Ideal Power Inc (IPWR) 2014 Q3 法說會逐字稿

Good day and welcome to the Ideal Power third-quarter earnings call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Matt Hayden, President, MZ North America. Please go ahead, sir.

Thank you. Good afternoon, everyone. Thank you very much for listening today to Ideal Power's third-quarter and year-to-date results.

Your hosts are Mr. Dan Brdar, Chairman and CEO, and Mr. Tim Burns, Chief Financial Officer. Dan will provide a business update including recent commercial orders and product announcements, while Tim will discuss the financial results.

A press release detailing the earnings crossed this afternoon at 4 PM and is available at the Company's website, IdealPower.com. Following management's prepared comments, we will open the floor to your questions for those dialing in and also to those participants joining webcast.

Before we begin the formal presentation, I would like to remind everyone that some statements made on the call and webcast including those regarding future financial results and industry prospects are forward-looking and may be subject to a number of risks and uncertainties that could cause actual results to differ materially than those described in the conference call. Please refer to the Company's SEC filings for a list of all associated risks.

In addition we would also encourage visitors or investors to visit the Company's website, IdealPower.com, for supporting investor and industry information, which will help deepen your understanding of the technology and market.

At this time I would like to turn the call over to Dan. The floor is yours.

Thank you, Matt, and thanks, everyone, for joining us on the call. For those of you on the call today that are new to Ideal Power, we have developed a unique power conversion technology called the Power Packet Switching Architecture, which we believe can significantly change the landscape for power conversion.

The power conversion markets available to us are large, by some estimates in excess of $50 billion per year. Our technology allows the development of power conversion products that can have higher efficiency, 1/5 the size and weight, higher reliability, and lower costs than conventional power converters. Our initial focus is on renewable energy applications and in particular for the near term, commercial and industrial energy storage applications.

Due to the rapidly declining battery costs and increasing utility demand charges, energy storage solutions for commercial and industrial customers now represent an economically attractive solution for businesses and building owners to control their utility costs. Our initial product incorporating our PPSA technology is a 30 kilowatt battery converter that's used by system integration companies to provide a storage solution for commercial and industrial customers. Today I am pleased to report to you on our progress and scale in sales of our first product and developing a compelling product family that will further expand our growth opportunities.

In the past I've discussed our initial focus on the commercial energy storage market in California and other states. We decided to target this emerging market segment since we feel it will be one of the most economic markets for our energy storage with potential customer financial paybacks of three to five years. In many cases our initial customers, energy storage system integrators, will provide financing for a zero capital cost model to commercial and industrial building owners with guaranteed savings to the end user.

We feel that the favorable economics and performance-based contracts offered by our system integration customers will enable rapid market growth. By working with industry leaders in this market, we expect to benefit from this growth.

Our 30 kilowatt battery converter is an attractive solution that offers a compelling value proposition for this market. Our products can provide superior efficiency and significantly lower size and weight than conventional power converters. According to independent and publicly available testing, our product efficiency is 96.5% compared to 92.5% from a typical competitor. Two power conversions are required in energy storage so our products can lower round-trip efficiency losses by 8 percentage points. This can enhance the return on investment for our customers.

By using our product versus a conventional power converter, an Ideal Power base system requires 8 percentage points less electricity when charging and discharging batteries and can enable a system to get more work out of the system capital invested in batteries.

The product size and weight is also an important factor. Our product weighs less than 100 pounds while conventional products weigh as much is 650 pounds. This significantly reduces shipping and installation costs as our product can be delivered by UPS ground and can be mounted on a wall. Competing products require a freight truck for delivery and use of a fork truck to install them on a concrete pad. All of these adds to their installation cost.

Also in many urban locations, fitting a conventional power converter into an existing building can be challenging due to its size and weight. Our small size and weight allows our units to be readily deployed in almost any building. Product weight also correlates to manufacturing costs. Since our PPSA technology eliminates 90% of the passive components of a conventional power converter, items such as bulk capacitors and transformers were inherently a lower-cost design. As order volume increases with our contract manufacturers, this cost advantage will become evident.

Another key factor for our products is their low noise. In many locations such as office and apartment buildings and commercial businesses, storage solutions are being installed in close proximity to where people are working and living. The quiet operation of our products allows their use in locations where a conventional product converter would disturb the building occupants.

Our focus on commercial and industrial storage is showing results. With today's announcement of an additional three megawatts of orders for our 30 kilowatt battery converter, we have received over 7.5 megawatts of orders since early September. This represents over 250 units and is a significant step change in our order flow. While we are only at the beginning of the adoption curve for our technology, we believe the recent increase in orders represents several key signals for Ideal Power and the energy storage market as a whole.

First, since the majority of these units are from our previously announced system integration customers and commercial energy storage, Sharp Electronics, Green Charge Networks, and Koda Energy, it indicates the customers who have been using and evaluating our technology are pleased with its performance and its value proposition.

Secondly, it indicates that the education of the commercial and industrial end-user customer by our system integration partners is beginning to produce meaningful order flow for their businesses. The long promise of storage to mitigate the problems of intermittent sources of generation such as solar and wind has finally reached the point where it represents an economically attractive solution for the commercial and industrial markets. Today storage solutions are primarily driven by demand charge reductions. However, as the cost of batteries continues to decline, other markets such as utility and residential users will also become addressable markets for us. Since our PPSA technology is very scalable, we will be able to introduce highly competitive product offerings for those markets as well.

The units covered by our recent announcements are scheduled for delivery through mid-2015. We anticipate adding additional unit orders from our current and new customers as the market continues to ramp. The units from our recent announcements will be primarily installed in California. California is often a leader in energy and environmental policy and technology adoption. We are now seeing other markets follow their lead as increased demand charges and high time abuse charges from utilities are creating opportunities in other parts of the US such as New York, New England, and Hawaii and international opportunities as well.

We expect that our products used for commercial and industrial demand charge reduction will provide us with a solid and rapidly growing revenue base in 2015.

In the third quarter, our leading customers prepared for the high forecast growth in the commercial storage market, securing orders from end customers and equity and project financing. For example, Green Charge Networks raised $56 million from K Road, a leading utility solar scale developer, to provide them adequate customer and project equity financing, while Sharp launched its smart storage business unit in late July.

Our business, our success in capturing the business of the early commercial and industrial market leaders is also drawing others to evaluate Ideal Power's PPSA technology for their businesses as well.

With the economics of energy storage becoming increasingly attractive and third-party financing beginning to slow to the market, we are increasingly approached by other potential partners due to our novel technology and compelling value proposition. We anticipate adding other channel partners in the coming months as several successful companies in the renewable energy markets evaluate their own offerings for the increasingly attractive markets being enabled by declining battery costs and novel technologies such as ours.

The other major topic that I wish to discuss is the significant progress in broadening our product family for other vertical markets. But first, I want to turn the floor over to our CFO, Tim Burns, to discuss our financial results. Tim?

Thank you, Dan. Total revenue for the third quarter was $438,000 consisting of product revenues of $289,000 and the balance coming from brands. Total cost of revenue was $559,000, which included $166,000 in grant research and development costs.

Operating expenses which include $664,000 in research and development spending, totaled $1.7 million, yielding a net loss of $1.9 million.

Total revenue for the nine months ended September 30 was $1.3 million with $842,000 from product sales and $448,000 coming from brands. Total cost of revenue was $1.6 million, which included $498,000 in grant research and development costs. The net loss was $4.9 million for the first nine months of the year consistent with our expectations.

At September 30, 2014, our balance sheet had $9.7 million in cash and cash equivalents and no debt. We have a Federal NOL, which will shield us from income taxes when we become profitable. At September 30, 2014, we had 7 million shares of common stock outstanding and just under 10 million shares on a fully diluted basis, which includes approximately 1.6 million warrants and 1.3 million options outstanding.

I will now turn it back over to Dan. Dan?

Thanks, Tim. We discussed our initial vertical market and commercial and industrial storage and how we are winning in this high-growth emerging market. We are leveraging our early success in standalone storage applications to capture other adjacent vertical markets. Our technology allows us to use a standard hardware design and support multiple applications. You can think of it as a software defined power converter platform that can address multiple vertical markets. This flexibility allows our products to be used in a wide variety of applications. It also allows us to scale our product offerings relatively quickly since our technology platform is very flexible.

Two trends that we see in the market drove our two most recent product introductions. First, a macro driver we see in the renewable energy markets is what we feel is the inevitable convergence of solar and storage. As the penetration of solar continues, it creates a variety of problems for the utility grid due to its intermittent nature. As more and more solar is deployed, the grid itself can become unstable since our electric utility systems were never designed to have any significant amount of intermittent generation.

Coupling storage with solar solves the problems of intermittency and grid instability while also mitigating demand charges for users. Today solutions that put storage and solar together have been cumbersome and expensive. In response to the coming convergence of solar in storage, we introduced our award-winning 30 kilowatt hybrid converter, which puts the functionality of a solar inverter and a battery converter into one compact cost-effective efficient unit. It is our view that conventional solar inverters will become obsolete in an increasing number of locations where it will be required to install solar and storage together.

Secondly, our 30 kilowatt product serves as an excellent modular building block that enables our customers to address a wide variety of project sizes. As commercial and industrial customers have become increasingly aware of and comfortable with storage to address their demand charge issues, we've seen projects growing larger in size. Based on the market feedback we have received, we felt it was time to leverage our existing 30 kilowatt development efforts and introduce our 125 kilowatt family of products.

The 125 kilowatt hybrid and battery converter products not only allow us to provide an even more cost-effective answer for large commercial and industrial installations but it also gives us a building block to capture opportunities being developed for small utility scale storage projects. Our 125 kilowatt family of products offer similar efficiency, size, and weight advantages as our 30 kilowatt unit.

Using multiple 125 kilowatt units provides an attractive building block for megawatt scale applications, particularly for the increasingly popular shipping container-based solutions being developed by several companies looking to provide industrial and utility scale storage solutions. We already announced this sale of our first 125 kilowatt unit to our long-term customer, Koda Energy.

We will be announcing additional sales of the larger unit in the coming months since initial feedback would indicate it will be a successful addition to our product offerings.

The product was part of our booth at Solar Power International and generated great interest by both potential end-users and a new set of potential customers and channel partners who are focused on larger industrial and utility applications. We will be making announcements in the coming months about new relationships that are the result of our larger product offering.

The wide variety of generator storage and loads required by the industry are served today by different products from different vendors with different control systems. We believe the industry urgently needs a building block set of power converter solutions that will allow system integrators to easily configure and install integrated systems that combine these systems with greater value, lower cost, and improved reliability.

Another vertical market we see being enabled by both our technology and the declining cost of batteries are micro-grids for islands, defense installations, hospitals, and locations served by diesel fuel for power generation.

In the third quarter, we announced our first strategic partnership and customer agreement in hybrid systems. EnerDel jointly announced with us that they are developing a new generation of mobile hybrid power systems by integrating our 30 kilowatt hybrid converter with their lithium ion batteries, control systems, and the conventional diesel generator. This system is expected to reduce diesel fuel consumption for remote off grid applications by over 70%.

Their mobile platform can also incorporate solar into the mix of batteries and engines and provide improved power quality and greater reliability. EnerDel plans to sell a family of trailer and skid mounted solutions worldwide with our hybrid power converter. Their skid mounted micro-grid solution will be available for sale later this year and we anticipate micro-grid applications contributing meaningfully to our 2015 revenue.

We estimate that there are 1 billion people globally without access to a power grid and another 1 billion dependent on expensive diesel generators for electricity. So a large market exists for providing superior off-grid solutions integrating storage, solar, and diesel generators. For many applications, we believe these systems can have a two-year financial payback by dramatically reducing the amount of diesel fuel used for power generation. The market for commercial solar and energy storage and the market for off-grid micro-grids using solar and energy storage are both at an early stage but are forecast to roughly double annually for the next several years, creating a new power converter market of almost $1 billion by 2018.

We believe our announced products are significantly better for these applications than those from any other company and we are well-positioned to benefit from these growing markets.

Lastly, I want to mention that we are continuing to invest in the development of our next generation bidirectional power switches. This effort started with support and funding from the US Department of Energy's ARPA-E program and continues to make good technical progress.

First switches are now in fabrication and once they are evaluated by our technical team, we will make our first prototypes using the new switch design. Our performance expectations for the technology have been confirmed by third-party simulations and we remain excited about the potential of this next generation of our technology.

The bidirectional switch development is expected to have a significant impact on our already unique products. As a result of the bidirectional switch development, the efficiency of our products is expected to increase to 98% or greater. The effect of this improvement would enable us to potentially double the power density of our power converter designs. For example, the box that today makes 30 kilowatts could produce close to 60 kilowatts in roughly the same size and weight device. Obviously this would have a significant impact on our unit cost.

We will be making announcements in the coming months to update you on our progress and to highlight key accomplishments in our development efforts.

Before we open up the call to questions, I want to cover a couple of other items. This quarter we made a new addition to our team by adding Ryan O'Keefe as Senior VP of Business Development. Ryan is an industry veteran who has held senior positions at startups and Fortune 100 companies alike in the energy storage and renewable energy industry. These include companies such as General Electric and Next Era Energy.

As evidenced by our recent order announcements, he has hit the ground running and we look forward to his continued contribution to our sales and partner development efforts.

Also during the past three months, I have attended investor meetings in New York City, California, and Las Vegas at the Solar Power International Conference. We frequently host visitors to our new Austin facility, located 10 minutes from the airport, and we will participate in the Ideas Conference in Dallas, which is held in November 19 and 20. If you have an interest in arranging an in-person meeting or scheduling a call or visit to our facilities, please contact Matt Hayden from NZ Group.

At this time I would like to open up the call for questions. Operator?

(Operator Instructions). Philip Shen, ROTH Capital Partners.

Congrats on the progress you are making. It looks like your business is developing nicely through mid-2015. I was wondering if we could talk about the revenue mix. It sounds like commercial might be taking off as well as the hybrid converter. So when you think about revenue mix for 2015 and the three opportunities you have in front of you, what might it look like?

I think what you're going to see is certainly for the first half of 2015, revenue is going to be dominated by the 30 kilowatt battery converter and it is really driven by the fact that sort of the pipeline of projects that has been developed by Sharp, Koda, and Green Charge is really based on that product, and those are now actually going to closure with the system integrators.

Also while we have rolled out the hybrid converter, it can be used in off-grid applications as an uncertified product but the commercial applications where certification is required by UL, that is going to pace the order flow there and that certification isn't planned until we get into the beginning of next year. So I think you're going to see as we get into the back half of 2015 the 30 kilowatt hybrid converter is going to take an increasingly bigger share of the revenue mix and then the same thing with 125 kilowatts. Since it is a new product, we need to go through a little bit of the evaluation stage with potential customers, but you will see that starting to come into the revenue mix in the second half of 2015 as well.

Great. So in terms of margins, how would you expect margins to trend? You guys were negative gross margin in the quarter obviously given the low volumes. But what do you see for 2015? Can you start to see some positive gross margins and what might the (inaudible) be?

Yes, so on gross margins, it's actually very small volumes that will require us to get to positive gross margin. We're talking a few hundred units, maybe as well as a couple hundred units and we have already announced here recently volumes that already hit that target number for us to feel positive on gross margins. So we would expect it relatively early in the year, potentially as early as Q1 but definitely into Q2 we would expect that.

Thanks, Tim. In terms of your licensing strategy, I know in the past you have alluded to the potential of pursuing licensing over the longer term given the wide variety of end markets your technology can target. Has there been a change at all in terms of the timing at all with this strategy? And if so, just provide us a general update on how you are thinking about licensing. I know initially you plan on focus -- being focused on developing the product and manufacturing with your partners. Just a general update on that topic would be helpful.

Our strategy there hasn't changed. Licensing is going to be a significant part of our business strategy certainly for the long-term. Part of the challenge early on is that we have a very novel technology, so we have to reduce that technology into a working product that people get comfortable with. But the way we see this unfolding is as we have customers like Sharp and others, as they gain volume, the first step in licensing would be to enable them to actually have what we call a purchasing license, where they could buy directly from our contract manufacturer. So if their scaling commensurate with what their balance sheet would allow, a company like Sharp is a huge company, they wouldn't have to worry about us and our access to working capital. It really becomes the working capital of our contract manufacturers who are actually much bigger than us.

And then as we think about going into other international markets, for us to compete as Ideal Power doesn't make a lot of sense. We have no brand recognition, no installed customer base. We would actually give our partners the ability to actually license the product design so they could either make it as contract manufacturers that we would guide them towards or in their own facilities if they have that capability. So still very much a part of our strategy and it's really just getting everybody comfortable with the product and then scaling the business to the point where it justifies transitioning to the license.

Great. One more question and I will jump back in queue. In terms of your next product offering, I was wondering if you could give us some color on that. I know you have talked about the bidirectional IGBT but would that be the next product or you could just have another product based on the gen one technology that you foresee ahead?

Fortunately because our platform is very scalable and flexible, we think there are other products we can come out with that really leverage a lot of the development work that has already been done before we even get to implementing the bidirectional, the new bidirectional switches. So you're going to see us leverage the existing platform. I'm not going to say specifically what it is because we've got several opportunities that are out there and for those of you that know me I would like to under promise and over deliver. So I think we're going to have some pleasant surprises for people when we get into 2015 with some of the new product announcements that are in our plan. And we will just leverage all of those existing products as we get to the point where we can commercialize the bidirectional switch development activity because they will move all the existing product designs to just another whole level in terms of performance efficiency and it's cost point.

Great. We'll look forward to that, Dan. Thank you and thank you, Tim, as well. I will get back in queue.

Colin Rusch, Northland Capital Markets.

Can you talk a little bit about the development of the sales organization? Obviously you gained some addition today but you look at the applications for the micro grid product and reaching out into developing economies and more remote areas, can you talk of how you are expecting to reach those customers and really do that in a scalable fashion?

For other applications like micro grids, it's really an extension of what we are doing on standalone storage. It's really find the partners where they already have the investment and the upfront piece of the business to go create projects, capture units, capture customers, and our technology just gives them the ability to have a more attractive offering because of the value proposition of our power converter.

I don't see us ever in the point where we're going to be out trying to actually capture those end customers ourselves. It would put us in competition with our current customer base and it is not really our core skill set and it takes a lot of cash to do that because those development cycles can be long. It takes a lot of travel, a lot of people in the specific markets. And you also have to start doing things like bringing project financing and other things.

So we are going to focus on the core technology and really leverage the model of finding the channel partners who are really committed to the various market segments we want to enter and where we work closely with them to enable our product to really bring them a more competitive offering as a result of working with us.

Okay, as you look out over the competitive landscape, you've had a unique IP position for some time but certainly there's efforts to catch up on (technical difficulty) our developments you guys have done. Talk a little bit about what you are seeing out there and what sort of competitive threats particularly from a price perspective you are starting to encounter at this point.

We are not seeing a lot in terms of price pressure yet. I think it is coming because the storage business from many respects is going to look like solar several years from now where particularly the battery piece of this is going to get commoditized pretty quickly.

The challenge is if you look at the likely competitors who can come into this space, they are the largest solar inverter manufacturers today. They are in a difficult position in that most of them have found that this is very profitable for them now has declining margins or maybe negative margins, so the ability to invest a lot in the storage market, which is still very small compared to solar, is a little bit constrained. We think it actually presents an opportunity for us where we actually may work with some of them to actually help them bring a product based on our technology rather than try and go through the development cycle themselves.

Licensing is obviously part of our model and if we can enable some big players out there to get a differentiated offering quicker, it certainly works with what we are trying to do because we view the storage space as just one of many markets we want to go into. We think it is just a matter of when we see some of the larger players come into this space, but so far we don't see anything that's really directly competitive with us that we have to worry about.

But it shows like solar power, international, and others, we are always scanning to see what other products people have and what announcements that they are teeing up to get the market interested. So far our competitive position looks to be pretty good. Our patent base for this continues to grow. And as we start to ramp volume, I think if there starts to be significant price pressure because we are inherently lower cost, we are going to be in a pretty good position to actually be a low-cost supplier if that is the direction we need to go.

Great and thanks for the segue into the non-storage product development. So (technical difficulty) come to here and some questions. Can you talk a little bit about the customer development just in terms of the number of customers for them in storage devices. And then new customers on non-storage applications, just help us understand kind of where we are at in terms of real potential orders that you might be able to scale in the next six to 12 months in those non-storage applications.

Yes, the orders that we have been announcing here over the last couple of months have really been with -- largely with the existing three primary customers that we see out there leading the space, that's Sharp Electronics, Recharge Networks, and Koda Energy. The success that we have had with them and the visibility that we have gotten from the technology has introduced a whole suite of new folks that are going through the evaluation process with us that we think have the potential to add the same or more volume than any of them.

What is nice is a lot of them are already very knowledgeable about the space and that learning cycle gets to be shorter as people find real projects and they understand the economics around them. So I think as you look into 2015, you are going to see the first half of 2015, our three existing customers are probably going to dominate what that revenue mix looks like but in the second half of 2013 as we get through the evaluation with some new potential partners, you are going to see some other players that are going to be a pretty meaningful part of our revenue.

We think it's still largely going to be dominated by the standalone storage business but we think the micro grid applications are going to start to grow as well. The announcement we made with EnerDel we think is going to start to deliver real revenue in 2015 but it also is drawing new potential partners for us that are focused on micro grid applications. So all of these things kind of give credibility to the next player that wants to come in, because the challenge is always nobody wants to be first.

But now that we have multiple customers in these segments and they are ramping their volumes, it makes others not only pay attention to it but it gives them comfort that they are not trying to do something that no one has done before.

Perfect. Thanks so much, guys. I will hop back in queue.

[Alan Rachap.]

I am a shareholder living in Hawaii, a solar user, and I have followed the Company for a while. I'm interested in some color on ramp up of cash flow. I take it that the 30 KW unit is the bread-and-butter revenue generator and it's by way of the systems integrators you mentioned. But how is the flow of business to them going if they install a demand charge mitigation unit at one operation of store, drugstore, or a 7-Eleven or whatever, are they seeing follow-on orders as the success of those things is proven out? And how many of those 30 kilowatt units do you figure you will need to push out in 2015 to turn cash flow positive?

Thanks, Alan. We are fortunate that the agreements that we have with the system integrators that we are working with have it in those a provision for them to provide us forecasts. So we have a pretty good look at what Sharp and Green Charge and others are doing and what their business ramps look like because they want to make sure that we have visibility to product demand since there's a long lead associated with building hardware and what we have seen from all of them is their businesses are ramping very nicely to the point where one of the things that we did in preparation for what we saw coming was to bring on a new contract manufacturer that had significantly higher volume than the one we've been working with. So we think the orders that we have been announcing while they are scheduled for deliveries through 2015, we know that all of them are likely to place significant orders before those deliveries are finished just based on the way their own businesses are ramping.

So we think the ramp that you are seeing is going to continue certainly going into 2015 based on the forecast that we have with just the existing customer base and that as we add others to that, that will just continue to add to it. I'll let Tim talk a little bit about volume and profitability.

So if you are looking at total cash flow breakeven, we are probably looking at a few thousand units and that is our 30 kilowatt battery converting units, which are in our lowest price point. We haven't given specific guidance whether that's going to be 2000 units or 4000 units, but it's in that rough range from an annual volume perspective.

Thank you. I will jump back out.

[John Harrell, Harrell & Associates.]

Yes, I see the Company's cash burn and I ask myself if it's even possible that the Company turns profitable before it's time to raise capital again. Is it possible?

Well, you know, a lot of it is a function of just how quickly the stores markets themselves develop since we certainly don't control that. We are a supplier to that chain. I think that the issue really now is just seeing that the customers we are working with, they continue to ramp well. That the experience they have with this is a good one so that they are comfortable placing significant orders in advance of -- they are actually needing and install them. So I think right now it's really a function of the timing of these storage markets. The fact that our partners that we are working with are ramping a little more quickly than we expected and they seem to be very enthusiastic about their business is a good sign for us but the timing of that is yet to be determined. We will certainly know better coming into the beginning of 2015. What does that continued ramp for the storage market look like?

And our cash burn is at or even slightly better than our expectations and that is with today would've been very limited volumes. So as we scale the business, that will obviously help produce those cash burn numbers as we go into 2015.

Great, thanks.

John Shaw, Wilshire Partners.

Thanks for taking my questions. Sort of following up on the gross margins and maybe this ties into your breakeven cash flow model or what do you see as the gross margins reaching? I know there's a curve that will start to bend at some point but what are you using or what should we expect for gross margins at would you consider a healthy volume where there's not too much more to be achieved with higher volumes?

And I had a second question about your announcements of the orders over the past quarter. I read while they are installed or being incorporated into energy systems targeting would suggest big players but do I understand now that you are selling to systems integrators and not to the end-users which to me is going to put a lot of -- I would think would put pressure on gross margins because systems integrators, do they not typically want to mark up the hardware and services that they are buying?

Let me -- just for the second part of your question I will let Tim talk to gross margins. What we are seeing in the market is that the system integrators who we sell to are in an increasing number of cases, they are actually owning the assets themselves. So what we are finding is a lot of cases what they are doing and why they are bringing in project financing is they actually own the asset and the guaranteed savings to the commercial customer. It enables them to get the decision process really accelerated where the commercial customer doesn't have to worry about are they buying the right product, is it the right kind of battery, is it enough storage? Because for the typical commercial segment, that is not their area of expertise.

What we are also finding is because of the fact that there are both some incentives that are out there and the fact that our units for example give a better performance factor, those are enhanced returns that I think to some degree the system integrators want to keep for themselves.

So the fact they actually in many cases are owning the assets and not reselling them, we don't see that price pressure. As other players come into the space that might have a business model, we might start to see that, but it is really all about can they provide the return to that end customer by eliminating the demand charges they gives the three- to five-year payback? And as battery costs being what they are today, that already works and as battery costs continue to decline, we think those margins are just going to get enhanced for the system integrators.

As it relates to gross margins and obviously this is impacted by product mix and where we are in terms of scaling but if you exclude any benefit from licensing revenues that we could potentially have in the future, we are looking at target margins of roughly 30% to 40% gross margin.

Okay, thank you.

Don McKiernan, Landolt Securities.

Thank you. I would like an update on the electric vehicle opportunity, electric vehicle charging market. I think you have had some exposure in that space through NRG and maybe some other companies and are you seeing any traction or progress these days?

Yes, NRG filings actually had gotten their approvals done. They've actually moved forward and purchased their units for the demonstration they are doing with us. We are going to be shipping those units later this year and they will get installed, so we will actually have a working model out there with them that we will hopefully be able to use to drive additional sales.

We are seeing that market is developing certainly more slowly than the standalone storage application but we think the long-term potential is still there. But it has really been paced by -- since we are working through energy, getting them done with their demonstrations, so we're just glad to see it kicked off and hopefully we will see some hardware on the ground with them here shortly and we will be able to report back some progress in terms of how are the units operating and then where are we going next with that relationship?

Do you really think electric vehicle market is going to continue to grow rapidly and I'm assuming you are probably in agreement with that couple of -- that thought process.

Yes, we are. It's a little bit of a chicken and egg because we are finding that people don't want to invest a lot of money in the infrastructure until they see the sales that warrant it. So I think it has had a little bit of fits and starts in terms of seeing some of the charging stations, particularly those that include buffer storage deployed but I think it's inevitable.

And then on the micro grid opportunity, for lack of a better way to define it, you mentioned that is about a $1 billion addressable market, is that right?

Yes.

Could you give us an idea of what the addressable market would be for your bidirectional switch? Is that easy to define?

As it relates to the bidirectional switch, that is something that we would incorporate into our product family, so it's not really tied to a specific market. It would be part of our core technology and power conversion platform. So we would expect to incorporate that switch into all of our products and as Dan I think had mentioned in some of his prepared comments, if you look at the power conversion market in total, all applications, you are talking about a $50 billion market. So it is a very large addressable opportunity for us.

Great, you guys are doing fantastic. Continued good success, thank you.

Mark Bronzo, Nudge Capital.

Two questions for you, Tim. One is did you announce who the contract manufacturer it is that you're going to work with (multiple speakers)?

No, and that will -- we will have to look to add additional contract manufacturing resources potentially as we scale. We did recently make a change to make sure that we would have adequate capacity with contract manufacturing to get us through what we expect to be very rapid growth in this market.

So you will be using more than one?

Yes, we actually don't want to be captive to any one supplier just because it introduces an element of business risk that isn't desirable for anybody in case something were to happen. And once you start to get volume, the ability to actually get multiple contract manufacturers and still get competitive pricing from them gets a lot easier.

The second question, I'm looking at your revenues for the quarter. It's about -- you said $438,000 and expected was $190,000. So it's about 130% more than expected. And I know, Tim, either you or Dan talked about the inflection in the orders especially since September. When I look out to 2015, the projections are for revenues of 1.72, which is only a little over 20% versus growth over 2014. So without you giving me specific numbers because I'm sure you don't want to do that at this point, is it safe to say that those numbers seem extremely conservative now that your orders are ramping?

I'm trying to follow your math a little bit there. We had product revenue about just over $400,000 this quarter and really if you look even our year-to-date revenue, it's just a fraction of the announced orders that we've announced here over the last couple of months. We would obviously expect to rapid revenue growth. We have announced 250+ units of orders in the first half of the year and that is we expect more in addition to that in the first half of the year.

If you look at our units today, our 30 kilowatt battery converted unit costs roughly $10,000 a unit, we do have significant potential and we expect things to continue to ramp in the back half of the year. So if you look at the first half numbers that they will continue to climb here in the second half of 2015. So I'm not going to comment specifically on I assume you were referring to the analyst estimates on Q3 earnings but we do have a chance to have a very strong 2015.

There are no more questions in the queue. That does conclude our question-and-answer session today.

We did receive two questions through email that we just want to make sure that we address so that everybody has all their questions answered. Tim, could you address the ones that came in?

Yes, the first question I will skip because it has been asked and answered here on the call which was related to when we expect to turn the gross loss into a gross profit. Which just to refresh things I guess was in the first half of 2015.

The second question, if the Company is not able to achieve licensing interest in OEM to make their product as envisioned, does management foresee the Company can still be able to thrive and prosper if production remains with the contract manufacturer or will production have to be brought in-house to achieve viability, i.e., long-term profitability?

So over time the Company fully expects to enter into manufacturing licensing relationships with certain of our large customers and for international markets. We do not foresee bringing manufacturing in-house even absent licensing interest. We believe the characteristics of our capital efficient business model and the cost advantages inherent to our technology will allow us to thrive and prosper with fully outsourced manufacturing. So we have no intent regardless to bring manufacturing in-house. It is not consistent with our model. We don't think it's the best utilization of our time. There's other people that are specialized in manufacturing and have that skill set. We are largely a development organization for what is a novel technology.

And that concludes the questions received via email and I think we did not receive any questions via the Web link.

Okay. Well, at this point I would like to thank everybody for joining us on the call. We are looking forward to continuing to keep some exciting announcements coming out there and giving you an update on our next call. Thank you for joining us.

That does conclude today's conference. We thank you for your participation.