Ideal Power Inc. (NASDAQ:IPWR)
Q4 2016 Earnings Conference Call
February 27, 2017 16:30 ET
Chris Tyson - Managing Director, MZ North America
Dan Brdar - Chairman and Chief Executive Officer
Tim Burns - Chief Financial Officer
Eric Stine - Craig-Hallum
Colin Rusch - Oppenheimer
Jeff Grampp - Northland Capital Markets
Carter Driscoll - FBR
Good day and welcome to the Ideal Power Fourth Quarter and Full Year 2016 Conference Call and Webcast. Today’s conference is being recorded. At this time, I would like to turn the conference over to Chris Tyson, Managing Director of MZ North America. Sir, please go ahead.
Thank you and good afternoon. I would like to thank you all for taking the time to join us for Ideal Power’s fourth quarter and full year 2016 conference call. Your hosts today are Mr. Dan Brdar, Chairman and CEO as well as Mr. Tim Burns, the company’s Chief Financial Officer. Dan will provide a business update, which will cover partner announcements, product updates, while Tim will discuss the financial results. A press release detailing these results crossed the wires this afternoon at 4 PM Eastern today and is available on the company’s website, idealpower.com. Following management’s prepared comments, we will open the floor to questions for those of you who are dialing in for today’s call.
Before we begin the formal presentation, I would like to remind everyone that statements made on the call and webcast, including those regarding future financial results and industry prospects are forward-looking and maybe subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the call. Please refer to the company’s SEC filings for a list of associated risks and we would also refer you to the company’s website for more supporting industry information.
At this time, I would like to turn the call over to Dan Brdar. Dan, the floor is yours.
Thanks, Chris. 2016 was a pivotal year for Ideal Power as we made significant progress with our commercialization strategy for our Power Packet Switching Architecture and they introduced new products that expand our addressable markets and strengthen relationships with several existing and new system integration partners. Despite the disruption in our initial target market in California resulting in weak 2016 product sales, several other financial and operational metrics trended well that give us confidence as we commence our domestic and international rollout of our new Stabiliti and SunDial products in 2017.
On the operational front, we established key partnerships with some of the largest players in the commercial and industrial storage segment, introduced new products, expanded our product capabilities, entered new geographical markets, diversified our revenue base, expanded our addressable markets and signed our first major licensing agreement with a Fortune Global 500 company, Flex and their subsidiary, NEXTracker.
On the financial front, we experienced significant headwinds in 2016 that led to poor product sales in our core marketing of California driven by the delay in the California’s Self Generation Incentive Program. As the sixth largest economy in the world and a leader for climate action and renewables, California represents the large market opportunity for Ideal Power products and I know many of our shareholders expressed concern with delay to launching these subsidized storage projects. As many of you know, the California Public Utilities Commission and the California legislature have resolved the programmatic issues from last year and in fact strengthened the program considerably increasing the storage target by 500 megawatts to 1.8 gigawatts by 2020 and doubling the total incentive dollars available for storage projects in the state for calendar years 2017 through 2019. In discussion with our system integration partners, they are now working with the close projects with their end customers submitted under the previous solicitation and are working to build a pipeline of opportunities to submit for the next round of the SGIP program later this year.
Today, we announced the completion of $15 million financing, with participation from institutional and accredited investors, the entire senior management team and our full Board of Directors in the offering, which provides the financial runway we need to allow our solution providers to build and begin closing our pipeline of business that drives growth. Before we look at our expectations for 2017 in more detail and review strategic initiatives with our new capital, I want to recap key progress made during 2016 with an emphasis on developments during the fourth quarter and have Tim review the financials.
Our initial target market, standalone energy storage, is anticipated to be a multibillion dollar global market opportunity for utility, commercial, industrial and residential customers largely due to the dynamics of rapidly declining battery costs and rising costs of peak electricity generation. Our efforts have been directed at developing innovative products based on our PPSA technology and capturing the domestic and international system integration partners targeting the commercial and industrial segment and partnering with the battery suppliers who will create and grow this market over the long-term.
First and foremost, the fourth quarter was highlighted with the 4-megawatt purchase order from JLM Energy for our 30-kilowatt and 125-kilowatt power conversion systems for JLM Energy’s portfolio of commercial battery and the storage systems and microgrid projects. JLM is a leading provider of commercial and industrial energy storage systems with an impressive pipeline of commercial and residential projects. Their ability to drive standalone energy storage or microgrid projects from design to installation and system monitoring makes them a highly valued partner. This order is for deliveries over the course of 2017.
While JLM is based in California and is active in that market, they are also executing projects outside of California, including the Midwest and East Coast for demand charge management, microgrids and the combination of solar and storage. In addition to JLM, we have also been selected by both NEC and Stem as part of their offerings. NEC created NEC Energy Solutions that is bringing integrated storage solutions to the market, building on their success in the utility scale market where they have developed 120 megawatts of their grid storage systems they are now entering the commercial and industrial market with their distributed storage system, or DSS. We are pleased they selected Ideal Power as a key supplier for the commercial product launch and displayed our product as part of their offering at the recent DistribuTECH Conference.
Also in 2016, Sonnen, the largest storage provider in Germany entered the U.S. market and selected Ideal Power for their commercial system offering. Their U.S. initial launch was for their residential system leveraging their experience in Germany and will be followed by their commercial, industrial system offering. In Canada, we received a 360-kilowatt purchase order from KACO new energy to supply our three-port grid-resilient 30-kilowatt power conversion systems for the Living Energy Project at the Leduc #1 Energy Discovery Center in Alberta, Canada. The Living Energy Project will utilize solar PV with trackers, energy storage, a wind turbine mounted atop a purpose-built oil derrick, and a natural gas-fueled cogeneration unit to capture geothermal energy from an abandoned oil well. Our PCS single AC plus dual DC power ports will enable the integration of solar and energy storage utilizing single inverters at the Living Energy Project. The Living Energy Project is an excellent showcase for our power conversion technology enabling energy storage to be integrated directly with a solar tracking system. The project will demonstrate the intersection of oilfield services and renewable energy. The mobile solar PV system used at Leduc #1 will utilize a much cleaner and lower cost method to power remote, off-grid facilities than a traditional oil-fired diesel generator.
By way of background, KACO new energy is among the world’s largest manufacturers of solar inverters. They selected Ideal Power for their storage solutions due to the unique advantages of our PPSA technology rather than develop a storage-based product of their own based on conventional power converter technology. In our initial storage market of California, the increase in the state storage targets and incentive funding will drive more project development for the behind-the-meter installations. Although the initial markets are transacting slowly, the plans to enter the commercial and industrial market this year of large, well-capitalized system providers such as NEC and Mercedes signals the maturing of the space and confirms the magnitude of the long-term opportunity. While California leads the adoption of storage, we now see the East Coast moving forward as well. Storage projects are being bid as part of the regional transmission system in the Northeast to provide fast frequency response for the grid.
New York City has adopted a storage target of 100 megawatt hours by 2020. Massachusetts, which currently has almost no installed storage, is working to set a target later this year, expected to be at least 600 megawatts by 2025. These initiatives and others are creating the long-term opportunity that coupled with expanded battery production capacity and lower cost will drive the market adoption of storage systems. The interest we are receiving from existing and potential partners for opportunities outside of the U.S. validates that energy storage is becoming a global business.
According to market research from IHS, global energy storage system deployments are expected to reach $13 billion by 2025, which creates a $2 billion power converter market, with the commercial and industrial segment being one of the larger segments. While the growth of this market in the near-term will remain unpredictable and incentive-driven, the declining cost of batteries creates an attractive long-term opportunity that is attracting large system providers to enter the space. To support the needs of the standalone storage market, we introduced 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 in Q1.
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 capability 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.
Beginning this year, we will be adding international certifications to the product, starting first with Australia where we have already identified our first solution providers and customer opportunities. Despite the significant disruption in the U.S. commercial and industrial energy storage market in 2016, we continue to see new well established companies coming to the market as solution providers. Our products are already in evaluation with several of these that have publicly announced their plans to be a solution provider, companies such as Mercedes and Panasonic as well as others that are not yet household names. We will keep you apprised of our progress with them in the quarters to come.
The second market we are targeting for our PPSA technology is to solar market with particular focus on the convergence of solar on storage. These two technologies will be increasingly used together as economic energy storage mitigates many of the issues created by high levels of intermittent solar generation. In fact energy storage is essential for solar to continue to grow at the rates projected by the solar industry. In markets such as Hawaii, solar is no longer allowed to be connected to the grid without being coupled with storage to mitigate the intermittency inherent in solar generation. Similar to Hawaii, other states such as Nevada and Arizona are eliminating net metering preventing solar owners from selling their excess power back to utilities to our peak generation. This adversely affects solar economics but could be mitigated through the coupling of solar on storage potentially providing a better return on investment than solar alone. In December we announced the NEXTracker a Flex company who will be selling our SunDial solar PV plus storage string inverter as part of their newly launched solar plus storage tracker.
NEXTracker’s NX Fusion Plus will integrate the SunDial together with NEXTracker’s best in class solar tracker, a battery pack and software to deliver maximum return on investment to solar power plants. This solution will be packaged and sold by NEXTracker to its global customer base to increase the amount of solar production for its customers. Flex research forecast that the solar plus storage market will reach $8 billion by 2026. NEXTracker was acquired last year by global electronic manufacturing giant Flex formerly known as Flextronics and it’s the number one solar tracker supplier worldwide with over 5 gigawatts of shipments. The company is widely recognized for its innovative independent tracking systems and its global leadership position in the solar industry. NEXTracker’s NX Fusion Plus system is a key part of their plan growth and entry into the commercial and industrial segments. We are working closely with them on the system launch they announced at the Energy Storage North America conference and expecting on further information to share with you in the coming weeks.
The SunDials are galvanically isolated, grid-tied 30-kilowatt PV string inverter that could be equipped to add energy storage either at initial installation for anytime in the future with this upgradeable third port upgrade kit. As the SunDial allows AC power flow in only direction, the primary use 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 cash/credit requirements for integrating storage with solar. The growing installed base of solar and resulting grid instabilities will increasingly force the coupling of solar and storage. Our new SunDial represents innovative way for Ideal Power to share part of this market while giving our customers with flexibility to create additional value from their system via direct storage integration. We have recently completed UL1741 testing and certification for the SunDial product and we will be shipping the first certified units to customers in Q1.
In the third quarter, our SunDial products was recognized as one of the top 20 energy storage disrupters by leading industry publications PV-Tech magazine where listing goes out energy storage companies and technologies that are making an impact on the industry. Every year at the Energy Storage North America conference projects were selected for their innovation and design excellence. At ESNA this year there were six projects selected as finalists and four of those included our power converters. The awards annually recognized energy storage projects that demonstrated an exceptional level of design and engineering and practical applications. We are pleased by the project developed by EVgo for electric vehicle fast charging was selected as an award winner in the fourth quarter. The EVgo system reduces the cost of ownership for electric vehicle charging by leveraging two Ideal Power 30 kilowatt battery converters integrated by EV Grid with 250 kilowatt-hour second life batteries from BMW. The project demonstrates the demand management solution for EVgo’s network of DC fast chargers. This project demonstrates how incorporating energy storage with Level 3 EV charging infrastructure can reduce the cost of developing, constructing and operating EV charging stations to make charging accessible, affordable to all of EV drivers facilitating EV charging directly from energy storage to minimize demand chargers. They just wanted many applications for our power converters excel and is a targeted growth market for our products.
According to a recent report from Greentech Media the electrification of electric vehicles is becoming increasingly part of decarbonization conversations and energy policy in business. Prior to 2010 the energy information administration estimated a total of 57,000 electric vehicles in use in the U.S., between 2010 and 2015 EV sales surpassed 400,000 vehicles with a value of $15 billion. This technology and infrastructure continued to improve EV sales could increase to 12 million vehicles. This market will have a significant impact on current and planned grid infrastructure creating opportunities for existing stakeholders and new market players that can create integrated solutions for the EV driver, electric utility, wholesale energy market and aggregators. We view electric vehicle fast charging as a key growth area in the next few years as the infrastructure is developed to allow the fleet of electric vehicles being introduced in the market. Our products small size electrical isolation without the need big bucket transformers and it’s ability to be prepared, being carried with onsite energy storage make it a good choice for incorporation into the new fast charging network being developed by companies such as EVgo. We have built the largest public electric vehicle charging network in the country. The investment and build out of fast charging networks is being driven by both the desire of auto manufacturers to enable the sales of their planned electric vehicles, but also my mandated investments in the case of energy and Volkswagen [ph].
Now that we have successfully participated in several demonstrations of our technologies for EV charging, we are engaged with several fast charging providers as part of our product planning and channel partnering development. We are targeting ending this market on a commercial basis late this year leveraging our existing product designs. 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. Ideal Power now holds over 20 patents on B-TRAN including patents on the unique double handle wafer process developed to produce the devices. The B-TRAN due to its unique double sided structure 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, faster switching performance predicted from B-TRAN should result in more efficient smaller and lower cost power converters.
Our focus during 2016 was working with two semiconductor fabricators to develop the manufacturing processes to produce double sided silicon devices essential for production and commercialization of this unique technology. While that process will come slowly, we have now down selected to one semiconductor fabrication partner who demonstrated the capability to manufacture double sided silicon devices. Also during 2016, we had a firm development packaging design to allow the B-TRAN devices to be mounted on to circuit board for testing. After conducting a drive run with the packaging house amounting double sided silicon, the packager recommended changes to the packaging design to improve the connections for the B-TRAN devices and improve how the devices will be mounted to the circuit board. The recommended changes to the packaging design are now being implemented and the revised design will be used for our device testing. Based on the test results from the single sided devices tested last year we are optimistic about the performance potential of the early devices. Results of the initial testing will be used to drive optimization of the device design and our manufacturing process.
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 your apprised of our progress. While this is not registered on an income statement intellectual property for a company such as ours is a key asset and therefore continues to providing us a good deal of management attention. Growing our IP estate smartly and correctly is something we take a great deal of pride in as we look to complement our product sales with licensing arrangements both in the U.S. and abroad. The value of our patent portfolio will become more and more apparent. Currently our total patent portfolio consists of 62 issued patterns with almost 100 pending.
Before I take a look at 2017, I want to turn the floor over to our CFO, Tim Burns to discuss the financial results. Tim?
Thank you, Dan. I will run through the fourth quarter and full year 2016 financial results. Product revenue in 2016 was $1.6 million or a decrease of 62% compared to product revenue of $4.3 million in 2015. Product revenue for the fourth quarter was $371,000 or a decrease of 62% compared to $967,000 in product revenue for the fourth quarter of 2015. The decrease in revenue was driven by the disruption in our initial target market in California that Dan mentioned earlier. As we have noted on prior calls, our revenue and the revenue for the storage market in general will be lumpy in the short-term as it is still an early market. As the addressable market continues to mature and expand and we diversify into other more established target markets, we would expect much of this quarter-over-quarter variability in the market to SM providing a more stable revenue base.
Looking forward, we expect the mid-2016 resolution of the SGIP delays, delayed third quarter favorable changes in the SGIP program, the expansion of addressable markets in the U.S. outside of California, our entry into the Australian market planned for later this year and the recent certification and availability of our SunDial and Stabiliti Series 30-kilowatt advanced power conversion systems to drive meaningful revenue growth beginning midyear. Due to the expected timing of growth in our initial target markets, we thus expect revenue to be heavily back half loaded in 2017.
Gross margins were negative 19% in 2016 compared to 9% gross margins in 2015. Gross margins in the fourth quarter were negative 10% compared to 1% gross margin in the fourth quarter of 2015. 2016 margins declined significantly due to a one-time $0.3 million inventory charge from the discontinuation of our legacy IBC-30 battery converter in the third quarter. Our 2016 and fourth quarter margins were also negatively impacted by $0.1 million unfavorable charge to increase our warranty accrual related primarily to our now discontinued legacy IBC-30 battery converter. Without these unfavorable charges, our 2016 and fourth quarter gross margins would have been 9% and 12% respectively.
Also as previously communicated, as we ship at low-to-moderate volumes, our quarter-to-quarter gross margins will have variability depending upon the product mix and timing of new product introductions. We are targeting gross margins of 30% to 40% at scale and exclusive of any benefit from licensing. We have already shown that even at low volumes, our gross margin swing from negative to positive as many one-time unfavorable charges and as revenues grow, we expect the margin expansion with the leverage in our business model becoming even more apparent. We expect some downward pressure in the first half of the year due to new product introductions since first deliveries of the SunDial and Stabiliti products are scheduled for later this quarter. It is also important to note that we generally expect loan margins on the SunDial product, particularly purchased without the storage port due to significant pricing pressure and lower pricing expectations in the PV market.
Research and development expenses decreased 5% in 2016 to $5.2 million from $5.5 million in the 2015. Research and development expenses decreased 23% in the fourth quarter to $1.3 million compared to $1.7 million in the fourth quarter of 2015. Although the timing of product and B-TRAN 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 will have the highest return and maximize our revenue growth and shareholder value.
SG&A increased 3% in 2016 to $5.5 million versus $5.3 million in 2015. SG&A increased 8% in the fourth quarter to $1.5 million compared to $1.3 million in the fourth quarter of 2015. We do not expect significant increases in SG&A in the short-term, but we will strategically expand our sales teams to drive future growth as we diversify into new markets and geographies. Operating expenses in 2016 totaled $10.7 million, yielding a net loss of $11 million or $1.15 per basic and fully diluted share. Operating expenses in the fourth quarter of 2016 totaled $2.8 million yielding a net loss of $2.8 million or $0.29 per basic and fully diluted share.
At December 31, 2016, we had backlog of $5.5 million compared to backlog of $4.5 million at September 30, 2016. Our year end backlog was primarily related to orders for the standalone storage market, and to a lesser extent, the microgrid market. We expect that mix to change, in order words we see certification on the SunDial, which is targeted to Solar Plus storage market. In 2015, we saw our backlog translate to revenue typically within 6 months. In 2016, as the standalone storage market was disrupted, we saw customers with rescheduling flexibility push out deliveries resulting in a much longer path from auditor revenue. Going forward, we would expect new orders to be for deliveries not to exceed 1 year and in many cases for orders be for 3 to 6 months of deliveries. This will provide us with better visibility into the time you feature revenues. And after we delivered the existing backlog, we would expect the return to closer to a 6-month order revenue cycle similar to what we saw in 2015.
From a working capital perspective, although most orders are self-financing meaning payment terms to the manufacturer and collection to customer receivables are closely aligned, we did see negative impact to working capital in 2016 due to lower revenue levels. Just as revenue growth works in our favor from a working capital perspective, declining revenues work against us. We expect that this impact will verse itself as revenues ramp up over the back half of 2017. We currently had ample capacity at our contract manufacturers to meet backlog and forecasted growth for 2017.
On December 31, our balance sheet included $4.2 million in cash and cash equivalents and no debt. Cash usage in 2016 totaled $10.8 million versus $8.8 million in 2015. Our 2016 cash usage included a $1.4 million adverse impact for working capital as our revenues declined from 2015. Subsequent to the closing of the fourth quarter 2016, we completed a $15 million private placement with institutional and accredited investors, all members of the company’s 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 participated in the offering. We are very pleased to see that many of our current investors participated in this private placement. Of critical focus for us in 2017 as our initial target markets develop will be to prudently manage our spending to reduce our cash burn. We have begun our focused efforts of leadership teams and as a company to identify and capture opportunities to reduce our spending and overhead.
Lastly, I want to mention we will be attending two investor conferences in March and May. Dan and I will be attending the 29th Annual ROTH Conference on March 13 and I will be attending the B. Riley 18th Annual Investor Conference on May 24 and 25.
I will now turn it back over to Dan. Dan?
Thanks, Tim. We see the standalone storage space already in transition, who have new well-capitalized players entering and small players who did not bring project financing struggling to compete. Some of these solution providers both large and small will succeed [indiscernible]. Our objective is to capture as many of the potential solution providers as possible and use their collective market feedbacks to drive our product offerings and product roadmap. The groundwork for the industry is being laid both domestically and internationally with some markets such as the U.S. being driven first by the commercial and industrial and utility segments and others where the residential market will transact first. All of these markets are being driven by the macro trend of rapidly declining battery costs, greatly expanded manufacturing capacity for batteries and the growing incorporation of storage and state level objectives and utility planning for both behind-the-meter and in front-of-the-meter applications.
Based on discussions we have been having with our market channel partners, we have 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 opportunity for scale that allow us to contain our costs. The emergence of the Solar Plus storage market is the segment we expect to begin transacting this year. We intend to lead this initiative through our licensing arrangement with Flex and NEXTracker and expect to expand that relationship this year and engage with others as well.
One of our planned initiatives for later this year is the electric vehicle fast-charging market. Our PPSA technology brings unique benefits due to its features small size and footprint and our ability to be coupled with buffer batteries to improve the economics of these installations. We are in discussions with solution providers in the space and intend to leverage our existing product designs and the award winning installation we have participated in with EVgo to become part of the build-out of the charging infrastructure over the next several years. Our focus going forward is to use our capital smartly to drive the sense of urgency and focus for our own development and market entry efforts and to capture and drive our partners and market segments to transact.
2016 has been a challenging year for the energy storage market, particularly in the commercial and industrial segment. And as the magnitude of the opportunity had changed, we have to reconsider our direction priorities and expectations, but it hasn’t. We believe the adoption of energy storage will fundamentally change the conventional approach to electrical generation, distribution and use. We see new large Fortune 500 companies launching system offerings and creating entire energy storage business units to capture the long-term opportunity. Large battery manufacturing capacity additions are already in progress as most major battery producers essential to serve the expected demand, but also key to driving down battery costs over the next several years.
Many of our partners are now bringing financing to the space necessary for market segments such as commercial and industrial. These aspects and others confirm for us the magnitude of the opportunity in the market. We appreciate the support of our shareholders and those who have done diligence to appreciate the growth profile of this market and the reason why they both want and need to invest here. Our focus has been on executing the aspects of our business we can control, developing competitive differentiated products, capturing the system integrators and channel partners that will ultimately drive the global market and securing the industry certifications needed to expand beyond the initial market of California. While the pace of adoption for an early market can be sporadic especially when event like SGIP disruption occur, the pipeline of opportunities, new system providers entering the market, expanding state and city storage objectives in funding and declining battery prices confirm the long-term opportunity for energy storage to alter the energy landscape.
On our last call, I noted several key initiatives management was going to focus on to create value for the enterprise and improve our operating metrics, let’s see our progress so far. First is expansion into international markets. We have now shipped products into Germany and Canada and are adding Australian certification to our products this year and identified our market entry partners for the market. Next return of order flow for the California market with resolution of the SGIP program in place, our storage solution partners are focused on closing projects with their end customers and we anticipate to translate into orders for us as they are successful. Next the addition of new system integration alliance partners for standalone energy storage. In Q4, we announced our first orders with GLM Energy and KACO new energy and NEC launched their storage system showcasing Ideal Power as their power converter supplier.
The SunDial product launch, our SunDial product completed UL certification and our launch customer NEXTracker officially launched their new NX Fusion Plus system, highlighting Ideal Power as the power converter supplier. We expect to have more to talk about regarding NEXTracker in the coming weeks. Success with our B-TRAN technology having validated single sided devices and developed the manufacturing processes needed for double sided devices, our focus is now to package and test B-TRANs to enable us to attract and engage semiconductor partners for commercialization. Continued innovation, our new Stabiliti and SunDial products are now launched, UL certified and in production and are winning industry awards and recognition for innovation such as the ESNA and PV-Tech awards.
Our storage related markets presents the significant long-term market opportunities. They are new markets that will grow at uneven and an unpredictable pace. We fortified our balance sheet with our recent offering which included participation by all members of our Board and senior management team as we believe the energy storage will fundamentally change the electric infrastructure and that our PPSA technology is well suited to serve those markets as they develop. This gives us the flexibility we need to allow the storage markets to develop, focus our development efforts only on those opportunities that have visibility to scaling, use our cash in areas with the best return on investment and drive the sense of urgency on what we do and knit our partners to collectively leverage our early mover advantages in the energy storage markets. The combination of upcoming milestones, momentum with new commercial partners and new macro tailwinds for energy storage, the release of our new Solar Plus storage products and licensing deals as well as realization of our proprietary bi-directional switch technology positions Ideal Power as a leading power conversion technology for the renewable energy connected grids of tomorrow.
At this time, I would like to open our call to questions from our listeners. Operator?
Thank you. [Operator Instructions] We will now take our first question from Eric Stine of Craig-Hallum. Please go ahead.
Hi Dan. Hi Tim. So it sounds like you got a fair amount of confidence in a ramp here in the back half, I mean when you look at that, is that mostly related to SGIP or maybe and you have talked about some of them, but just when you think about 2017 areas that might impact that and then just kind of a follow-on there to SGIP just to confirm, are you seeing your partners, are they closing on projects or is that something you need to see here to reach the back half ramp that you are expecting?
As we look at what our revenue looks like based on the modeling we have done discussion with partners, we see a diversification away from just California in the SGIP program. The SGIP program I think is useful and it creates great compelling economics. But there is nothing as time bound on them and we have seen that these markets go slowly and there is no danger of incentive funds going away. So as we look at where the ramp is going to come from, it’s really going to come from other things coming into the mix like the SunDial product and launch of what NEXTracker is doing projects outside of California for things like microgrids and things like we are doing here in Australia and on the East Coast, so that we are really diversifying away from the exposure that we have to adjust the California and SGIP driven projects.
Got it. That’s all – maybe just turning to Sonnen and that partnership just maybe early view of the pipeline and I guess is that in light of the fact that they have just announced that they are coming to the U.S. and will have a manufacturing presence there, just how you think the C&I market with that partner is developing?
They have made it clear that they were launching their residential product first, which they have done. The facilities that they have got to land actually is going to cover both residential and the C&I space. They have a design for the C&I products, they have actually taken it to some of the shows. They are getting through the residential launch here first before they do the commercial launch. But we do have products that we ship to them, but in terms of putting the same level of fanfare around commercial as they did residential they are yet, but we expect to see that in the not too distant future.
Okay. And maybe this one last clarification for me, so on the variable frequency drives is that still maybe we should think of that being paused to an extent just because it will – they don’t incorporate B-TRAN, so you got to get B-TRAN?
Exactly, I mean because variable frequency drive is a more material market if we are going to try and come into that market and attract one of the major players there. We really need to bring the absolute state-of-the-art technology which means that really should be a B-TRAN based power converter.
Got it, okay. Thanks a lot.
Thank you. We will now take our next question from Colin Rusch with Oppenheimer. Please go ahead.
Thanks so much. And then guys could give us a sense that when you are expecting some sell into the channel, at this point clearly you have gained or won a tremendous amount of share within stationary storage market, but I am curious about just pacing of deal flow and what you are seeing at this point on that ramp for the...?
When we looked at it Colin what’s been happening with just deal flow in this space, particularly second half of ‘16, we started to see some of the utility projects that have been announced 1 year or 2 years earlier. We are actually finally transacting on the commercial side and commercial industrial side we still see the transaction rate of the people that are capturing the end customers is being slow. We expect that to improve in ‘17, because a lot of the uncertainty around the self-generation incentive programs and other things that were driving some of the economics have been resolved and we saw lower cost batteries come out from both LG and Samsung which the market was expecting because they have signaled it long at advance. So I think a lot of customers love the system and their integrators basically said well, why buy the previous generation batteries when there are something higher performing and lower cost coming in the near-term. So ‘16 as we looked at what actually got deployed it were some high profile projects that has been announced quite a while ago and a lot for the C&I space, but based on the level of activity, we expect to see that change in ‘17 as people are back now trying to close with their end customers. And we will benefit as they turnaround an order equipment.
Great. And then I am curious about what’s happening with corporate campuses and educational campuses, certainly there has been a lot of interest and resiliency around those sorts of properties as well as the sustainability and renewables and the economics have really caught off at this point, are you seeing more wind plus storage type systems at corporate campuses, because the interest level in microgrids accelerate, what can you give us on those two end markets?
Yes. It is an area where microgrids in particular are something that’s being pursued simply because they really want to have places like the campuses be some place for students are safe from any disruptions in the power supply. The project that we do with EVgo the fast charging project coupled with buffer batteries was actually done at UC San Diego. And there were some other projects that were going on there but were distributing generation type using batteries yet. But its clearly I think something we are going to see more and more as people look to make some of these facilities that have significant bodies of people on them 24/7 be more secure in terms of just the power supply.
Okay. And then a follow-up question from me, as you are looking at taking the B-TRAN into commercial applications, the designers of the systems that will use the technology, how engaged are you at this point now that you have gotten down the road pretty far with the packaging and the final designs?
Well, we really want to show this first in our own power converter. I think we have got to show people that we are actually using it in an actual application as part of our own long-term cycling and also in terms of what the real benefit can be of the device when you put into a power converter. So, we really want to get to the point where we actually have a prototype of the power converter that incorporates the B-TRAN before we really get too far with those other folks. And also we want to make sure that we have enough lifecycle testing data that makes them comfortable that has worth them going into a design cycle.
Okay, perfect. Thanks a lot.
Thank you. We’ll now take our next question from Jeff Grampp with Northland Capital Markets. Please go ahead.
Good afternoon, guys.
Dan, wanted to get maybe a little bit more on the EV side of things, I guess that’s kind of a newer one to hear from for you guys on my end. Just kind of wondering how you think that opportunity kind of scaling up and can you just kind of give us a sense for what type of news flow we should expect as you guys progress down that path?
Yes. We actually have started to meet with some of the providers in that space to really understand what they are looking for, for the system, what the power converter needs to do and what the scope needs to be from the power converter or supplier. It’s pretty clear from the discussion we have been having so far is the size of the fast-charging installations are going to get larger and larger. It’s really driven by the fact that people want to be able to charge their vehicles in a much shorter period of time, not take 4 hours or overnight or even an hour, they want to drive to the 15 to 20 minute kind of size range, which really drives the size of the power converter. We are going to leverage some of the product design work that we have already done and some that we are actually having in the plan, because we can move to a EV charging product really leveraging our core power converter that we are using for the standalone storage market. So, we just want to make sure that we understand what the partners are looking forward from us, where they see their scope stopping, how we have to communicate with the charging and billing software that they are going to put over this. So, we are very much in the product definition stage. So, it’s really something that we are going to be doing in the back half of the year leveraging another product design that we are working on right now.
Okay, great detail. And then just thinking about I guess kind of the ramp here in ‘17 and associated margins, it sounds like I guess there is a couple of things kind of working in your favor with getting some of these legacy costs in the rearview, but then maybe as SunDial ramps up, you guys kind of alluded to maybe lower margins on potentially at least on that side of the business. So, can you guys kind of give us maybe any incremental sense for how we should expect margins to progress throughout ‘17?
Yes, it will be very dependent on the timing of revenue, but from looking at the first half of the year in particular, we are launching here right now we just recently received certification on the SunDial and Stabiliti. Just like we have seen with our couple, last two product launches, there is typically about 3 to maybe 5-month period after initial launch room product where that specific product has lower margins and that’s just due to the fact that our initial builds are small volume builds. So, we are not getting the benefit of a lower cost for a larger order commitment. So that will challenge margins over Q1 and Q2. As we look at the back half of the year, revenue will obviously help from the perspective of – although we don’t have that much overhead within costs that will eat through the overhead pretty quickly, we saw 2015 with just over $1 million in revenue. Our margins started to be in the 10% to 15% range. Our Stabiliti product will be at margin levels that support those kinds of numbers. The SunDial, if we sell a SunDial without a storage port that will definitely be depressed margins, which is very price competitive for a PV inverter. With the storage port, it still won’t be quite as high as the microgrid capable Stabiliti product, but it won’t necessarily be that far off and we expect actually probably most of our sales of the SunDial to include the storage port. It sounds like most customers are interested in having the storage immediately not waiting to do the sales upgrade.
Okay, great. And then last one for me and sorry, if I missed this in the prepared remarks, but on the backlog, did you guys disclose what that number was at year end?
It was $5.5 million at year end.
Okay, perfect. That’s all for me. Thanks for the time guys.
Thank you. [Operator Instructions] We will now take our next question from Carter Driscoll with FBR.
Good afternoon, guys.
First question, could you maybe at a high level and I know you gave quite a bit of detail then, Tim, but at a high level kind of prioritize your either product or project spend within your core buckets, over say next 3 to 6 months versus all of 2017? Is this Solar Plus than EV standalone microgrid just kind of trying to get a sense of where the pull-through was going to come from, obviously, there is bit of a solar ramp in C&I than you initially envisioned, trying to get a sense at a high level? And I have a couple of follow-ups.
Are you talking about the revenue spend or the R&D spend to support it?
To start with the R&D and then kind of work their way into just timing of when you are going to see pull-through beyond Solar Plus storage, I mean you have alluded to a little bit in the SunDial ramp, you have talked a little bit about potential ARM community charging, it doesn’t sound like is it 2017 revenue event? Just trying to get a sense of the cost versus the pull-through in the revenue side in the big bucket?
So, the good thing about our technology is it the platform. So, we will be probably the main focus or the largest focus I should say of our R&D spend this year will be on our 125 kilowatt product. We will be launching a two-port and three-port version of those products here in 2017. That product will be the base product for the EV charging product. So, we will basically share the same core hardware for the EV charging project. So, we are able to leverage that R&D spend over multiple markets. So, that will be for – could be used for standalone storage, could be used for microgrids potentially for Solar Plus storage and also that will be the hardware with some additional firmware for the EV fast-charging market. So that will be the largest area for our R&D spend. Second would probably actually be the B-TRAN, we have down-selected to one semiconductor fab, but that’s something that we will probably spend it similar to 2016 levels on the B-TRAN. We are through a lot of this spend now with certification on the SunDial and Stabiliti products. And on the SunDial, we may continue to look at that as try to even cost reduce that even more here in the future, which may drive a little bit of R&D spend. In terms of pull-through electric vehicle contributions are really we are talking about 2018, 2017 will be about growth in Solar Plus storage for us, particularly in the second half of the year. Hopefully, a pickup here in the standalone storage market in California, but also outside of California, including the East Coast and then the microgrid market. So, JLM, for instance, was an order that’s largely for the microgrid market that was for deliveries from 12 months from orders. So, we will be seeing that order flow and we see actually pretty good demand from the microgrid side. So, it will definitely be a mix of the three. It’s actually possible that Solar Plus storage maybe the largest contributor of the three for 2017
Perfect, that’s helpful. If you look at Dan maybe a question for you, if you look at some of the larger system integrators and system developers, certainly a little bit longer timeframe from kind of initial discussions to when you think you might get first commercial orders, is it – I mean, obviously without GM, Samsung introducing the cheaper batteries, people really waited, you had Tesla come out and really depressed the price of their next generation power wall and power pack. Is that – is it still kind of a waiting game? I mean, what in your opinion is the biggest hurdle to getting the C&I market going? Is it a combination of all factors? Is it still financing and changing business models of some of these guys, just kind of the natural headwinds you have with a new type of technology adoption? Just trying to get your sense of timing internally your expectations versus kind of on the ground orders kind of a lateral question to what I am talking about, is just there is so limited visibility from our perspective sometimes when you have these great discussions and then what is actually getting people to pull the trigger? Any color will be helpful.
For the larger players that are coming into the space, folks like NSC, Mercedes and others, while they bring a lot of credibility and they bring brand recognition and they certainly either bring your own financing or are financeable because of who they are, for them to go through the process of bringing a system out takes time. If you think about something like Mercedes who is known for quality when they go through and select their suppliers, it’s a long process where you are spending months and months in the lab as they bring your product out and make sure they understand it. They have tested it for liability. They then have to go and design an integrated system. And then they have to take that integrated system in some cases through a certification of its own or certainly through many operating cycles to be comfortable that they can stay behind the system because one of the things that the players bring that the small players don’t is they typically want to step up and provide performance guarantees of the system or well guarantee the saving to the end customer. So for the larger players I think it’s just the nature of how they have to rollout a system to protect their brand and the people make the guarantees that help differentiate them and make them financeable. I think in terms – at the customer level there is really two things that are happening. If you look at the end customers, what is it’s still very much an education process for a lot of businesses who really have nothing to do with energy storage I mean all they know is they have got electric bills that’s higher than it was last year and that’s higher than a year before. So you have to reach them, you have to educate them and look for those customers that have the ability to scale. And with a lot of noise about what’s going on in batteries, it’s still an for them to basically to do nothing because the thought may be, well, with all this money that’s flowing into these battery factories once the system be cheaper for me next year than it is this year, but I think you will see a little bit of that dynamic going on as well.
And then you alluded too maybe in last question, alluded to some of the auto OEMs may be getting behind I don’t know whether you were referring to going to be the standardization on fast charging product or actually may be potentially putting dollars to work to help, develop the marketplace, maybe characterize their potential involvement into our financing or maybe you can comment on the recent issues in California to now push storage in new residential construction?
For fast charging there is a couple of things that are happening. One is there are actually some mandated investments that need to be made. Energy, basically in the settlements that they had with California Public Utility Commission from some of the market activities several years ago has a commitment in terms of how many fast chargers they need – how many chargers they need to put into the California infrastructure as part of that settlement. Volkswagen as part of the issues they had with reporting diesel emissions falsely has reached us, where they have got to spend a lot of money building out electric vehicle charging networks here in the U.S. was part of the deal they made with U.S. regulators. The auto manufacturers though they have all come together and they are pooling money and agreeing on the standards to collectively mitigate the risk of Tesla has been building after a charging network and they have been using their own standard and they really hadn’t do that to enable them to sell parts, but the other auto manufacturers I mean they already have combustion based cars, they can sell, this is just part of their broadening out what they are going to do in terms of where the markets are naturally going with the luxury people so they have a chance to work together and say, okay what is the charging standard we want to agree to, how do we pool the money to actually buildup the infrastructure because we don’t – each one to do it ourselves. We can always do it more collaboratively if we form an alliance and they have actually done that and they are now starting to put money to work to actually start to identify the high profile science work. It’s a great opportunity that you are close to hardware infrastructure, that you are close to tie into the grid, the high value sites are the ones that they are going to start to tackle here to build out the network that they are going to be able to use for all their electric vehicles regardless of whether you are GM or Ford or European manufacturers. They are really approaching it on a collaborative fashion because of the magnitude of the investment.
Perfect. I will the first line offline. I appreciate all the color guys. Thank you.
Thank you. That does conclude today’s question-and-answer session. I would like to turn the conference back over to the management for additional closing or prepared – additional or closing remarks.
I just want to thank everybody for joining us today and thank you for your continued support. And we look forward to updating you on our next call.
And that does conclude today’s conference. Thank you for your participation. And you may now disconnect.
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