Chris Tyson – Managing Director-MZ North America Dan Brdar – Chairman and Chief Executive Officer Tim Burns – Chief Financial Officer.

Craig Irwin – ROTH Capital Partners Colin Rusch – Oppenhemer Eric Stine – Craig-Hallum Jeff Grampp – Northland Capital Markets.

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

Thank you and good afternoon. I would like to thank you all for taking the time to join us for Ideal Power’s Second Quarter 2016 Conference call. Your hosts today are Mr. Dan Brdar, Chairman and CEO, as well as Mr. Tim Burns, the company’s Chief Financial Officer.

Dan will provide a business update, which will cover partner announcements, product updates, while Tim will discuss the financial results. A press release detailing these results crossed the wires this afternoon at 4 P.M. Eastern today and is available on the company’s website, idealpower.com.

Following management’s prepared comments, we will open the floor to questions for those of you who are dialing in for today’s call.

Before we begin the formal presentation, I would like to remind everyone that statements made on the call and webcast including those regarding future financial results and industry prospects are forward-looking and maybe subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the call.

Please refer to the company’s SEC filings for a list of associated risks and we would also refer you to the company’s website for more supporting industry information. At this time, I’d like to turn the call over to Dan Brdar. Dan, the floor is yours..

Thank you, Chris. Our Power Packet Switching Architecture or PPSA has several unique attributes that make it well-suited for a variety of power conversion applications.

PPSA provides electrical isolation without the use of bulky conventional transformers, resulting in products that are typically one fifth the size and weight of conventional power converters.

It’s also software-enabled so the same hardware can be used for different applications and geographies these electrical systems may require different voltages or frequencies, compared to the U.S. PPSA is also inherently a bi-directional device, making it well suited for applications involving energy storage that have charging and discharging cycles.

It also has low harmonics avoiding the electrical noise that is a challenge for conventional power converters for use in applications such as variable frequency drives for motors.

And lastly, it is also multi-port capable, which allows multiple sources of generation such as solar and batteries to use a single power converter instead of multiple devices. These attributes create multiple opportunities for us to commercialize our PPSA technology.

Our initial focus is on markets with a large macro driver supporting their development.

And in particular are enable by the rapidly declining cost of batteries where we can bring a highly differentiated and competitive power converter solution, these initial markets including standalone energy storage for demand charge management, the convergence of solar and storage and these batteries and microgrids displacing engines in diesel fuel.

Today, I’ll provide an update on the first two target markets for our PPSA technology and our progress in standalone energy storage and the combined use of solar and storage as we have exciting developments to announce in both areas. We’ll also touch briefly on the next two markets we’re addressing, microgrids and variable frequency drives.

And I’ll provide an update on our proprietary bi-directional switch development efforts.

Our initial target market, standalone energy storage, is anticipated to be a multi-billion dollar global market opportunity for 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 will crate and grow this market over the long-term.

While the opportunity for energy storage remains great, the fits and starts of new markets have made themselves evident for everyone in 2016. According to Greentech Media, California and utility scale PJM frequency regulation market in the Northeast, make up 92% of the domestic storage market today.

This year we saw a major disruption in the California storage market due to delays in the Self Generation Incentive Program funding. This delay in the SGIP program in California significantly impacted the energy storage industry and the deployment of systems by our partners and as a result our revenue for the first half of the year.

Despite the short-term impact in the market, the long-term changes for the SGIP program and the opportunity for energy storage in California are positive and will now enable approximately $70 million of new energy storage projects submitted in December 2016 proceedings to go forward.

And for the side note $276 million in total projects were submitted for the February SGIP allocation, which provides insight into the demand across California.

While the disruption in the SGIP was a major headwind for the energy storage industry during the first half of 2016, the good news is those sales did not go away but were just delayed with many of the projects now moving forward.

For those not familiar with the program, the SGIP provides $83 million per year of incentive funding through 2019 for behind-the-meter distributed energy projects in California.

Stem Incorporated, a leader in software-driven energy storage systems reportedly was able to monopolize the online commission process for the first two or three minutes of the live opening in the online bidding portal that was able to secure the first 56 applications in the February SGIP reservation process.

After negotiations with the California Public Utilities Commission, Stem released half of its awarded applications and the delays in the February SGIP process where resolved in early July. As a result, approximately $36 million of incentive funding allocated for $70 million of projects have now been approved.

And $35 million of additional incentive funds will be made available for additional projects in the coming months.

The resolution also included positive changes to the program going forward including 75% of funding is now dedicated to energy storage, making this program largely an energy storage program and less of a distributed generation program due to the high value energy storage brings to California’s generation infrastructure.

The program is moving to a continuous submittal process similar to the California Solar Initiative rather than once a year first-come first-serve approach.

And lastly, the program gives priority to storage systems used in combination with renewable energy which plays well for our multi-port converters and will move to a lottery-based system when the program is significantly oversubscribed.

We’re excited to announce that Stem who received approximately half of the February SGIP reservations, has selected Ideal Power as a key power converse supplier for their energy storage systems. In addition, we believe that more than 50% of the projects receiving SGIP funding will be utilizing Ideal Power products.

Our system integration partners have already begun to receive notices of funding awards for their projects from the SGIP program administrators, who will either see the system integrators begin to close projects with their end customers and see the market resume deploying systems.

While California is an important initial market, there are other domestic activities and markets opening up for energy storage as a result of both state and federal initiatives. For example, in New York, our new partner Stem was one of the winners in ConEd's Demand Response program.

In Massachusetts, earlier this week, the governor signed legislation requiring a statewide energy storage mandate and allowing distribution companies to own energy storage assets. The mandate requires utilities to procure a specified amount of energy storage by 2020. This is part of an ongoing statewide trend.

Greentech Media recently published a study showing that 19 states are expected to have attractive economic returns for energy storage in the next five years, directly attributable to the rapidly declining cost of batteries.

In Hawaii, our 30-kilowatt power conversion system was approved by Hawaiian Electric for its customer grid-supply and self-supply distributed resource programs. Later this year, we expect Hawaiian Electric to qualify our 125-kilowatt product, as well.

At the Federal level, Bipartisan Bill is known the Energy Storage Tax Incentive and Deployment Act were introduced House and Senate to bring the same type of investment tax credits for energy storage systems that have been instrumental in driving growth in the solar market.

The state and federal initiatives are complemented by the introduction of lower priced and more technically advanced batteries, the entry into the market of Fortune 500 companies, and an influx of capital investment and financing.

While battery costs have declined by 50% over the last few years, large plant increases in production capacity and technology improvements will continue to produce energy storage system cost and as a result increase the size of the addressable market.

For example, two of the largest suppliers to the market LG Chem and Samsung, are introducing higher performance battery offerings this year.

Pricing for these new battery systems including the batteries, racking and battery management systems is expected to be approximately 20% lower than battery systems sold last year and provide double the power density measured as the kilowatt hour second fit and rack.

On the system integration side, we’re seeing new Fortune Global 500 companies entering the storage market as system integrators. These companies bring established brands, global market access and the ability to provide system guarantees necessary for third-party financing.

Mercedes, NEC, Lockheed and others are all preparing system offerings for future market introduction and we are working closely with and have products and evaluation with each of them. While many of them are starting with the U.S. market, the opportunity for them is viewed as a global market with significant long-term growth potential.

To support the opening of the global storage markets, we’ll be adding international certifications to our products later this year, starting with the certification of our 30-kilowatt product for the Australian market, another early storage market outside the U.S., specifically targeted by some of our current and pending partners.

In early July, Sonnen formally launched their commercial energy storage solution in partnership with Ideal Power with the launch of its sonnenBatterie pro, utilizing Ideal Power’s 30-kilowatt power conversion system.

The modular sonnenBatterie pro scales from 18-kilowatt and 24-kilowatt hours up to 90-kilowatt and 240-kilowatt hours in a modular design and is available for shipping in late Q4. Sonnen is the leading residential energy storage company in Germany and is expanding in both the residential and commercial energy storage markets in the U.S.

We’re excited to partner with Sonnen on their commercial solutions and are initially targeting the U.S. market, and we’re also engaged with them now on our potential opportunities in Europe.

In addition to the large system integrators coming into the energy storage market and selecting Ideal Power, we’re also seeing considerable capital investment enabling new system integrators and bringing third-party project financing. Our partner, recently received investment to enable their expansion from entities such as GE Ventures.

Our partner Gexpro secured project financing from NextEra Energy, one of the largest renewable energy project developers and financiers in the country. Our new partner Stem just raised $100 million in project funding for energy storage systems.

Even oil giant Total, is entering the market with their $1.1 billion acquisition of Saft, a French battery company. Total use energy storage as the fourth component of the electricity system besides generation, transmission and distribution, driven by renewable energy.

Access to large amounts of project funding is a big differentiator for energy storage system integrators and an enabler for the market. The next decade is likely to see significant changes in the mix of energy consumed across the globe and we see energy storage playing an important role in that next-generation of energy infrastructure.

We remain steadfast in our conviction that the energy storage market represents a great opportunity for Ideal Power, based on all the initiatives mentioned above. Of course, that growth can’t ever come fast enough.

While most of the market studies show energy storage as a multi-billion dollar market opportunity over the coming years, it is a new market that will have its own volatility and industry issues as it matures. With respect to our market share, behind the meter non-residential storage saw approximately 20 megawatts installed in 2015.

At Ideal Power we shipped more than 13 megawatts of product last year. While not all of this was installed in 2015, it does indicate that we’re capturing a significant share of the early market.

More importantly, we’re capturing the major system integrators already in the market and are focused on capturing new players who will be entering the space and participating in driving its long-term growth. The second market we’re targeting with our PPSA technology is the solar market that particularly focus on the convergence of solar and storage.

These two technologies will be increasingly used together as economic energy storage mitigates many of the issues created by high levels of intermit solar generation. In fact energy storage is essential for solar to continue to grow at the rates projected by the PV industry.

The convergence of solar and storage is the market driver that led to the creation of our new SunDial 30-kilowatt product, an entirely new approach to a typical PV string inverter and the first in the family of products we plan to introduce.

One that can be installed today at a cost competitive with traditional solar inverters a market that was estimated at almost $7 billion a year in 2015, by IHS Technology, but with the built-in capability to work with energy storage either today or at any time in the future.

The Solar Plus storage market alone is estimated by Lux Research to reach $8 billion by 2026, representing a market larger than today’s solar inverter market. Independent validation helps with our branding and we recently received an award from PV-Tech magazine as they named our SunDial product as one of the top 20 Energy Storage Disruptors.

The development of SunDial product was done in close collaboration with established solar industry partners to make sure we were bringing out the right feature set for the industry. The SunDial product is now designed and the first units are going through testing and performance validation in our engineering lab, prior to beginning UL certification.

We exhibited the product last month at Intersolar North America Conference and received strong interest from new potential partners and market channels. All of the pre-certified, pre-production units we plan to make are already sold.

So our potential new market channel partners can begin their valuation of the product prior to us putting it into production, later this year. We recently announced that we had licensed the design of the product through a Fortune Global 500 company, our first licensing agreement for our PPSA based product.

We are pleased to disclose today that the licensee for the SunDial product is Flextronics International. And the product will be sold through their subsidiary NEXTracker and its NEXTracker NX Fusion solar-plus-storage tracker. NEXTracker is targeting to launch their system in Q1 of 2017.

As part of the agreement, we’ll receive a fixed royalty per unit paid quarterly. For competitive reasons we’ll not give specifics of the terms of license, but we can say it’s consistent with industry norms.

The agreement further highlights the competitive advantages of our technology and expands our region to the large, established solar markets and represents diversification in our revenue base, which has historically been concentrated in standalone storage.

Since our SunDial PV string inverter is inherently bi-directional and fully isolated, it’s the only PV string inverter on the market, capable of giving NEXTracker’s customers the option for future-proof their solar investment for energy storage today at cost competitive with standalone PV string inverters.

NEXTracker is a leading supplier to the solar industry and shipped over 3 gigawatts of their innovative tracking system. They were acquired last year by global electronic manufacturing giant Flextronics and are widely recognized for their innovative tracking systems and global leadership position in the solar industry.

NEXTracker systems are being deployed in utility-scale PV installations at a rate of 100 megawatt per week across five continents.

NEXTracker selected Ideal Power as their strategic supplier for their commercial system offering, because of our unique technology, small footprint and ability to provide future proof power converter for the later in-filled addition of energy storage.

While this is the great first step, we will also be taking the product to other solar developers and integrators. The level of interest from PV and battery system integrators and project developers we met in July at Intersolar North America, confirms the market’s desire for our product like the SunDial.

We’ve already had our discussions with other channel partners and potential licensees and expect to see others displaying the product at some of the upcoming solar industry trade shows. We anticipate revenue for this product to start in the fourth quarter.

We expect the SunDial product to be a natural fit for licensing of the product design to major solar providers and OEMs, as well as direct sales to integrators or through distribution. We look forward to sharing our progress with NEXTracker and the rollout of our SunDial product on future earnings calls.

Looking briefly at microgrids, since adding microgrid capabilities to our products we’re engaged in several projects that are using our power converter in combination with multiple generation sources such as batteries, solar, diesel engines, et cetera.

I won’t spend much time on microgrids since it’s largely a project-based business today, but do want to highlight one of our most recent projects.

During the quarter, we completed a state-of-the-art microgrid project with Aquion Energy utilizing their AHI batteries with Ideal Power’s grid-resilient 30-kilowatt multi-port power conversion system for Stone Edge Farm’s winery in Sonoma, California.

The solar PV plus storage installation is part of the farm’s innovative microgrid and it’s designed to provide energy for a number of buildings on the site including the primary residence, offices, and workshops.

We strongly believe microgrids utilizing renewable energy and energy storage technologies will be a crucial part of the global energy infrastructure moving forward. We recommend watching the short video prepared by Aquion for this project that’s posted on our website along with the related press release.

The project was also a featured tour site at the Intersolar North America Conference in July. Earlier this year we successfully tested and demonstrated the use of our PPSA technology as a variable frequency drive.

That demonstration was conducted by independent researchers at the University of Texas Center for Electromechanics and our VFD was tested alongside a popular product from one of the world’s leading manufacturers.

Our PPSA-based VFD demonstration showed the potential to bring improved performance to the industry due to its low output distortion resulting in quieter motor operation.

We believe this technology offers the potential to open up new market segments through the ability to install PPSA-based VFDs on the large installed base of non-inverter grade motors common on the older commercial air-conditioning systems, as well as at our existing segments of the VFD market where our products low harmonics and acoustic profile will be a competitive advantage.

Our plan to address the VFD market is through licensing and alliance partnerships and our next major milestone will be the development of the commercialization plan followed by product development and field trials which will be utilized to attract strong partners and channels to market.

We’ll continue to provide updates on our progress against these developments and commercialization milestones. These accomplishments further demonstrate our success of diversifying our reach into established multi-billion dollar market opportunities.

The key takeaway, I hope you get from this call, our PPSA technology is a power conversion platform technology that can be used for a variety of applications.

While we started PPSA commercialization using storage-based applications our plan is to leverage those products and features to diversify our revenue base into larger more mature market segments overtime.

Another key aspect to keeping our technology and the leading edge of performance and cost means diversifying our enemies and diversifying our business is the commercialization of our B-TRAN technology. We continue to make significant investments in B-TRAN for good reason. As the markets were going after are large and we believe primed for disruption.

In early 2016, we announced our selection of the B-TRAN as our preferred approach to bi-directional switches as it offers the potential for significant performance improvement over bi-directional IGBTs and it’s protected by a solid and growing patent portfolio. Currently we have 19 patents issued on B-TRAN with many more pending.

As awareness of our B-TRAN technology has increased, we continue to receive inbound interest from large potential users and licensees. We also recently announced that one of our third-party semiconductor fabricators successfully tested B-TRAN silicon dies.

These results are probably key characteristics of the semiconductor power switch and the results are consistent with multiple third-party device simulations that predict significant performance and efficiency improvements over conventional power switches.

According to research firm, IHS technology, the power semiconductor market was approximately $17 billion in 2015 and we believe that B-TRAN can potentially address a significant portion of this market, as well as creat new products and markets that are enabled as a result of a high performance AC switch.

The next major milestone towards commercializing B-TRAN will be the development and testing of the B-TRAN device later this year. Currently both of our semiconductor fabrication partners are in the final stage of producing double-sided devices.

And we expect to be making some announcements about their progress in the near-term as we’re very encouraged to see two firms demonstrating the ability to produce the double-sided devices.

While this is not registered on our income statement intellectual property, for a company such as ours, is a key asset and therefore continues to garnish a good deal of management intention. Growing our IP estate smartly is something we take great deal of pride in as we look to compliment our product sales with licensing agreements both in the U.S.

and abroad. The value of our patent portfolio will become more and more apparent. Currently our total patent portfolio consists of 55 issued patents with more 100 pending. Before I provide a look at what to expect going forward, I want to turn the floor over to our CFO, Tim Burns to discuss the financial results.

Tim?.

Thank you, Dan. I will run through the second quarter 2016 financial results. Total product revenue for the second quarter was $322,000 or a decrease of 73%, compared to $1.2 million in product revenues for the second quarter of 2015. The decrease in revenue was driven by the delays in the SGIP as Dan mentioned earlier.

And we’ve noted on prior calls, our revenue and the revenue from the standalone storage market in general will likely be – won’t be in the short-term as it is still an early market.

As the addressable market continues to mature and expand, we diversify into other more establish target markets we expect much of this quarter-over-quarter variability in the market to lessen, providing a more stable revenue base.

Looking forward, we expect the resolution of the SGIP delays and changes in the SGIP program, along with the rollout of SunDial later this year to drive revenue growth. Gross margins were 7.2% in the second quarter, compared to 11.9% gross margins in the second quarter of 2015 and 0.4% gross margins in the first quarter of 2016.

Quarter-over-quarter margins improved 682 basis points despite lower revenue as Q1 2016 margins were negatively impacted by the late 2015 introduction in initial small volume build of our 125-kilowatt product. As previously communicated, as we roll our new products, we would expect a temporary short-term reduction in gross margins.

In the second quarter we shipped 125-kilowatt units from our first volume build in this product and realized and now expect normalized margins for 125-kilowatt product.

Also as previously communicated, as we ship at low to moderate volumes our quarter-to-quarter gross margins will have variability depending upon the product mix and timing of new product introductions but we’re targeting gross margins of 30% to 40% of scale and exclusive of any benefit from licensing.

We have already shown that even at low volumes, our gross margin swing from negative to positive and as revenues grow, we expect margin expansion with the leverage in our business model becoming even more apparent.

Research and development expenses increased 9% in the second quarter of 2016, to $1.2 million from $1.1 million in the second quarter of 2015, largely as the result of higher personnel cost as we added engineering personnel to support product diversification and new product development.

Due entirely to the timing, research and development expenses were lower as compared to the previous three quarters. We expect incremental spending relate to both the B-TRAN and the SunDial in the second half of 2016, resulting in R&D spending more consistent with the levels seen in the second half of 2015 and first quarter of 2016.

We believe our current investments in research and development will drive revenue growth and diversification, thereby generating substantial long-term shareholder value. SG&A was flat at $1.3 million, in the both the second quarter of 2016 and the second quarter of last year.

We do not expect significant increases in SG&A in the short-term, we’ll strategically expand our sales team to drive future growth as we diversify into new markets and geographies. Operating expenses for the second quarter of 2016 totaled $2.5 million, yielding a net loss of $2.5 million or $0.26 per basic and fully diluted share.

At June 30, 2016, we had backlog of $4.7 million, compared to backlog of $4.9 million at March 31, 2016. Backlog was negatively impacted by delays in the SGIP, but we are encouraged that over 50% of backlog is for our new 125-kilowatt product and with renewed activity in the standalone storage market, we have seen over the last month.

Although our quarter end backlog was for deliveries initially scheduled through the end of the year we now expect some of these deliveries to occur in 2017 to rescheduling cost by the SGIP delays and typically provide our customers with summary rescheduling flexibility for large volume orders.

We expect our 125 kilowatt product to likely represent the largest portion of backlog going forward, while this may change with the introduction of SunDial later this year because that product is a unique offering targeting a large existing market.

From a working capital perspective, although most order are self-financing meaning payment terms to manufacture and collection of customer receivables are closely aligned, we did see growth in our inventory balance as customers pushed out deliveries due to the SGIP delays.

Although our business model allows us to scale meaningfully without the specific need to raise working capital. Our working capital is negatively impacted in the near-term by declining revenues. We expected this impact will reverse itself as revenue ramps up over the back of half of the year.

We currently have ample capacity at our contract manufacturer to meet backlog and forecasted growth for 2016. On June 30, our balance sheet included $9.6 million in cash and cash equivalents, and no debt. Cash usage for the second quarter of 2016 totaled $2.7 million, versus $2.1 million in the second quarter of 2015.

We expect our cash usage to decline after we develop and test prototype B-TRAN devices later this year and as revenue ramps. In addition, we have a federal NOL of approximately $23 million at December 31, 2015 which will help initially shield us from the income taxes as we become profitable.

Lastly, I want to mention we will be attending two investor conferences in September. I will be attending the Rodman & Renshaw 18th Annual Global Investment Conference on September 12 and 13, and Dan will be attending the Roth Capital Solar Symposium on September 12. I will now turn it back over to Dan.

Dan?.

Thanks, Tim. The resolution now bring changes to the SGIP funding in California the state and federal initiatives taking place, such as the new Massachusetts storage mandate and the federal investment tax credit for a new storage.

The continuing decline in battery costs and the entrant of new large companies as system integrators and project financiers confirms the growing world of energy storage is going to play in our energy portfolio.

With international markets such as Germany and Australia now begin to transact, as well we’re seeing the beginning of a global market take shape. While the stand-alone energy storage market will likely remain lumpy somewhat unpredictable for the near-term with long-term opportunities becoming clear.

Energy storage addresses a number of key problems plugging today’s grid and large well-established companies entering the market are bringing the scale of resources necessary to drive growth.

Our focus remains on bringing out state-of-the-art, highly differentiated and competitive products based on our PPSA technology that continue to make us the preferred power converse supplier to the system integrators like Stem, that are bringing storage solutions to the market.

During the remainder of this year look for us to provide announcements our new partners entering the space, reengagement in order flow for the California market and adding capabilities and certifications necessary to open international storage markets.

As our Solar Plus storage initiatives look for news from us on completing the certification of our SunDial product and its release for production, we also look for more information on new channel partners and potential licensees of the product, as well launch orders.

We anticipate seeing product revenue from our SunDial product enter in our mix in Q4 with the first licensing revenues under our current and target licenses occurring early next year, as partners bring out their own branded offerings based on our product design.

Last, but perhaps most importantly, look for announcement from us on B-TRAN bi-directional switch development efforts.

With B-TRAN playing a significant role in the long-term competitive advantages of our PPSA products, as well as the new markets and licensing opportunities it creates for us realizing first devices from our semiconductor fabrication partners is a major milestone and we’re looking forward to being able to provide an update on achieving some major accomplishments in the development effort.

In conclusion, the combination of upcoming milestones will lessen with new commercial partners and new macro tailwinds for energy storage, the release of our new storage plus solar product and licensing deals, as well as realization of our proprietary bi-directional switch technology, positions Ideal Power, as the leading power converter of technology for the renewable energy connected grid of tomorrow.

At this time, I’d like to open up the call to questions from our listeners.

Operator?.

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

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

Thanks Craig..

I guess I have to say the same thing for NEXTracker. But I guess that congratulations really is for Dan. I wanted to ask your opinion about the shape of the rebound in the California market. Now everybody has read all the different articles out there about the gyration [ph] on the lease of the California SGIP money.

My understanding is that projects are actually starting to re-accelerate right now, but are more likely to see elevated activity in the fourth quarter.

Can you maybe confirm that and help us understand what this is likely to mean for revenue progression for Ideal Power in the third and the fourth quarters of this year?.

Yes, the things we’re hearing are similar to what you’re hearing Craig. And the way the process works is projects that were approved basically by the SGIP’s program administrators are getting wider as we speak.

Just notifying them of approval of their project and how much funding they’ve got and we’ve already talked to a couple of our partners that are already receiving those. Their next step is to go close the project with their end customers and that’s going to certainly vary a lot of customer by customer.

But I would expect this is going to take them some period of time to start closing projects and then turn around an ordering cost [ph] to support that. So I think it’s really the significant bump in revenue that’s coming out of the SGIP is probably going to be really a more fourth quarter event.

We’ll see some that are going to be pretty confident that we’ll order in advance of that. But I think your take on is pretty consistent with what we’re hearing..

Okay, great. And then when I was in Germany I had the opportunity to talk to both Samsung, SDI and LG about their new energy optimized cells. It seems that both of them are optimistic that they’ll have them shipping commercially by the end of the year, so people can see that product will step down and looking cost.

Can you maybe talk about the availability of approximate timeline between the availability of cells of these very important OEMs and then in the rack cells and when these can actually end up against projects? And how this can actually impact progression of some of your medium size projects that you’re pursuing?.

Yes, we can’t some of the specifics but one of those the two names you mentioned is a little further ahead in the certification process from the other. One is actually targeting having rack systems they are going to available at the end of the fourth quarter.

I think really it’s going to be a function of – if you look at the lead time we’re going to see orders where our partners are going to older equipment. They’re going to have to integrate it with those battery racks when they show up in Q4 and then install in their system. So I think it’s not going to be a pleasing item for us.

We did see a bit of an impact in the market though where because LG and Samsung were both very open about the new technologies that they were coming out with some system integration partners basically said, well I’m just going to wait till they are ready, I don’t want to order a product when there’s going to be something lower cost and higher performing that’s going to be out in a matter of months.

So one of the partners is definitely on target they’re actually having rack systems by the end of the year, I think the other one is – they are working hard to catch up but they’re not quite there yet..

Okay, that’s fine. And then my third question is about B-TRAN. So you really validated the competitiveness of that technology the superior efficiency and overall performance of products that incorporate your technology. B-TRAN is obviously in advance versus what your fielding unit today.

You’ve already achieved a very high market share in the storage product market.

Can you talk about B-TRAN and potential customers for B-TRAN, potential licenses for B-TRAN? How far along are the discussions right now? How many different groups are you sharing the testing and preliminary device data with? And how does this take shape looking over the course of the next several quarters?.

Sure. B-TRAN really has two step of rules, one is as it relates to our PPSA technology because we’re going to be the first users of the devices, because it really enables us to almost double the power density in our products. And while storage is a market that is not commoditize today, it will be at some point in the future.

So it’s an important part of us staying at the leading edge from both performance and cost because when that cost pressure shows up, we need to make sure we’ve got a technology roadmap that allows us to maintain really good margins but can respond to the market demand.

Now we’re seeing in terms of interest, we’ve actually seen interest from large automobile manufacturers, we’ve seen it from defense contractors where people are looking at using the device for other applications. And I’ll give you couple of examples.

In the electric vehicle market the switch would actually enable some things like electronic transmissions where today it’s not a good practical solution to do it but with high-performing AC switch all of a sudden a truly electronic transmission in electric vehicle could be something that would be a very realistic thing to do.

We’re seeing interest from defense contractors because things like the Navy ships are going to distribute electrification to make them less vulnerable to attack and lower no signatures and so you need very high-performance, compact ability to switch power on an AC level.

So it’s really been a verity of different applications where we’re actually learning from some of the people that are approaching us, our ways of basically using device that we really haven’t even thought about.

So one of the things that’s exciting to us is not just the fact that it can be used in applications like conventional power converters that would use an IGBT today.

But what we’re seeing is it actually opening up new market opportunities because there really is not a good high-performance AC switch that enables the use of things like matrix converters that could really advance the state of a lot of technologies if they have that high-performing AC switch..

Thank you. And then my last question I wanted to ask is really a housekeeping question but the margins have been – this quarter actually they were very strong sequentially than in prior quarters’ margins have been impacted by your late of product qualifications in the quarter.

Can you remind us what the qualifications are in the back half of the year? Maybe what you think could impact in third and fourth quarters as far as maybe driving up R&D or impacting gross margins as you shift increasing units of new products?.

So first from the R&D perspective we actually had a pretty low spend in the second quarter and it was due entirely to timing.

In both Q3 and Q4 we would expect an incremental spend, both related to the B-TRAN development and getting actual initial proto type devices completed with the two semiconductor fabs and also with the – largely in Q3, but also in Q4 with the first half of Q4 higher R&D spending for SunDial, as we roll that product out.

From how that impacts margins, SunDial will impact our margins in particularly in Q4. And at anytime we introduce a new product, our first build, our first production build is a low volume build. So it’s at a higher cost per unit in weigher volume builds. So we’ll have that first production build impact Q4 and potentially Q1.

We saw it actually effect few quarters with the 125 when we rolled it out in Q4 of 2015 in depressed margins in both Q4 of 2015 and Q1 of 2016. So that will be typical, it won’t be as noticeable as our revenue based gets larger, but as long as we lower our revenue levels it will be pretty apparent to gross margins when we introduce new product..

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

Thanks Craig..

Thanks Craig..

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

Thanks so much guys.

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

That will come after we complete the testing of the fully packaged device, because I think probably what’s going to be important to get them really excited for the B-TRAN devices is to have a preview body [ph] of test data that we can go in show them how this device performs under whole variety of conditions.

When we look at PPSA-based products it’s a little different, because it’s more mature.

So for example, when we did the SunDial, we worked very closely with the NEXTracker team to identify what their product requirements are going to be that will process actually from the time we actually started working with them on specifications to one we’re going to get through the certification is probably about a year.

So our design cycles to get through design and certification on products is actually pretty short compared to most companies. When I was General Electric typical design cycle was probably about 18 months..

Okay, great and then obviously you don’t want to license this technology as a featuring technology at some point.

How mature are those conversations, as you get to this final legacy, obviously [ph]?.

We actually have been getting quoted by one of our semiconductor fabricators already who understands that the power semiconductor market and have an interest in it. We really want to have the data on the package devices, because we think this enables us to drive a better deal.

So we really want to make sure that we don’t do a deal with somebody that might actually prohibit us doing a better deal with a big power semiconductor player later. So we’re going to make sure that we do the right deal for the company and the shareholders rather than the first deal that comes along..

Perfect. And then my last question is just around your visibility into inventory on the energy storage side. You don’t actually have any number of customers and seen a bit of a slow ramp here with some of the demand.

Are you – do you have a good feel for how much a product is still out on shelves waiting to be deployed as we see the revamp on that market..

Yes, it varies tremendously by partner. We have one that actually has quite a few units and unfortunately they are a partner that does not have project finance in place. Some of the other partners have very little to none. So it’s a partner by partner issue.

And it’s been largely driven by the fact that their ability to actually either only the storage system will provide turkey financing for it. That seems to be the driver..

Okay. Awesome guys, thanks so much..

Thanks, Colin..

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

Hi Dan. Hi, Tim..

Hi, Eric..

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

Well our partners are actually involved in I think in almost all of the projects. We think there’s probably more than 50% where they’re going to use us because some of the projects, for example, Sonnen had a bunch of projects in the SGIP that were residential, we’re not residential product.

Stem has some that are going to use products bigger than what we make. So we think we’ve captured most of the players that are participating in that program in pretty meaningful way. The real issue is going to be we do our product for the particular project they’re going to do.

That’s why when we look at it we go through a list of project by project, we think that there’s probably at least 50% of those that we’re going to be able to capture. The only exception to what’s in the queue is I don’t know how many Tesla actually has in there, but they would be the one that we haven’t captured yet..

Okay, got it. And just to confirm with Stem.

Do you currently have or maybe you can quantify if you have any thing in backlog from Stem right now?.

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

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

Yes, assess that federal government has been doing for those who don’t know the federal government has been actually making a lot of noise recently about looking at the use of storage for federal buildings because obviously they would have the same benefits if they’re commercial customers. It’s not clear how they’re going to try and procure that yet.

We’re going to rely on our partners to figure out how to go through the GSA qualification process and whatever they need to do to participate in any request or proposal to come out. We’ll get pulled in sort of by default. We’re not going to spend much time on our – on ourselves because it will be a system level offering that needs to be done..

Got it.

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

Yes, they have done both of those, they are actually now in the process of actually doing their packaging design on what the system will actually look like now that they know who the battery provider is going to be.

Now that they – they certainly know what our product looks like but they need to come up with sort of a skid mount design that puts all those things together and that’s the process they’re in right now.

They’re actually also in the process of hiring some additional people for that part of the business because they view it as a pretty important opportunity for them going forward I was just speaking with their CEO just earlier this week.

So I think they’re moving a little slower than I think they would have liked but they want to make sure that they bring out a product that really leverages what their own packaging expertise has been with some of the large solar projects that they have done..

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

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

Okay, thank you..

Thanks, Eric..

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

Afternoon, guys..

Hey, Jeff..

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

Well they view it as part of an integrated offering that they’re making with their new racking system as part of their expansion into the commercial industrial space. They’re pretty much done, I think, with the design of their system.

So I think it’s really a matter of getting the products through certification, getting Flextronics comfortable with the design itself because they’ll be obviously making it for NEXTracker. What they have told out is they’re targeting to do the initial deployments for that in Q1 as a product they would make.

But what they have told us is they may actually have opportunities where they’re going to actually buy the products from us as part of getting some of their early demonstrations and launches done as early as Q4 of this year..

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

Yes, sure. They actually surprised us, where they had some pretty significant activities going on in Europe and they came back and said we just basically pre-sold x number of your units for Europe. We have to go through that how to make sure that that works. So the kind of pleasant surprise you’re like get.

I think they’ve to get through finalizing those opportunities that they teed up and sort of pre-ordered with their customers. But I would expect that’s going to happen and reasonably short order because they seem pretty excited about seeing the commercial market open up in Germany for them..

Okay, great..

[Indiscernible] on that in the next call..

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

Thanks, Jeff..

[Operator Instructions].

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

Thanks everybody..

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