EnSync's (ESNC) CEO Brad Hansen on Q2 2016 Results - Earnings Call Transcript

| About: EnSync, Inc. (ESNC)

EnSync, Inc. (NYSEMKT:ESNC)

Q2 2016 Earnings Conference Call

February 16, 2016 4:30 PM ET

Executives

Matthew Selinger – Investor Relations

Brad Hansen – Chief Executive Officer, President and Director

Jim Schott – Chief Financial Officer

Analysts

Eric Stine – Craig-Hallum

Chip Unsworth – Legend

Operator

Please standby, we are about to begin. Good afternoon, ladies and gentlemen, and welcome to the EnSync Energy Systems Reports Second Quarter Fiscal Year 2016 Results Conference Call. This call is being recorded. I would now like to turn the call over to Matthew Selinger, Investor Relations. Please go ahead sir.

Matthew Selinger

Thank you, operator. Good afternoon and welcome to the EnSync Energy Systems quarterly conference call. On the call with me today are Brad Hansen, CEO of EnSync Energy Systems; and Jim Schott, the Chief Financial Officer.

The EnSync Energy Systems press release and 10-Q containing the full second quarter results and commentary were sent out earlier this afternoon and may also be found on our website. We encourage you to read the release as it details the numerous accomplishments within the quarter.

Please also take note of the Safe Harbor paragraph that appears at the end of the press release covering the Company’s financial results and that any forward-looking statements that we make only apply as of the date made and are subject to inherent risks and uncertainties, including those described in our most recently filed Annual Report on Form 10-K and should not be unduly relied upon. Except as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statements.

With that said. I’ll now turn the call over to Brad Hansen, CEO of EnSync Energy Systems. Brad?

Brad Hansen

Thank you, Matthew, and good afternoon. Today I’ll begin with the discussion of current operating environment, then Jim Schott, EnSync Energy System, CFO will cover our second quarter financials. Following that, we’ll review our current projects and conclude with the discussion of this quarter’s accomplishments and our near term outlook and priorities.

We are encouraged that our market environment is being bolstered by favorable policy trends at the global, federal and state levels, despite the ongoing macro economic uncertainty. Internationally, the recent Paris Climate Accord, creates the need for a world energy portfolio that relies less on fossil fuels and more on renewable energy as a means of reducing carbon emissions. From this accord will come additional global incentives by individual countries to meet their compliance targets. According to Bloomberg well over 50% of the global energy generation capacity to be added through the year 2030 will be from renewable sources.

In the U.S. there are several positive trends. First, the president recently signed the budget bill, which extends the solar investment tax credit an unprecedented five years, providing a strong foundation for future growth. This is important since energy storage systems integrated with the solar are eligible for the credit.

Second, the Supreme Court endorsed the Federal Energy Regulatory Commission, or FERC jurisdiction over demand side management. This rule clears the way for FERC to designate behind-the-meter energy as a resource for the electric grid. The importance of this to us is that a key future EnSync application be supply response on demand, where combined solar and storage create a high value energy exporting system.

Third, state commissions continue to make adjustments to net metering programs, which are nearly always reductions or. This removes the grid as a free battery, a barrier to robust energy storage deployment and makes incorporation of storage almost mandatory for solar installations.

Finally, more locations are introducing time-of-use rates opening up the capability to move energy from lower rate time periods to higher rate time periods by utilizing energy storage. Our systems are designed to maximize the return to the investor by capturing and monetizing these and other value streams. Favorable policy trends can be expected to be an even greater growth driver for our business in the future.

The market for integrated solar with energy storage systems is in its early stages. Today EnSync enjoys strong differentiation in these systems when they’re in a commercial and industrial building or microgrid installation. Few companies can compete with our systems applications portfolio, proprietary control methods and capability to customize a high value solution for the individual low characteristics and local programs for virtually any building. These competencies will continue to be key to the company going forward and we will invest in them to maintain competitive separation.

I’ll now turn the call over to Jim to discuss the Q2 financials. Jim?

Jim Schott

Thank you, Brad and good afternoon. Before we get to the detail of the second quarter results, I would like to point out that most of the activity in the second quarter was devoted to purchase power agreement or PPA projects and other projects that are being commissioned later this year. Brad will discuss these projects in greater detail in a few minutes. This activity did not generate any revenue in the second quarter. But will result in increased cash flow and revenues when the PPA projects are sold or financed and the other projects are commissioned, both of which we expect in the last two quarters of this fiscal year.

That being said, total revenue recognized for the three-month period ended December 31, 2015 was $382,000, compared to revenue of $301,000 in the year-ago period. Again please note that we have not recognized any revenue yet from any of the PPA projects or any of the projects or have shipped products that are not yet been installed and commissioned.

Product revenues less cost of sales were $12,000 this quarter, compared to a negative $58,000 in the second quarter of last year. The improvement is due to increased product sales offset by an increase in warranty expense. Engineering and development sales, less cost of sales were negative $35,000 this year, compared to positive $126,000 in last year’s second quarter. The decline was due mainly to the timing of cost for the Lotte research project.

Other operating expenses were up $1.1 million – $1,118,000 to $4.3 million. This increase was primarily due to two factors, additional product development costs and additional staffing for the PPA project initiatives. The increase in the product development costs is temporary. As a result, we expect these other operating costs to decline from $4.3 million this quarter, to under $3.8 million per quarter by the beginning of the next fiscal year. The increase in operating expenses, I just mentioned, was partially offset by dilution from the issuance of additional stock earlier in the year, resulting in a $0.01 increase in the loss per share, from a loss of $0.09 in the second quarter of last year, to a net loss per share of $0.10 in this year’s second quarter.

Now I would like to turn to our balance sheet. First, our cash balance at December 31 was $28.2 million. This represents a reduction of $8.1 million from our September 30 balance of $36.3 million. This reduction is due to the operating loss of $4.5 million and the increase in project assets of $3.6 million. The December 31, cumulative balance of $5.8 million in project assets is a reasonably – is a reasonable expectation of the level working capital required for the PPA initiative, going forward.

As a result, we expect the level working capital needed for the PPA strategy on ongoing basis will not change significantly. As we sell or finance the PPA projects, we expect to reinvest the proceeds in the future PPA projects. So again, we do not see a significant net change to working capital for the PPA projects in the future.

In the unlikely event that we do not sell or finance a project, the investment will remain in the books and will generate cash and gain if any over the life of the PPA, generally 20 years. We expect these instances to be rare if at all. Brad?

Brad Hansen

Thank you, Jim. I’d like to spend a moment discussing a few of our noteworthy accomplishments since our November call, as well as given an update on our specific projects and progress towards power purchase agreement investor development. Following this, I’ll provide an outlook for the upcoming months in terms of priorities and business.

We’re excited about our progress towards operational execution of the $11.2 million of PPA projects that are in our backlog. Six projects in our portfolio are in various stages of installation and commissioning. Holu Energy, our Hawaiian subsidiary company, continues to develop a robust pipeline encompassing dozens of projects.

As we stated previously, we believe that Huawei, C&I, and Microgrid market size through the end of our fiscal 2017 is approximately $15 million. We are driving to secure as much share of this market as it’s feasible and profitable.

Our ability to execute multiple large projects concurrently and keep on schedule has been confidence building. Our initial solar with storage project at University of the Nations has progressed very well with Phase 1 already being operational. Our Honolulu Christian Church project is complete and awaiting permit closeout. The balance of our projects in the initial tranche is targeted for sale and completion prior to the end of our fiscal year. We are in the process of working on a second tranche of projects and will report more on our progress with that effort next quarter.

Our Cayman Islands project was shipped to the customer and will be commissioned by this May. This project takes an entire commercial building complex off-grid, it is already been well publicized and is attracting a great deal of ventures, it will be reference project for the entire Caribbean upon completion. We’re also in the process of installing and commissioning our project at the OATI facility in Minnesota. We’ve already begun to collaborate with OATI on other initiatives and opportunities and we’re excited to continue to develop the potential synergies with one of the top utility infrastructure companies in North America. OATI and the Cayman Islands project our straight system sales not power purchase agreements and going forward we will continue to have a mix of both types of opportunities.

I’m excited to have Fred Vaske, our Vice President, Structured Finance, join the company. Fred came onboard in December and brings a wealth of experience in project financing, especially for renewable energy projects. He’s presently developing a pool of investors for our PPA projects. I’d like to provide some color as to what types of investors are interested in these PPAs and why.

The investors interested in our PPA projects are banks and corporates. These investors typically have established tax equity teams with the background in solar PPAs or other renewables projects. As these investors are usually participating in existing solar projects they understand how the model economics and account for changes in technologies in modules, racking, inverters and other equipment and services. In short, they understand solar projects and economics very well. This foundational understanding is precisely why they are interested in what we’re doing at EnSync.

Solar investors understand the limitations of solar only systems, including the intermittency issues, difficulty with utility acceptance of export and electricity from the solar and the risk of future utility tariffs and other program changes that can adversely impact economics. The majority view solar with energy storage system as being the best solution for the future and a safer investment since storage provides a hedge against uncertainty in future program changes.

One can imagine the massive disruption that Nevada’s net metering elimination cost to those that had invested in solar energy the last few years. The investors also known that energy storage enables the distributed generation system to have more flexibility and can open up new value streams.

Many corporate investors are interested in our projects for strategic reasons. Some are in adjacent markets and want to learn more about how systems or solar and energy storage operate in order to find a place in the value chain where they can participate. Others have a mission to invest in renewables projects and realize that the future must include energy storage to maximize value and efficiency of the installation.

Like any new product in the market, there will be early adopter investors and those who come into the pool later. We’re very encouraged by the increasing number of investors that have an interest in what we’re doing on these projects.

There are a few different potential financing pass that are available for us [ph], but we’re primarily focused on to: the outright sale and the sale leaseback. Jim will give a brief description of how both of these work. Jim?

Jim Schott

Thank you Brad. And as Brad just mentioned, we are expecting that we will go down one or two pass either an outright sale of the project or financing the project, most likely as a sale and leaseback of the underlying assets. And our right to sale the projects, is fairly straightforward. In that case we will report revenues equal to the proceeds and costs equal to what we have invested in the project as of the data of sale.

And again a loss would be reported on the income statement at the time of sale and the cash from the sale would be included in operating income. And the sale on leaseback transaction we will sell the asset to a third-party investor and lease it back from that investor. While it depends on the actual terms of the agreement, this transaction will most likely be treated as a “capital lease” for accounting purposes.

In a capital lease, the investment in the project remains on our books as an asset. We would also have a liability on our books to the third-party. The proceeds from the sale part of the transaction will be recorded as a financing transaction not as operating income as is the case in an outright sale. The cash proceeds are approximately the same but are recorded differently. From an income statement standpoint, however, there is no income statement in fact at the time of the sale and leaseback transaction. The gain or loss on the PPA project will be recorded over the life of the lease.

So the key takeaway is that our cash position is substantially the same whether we sell the asset outright or enter into a sale as leaseback. The accounting rules for lease transactions are under review by the accounting profession and may be subject to change. And incoming changes would obviously not affect our cash position and are not expected to materially change the impact on net income. How and where items are recorded within the balance sheet or income statement may change. Brad?

Brad Hansen

Thanks, Jim. We have several major accomplishments this quarter in addition to our project execution. We fully transition production of the Agile flow battery in the Matrix Energy Management platform to our China joint venture, Meineng Energy of which we own 30%. This will benefit us significantly going forward in terms of product cost competitiveness, manufacturing cycle times, business cyclicality and profit margin.

Since our last conference call 14 Agile Flow batteries were delivered to EnSync customer sites from Meineng Energy, 13 Matrix Energy Management platforms have been shipped or are in the process of final assembly and test at Meineng. In addition to this, eight V3.3 Flow batteries were shipped to customers since the beginning of Q2 that were also built at Meineng. So Meineng is now qualified to build all of EnSync’s advanced products.

Our Matrix Energy Management platform recently received listing by ETL to the critical UL 1741 specification, including the DC-AC and DC-DC modules, as well the cabinet itself. This UL 1741 compliance is required to connect the installation to the grid. The matrix and intersection platforms have also achieved compliance with Huawei’s next generation smart inverter requirements. We were among the first companies to achieve this designation in Huawei.

EnSync’s capability to hybridize commercials scale energy storage with multiple technologies simultaneously controlled and optimized in the same system is a key product differentiator. In Q2, we surpassed the milestone of 1.5 megawatt hours of hybrid energy storage shipments for the C&I market. We achieved this less than nine months after product announcement.

In January, we successfully closed out our V3 field upgrade program that covered approximately 60 batteries. We not only achieved high customer satisfaction, but also came in under budget. The closeout of this program will also contribute to the reduced quarterly cash burn rate.

We’re now in the process of ordering parts and building the 500 kilowatt hour flow battery module for delivery to Lotte Chemical later this year. The design has been transferred to Meineng Energy, who will manage the supply chain and production activity on the project. Concurrently, we’re in the process of scaling-up the Agile Hybrid lithium-ion flow battery to 600 kilowatt hours. This product will also leverage Meineng Energy’s supply chain manufacturing and test capabilities. Both products will be delivered or available for delivery by the end of this calendar year.

Finally, over the last six months, we have significantly increased our efforts in chemistry and materials research and development. With a target of achieving the next generation battery cell, that provides at least a 10-point improvement in energy efficiency, a five-fold increase in cell lifetime and a 50% reduction in self discharge. This effort has begun to yield good results and in December, we passed through the single cell level concept and feasibility checkpoint. The next step is scale up to a series of full size working cells.

The last 18 months can be characterized as having been the most intensive for product development in the history of our company. The vast majority of this activity has been focused on hardware. Moving forward we’ll be significantly reducing our hardware development and prototyping efforts. For this, we will rely on Meineng Energy or third-parties, which frees up our bandwidth and financial resources to focus in four core areas.

First, next-generation battery cell materials development. Second, control platform and software development, including that which is required for linking distributed generation assets to each other and to the utility or transmission level items [ph]. Third, customer systems design and applications development then enables us to provide a high value system for any individual building we’re targeting. Finally, the management of our strategic partnerships for power and electronic supply. As we move forward we will specify the hardware design requirements to third-party partners with EnSync bringing the systems design and controls capability. As hardware development typically consumes a relatively large amount of cash and engineering resources, we expect to realize reductions in our operating expenses in FY2017 versus FY2016.

We had great success so far in Hawaii we look forward to building on these results with Holu Energy, our Hawaii subsidiary. Outside of Hawaii we see California, the Pacific Islands, the Caribbean, Australia and China as our major market opportunities. Next month we will open our new office in Petaluma in California. This will improve our U.S. West Coast presence and provide an operating base in the key Californian market.

We continue to work to find opportunities for jointly driving business with SPI. Progress has been made in Asia with business development, however, the China market has been somewhat impacted by macroeconomic factors beyond our control. Outside of Asia there is progress occurring in California the traction will come slowly as many of these projects being proposed have relatively long cycle times. We have stated previously that we expect any SPI related orders to be back end loaded in our fiscal year. There are efforts towards that end, but these orders will likely be delayed somewhat into our FY2017.

In conclusion, it was a great quarter operationally for project execution, completion of our executive team and transitioning our latest products to volume manufacturing in China. From a market standpoint, policy trends continue to be more supportive than predicted and will continue to impact our market and business in positive ways. We have strong competitive differentiation in the C&I and Microgrid market segments and will drive relentless laid to ensure we maintain this position into the future.

We look forward to reporting on the results of our operations and business execution in the coming months. We appreciate you calling in today and happy to now take your questions. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We’ll take our first question from Eric Stine from Craig-Hallum.

Eric Stine

Hi, Brad. Hi, Jim.

Brad Hansen

Hi, Eric.

Jim Schott

Hi, Eric.

Eric Stine

First, just wanted to touch on the PPA. So when you look at the market, I guess near-term and long-term, I mean how do you expect it to fall or what do you expect to mix to be between sale and sale leaseback.

Brad Hansen

Eric, I think we are expecting it to be more skewed towards the sale versus the sale leaseback. The pool of customers per sale leaseback is probably a bit smaller versus straight sale category. So I think it will be more skewed towards the straight sales.

Eric Stine

Okay. And then when you look at the $11.2 million that you’ve currently got in your PPA backlog, I mean, I would assume, well first of all just to clarify, so you do expect that over the next two quarters. I want to confirm that but also I mean, how do you expect that to kind of play out literally – the linearity of that, I mean, is that going to be heavy, is there a way to say is that heavy next quarter or the quarter after that?

Jim Schott

Well, I think really it was going to likely be in our Q4.

Eric Stine

Okay.

Jim Schott

When you’re engaged with the buyers on these are typically a cycle time to that somewhere between two months to four months. So it is a process to work through all the economic modeling and get alignment on that. So it will be likely in our Q4 versus Q3.

Eric Stine

Okay. And then I would assume your previous statement would stand for that as well that you would expect the majority of the $11.2 million to be a project sale and impact revenues rather than the sale leaseback.

Jim Schott

Likely, that’s likely correct.

Eric Stine

Okay.

Jim Schott

Again, we’re at the early stages Fred is out with the investor pool and it could change, but that’s what we would say today.

Eric Stine

Okay. And then may be just sticking with that I know you have targeted $50 million, that goal over the next couple of years in Huawei. I mean is that – is there a way to kind of peg a real realistic capture rate of that $50 million given you’re one of the first in the market, you’ve got that first mover advantage?

Jim Schott

I think that we’re going – we will not be very satisfied unless we’re the market share leader. And what that means, can’t tell you today, but I do believe we’re well-positioned through the end of our FY’17 to take a leading position in that market and be able to hold that. So, I’m comfortable that we’ll be the market leader and we can probably give more color on that as we get more into that time period and maybe into early 2017.

Eric Stine

Okay, understood. May be last one for me, just on OATI, it sounds like the installation of the Agile system is underway right now, but just curious, what kind of inroads you and OATI together are making with utilities in terms of getting the message out, what you can bring to the table? And then, I mean maybe just some thoughts on when you think this could be a contributor to revenues? I mean, I would assume it’s more of a fiscal year 2017 event?

Brad Hansen

That’s likely, what’s happening right now, and the system is just installed and we will need a couple of our months, I think to get it through a commissioning. But, I’m encouraged that they’re being aggressive, and we’re being aggressive looking for additional projects together prior to that system event being through commissioning. We were doing a bit of a, I guess a beta test on the relationship for lack of a better term, in Huawei to start with. And we’ll see where that goes to, we’re looking at doing some activities together there. And that will include working with those system one of our installations there.

Eric Stine

Got it. Okay, thank you very much.

Brad Hansen

Thanks Eric.

Operator

[Operator Instructions] We take a question from [indiscernible] from SW Associates.

Unidentified Analyst

Good afternoon guys. So what does it mean, you guys standing with SPI going forward, it sounds pretty uncertain?

Brad Hansen

I think it’s liable to be a little later than we thought and primarily because a lot of what we’re doing in California with them, our larger projects than we anticipated, kind of in the small utility scale versus the C&I type of projects. Those typically take a while longer and so it could be into, early into our 2017 or there about before we get any movement in the U.S. just because of the cycle time of the projects. The uncertainty would revolve more around China where there is just some degree, things are a bit frozen there on renewables right now, waiting for, I think more clarity from the government on what they’re going to do and more clarity on the economy.

Unidentified Analyst

Okay. And then, is the Lotte are they a supplier to you now?

Brad Hansen

No, Lotte doesn’t supply us today, they did supply us a couple of quarters ago with some sales tax and they were – we use them as kind of an overflow production source for our sales tax, complementing our internal production. But our outfit is such that we’re able to scale that back. So today, they’re not supplying us anything.

Unidentified Analyst

You just have something scheduled to deliver.

Brad Hansen

Right, we’re delivering product to them, it will be later this year, that’s the 500 kilowatt-hour module.

Unidentified Analyst

So, where do you see that leading?

Brad Hansen

I’m sorry, can you repeat that?

Unidentified Analyst

How do you see that relationship playing out if you did 500 kilowatt unit headed there, to be shift and how’s that relationship looking going forward?

Brad Hansen

Some of that depends on their plans, and strategy, and aggressiveness and market success. I think to the degree that, they’re successful and it will benefit us. I will just have to see how that goes. And obviously this 500 kilowatt-hour just turns important to us and important to them. And they view it as a key to be able to scale their utility level business in Korea.

Unidentified Analyst

Got it. Okay, so where does that leave operations in Wisconsin and are you based out of their field [ph] or where are you based?

Brad Hansen

Yes, I mean headquarters in Wisconsin. What we do in Wisconsin is the following: we produce cell stacks and are in volume production in cell stacks. We do product design and system design for batteries, power electronics, and software and control systems. When those get produced or where the prototypes get made is – depends on what it is. In some cases its Meineng Energy, in some cases it’s a third-party. But we’re focused more on the high-value add design, and software control systems and being able to do applications and customer configuration, that will make a successful in the market.

Unidentified Analyst

What’s the headcount, what do you see envision for the future of the Wisconsin operation?

Brad Hansen

We’ve operated during our product development stage that’s been intensive as we noted in the conference calls script. We operated about 25% headcount, 10% contractors, that is starting to taper off. As we’ve gotten through various programs and we would look for that to continue to taper off to the point where we’re somewhere in the 70 employees to 75 employees versus the 90 employees were up late [ph] that we were at the start of Q2.

Unidentified Analyst

Okay, I mean, you ultimately see a credit to California or…

Brad Hansen

California is – well California is very important to us from market standpoint. What we have there now is we’re running sales and project finance out of there and doing a lot of our product economic modeling out of that office. But the core competency here at headquarters, is definitely, design and controls and software. And we anticipate that that will stay here for the duration.

Unidentified Analyst

So what kind of material information can give us regarding some of these big projects, with you looking at with SPI?

Brad Hansen

Really nothing more than I’ve said so far which is, there’s a lot of activity in California, a lot of – I would call them medium size to small size utility scale type of projects there is multiple ones there we’re working with them on. So we’re working hard, we’ll see when we land one.

Unidentified Analyst

Okay, fair enough. Thanks for answering the questions and good luck going forward.

Jim Schott

Thank you.

Operator

[Operator Instructions] We’ll take our next question from James Collins with HDF Associates [ph].

Unidentified Analyst

Hi, Brad.

Brad Hansen

Hi, how are you Jim?

Unidentified Analyst

Just fine. The thing that’s comes to mind is the battery chemistry that we use the zinc-bromine I keep seeing vanadium redox systems out there and so how do we stack up? Is any one chemistry for the full battery is getting more business on the other or just what’s the story on that?

Brad Hansen

To my knowledge there is not much success on vanadium redox in our primary target market which is C&I.

Unidentified Analyst

Okay.

Brad Hansen

And there’s reasons for that. The size of that product is three times to five times the size of our product. You start to get to just practical limitations of being able to feel the product in and around a building.

The second thing Jim is, for that market you really need to hybridize. There’s too many power type of applications in addition to the energy application

Unidentified Analyst

I see.

Brad Hansen

I don’t know that anybody that’s doing vanadium redox is able to hybridize at this point.

And I think lastly a lot of those batteries are moving to a chemistry that is called vanadium vanadium and the pH of that chemistry can be one or less. And it’s just not something you want to put around and optimize [ph].

Unidentified Analyst

Yes, periodically [ph]. Then Ben I see Redflow is – seems to be having some modest success. And I think they have a significantly [ph] a different business plan and what they are doing are you seeing much of them out there and the business that you’re going after?

Brad Hansen

They are kind of in a different space than us.

Unidentified Analyst

Okay.

Brad Hansen

May be at some point that there gets to be more crossover but they seem to be more focused on residential, or very small commercial. So I think at this point there’s not a lot of overlap other than we view this similar material in chemistry.

Unidentified Analyst

Okay.

Brad Hansen

They’re probably the only other fully commercialized zinc bromide product out there other than us. So we wish them well, you wish for su..

Unidentified Analyst

Of course, [indiscernible] 2006, the – that the most of solar storage that you see is pretty much lithium-ion stuff. And I’ve been going through various projects and so on. And that seems to be the big thing that’s been used. And as I understand at some point once they decide that they would need something like that had more longevity in terms power, it could may be a couple hours of solar is that always going to be a short-term 15 minutes or so for when they’re using lithium ion as opposed to they won’t run into the need for the longer duration of which the case they would maybe have to retrofit four batteries or in that same vein would there be any retrofitting of the – you feel like that the Nevada companies who are just solar power only.

But they might want to retrofit solar storage. If you give it more flexibility and maybe get some more income from of those systems. Is that a possibility retrofit I guess?

Brad Hansen

It could be, I think it would have to be retrofit to existing projects, have to be able to add another value stream in. Or in the case of Nevada it may be that you would have to be able to do it, just to take your system to be optimized I don’t know.

Your first question on the construction of the systems, the bulk of systems out there right now where storage is involved with solar are typically doing something pretty simple.

Unidentified Analyst

Okay.

Brad Hansen

May be lithium ion is doing since moving may be occasionally participates in demand response. But going forward the trend is definitely more applications, more complexity. There is somewhere between 12 and 15 applications and value streams that are possible…

Unidentified Analyst

Well okay.

Brad Hansen

Depending on the location. They divide pretty equally between kind of the four-hour, type of applications and 30-minute type of applications. So that’s why when we looked at this about a year ago, we just decided we have to go hybrid. And we can’t push one technology to do what it’s not good at doing.

Unidentified Analyst

Yes.

Brad Hansen

And the cost effective of doing.

Unidentified Analyst

Okay

Brad Hansen

So we put the two of them together. We believe that we made the correct call, there is nothing we’ve seen since then that would cause us to think differently. And our real world project experience just reinforces what we’ve done.

Unidentified Analyst

Any competitors out there doing the same thing?

Brad Hansen

At this point no, should be able to operate the two different technologies up the same bus.

Unidentified Analyst

Okay.

Brad Hansen

For different applications, is really difficult and really complicated. But we have a very elegant solution to how to do that that we have IP on. And so our system is pretty simple, but it’s a very complicated matter to address in the real world.

Unidentified Analyst

Okay, okay I understand. So, are we a market share leader in any of the 11 or 12 applications that you’re talking about? Who is the market share leader?

Brad Hansen

Well, where we think we’re the leader is be able to put together multiple applications in the same system. And Hawaii is a good case for that, where we’re doing multiple applications and the same commercial property and we’re definitely the leader in Hawaii at this point in C&I and microgrid.

Unidentified Analyst

Okay, and over there with $50 million you’re saying would be, the target market for the next year?

Jim Schott

We think that’s the market size through our fiscal year 2017, so looking forward…

Unidentified Analyst

2017 okay.

Jim Schott

Yes.

Unidentified Analyst

Okay, Okay. Well thank you very much. Brad

Brad Hansen

All right. Thank you.

Operator

We will go next to Chip Unsworth with Legend.

Chip Unsworth

Hey, Brad, how are you?

Brad Hansen

Good. How are you Chip?

Chip Unsworth

Good. So a couple of questions just on the – I was very interested when things had turned for the better being the solutions provider and getting on a power purchase agreement. Those power purchase agreements that that you have signed are any of them active.

Brad Hansen

We are in the process of going through and finding buyers for that first tranche, so one of them is producing the second we’ll be producing eminently. As Jim pointed out, we’re going to either to sell lease back or straight sale on those from now through the end of the fiscal year. And that’s the timing that we’ve given.

Chip Unsworth

Okay, so well that’s great. So you’re live on one or two of them and with that what is, is it a 10-year or 20-year how long is the power purchase agreement?

Brad Hansen

Yes, everything in the initial tranche was 20 years.

Chip Unsworth

It’s 20 years. And so what dose that revenue stream look like over 20 years?

Brad Hansen

I would have to take that one-off line with you. Ultimately we’re trying to sell these not keep them.

Jim Schott

If you ask on the shape of the revenue stream and we’ve start off with a certain kilowatt hour. And the net goes up ratchets up 1% to 2% a year depending on the contract.

Chip Unsworth

Okay. Right, okay.

Brad Hansen

Yes, look whoever holds…

Chip Unsworth

I don’t know the variables for the algebra count [ph], but I think I’m on some what the same page. So basically I mean you’re going to sell at some sort of either discounted level of what that full contract would be and I would assume that there’s a fair amount of off takers for that?

Brad Hansen

Well, the off taker is the contracted party. We…

Chip Unsworth

I’m sorry, I used the wrong word, I meant the person that would basically buy out that power purchase agreement.

Brad Hansen

Right, they would buy it at some profit to us. That’s our target. And they would receive the tax credits or whatever credit, they would receive the ongoing revenue stream. And that point we would be out other than where they were in charge of executing the warranty.

Chip Unsworth

Yes. Okay. All right, so let’s have more discussion on that and looking forward you guys actually have that office in Petaluma when is that going to open?

Brad Hansen

In March.

Chip Unsworth

Okay. So that’s soon enough. And I hope that you’re coming out at some point either before that or around the same time we open it.

Brad Hansen

I’ll be out soon.

Chip Unsworth

Okay. All right. For whatever guys well good, good. Thanks it sounds like there’s progress. Thanks a lot.

Brad Hansen

Thanks Chip.

Jim Schott

I appreciate it.

Matt Selinger

Thanks, Chip.

Operator

And with no further questions in the queue, I’d like to turn the call back over to Brad Hanson for any additional or closing remarks.

Brad Hansen

Thank you operator and thank you to everyone who participated on the call today. As we mentioned we’re pleased with the progress made and accomplishments achieved to position EnSync as a leading provider of technologies and solutions, to move the global economy from a focus of coal generated power to one utilizing renewable energy sources.

Specifically, we made progress on our PPA projects with an expectation of monetizing these projects in the near future. We’re building out our sales channels and look forward to bringing in additional projects outside of Hawaii later in the year. We’re driving efficiencies in our product development and manufacturing capabilities to improve our competitiveness in the marketplace and profitability as a company.

And finally, our balance sheet remains strong allowing us the opportunities to execute on our strategy. We look forward to speaking with you again at the end of the current quarter. Thank you again for your support and interest in EnSync Energy Systems.

Operator

This does conclude today’s conference. We thank you for your participation.

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