired set of hardware that have been sized and matched to optimize system performance for specific applications. LG Chem is well respected global brand with a strong reputation and a leading position in battery energy storage development.

LG Chem, deployed largest single installation of battery storage in the U.S., a 32 megawatt hour project in California for Southern California Edison. LG Chem is also a leader in the supply of batteries for electric vehicles with customers such as Audi, Mercedes, General Motors, Ford and others.

Winning this agreement required extensive testing to confirm that our technology is the most sufficient and have the smallest print in addition to the highest degree of flexibility. As a result of successful testing and collaboration, we’re now engaged in joint marketing activities with LG to system integrators in the U.S. and Canada.

We expect to continue to build on this relationship for other vertical markets and geographies. In April, we announced that, Aquion, the maker of aqueous hybrid-ion batteries had tested and validated Ideal Power’s PPSA based products for use with their batteries.

Aquion’s low-cost, sustainable saltwater batteries are optimized for storing energy for residential off-grid and microgrid applications. The reason they chose Ideal Power was so their customers can optimize their system performance with true system flexibility.

Aquion’s battery chemistry is a safe, sustainable and cost-effective energy storage solution for both, microgrid and off-grid application. This relationship provides another conduit for both. Aquion has deployed over five megawatt hours of their new battery technology and projects around the globe.

They have the aggressive growth and cost targets to make their technology an attractive alternative for their target markets. It's worth noting that the Aquion relationship had similarities to our customer, Eos, in that both companies are focused on bringing a low-cost battery product using novel chemistries to market.

This provides further confirmation that Ideal Power’s PPSA technology is battery agnostic. We anticipate having additional partnerships and alliances with leading battery suppliers in the coming months.

As we've discussed, intellectual property is a key asset, and is essential to block potential competitors from capitalizing on our development efforts. The depth and breadth of our patent strategy is essential to protecting our technology and enabling broad scale commercialization. To-date we had 20 patents issued in the U.S.

and four issued internationally, covering our core technology. In addition, we now have close to 100 pending patent applications, a couple of broad range of technology advances, production techniques, control algorithms and applications of our technology.

While the number of issued and pending patents is important, what is more important is the strength of that patent in portfolio which will continue to grow as increasingly focused on building an international patent estate, that provides broad and the coverage for our technology, in addition to the many addressable markets we may choose to pursue.

As many of you know, a key element of our technology roadmap is the development of bi-directional switches for our PPSA technology.

For new investors, our bi-directional switch development is targeted for implementation in our next generation power converters and are expected to produce substantial competitive advantages that should enable long-term cost and performance leadership for our products.

Bi-directional switches are silicon-based devices that are expected to enable us to increase our product efficiency from 96.5% to an excess of 98%. The result of this improvement will allow us to double our power density. And in fact, we’ll be able to produce close to 60 kilowatts from the same small size box that today can produce 30 kilowatt.

This will produce a significant reduction in the cost of our products, in addition to the operating benefits of higher efficiency. Also each bi-directional switch will take the place of what is done today with four conventional devices such as IGBTs and diodes.

This reduces the number of points of potential failure and results in higher inherent reliability. The significant reduction in size and cost and corresponding increase in efficiency and reliability opens up several new multibillion-dollar mature markets for our technology that currently rely on conventional power conversion technologies.

Our next step in the development process is to fabricate and test the new switches to fully characterize the switch performance in our engineering lab. This testing will provide validation of the simulation work and likely identify some additional improvements for the next generation devices.

Today we've been very pleased with the predictive performance of the switches and the manufacturing process development work of supplier to produce the switches based on our design.

We’re excited about the potential this development activity represents for us, and we'll be announcing the results for the bi-directional switch testing later this year, as well as our plans for commercialization. We'll update you as developments occur.

We also anticipate several new patents to issue related to our development efforts on bi-directional switches. We recently received notice of allowance from the U.S. patent office on several key patents related to our switch development and we’ll be making a formal announcement in the coming weeks, once the patents are issued.

Our initial 125 kilowatt units are built and being tested, as we speak, with our first shipment of uncertified products going to our launch customer, CODA, later this month. Immediately following that, units will begin shipping to Powin Energy, Eos and others interested in evaluating and deploying our new larger output product.

Going after larger projects, we’ll open up meaningful growth opportunities and new customer and partnering opportunities. Our initial product and production focus will be on our two-port 125 kilowatt product, followed by the three-port version of the product.

Our UL certification testing is on track and scheduled for this summer with the actual receipt of the product certification coming a few weeks after the completion of test [ph].

Due to the commonality of our products, we have a high degree of confidence in completing the certification of the two-port 125 kilowatt products on time and to begin accepting orders for delivery of certified units later this year. In addition to energy storage, we are targeting the high-growth multi-grid opportunity.

The declining cost of batteries has now enabled them to be used in conjunction with, and often in place of diesel gensets. The high cost of fuel challenges, delivering fuel to many locations around the world and the poor power quality associated with gensets has made this market segment right for innovation.

One of the great advantages of our technology is that we are input agnostic. We can work with any type of battery chemistry and can incorporate multiple generation sources simultaneously, such as solar, wind and diesel engines and make them all work together seamlessly and efficiently.

We estimate that there are approximately one billion people globally without access to a power grid, another billion dependent on diesel generators for electricity. So a large market exists for providing superior of-grid solution, integrating solar, storage and diesel generators.

For many applications, these systems can have a two-year financial payback by dramatically reducing the amount of diesel fuel use for power generation.

The market for commercial solar and energy storage and the market for off-grid, microgrids using solar and energy storage are both in the early stage that are forecast to roughly double annually for the next several years, creating a new power convertible market of almost $1 billion by 2018.

We’re engaged with several companies targeting the microgrid market. We'll be providing more information on our partnering activities for microgrids in future calls. Before I provide a look at what’s pending for 2015, I want to turn the floor over to our CFO, Tim Burns, to discuss our financial results.

Tim?.

Thank you, Dan. I will run through the first quarter financial results. Total revenue for the first quarter, which consisted entirely of product revenues, was $1.2 million. Our first quarter revenue was almost all from sales of our two-port 30 kilowatt converted product.

We previously communicated that we saw that the first quarter would be an inflection point for our business. This is evident in our revenue growth.

Our first quarter revenue equaled all of our product revenue for 2014, was over 10x our product revenue in the first quarter of 2014 and was sequentially more than 3x our product revenue from the fourth quarter of last. Total cost of revenue was $1 million yielding gross margins of positive 15%.

The positive gross margins this quarter show that even at relatively low volumes, we have a business model with significant leverage. Operating expenses were $2.4 million, yielding a net loss of $2.2 million.

Research and development expenses increased significantly to $1 million from $300,000 in Q1 of last year as a result of our investments in bi-directional power switch development, as well as product development activities.

SG&A increased by approximately $370,000, largely as a result of non-cash items including higher stock compensation expense, as well as one-time severance expenses. As a reference point, in December 2014, the $2.5 million Department of Energy ARPA-E grant was fully funded.

So we will not have grant revenue or grant research and development costs for that program during 2015. In addition, we expect higher R&D spending in 2015, as we are now self-funding these efforts. We ended March 31 with a backlog of $1.9 million compared of a backlog of $2 million on December 31.

This was mainly timing issues we received initial volume orders from our larger customers in the fourth quarter of 2014. As these customers placed their next volume orders in our new alliance season agreements translate into larger customer orders, this will translate into growing backlog.

As a general rule, backlog will be converted into revenue within six months, although some will be much quicker.

And as another rule of thumb, when we drop an order to our manufacturer, units will be produced and available for shipment within 90 days for larger orders and potentially shorter timeframes for smaller orders, as we maintain a minimum level of stock on hand.

Further our payment terms to customers and as our collection of receivables is closely aligned with our payment terms to our contract manufacturer, thus meaning the most orders will be self-financing. We saw this in the first quarter as working capital timing was favorable despite the strong revenue growth in the quarter.

We currently have ample capacity manufactured and we'd estimate the product shipments for the balance of 2015. On March 31, our balance sheet had just under $6.2 million in cash and cash equivalents and no debt. This is sufficient to meet our strategic plan for 2015.

In addition, we have a federal NOL in excess of $15 million, which will help shield us from income taxes as we become profitable.

At March 31, we had just under 7.1 million shares of common stock outstanding and just over 10 million shares outstanding on a fully diluted basis, which includes approximately 1.6 million warrants and 1.4 million options outstanding.

We expect our revenue over the next few months to consist primarily of sales of our 30 kilowatt product, including both the two-port and three-port versions of this product.

Upon UL certification of our two-port 125 kilowatt product in late summer, we expect to shipping our product mix, with that product contribute significantly to our revenue and revenue growth for the balance of the year. Our gross margins will be impacted by our product mix.

And on a quarter-over-quarter basis, we will see some variability in gross margins related to both changes in revenue, as well as cost to commercialize and scale new products. I will now turn it back over to Dan.

Dan?.

Thanks Tim. We'll continue in the remainder of 2015 with the momentum gained during the first quarter. Our existing customers are successfully ramping up their businesses. We're focused on supporting their success by delivering innovating flexible power conversion products.

We’re adding additional world-class partners and channels to market with global reach, such as Gexpro and LG Chem. We expect to have additional relationships announced each quarter as this market expands rapidly.

These new partnerships will be instrumental in building our revenue for the second half of 2015, and in particular, to keep our growth going through 2016. As our business ramps further, we're looking for further improvement in gross margins with a target of the mid-30s.

Accompanying this will of course be a growth in our top line with an increasing amount of our revenue coming from a new 125 kilowatt product family. In order to protect our technology and build on the strength of our intellectual property, we continue to aggressively pursue patents around our core technology and its application.

As I mentioned previously, with close to 100 new patent applications pending in the patent office, we'll see our domestic and international patent portfolio grow significantly to broaden our global patent coverage for the PPSA technology and its use.

The next generation of our PPSA technology continues to make good progress, and we’re pleased with the developments on the bi-directional switch development, with testing slated for our engineering labs later this year.

We'll be making announcements about their performance in our commercialization plans as part of our - maintaining our long-term competitive advantages and efficiency, performance, cost and reliability, and to keep our products at the leading edge in the market.

We'll also be making some announcements in the near-term regarding some key patents on our bi-directional switch development that will be fundamental to protecting the intellectual property of our next generation of products. As we progress through 2015, we’re well positioned to execute our business plan.

You'll be able to readily measure our progress this year by our growing annual revenue, new products, new customers and channels to market, new applications and geographies for our products, significant expansion of our IP portfolio and a next generation of technology that will enable us to maintain a leadership position.

We’ll participate in late May at both the Craig-Hallum Institutional Investor Conference in Minneapolis and the Cowen Technology Media and Telecom Conference in New York City. In addition, we are pleased to announce that Craig-Hallum picked up coverage of Ideal Power. We'll plan to host additional meetings around these events.

If you have an interest in meeting, please confirm a time with Matt Hayden from MZ Group. At this time I'd like to open up the call for questions.

Operator?.

Thank you. [Operator Instructions] We'll pause for just a moment to allow everyone an opportunity for signal for questions. And our first question comes from Philip Shen with ROTH Capital Partners..

Hi guys. Congrats on the nice quarter, especially with positive gross margins..

Thank you..

It sounds like you have a nice series of future announcements coming out on to play which is nice.

As you guys are announcing all these wins with major companies out there, can you talk to us about how the competitive landscape might be evolving? Are you seeing any new entrants of competitors in the marketplace and talk to us about your leadership on that score?.

Yes, we are seeing several potential entrants to the field. Some of them are - kind of figure out that strategy as they go. We had some that approached us that wanted to see whether they could white label a product. Some of the folks that we thought would be competitors on the power conversion space are kind of taking a different route.

So I think 2015 is going to be a very interesting year in seeing not just who comes into the space, but what’s the strategy that they used to come into differentiate themselves. We even see it with the battery companies that are out there. The battery companies have learned a lot from the solar space.

They've seen how - the panels were the first thing that got commoditized and they’re very sensitive to that issue. So they are looking at how do they get a differentiated offering versus the other battery companies. That’s why we see companies like LG Chem and Aquion and others, wanting to figure out how to make our products work together.

So I think ‘15 is going to be an very interesting year. But I think it's too early and we’ll see who some of the key players are as we get a little further on, and what their actual strategy is, because there is a lot of noise in this space, but who is actually going to be executing is yet to unfold..

Great. Thanks Dan. In terms of - you guys have - you talked about some international markets and you have a bunch of end-market that you're addressing as well.

If you could kind of map out for 2015 and 2016 for example what the end market mix of the revenues might look like? I know most of its likely going to be commercial peak shaving especially in ‘15, but how does that shift in from ‘15 to ‘16 as perhaps microgrid starts to take-off in another potential end-markets?.

Yes. I think for ‘15, the commercial industrial demand charge reduction is still going to be the lion’s share of that market. You'll start to see some of the microgrid revenue come in the second of ‘15. I think as we look to ‘16, you'll see both, more on the microgrid side, but still dominated by the demand reduction space.

You'll start to see the size of the project that we’re doing likely get bigger, as the 125 is being used probably more frequently than the 30, and we’ve seen multiple 125s used together.

You’ll start to see in ‘16 more international revenue for us still going to be largely domestic here - the early units that we’re going to ship to places like China and Canada, but ‘16 it really started to become more of a mix of international and U.S.

And then I think probably as read out to ‘17 and battery prices have come down even more significantly, we’ll actually come out with some other product based on where the economics start to work, whether that’s residential or whether it's something larger for the utility scale..

So in 2016, what kind of international revenue mix could we see, as much as 30%, or what you see there?.

I think it’s really a function of how fast some of those markets grow. It could be as much as 30%. I would expect it to probably be little less than that..

Okay, great. So shifting over to the backlog. I know there is a bit of a timing situation there as backlog was mostly flat quarter-on-quarter.

But since the quarter ended, can you talk to us about how backlog has changed?.

So Phil, we started reporting on backlog as of quarter-end last year, and we’d expect to continue to do so. As you had mentioned and I guess I had mentioned in my prepared comments, backlog is impacted by timing and it can change as often as daily, as we are seeing new orders and we ship products.

So at this point, we just think it makes more sense to have consistent quarter-end backlog reporting and we’ll continue to do that going forward, but we're not going to, each time we hop on a call update on where we actually stand in terms of backlog..

Thanks, Tim. One more for me in terms of bit of housekeeping question and I'll jump back in queue. In terms of R&D, we saw a bit of a spike up this quarter.

How should we expect R&D levels trend as we go through the year?.

So I think Q1 is a good indicator of what that trend will be. We had - a significant part of that job was related to the advanced power switch development and we expect that continued throughout the year. As I noted in the prepared comments, that was 90% funded by ARPA-E in 2014, so that's incremental to the expense to us.

And we’re also still spending behind some of the products, so we'll get certified later in the year, such as the 125 kilowatt two-port. So we are investing intentionally pretty heavily in R&D this year..

Great. Thanks Tim. Thank you, Dan, as well. I'll jump back in queue..

Thanks Phil..

Thank you. Our next question comes from Eric Stine with Craig-Hallum..

Hi, Dan. Hi, Tim. Nice quarter..

Thank you..

Maybe just on the partner outlook, clearly there has been a lot of activity picking up as of late and your technology is gaining quite a bit of traction.

Do you have a - give us thought on what the right partner number is, or potentially what 2015 looks like exiting the year? And then just could you talk about the type of visibility that gives you into what growth looks like going forward?.

As we look at some of the markets we want to go to, it’s bit of a mixed in terms of the partners. We have some fairly big players that we're working with, that we’re going to be signing agreements with.

We think they are important because of the potential work out [ph] plan that stays and also because they discontinued to give us validation in the marketplace, by going through that process and being associated with them.

There are some that are smaller that we’re going to add because they are fit and particular niches, whether it's geographies that they are uniquely positioned in or certain key markets that they go after. So I think you're going to see us announce several more and it will be mix of both large and small.

For us, there is not a magic number in terms of what's the right ones. It's making sure that we have a good mix in terms of system integrators, battery partners, project developers and also good spread geographically.

One of the things that we have noticed as this market has started to unfold is, because storage-related applications are relatively new, it’s not clear yet who the real winners are going to be.

And as we've engaged with others, people who you would think would be a pretty big, ultimately when they come into this place have shared with us what their business model is and it's part of what has driven us to do some things like what we did with Gexpro, where some of these folks really want to buy a complete system because the financers at the end of the day, they are not necessarily technology folks.

So I think’15 is going to be an interesting year as we see new players come in and they kind of sort out how they are all going to compete and differentiate themselves, relative to one another. And we're going to try and win as many of those key producing relationships as we possibly can..

Got it. And I know that - I mean product revenues big uptick here, but safe to say that you're barely touching the surface with these partners. This is only just starting see that impacts..

Yes, sure. Because the partners - even the folks who have already announced that are in this space, they’re all just getting started too. So while we’re excited to see the business model turn already, the real growth for things related to storage still have us..

Okay. Maybe just turning to the bi-directional switch.

Once that’s commercialized and you start looking at these other markets, do you think - how do view the timing of getting into those markets? Is it faster because those are more mature markets, or is it something where you need to educate the market on PPSA and you can apply it to all these applications with the software tweaks?.

Well, I think the first thing will be for us to take the data that comes from that testing, put it together with the market assessments that we are doing on the various spaces and figure out what's the first one that we are going to target, because there is too many segments to go after.

So what we'll do is we'll figure out which is the one that we're going to target. We've got a pretty good idea of what that is already.

And then we had to go to the players in that market with data, because in the mature markets, there is not necessarily an interest in a technology if you can't show that you’ve actually operated the data in that application that have real-world data of why it would be a compelling answer for them.

We're going to actually do our first demonstration of the PPSA technology outside of the renewable energy field later this year. We've got the demonstrations that have already identified, the agreements are in place. So later this summer we’ll be installing our PPSA technology.

And that particular market is one that would be a very good application for the bi-directional switches in the next generation. So we are actually going to start some of those discussions even before the bi-directional switch is verbally commercialized..

Okay. I guess to be continued on that. And then lastly, did you update on the grid resilient products, what the reception has been in the market? And can you just remind me of the specific attributes that lend to microgrid applications? Thanks a lot..

Yes. It's really providing products that have the ability to deal with places where you might have unstable grids, where you might have a lot of fluctuations in terms of the voltage. You basically have to have the ability to disconnect from the grid itself in case it goes away and still provide power to critical facilities.

So we've added that capability. That's part of the products that are going through certification testing as we speak. So although we're shipping units as recently as last week that are uncertified that has that capability that actual certified version of that product is eminent. The testing for that is about done.

So we'll see the certification come out in a few weeks. There seems to be a growing interest in that space, because it's really not much different to the end-user to have the prior products versus the one that has the grid resilient capability in it.

So I think it's going to be increasing part of our revenue mix certainly as we get into the second half of ‘15 and for sure ‘16, because it's just a more flexible product. So I would expect that probably at some point our solar products are going to have that capability as part of our standard feature.

So to just give everybody more flexibility in terms of what they do with the product..

Okay. That’s great. Thanks guys..

Thanks Eric..

Thank you. [Operator Instructions] We move now to Colin Rusch with Northland Capital Markets..

Thanks guys.

Can you just remind us, how much revenue you think you can do with your current contract manufacturer, and where you are in your plans to migrate to someone that can handle a little bit quicker revenue ramp?.

The contract manufacturer we brought on last year has the ability to do about 500 of our 30 kilowatt units a month. They could probably go beyond that, if they wanted to invest capital.

But we think - it probably just would make more sense before we even get to that 500 a month to have a second contract manufacturer, just so we don't have a high volume single source of supply in case anything were to happen to their facility..

And what do you think happens to your supply chain management as you migrate towards a little bit bigger CM?.

In what respect?.

Just in terms of your cost reduction potential.

How much do you think you can get by moving things over and having them healthy with some of the purchasing?.

We think there is a lot can be done just purely as a result of volume whether it’s us doing ourselves or whether it is the contract manufacturer. If you look at the cost curve on products, this early part of that curve where volume is going from small numbers up to a few thousand units is pretty steep.

We think that over the next several years between what we are going to do from a supply chain standpoint, what volume can contribute, what we're going to do on just the engineering cost basis for the product from a design standpoint and an implementation of our bi-directional switches, we see a pretty clear path to do a 50% cost reduction from where we came into ‘15..

Great.

And then the 30%-plus gross margin level, where do you think you need to be from a revenue standpoint to get to that level?.

So it depends a lot on mix. So we're targeting 30% to 40%, and that's exclusive of any licensing revenue. But that's not something that we expect necessarily here in 2015. But it's not going to take with our model. It won't take huge volumes to get there as we scale, but we'll give further guidance later on, on that.

But it's not too far off but it's not a 2015 event [ph]..

Couple of [indiscernible] probably..

Yes..

Okay, perfect. And then one final one for me. Just with the UL testing for the 125 KW products.

When do you expect that to be fully complete?.

We think their testing will be complete in July and then it takes a few weeks after that for the actual paperwork for this year..

Okay, great. So we should be looking at August availability for that product, should everything stay on track..

August through September just depending how long - we don't really control how long it takes them to do their final reporting..

Okay. Perfect. Thanks a lot guys..

Yes, thank you..

[Operator Instructions] And we move now to Joe Pratt with Stifel..

Hi, I'm new to the game, so this question may be naïve.

But in your sales mix, what portion is getting done by your direct sales force versus your partnership, distributorship relationships?.

Most of everything we do is through our partners. We’re not out capturing any end-customers ourselves. We’d have to build a big sales team to be out trying to sell products. And at the end of the day, the spaces buying products today in the storage space for commercial and industrial customer, they typically want to buy a solution.

So they typically buy in from a system integrator like Sharp or Gexpro or Green Charge. So we're selling through those channels..

Okay that answers my question. Thank you..

Welcome..

And at this time, I'd like to turn the call to Mr. Tim Burns for any webcast questions..

We actually do not have any webcast questions..

Okay. We'll move next to Don McKiernan with Landolt Securities..

Thanks. Congrats on a great quarter. My question is concerning the residential opportunity, the recent announcement by Tesla moving into commercial and residential energy storage. It was rather intriguing.

And are you guys looking at the residential side? And also if you are, can the PPSA technology scale down that low and be an opportunity for you or not?.

Yes, our technology certainly scales down to that size. We actually looked at it a couple of times. We've actually been approached to make a residential product by some folks. Every time we go through the economics, though the numbers don't work. We think eventually it will be a pretty attractive market.

But battery costs have to be significantly lower for the residential markets to make sense, because they are not just a demand charge issue that you're mitigating there. I think it’s a good thing and an interesting thing that Tesla is coming into this space because they will certainly raise the visibility of storage as a solution.

And when the economics around residential makes sense, we’ll come out with a product and we’ll be up there either supplying them or competing with them. We're not sure what..

Okay. Thanks..

Thank you. This concludes today's question-and-answer session. Mr. Brdar, at this time I'd like to turn the conference back to you for any additional or closing remarks..

Okay.

Do we have any other questions that we have received from the test system?.

Sure. I'll cover a few of the questions that we received via e-mail prior to today. The first, in your Q4 call, you mentioned a new power conversion market of $1 billion by 2018 from microgrids. And to get to this market would be significantly larger than the commercial storage power conversion market.

Is the $1 billion estimate for inverters only, or is it the inverter portion some percentage of that $1 billion? Could you provide any color on percentage, and want percentage that market might Ideal Power capture or hope to capture?.

The $1 billion microgrid market in 2018 is for the entire microgrid ecosystem, not just the power converters. The power converter portion is about 20% of that number.

We can't speculate on what portion of that we are going to capture, but we are setting ourselves up both in terms of product capability and strategic alliances to establish a presence in that market as it emerges..

The next question. LG Chem announced a partnership in residential inverters with a small Canadian company called Eguana.

Does that affect the LG Chem-Ideal Power collaboration? Could you provide some color, if available?.

The announcement that LG Chem with Eguana really doesn’t have any effect on what we are doing with LG. LG is interested and having a solution in any potential market segment they can utilize their batteries.

Although we've been asked a couple of times to make a residential product, as I mentioned earlier, we’ve declined because we felt it’s just too early to spend the time and resources on residential storage.

The commercial and industrial customers have a real financial driver to adopt storage in markets like California and New York, where they’re subjected to demand charges that could be 50% of their bill or more. That same scenario doesn't exist in the residential market.

So as a result, there is no economic driver for homeowners today to spend several thousand dollars for residential system, unless they are living in a remote area, where there is may be not good sources of power or there are issues with the grid stability. If battery costs decline, we'll revisit the need for a residential product.

And if we choose to make one, we’ll work to actually displace Eguana from their LG Chem relationship, because we think we can bring them a higher-performing lower-cost better answer..

The next question.

As your Eos focused on utility scale storage and replacing the peaker plans [ph], was the Ideal Power announcement in February not relevant to that side of Eos business? Are Ideal Power converters competitive in the utility space?.

We are actually not currently producing a product specifically targeted the utility space. They tend to be very large in terms of their output rating.

With the introduction of our 125 kilowatt product build, we are seeing companies that are interested in using multiple 125 kilowatt watt units as part of 0.5 megawatt building block that could be used for large commercial and industrial applications and small utility installations.

As the utility space matures, we’ll assess if we feel it's a market where we should develop a product. We haven't specifically targeted utility space yet, since utility sales cycles tend to be very long and their rate of adoption of new technologies such as storage tend to be slow.

It's our view that the commercial and industrial markets will grow first, followed by utility and residential sectors as battery costs decline..

And the last e-mail question that we had received. There is a new high-power silicon carbide MOSFET from Cree, and they say it is better than a standard IGBT.

So just wondering if this new transistor device poses a threat to your next generation bi-directional IGBT?.

No, we actually don't believe it does. The silicon carbide MOSFET, it’s a very expensive device. And our device, bi-directional switches don't require the use of silicon carbide. So we think of silicon-based bi-directional switches will be more cost effective and provide better performance, particularly when implemented in our PPSA technology..

And that concludes the questions we receive via e-mail..

Well, I thank everybody for joining us on the call today. We think we've got plenty of exciting announcements coming up later in the year. And we hope that you will join us for our future calls, where we can brief you on our progress in the commercialization of our technology. Thank you everyone..

This does conclude today's presentation. We thank you for your participation..