Chris Tyson - Managing Director, MZ North America Dan Brdar - CEO Tim Burns - CFO.

Colin Rusch - Oppenheimer Jeff Grampp - Northland Capital Markets Carter Driscoll - FBR John Girton - Girton Capital Management.

Good day everyone, and welcome to the Ideal Power First Quarter 2017 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. Please go ahead, sir..

Thank you, and good afternoon. I would like to thank you all for taking the time to join us for Ideal Power's first quarter 2017 conference call. Your hosts today are Mr. Dan Brdar, 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 4:00 pm, Eastern today and is available on the company's Web site, idealpower.com.

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

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

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

Thank you, Chris. During the first quarter, we transitioned to our new generation of 30 kilowatt products, the SunDial and Stabiliti. Those products are now in production and shipping.

We see a significant increase in demand from new and existing customers for our new 30 kilowatt Stabiliti product as a result of its newly enhanced microgrid capabilities. And the new SunDial product is the core of our relationship with NEXTracker, which is progressing well, and we'll be discussing in more detail.

Based on the feedback from our customers, we continue to see the second half of 2017 as a return to growth for us and the commercial and industrial energy storage market in general.

Although the 2016 Self Generation Incentive Program for California was disrupted, those issues have been resolved by the California Public Utility Commission and legislature with several positive changes to the program.

In last year's incentive rewards there were 96 projects with $21 million of incentive funds approved, which will ultimately result in roughly 15 megawatts of behind-the-meter storage capacity added to the state. Many of those projects are now finally showing signs of advancing as project developers execute their projects.

While the overall storage market has been slow to transact, we expect to see increased equipment orders and energy storage systems installed in the second half of this year. We'll discuss the standalone energy storage market in the 2017 SGIP program in more detail.

But first I want to address one of the key market segments we're entering this year, with our SunDial product, Solar Plus storage, and the exciting relationship we're crafting with NEXTracker.

Our new 30 kilowatt SunDial product was designed in collaboration with some leading market players to specifically address the emerging applications of Solar Plus storage.

As states implement changes to net metering rules and utilities limit solar penetration rates on the distribution system, coupling solar with energy storage is the only practical way to allow solar to continue to grow at its predicted rates. The use of energy storage mitigates the grid instability issues that come from high solar penetration.

But conventional solutions typically require the use of multiple power converters and complicated installations.

The multi-port capability of our SunDial product allows the solar and energy storage to be put into one power converter with the ability to direct energy flow as needed to charge or discharge the batteries, and maximize the value of the solar energy.

As the value of midday peak solar generation declines, economic analyses show that using the excess solar energy to charge batteries is an effective way to enhance the return on the systems, and extend the amount of time during the day when solar can be used or exported to the grid.

Previously, we announced that NEXTracker, a Flex company, will be selling our SunDial solar PV plus storage string inverter as part of their newly launched NX Fusion Plus system, which will provide a single-axis tracking system, and ideal power and multi-port power converter, and a battery system designed as a highly integrated system to reduce installation costs and maximize system performance.

As a global leader in single-axis tracking systems with more than 7 gigawatts of systems installed, we're excited to be part of their strategic initiative. Their efforts will initially target the domestic commercial and industrial market, quickly followed by international expansion into markets, such as Australia.

According to Lux Research, the global solar plus storage market for utility, commercial, industrial, and residential segment is expected to be a multibillion dollar opportunity over the next several years. NEXTracker's parent company is Flex, and Flex is the first licensee of our PPSA technology.

Our shared objective is to introduce the system this year with Ideal Power proving the power converter products, and if their volume grows, transition to the license agreement with Flex, who can bring their formidable manufacturing and supply chain scale and expertise to bear.

Working in close collaboration with the NEXTracker team and their battery supplier, the power converter products they will use have been specified, and the system configuration work is in progress.

Supporting these efforts, we're in the process of closing a master supply agreement with NEXTracker to support their rollout effort, and expect to conclude the agreement in the next few weeks.

The agreement creates a commercial framework for our collaboration covering their sales volume forecast, the commercial terms and conditions for sale, volume pricing, product specifications, product warranty, et cetera that will allow the NEXTracker team to focus on execution in growing this new offering.

In addition, NEXTracker has augmented their sales staff to support the sale and pipeline development of their NX Fusion Plus systems, and are targeting significant deployments of these systems this year.

NEXTracker remains very bullish about their new offering, and we're excited about the opportunity to be part of their strategic growth plans, and are now exploring similar opportunities with others looking to come into the solar plus storage market.

We expect to have further information to share with you in the coming weeks as we take our next steps with the NEXTracker team.

The SunDial is a galvanically isolated, grid-tied 30-kilowatt PV string inverter that can be equipped to add energy storage either at initial installation or at any time in the future with its available third port upgrade kit.

As the SunDial allows AC power flow in only one direction, the primary use case for the SunDial is the rapidly growing Solar Plus storage market, where all battery charging is done from the sun, enabling project developers to meet the investment tax credit requirements for integration storage with solar.

The growing installed base of solar and resulting grid instabilities will increasingly force decoupling of solar and storage. Our new SunDial represents an innovative way for Ideal Power to capture a share of this market, while giving our customers the flexibility to create additional value from their system via direct storage integration.

We completed UL 1741 testing and certification of the SunDial product. We also recently completed the approval process by the California Energy Commission necessary for acceptance of the SunDial as a PV inverter for the California marketplace.

The features and capabilities of our new products are brining us into relationships with new participants in the energy storage, Solar Plus storage, and microgrid markets, and other unique applications where our PPSA technology can bring value.

We frequently find that large companies are often opposed to doing press releases about their orders and their new market initiatives to protect their competitive position. What I can say is that our recent orders and shipments include some interesting new names, including Bosch, Johnson Controls, Eaton, CivicSolar, and others.

As our relationships with these companies grow, we hope to be able to provide more information on how our PPSA technology fits into their initiatives. In addition to our work with NEXTracker and the new customers I just mentioned, we have our first megawatt class order in hand with an existing for the Solar Plus storage market.

As our customers clear their project financing hurdles, and we will release the build and ship their units, we'll be providing more information on the project. Based on input from our customer, we expect their project financing to be cleared this quarter as well.

As a result of our recent $15 million capital raise, we're well funded and able to focus our efforts on converting these and other customer engagements into revenue for the second half of 2017.

Looking at the SGIP program for 2017, the program was significantly expanded, and the available incentive budget for energy storage was doubled due to market demand.

Under the revised program, $567 million of funding has been allocated for the 2017 to 2019 period, of which $448 million is specifically targeted for energy storage projects, $391 million is for systems greater than 10 kilowatts, and roughly $57 million is for residential systems.

Under the new rules, if the demand for the incentives is strong a lottery mechanism will be employed that prioritize Solar Plus storage facilities and battery sighted [ph] in the Los Angeles Basin affected by the Aliso Canyon natural gas pipeline peak.

The amount of the incentive dollars per project will decline in later rounds, so the early rounds in particular are expected to be heavily oversubscribed. The first round of submittals opened on Monday, May 1st, and the program was heavily oversubscribed, as anticipated.

Currently, the CPUC is going through the process of qualifying and approving the submitted projects. We know of numerous projects submitted by our customers and partners that will utilize Ideal Power equipment.

Interestingly, we've also heard from some of our customers they are choosing not to participate in the program due to the delays it can introduce to program reporting requirements in the turmoil that surrounded the program.

For microgrid projects in particular, battery costs have dropped to the point where the project economics are sufficient without incentives, and we're seeing orders and growth in our pipeline from microgrids that confirms this.

Among the changes to the rules for this year are a limitation on the level of participation by any one developer to no more than 20%. This is expected to result is a much more diverse list of participants than in the past, where one or two companies dominated the incentive program and captured a disproportionate amount of the incentive dollars.

While it will likely be a more diverse set of projects, use cases, project sizes, and developers, we're optimistic that we'll be well positioned to benefit from the program.

Although changes made to the program this year are very positive for the energy storage market on a year where we hope to see future evolution of the program is a time limit on the use of the incentive funds awarded under the program but this will be challenging for the developers who do not always control the speed at which their customers, permitting agencies and contractors perform, we feel it would help drive acceleration of system deployment which is the ultimate objective of the program.

As the CPUC goes through their project qualification process and developers submit their reservation application fees, we will be monitoring the approved projects in the various rounds and keep you apprised of what we see as opportunities for Ideal Power.

During the first quarter, we made significant progress behind the scenes with our business development initiatives in the U.S.

and abroad more specifically key lines with some of the largest players entering the commercial and industrial storage segment, expanded our product capabilities took steps to enter new geographic markets and diversified our revenue base.

Our initial target market standalone energy storage is anticipated to be a multi-billion dollar global opportunity for utilities, commercial, industrial and residential customers largely due to that dynamics of rapidly declining battery costs and the rising cost of peak electricity generation.

Although the general energy storage market has transacted slowly, general sentiment from the recent Energy Storage Association Conference where participants are starting to see meaningful inflection point on the grid storage industry growth led by utility scale systems with C&I applications across power.

Like any new market, energy storage pass and may continue to see its share of disruption adversely affecting the markets in the near term, last year we saw the SGIP program stopped and felt the impact of the commercial and industrial sector, this year we saw [indiscernible] a novel battery technology manufacturer declared bankruptcy, we see some of the small private project developers struggling to raise funds for their operating expenses, while these short term disruptions the longer term trend for the adoption of energy storage continues to get stronger, California often leaves energy and environmental changes and the adoption of energy storage is no different.

By increasing the state's storage targets and doubling the incentive funding, the actions by the state legislature and the California Public Utility Commission will drive more product development from behind the meter installation.

Building on California's leadership, we now see storage programs being adopted in New York City, Massachusetts and now Maryland with its first of a kind tax credit for residential and commercial storage.

Even in our home state of Texas, storage is expected to play a significant role in balancing transmission and distribution system at the state and significant solar generation to the large installed base of wind in the state and retires as aging coal fired generation. As a low cost energy state, it speaks to how economic energy storage is becoming.

New system integrators both large and small are coming to the space, the entrance of large well capitalized companies is evidence that the early storage market is maturing and aside from new battery technology risk is becoming increasingly financeable to third party financers.

These large global energy companies in the oil, utility and power generation segment such as Total, NextEra and General Electric are beginning to participate in the energy storage market either as strategic investors, project developers or solution providers which confirms the size and the growing global opportunity from the storage to fundamentally change how we distribute and use energy over the next several years.

All our initial focus has been on the U.S. market in particular California. We're now seeing international markets such as Australia, United Kingdom, Germany and Japan begin to adopt energy storage.

The global interest reflected in the feedback and priorities we hear from our current and new customers and partners looking to participate in the global opportunity which is expected to reach $13 billion by 2025.

Growth of this market in the near term will remain unpredictable and incentive driven; decline in cost of batteries closed in attractive long term opportunity there is attracting larger system providers to enter the space. Beginning this year we'll be adding international certifications to our products.

Starting first with Australia, but we've already identified our first solution providers and customer opportunities.

We recently began working with certifying agencies here in Australia to complete the lengthy process and are looking forward to completing the Australian certification process and announcing shipping our first units for this new market later this year.

Our efforts have been directed at developing innovative products based on our PPSA technology and capturing the domestic and international system integration partners targeting the commercial and industrial segment and partnered with the battery suppliers who create and grow this market over the long term.

Although our several new and exciting battery chemistries being developed the rapidly declining price from name brand lithium ion battery suppliers and the large investment in battery manufacturing capacity by Samsung, L.G, and others is drawing third-party financing to the energy storage market.

We have several partners that either secured project financing or going through the process. We're supporting their efforts with a third party bankability study of our new products to ensure we are part of their turnkey solution.

For the standalone energy storage market and micro-grid market the first quarter of 2017 was highlighted with our new 30-kilowatt Stabiliti product. The product replaces our legacy 30B3 and IBC-30 product lines and is available on two versions, a two-port AC-DC bidirectional power converter and a multi-port AC-DC-DC bidirectional power converter.

Multiple pre-certified units were already shipped to key channel partners for evaluation and appropriation into their solution offerings. These products just completed and received UL certification and are now in production with first units shipping.

Based on feedback from the market, the new products add additional features to expand their capabilities for standalone storage and microgrid applications such as galvanic isolation and the ability to provide seamless transfer between grid type and grid forming modes.

We also use this design cycle to implement design changes to significantly enhance the high volume manufacturability of the product and reduce the product cost to stay ahead of what we expect to be a declining cost curve for the energy storage spaces of growth.

Battery cost declined by more than 50% from 2012, 2015, but we're seeing that rate accelerate working closely with our partners we're seeing better parts at levels that allow project in markets but high energy costs such as microgrid and high demand charges depend without subsidies.

The key aspect to keeping our technology at the leading edge of performance and cost over the long-term and the means of diversifying our business is the commercialization of our B-TRAN technology. We go strong and leisure property protection around our B-TRAN technology with 25 issued patents in the U.S.

and key international locations with many more pending. Our patents covered the device it's used and some of the key manufacturing processes developed for the fabrication. For those of you not familiar with B-TRAN semiconductor technology it's a unique double sided bi- directional AC switch.

That is expected to deliver substantial performance improvements over today's power semiconductor devices in bidirectional power control applications. Currently four conventional switches two IGBTs and two diodes are required to control power bi-directionally.

We believe that the B-TRAN will be able to perform this same function with the efficiency losses predicted to be one-tenths of that of conventional switches.

Additionally, the faster switching performance predicted from B-TRAN should result in more efficient smaller and lower cost power converters they can be used in both bidirectional and traditional unidirectional design.

The focus of our development efforts on B-TRAN for some time now has been working with our semiconductor fabrication partner to develop the manufacturing processes necessary to make B-TRAN devices and volume and a true production scale process.

Semiconductor process development involves a considerable amount of trial and error to ultimately develop the process of records that can be run at high volume in a production environment and if needed transferred from one semiconductor fabricator to another.

All the design of B-TRAN itself is unchanged a recent efforts have been focused on changes to fabrication process to improve device shield. A working device with a low production yield would not be acceptable in a volume production process and the most recent production runs needed further process changes to enhance the Y shield per wafer.

Our semiconductor partner identified and implemented the proper changes necessary to enhance yield. Devices based on the process changes are now in fabrication and we expect to receive the first of these in the coming weeks with more to follow up.

All this put up behind our original desired schedule we've got important to test devices that represent the actual commercial production process since small changes in semiconductor processing can significantly affect the performance of semiconductor devices.

But the development portion of the fabrication process now largely behind us we're looking forward to testing the first devices from a production ready process. Based on the test results from the single sided devices test of last year we're optimistic about the performance potential of the early devices.

The result of the characterization of the initial devices will be used to guide our further development efforts and many changes in how the devices are manufactured or driven International Circuit.

Our initial plans are for the first use of the devices to be in our power converters to demonstrate the potential performance improvement of B-TRAN and show their implementation in an actual product. We will keep you apprised of our progress.

In addition to the 25 patents that have issued on our B-TRAN technology we now have 40 patents on our PPSA technology. Bringing our intellectual property portfolio to 65 issued patents with close to 100 still pending in our key geographic markets.

Such a strong and broad base of coverage for IP our patenting efforts going forward will be focusing primarily on those high value innovation that extend the time period rep about applicability or have the value for our current new licensees and the high value markets were targeting in the near term.

Before I plan to look into the second quarter in the remainder of '17, I'll turn the call over to CFO Tim Burns to discuss the financial results, Tim..

Thank you, Dan. I will run through the first quarter 2017 financial results. Total product revenue for the first quarter was $275,670 or a decrease of 44% compared to $496,644 and product revenue for the first quarter of 2016.

The decrease in revenue is driven by the timing of and variability in the early market energy storage including the lingering effects of the disruption to our initial target market of standalone storage caused by the 2016 challenges with the California self generation incentive program.

As we've noted on prior calls, the timing and the growth of storage market is uncertain and our revenue and the revenue for the storage market in general be unpredictable and potentially won't be in the near term as it is still an early market.

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

Looking forward, we expect the 2016 resolution with SGIP program, the solicitation under the SGIP earlier this month, the expansion addressable markets in the U.S.

outside of California, our entry in the Australian market planned for later this year and the recent certification and availability of our stability in the SunDial series 30 kilowatt power conversion systems with advanced features in a more attractive price point to drive meaningful revenue growth beginning mid-year.

To the expected timing and growth in our initial target markets, we reiterate our expectation as revenue will be heavily back-half loaded in 2017.

Gross margins were negative 158% in the first quarter compared to 0.4% gross margins in the first quarter of last year, our gross margins in the first quarter were negatively impacted by the non-cash write down of inventory of $349,000 related to our first generation 125 kilowatt battery converters and end of life IBC-30 battery converters as well as lower volume levels as product margins do not cover relatively modest production overhead cost.

As I mentioned last call, we expect some downward pressure on gross margins in the first half of the year due to the late first quarter launch for our new SunDial and Stabiliti products.

As expected the higher cost to lower volume pilot build for the SunDial and Stabiliti did result in lower gross margins for the quarter and initially depressed margins on these new products will continue for one to two more quarters.

Also as previously communicated as we ship low to moderate volumes our quarter-to-quarter gross margins will have variability but we're targeting gross margins of 30% to 40% at scale and exclusive of any benefit from licensing.

Research and development expenses decreased 20% in the first quarter of 2017 to $1.2 million from $1.5 million in the first quarter of 2016; the decrease was due primarily the timing of cost associated with the bi-directional power switch development partially offset by higher product development cost as we launched two new products late in the quarter.

Although the timing of product and trained development activities will cause quarterly variations in our R&D spending, we intend to closely manage our R&D spending through intense focus on prudently spending our capital only on the development programs that we expect to have the highest return and maximize our revenue growth in shareholder value.

SG&A increased 9% to $1.5 billion in the first quarter of 2017 from $1.3 million in the first quarter of last year. The increase was due to higher sales and product marketing expenses. G&A was down slightly in the quarter.

We expect some year-over-year growth in sales and marketing spend as we strategically expand our sales team to drive future growth in product revenues and expect G&A remain relatively flat. As our business model shifts from licensing revenue in 2018 and beyond, we would not expect need for significant incremental SG&A spending.

Subsequent to quarter end, we implemented a cost reduction program into accelerating reduction in our cash burn, the cost reduction program aligns with the product roadmap simplification effort that we discussed on our last call, we began a process earlier this year to eliminate development efforts that do not have a clear line of sight to near term growth providing enhanced focus and allowing us to more tightly manage our spend, the benefits from this cost reduction will start to be seen in the back half of the second quarter and continue throughout the year.

We do not expect this program to have any noticeable effect on our ability to execute our 2017 growth plan. Operating expenses for the first quarter of 2017 totaled $2.6 million, revenue net loss of $3.1 million at $0.28 per basic and fully diluted share.

At March 31, 2017 we had backlog of $5.6 million compared to backlog of $5.5 million at December 31, 2016. Our quarter end backlog was primarily related to orders for the standalone storage market and to a lesser extent, the micro-grid market.

Due to disruption within one storage market in 2016 in customers doing shipments are not releasing orders further original forecast our backlog does not translate into revenue on the time line we originally expected as growth to stand on storage market occurs we'd expect to cycle from backlog to revenue to become more predictable.

Morton capital perspective although most orders are self financing meaning payment terms of the manufacturer in collection of customers receivables are closely aligned we did against the negative impact to working capital in the first quarter of 2017 due to lower revenue levels and collections timing.

Just as revenue growth works in our favor from working capital respective declining revenues worked against us. We expect that this impact will avert itself as revenues ramp up over the back half of 2017. We currently had ample capacity or contract manufacturers to meet backlog and forecast to grow for 2017.

On March 31 our balance sheet included $15.4 million in cash and cash equivalents in no debt. Cash used in operating investing activities in the first quarter of 2017 total $2.5 million versus $2.8 million in the first quarter of 2016.

In the first quarter of 2017 we completed a $15 million private placement with Institution and of credit investors all members of the company senior management and the full board of directors. Dr. Richard Blanchard, the inventor of the trench MOSFET and the B-TRAN consultant for us also participate in the offering.

We're very pleased to see that many of our current investors participated in this private placement and they were able to upside the offering to provide us incremental capital to support operations while the storage market develops and we progress to a positive cash flow generation for the business.

A critical focus for us in 2017 is our initial target market develop we'd prudently manage our spending to reduce our cash burn.

As I mentioned earlier we continue to focus our efforts as a leadership team and as a company on the opportunity to provide the best and near term opportunity for scale in identifying and catching opportunities to reduce our spending and overhead.

Lastly I want to mention we will be attending two investor conferences in May However be attending the Oppenheimer Emerging Growth Conference on May 16 and the B. Riley 18t Annual Investor conference on May 24. I'll now turn it back over to Dan. Dan..

Thanks, Tim. The long term market opportunity for energy storage is clearly being driven by the rapidly declining cost of batteries in particular lithium ion based solutions the hundreds of millions of dollars currently being invested in battery manufacturing capacity by Samsung, Mercedes, L.G.

Chem, Panasonic, [indiscernible] and others will continue that price trend as the battery suppliers quickly become commoditize and cut price to utilize their newly built production capacity. We're already seeing battery and pricing of levels that were previously predicted for two to three years from now.

The growing use of standalone storage and battery based micro-grids will need to features the capabilities of products like our stability series that bring the lightweight, small footprint, electrical isolation, high efficiency and CMOs grid transfer capability inherent in our PPSA technology.

The units we've already shipped and will be shipping this year are going to a variety of high profile projects that will highlight the capabilities of our technology at the energy storage association conference last month we heard repeatedly about the lower development cost and time associated with implementing our products due to a build and grid forming capability.

This will be key for Mike Ritz in particular to evolve from a customized design what off solutions to a more standardized and scalable solution.

The sold out storage market is a segment we expect in transacting this year and it's a driver for our newly certified and California Energy Commission listed SunDial product we intend to lead this initiative to our licensing arrangement reflects the next tracker and expect to expand that relationship in the near term.

As well as leverage this initiative with others based on the forecast we have from our existing customers new customer engagements and our new products and market geographies we've been excited about the growth expectations for the second half of the year and return to growth for us and our storage related markets.

In terms of our capital utilization our focus going forward is to use our capital smartly to drive a sense of urgency and focus on our own development and market entry efforts and to capture and drive our partners in market segment transact, while we offer an approach to develop new products for existing partners and new entrants and new applications that can exploit the features and value of our PPSA technology.

We intend to be selective on the opportunities we pursue particularly in light of the immature nature of some of the markets. We continue to engage and collaborate with much larger players in the power converter market but we remain focused on advancing those opportunities that have brought up applicability or near term visibility to scale.

As we mentioned on a previous call, we simplified our product roadmap, eliminating development efforts that do not have a clear line of sight to near-term growth.

While it may result in some missed opportunities in the market, as a small team, we need to remain very focused on the opportunities that provide the best near-term opportunities for scale and allow us to contain our cost.

The significant impact energy storage is having on our long-term energy transmission and distribution systems is driving a level of innovation in solutions and business models that allows us to become a technology provider to market segment leaders such as NEXTracker and Flex.

We're keen to create similar relationships that bring the complementary skill sets, business models, and market position of companies, such as NEXTracker, together with our unique technology to help shape the storage-related markets.

As we look into the second quarter of 2017 and beyond, we remain confident about solidifying near-term revenue opportunities based on our progress with NEXTracker, the new incentives with the SGIP in the California storage market, the commercial rollout of our new Stabiliti series products addressing the standalone storage and microgrid markets, and our international expansion into the Australian market.

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

Operator?.

Thank you. [Operator Instructions] And we'll go first to Colin Rusch with Oppenheimer..

Thanks so much, guys. As you look at the microgrid opportunity what we're starting to see are batteries guaranteed for 20 years.

Can you talk a little bit about the development of your warrantee and what you're seeing in terms of the warrantee interaction with [indiscernible] providing wrappers and any need for insurance support on that at all?.

Yes, we're doing a couple of things. One is the bankability study that we're doing with a third party is really a very rigorous detailed assessment by some technology experts to assess basically the predicted lifetime of our products. Financers typically want to see that because it gives them a really unbiased assessment of the rigor of the design.

It really helps make the financing easier to do and also less costly. But also from a warrantee standpoint in general, we've been staying pretty much with what we think the international and domestic markets are requiring, typically doing 10 years in the U.S., five years internationally.

What it does do for us though is as we start to see some of the battery suppliers wanting to extend their warrantees; it gives us the opportunity to actually sell an extended warrantee which is not unusual in the power converter space. And several of the projects that we've been working on we've actually done that.

We have quoted it, and it looks like the economics for selling an extended warrantee are something that works for the project. So I think longer warrantees give us an opportunity to basically do some up selling in terms of providing extended service. .

Excellent. And then [indiscernible] NEXTracker, obviously you've got these products that you're selling, but they've got a very large install base.

Can you talk about any other developments that you're working on with them in terms of a retrofit device, because it certainly seems like there is massive opportunities there with those folks?.

Yes, there really is.

And we started this with initially them taking the SunDial product as part of this bundled offering, but the agreement that we're ultimately going to sign is probably going to cover a couple of different products, because they do want to have that capability to take a product, like our Stabiliti, that is multi-port and can actually be used to retrofit and provide microgrid capability, grid transfer capability.

So I think you're going to see that relationship actually starts to expand once we get the relationship announced.

Because there's just going to be an increasing opportunity to go to those existing sites and make sure that they're not negatively impacted by things like [indiscernible] rules changing and so forth that could hurt the economics of the original solar installation..

Okay. And then the final one is around win rate. So you guys had a pretty impressive win rate for a period of time.

As you start to see the market reaccelerate, and obviously there's been some more aggressive competition out in the market, can you talk a little bit about where you're seeing the sales process go? And are you continuing to be able to sell in a value sale rather than in a price sale.

And a little bit of just those dynamics as we go forward into the back half of the year and see revenue ramp?.

Yes, there's certainly been a lot of talk about some of the potential Chinese solar and border [ph] suppliers coming into this space. We've seen products from some of them but we actually haven't seen them capturing much in the way of market share. It will put some price pressure on the space as a whole.

But a big part of what we focused on really was for both the SunDial and the Stabiliti products was a very significant cost reduction that allows us to actually stay ahead of that cost curve that is ultimately going to show up in this space.

So for now -- and when we look at what we're really competing with, the feedback we're getting from customers and partners is that the value of our technology is pretty well recognized. We're very competitive in terms of pricing and performance. So I think the real competition that might show up over time is kind of yet to show up yet.

I think it's more an issue of the storage market itself is not transacting as quickly as I think everybody would like..

Perfect. Thanks a lot guys..

Thank you..

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

Good afternoon, guys..

Hi, Jeff..

Want to talk a bit about the next-gen systems that you guys are sending out now. Can you maybe give us a sense of the customers or potential customers that you guys are involved with just from a high level? And maybe how long they've had these or do you guys have a general sense.

I know 2017 generally, but maybe drilling down on that on when that could potentially turn into some sales here?.

For the initial products, before we had actually gone through certification, a lot of the existing customers that we've had out there, folks like Sharp and NEC and others, most of them took an early uncertified unit because they wanted to get familiar with it right away.

For the customers that are going to be using this, they are the existing customer base that we've sold to traditionally. Plus, a lot of units have go to some of these new names that I mentioned earlier, like Bosch and Johnson Controls, and Eaton, and CivicSolar, and others.

So I think the features, the price point, the robustness of the design are starting to really attract a whole new set of players that are really looking to do more with the power converter that really fits well with what our technology can do..

Okay, very helpful. And then on the B-TRAN side, you kind of mentioned going through some different kind of runs there.

Can you maybe give us a sense for on timing, both with when those can be on your own systems going forward? And how that maybe impacts timing for a potential licensing deal?.

Yes. To get to a licensing deal what we really need to have is we don't actually have to have the B-TRAN implemented into a power converter. What we really need to do is just have the data from the testing that says the third-party simulations are largely corroborated with actual data from a circuit board that has B-TRANs on it.

That's the testing that we're going to be doing here, hopefully in a few weeks here as we get our next rounds of the devices. What I think that we're encouraged about is the level of discovery and development with the semiconductor fabricator really seems to be largely behind us.

So now it's really just a matter of production scheduling with them to get on the production runs to actually get devices in hand.

So we're feeling pretty confident about where we are with the device, and about how we think it's going to perform as well, and ultimately have something that we think is going to be transferable to other fabs because it's being done on eight-inch wafers and production equipment in a production environment..

Okay, great.

And last one for me, I apologize if I missed this in the prepared remarks, but did you guys quote where backlog was either ended the quarter at or kind of where things stand today?.

Yes, in March 31, backlog was at $5.6 million, which is relatively consistent. It's $5.5 million at year-end..

Okay, perfect. Thanks for the time, guys..

Thanks, Jeff..

And we'll take our next question from Carter Driscoll with FBR..

Good afternoon, gentlemen. So just -- I know you made a lot of comments about the early stages of storage deployment with [indiscernible] certainly solar plus. If you kind of look back just maybe over the last three months or this last time you reported, we've had some shift in business model.

Obviously the acceleration in battery price decline probably has an impact and the financing model still not straightened out. If you had to rank what those issues are in terms of their impact on the adoption rate of the market in general SGIP, just prioritize whether that's changed, were the nuances are just three months ago, that'd be helpful.

And then I have a couple of follow-ups. Thank you..

Yes, Tim can certainly give this perspective, but I was talking to him earlier, I saw an article on the street here at lunchtime was talking about Tesla's storage business being slowed down last quarter. I think a lot of it is expectations of a lot of companies were simply ahead of the market's readiness to transact.

What we have seen from not just projects that we've been involved in, but as we talk to system integration partners who are doing bigger projects, doing projects in other parts of the world, there's still an education process going on in deploying systems.

And a lot of it is involved getting permitting agencies comfortable with batteries, places like New York getting the fire marshals comfortable with batteries. So a lot of that I think is really the newness of the technology is actually pacing the ability of some of the system integrators to really deploy as quickly as they would like to.

I look at Stem for example. Stem has a great pipeline of projects, but a lot of the things that they and others spend time with are the permitting and education issues related to the installation. I see that getting better, but it's a process that takes time.

One thing that I think has really changed that we've seen in the mix here, just in the last quarter is, batteries have taken another step down in pricing.

And now, all of a sudden, a lot of things that were kind of in the pipeline on the microgrid side whether you typically don't have a lot of incentives to go after, now certainly the numbers penciled [ph], because what we've seen on our pipeline on the microgrid which was -- it would always tend to be a small portion of it, has now stepped up to be pretty significant relative some of the other things that we're doing.

I think the other thing that we see that's changed are business models for things like what NEXTracker is doing, where people are leveraging what they're doing in spaces like solar and saying, how can I actually bring more value, add scope, because the solar market itself is one where there's just a lot of pressure.

So people are looking for how they differentiate themselves and actually add value. What we've done with NEXTracker I think is going to be a significant driver for our revenue from the way things look. But we're finding that that's attracting others that want to explore similar kind of relationships.

That answer your question?.

Yes, absolutely. In particular, it does seem as though microgrids are becoming less -- depending [ph] potential [indiscernible] but that also might be causing just a pause because you're kind of waiting for that other shoe to drop. I would've thought that you made ahead the MSA in place by now with NEXTracker.

Is the -- you'd mentioned NIM programs and shifting around, and worried about the economics changing once they're in the deployments.

Is that a component of the negotiations you have? And is the retrofit market a significant component of that MSA in your opinion going forward [indiscernible]?.

Well, I think when the MSA is in place and -- one thing they have to do with that is provide us a forecast. We'll get a better idea of what their view is of where the mix is.

What actually took more time than anything to get the agreements to the part where it is now is really the product specs, because as we provided some units for their battery provider, as they have gotten more knowledgeable with their own people on what our technology can do, it just opened up all this interest on the ability of our product to do microgrids, the ability of our product to actually be grid connected, grid isolated, seamless transfer, things that were not into the original SunDial product, which they were one of the ones that we collaborated with who've come up with its design features.

So what happened was as they got deeper into our technology they got more and more excited about other things they could do.

So I think that agreement is also probably going to have two or three different products that'll largely be leveraging what we've already got, but it's a step beyond what they were originally thinking about, because they see an opportunity to leverage the technology, and they're pretty dominant space in the market to do more than just [indiscernible], but also to retrofit the end [ph] microgrid installations as well..

And then since it's not an exclusive agreement, you can potentially have discussions with other vendors as well.

Can you talk about where those might be, at what stage?.

Yes, it's interesting that every discussion that we've started always starts with, is it exclusive. And we tell people, no. We can do similar things with anybody else that wants to bring some similar kind of a model to the marketplace. Where we are with a couple of them, it varies.

We've got some that we're actually going through some project economics to find a launch project that would make sense. Then we've got others that are in the exploratory stage. I think when NEXTracker did their announcement at the previous conference is when everybody started to realize they're really serious about this.

I think the next to really drive some of these NEXT players to move more quickly is going to be getting the agreement with NEXTracker actually announced, because a lot of people there are going to want to follow what they do because they just the leader in this space.

So that's why we're so focused on getting this thing done here in the next few weeks..

Carter Driscoll:.

?:.

Yes, when we think about Germany, Germany is a market that really started with residential, could be the way to rate structures there are different. Here you see very high rates and demand charges on the commercial industrial space in terms sort of keep the retail rate low because it's different there where the retail rate tends to be high.

So, it drives the residential market to transact first, but our Russian in the start has been very good, they actually -- because of what they've done deploying units over there, I think it really started to build the case of why the C&I space needs to be thinking about energy storage not just residential.

For us, we want to see more than just done, we're in evaluation with Mercedes; Mercedes has indicated they're going to start with residential, move to C&I after that, just like [indiscernible] did, because they're coming from the German market or residential makes sense.

We really want to see more than just one player that wants to do C&I over there, because to go through the certification for Europe, it'd rather might be an expensive process. So, we're ready to do that.

We design the products and they would be compliant with the requirements over there, but to actually go through that process, we want to do it when -- we get to the part where we've got some partners they can say, "We have real demand that's going to transact here in the next quarter too, why can you bring the certification that we need for Germany?".

Thanks for taking my question. I will takethe rest offline. Have a good day..

Okay, thanks..

[Operator Instruction] We'll go next to John Girton with Girton Capital Management..

Hello. I had a question, last year, Elon Musk said, "I'm building a Tesla with solar and inverter hub, we are probably the best in the world on advanced inverter technologies." I wondered if you would take issue with that given that you're pretty advanced.

And even if they are the best, are they kind of captive to their own business and would you be perhaps the best outside of Tesla going to other customers?.

Well, I think what's a nice way to say that? We obviously take a lot of our technology, but we also see a lot of fights and Tesla is one that I think really has drawn a lot of hype.

Their focus really is leveraging the power converter technology they're using in the vehicles into other spaces, and typically what you need for a vehicle is not what you -- it's not what's the best choice for a stationary application; we think about how their systems come together where they're putting multiple power converters in parallel and modules.

At some point, that becomes a challenge both in terms of the cost associated it, the overhead associated with it. There's a reason that people make megawatt cross power converters, they just ultimately end up being lower cost, and just easier to service, and a whole variety of other things.

So I think there's plenty of space for a lot of people to play. What we are seeing though is because they are integrated doing this the AC battery approach and occasionally are in the development side, we're hearing quite often from some developers they're not sure whether Tesla is their supplier or their competitor.

But I think some of these business models unfold, we will get a better view, but like it's a very different approach for power conversion and we think we've got a great answer that is good or better for the application we're going after. We don't think our technology would be the right one for automobiles.

We don't know if their's is the right one for large scale energy storage, but the market will ultimately sort it out..

Okay.

And I had a follow-up; you talked about kind of refocusing off of certain product areas and on to others, could you say what you've kind of left behind and then maybe what your top three focus areas are now?.

Yes, from product perspective where -- our major focus right now obviously is on the stability in SunDial series converters. From an international perspective, it is on Australian certification for our product.

We had been looking at other geographies and the timing of when they enter other geographies, where rollout a larger version of our product, or even potentially a smaller version of our product. Those are decisions that we've delayed into it.

So we can really focus our efforts on maximizing the value of the stability in SunDial platforms and getting into our first international market in Australia just because there's a lot of customers or potential customers and partners that we'd spoken to in Australia that are ready to launch in C&I space.

So, it's something that -- that's our initial focus here is we will over the next six to nine months, and we'll -- there's other opportunities that we get on a regular basis they come our way because they evaluate you know what's the next thing in our roadmap, and at some point we may make sense to you temporarily increase spend to give opportunities large enough with the large enough commitments from perspective customers.

So, things will continue to evolve, but that's our focus today..

Thank you..

And due to time constraints, that will conclude our question-and-answer session. I will turn the call back over to management for any additional or closing remarks..

Thank you everybody for joining us, and to -- please keep an eye on some of the announcements that we have coming regarding our agreement with NEXTrackers and orders that we think are about to clear in terms of some of their financing hurdles and some new initiatives that we have going with some new customers.

And we look forward to keeping you update on what we are doing here, and we will talk to you again here -- talking about the next quarter and the results and what we have been to accomplish. Thank you everybody..

Thank you. And that does conclude today's conference. Thank you for your participation. You may now disconnect..