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Edited Transcript of ESNC earnings conference call or presentation 15-May-18 8:30pm GMT

Thomson Reuters StreetEvents

Q3 2018 EnSync Inc Earnings Call

MENOMONEE FALLS May 17, 2018 (Thomson StreetEvents) -- Edited Transcript of EnSync Inc earnings conference call or presentation Tuesday, May 15, 2018 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bradley L. Hansen

EnSync, Inc. - CEO, President & Director

* Charles W. Stankiewicz

EnSync, Inc. - Former COO and Director

* Robert Blum

* William J. Dallapiazza

EnSync, Inc. - CFO

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Conference Call Participants

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* Craig Edward Irwin

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* Eric Andrew Stine

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Sameer S. Joshi

H.C. Wainwright & Co, LLC, Research Division - Associate

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Presentation

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Operator [1]

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Good afternoon, everyone, and welcome to the EnSync Energy Reports Third Quarter Fiscal Year 2018 Results Conference Call. (Operator Instructions) Please also note, today's event is being recorded.

And at this time, I'd like turn the conference call over to Ms. Robert Blum. Mr. Blum, please go ahead.

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Robert Blum, [2]

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Thank you, Jamie. Good afternoon, and welcome to the EnSync Energy Systems quarterly conference call. On the call with me today are Brad Hansen, CEO of EnSync Energy Systems; and Bill Dallapiazza, Chief Financial Officer. The EnSync Energy Systems press release and 10-Q containing the third quarter fiscal year 2018 results and commentary was sent out earlier this afternoon and may also be found on the company's website at www.ensync.com.

Please also take note of the safe harbor paragraph that appears at the end of the press release covering the company's financial results and that any forward-looking statements that we make only apply as of the date made and are subject to inherent risks and uncertainties, including those described in our annual report on Form 10-K and should not be unduly relied upon. Except as otherwise required by for the federal securities laws, the company disclaims any obligation or undertaking to publicly release any updates or revisions to any forward-looking statements.

I'll now turn the call over to Brad Hansen, CEO of EnSync Energy Systems. Brad?

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Charles W. Stankiewicz, EnSync, Inc. - Former COO and Director [3]

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Thank you, Robert, and good afternoon. I'll begin the call today with commentary on our commercial and industrial and independent utility systems business, then Bill will cover our Q3 2018 financial results and accomplishments. After this, I'll provide detail on our exciting entry into the residential energy systems business that was announced last week, the significance of that market to us and how we will differentiate and when.

We first established our core C&I Energy Systems business in Hawaii almost 3 years ago. Last year, we added California into that core. The C&I market in Hawaii and California will continue to be the foundation for our revenue over the next 3 quarters to 4 quarters. The Hawaii C&I market is estimated to have $2 billion to $2.5 billion of remaining addressable market and be worth about $100 million a year for solar distributed generation and solar-plus-storage distributed energy resources, or DERs. We see no reason we should not be able to get at least 25% of this market each year on a go-forward basis.

Hawaii is the 1 location in the U.S. where electricity rates are directly correlated to the price of oil and the increasing prices beginning to exert upward pressure on rates, which should help us on deal economics. We will add more sales and execution capability to support the business in Hawaii on the coming months since, in addition to our C&I business, it will be our entry point for residential energy systems.

In California, our CAL FIRE system is completing interconnect approval, so we should see revenue there in the near term. We also have a relationship with Schneider Electric for DERs that cuts across multiple regions. And as we've said before, we expect additional business from this relationship to occur within the calendar year.

Our primary business model for the C&I segment is through use of power purchase agreements. And by the remainder of this -- and for the remainder of this year and FY '19, they will make up at least 80% of our new contracts.

Earlier this year, we entered what we call the independent utility systems business, where we are effectively a proxy for a utility. In this segment, we remain on track to see revenue contribution from the Illinois market in the second half of our FY 2019. The state is slightly behind on the execution phase of the renewables program, but that allows us the time to lock up the land we'll need to construct our initial 4 community solar projects, each for a 2-megawatt PV installation. We're in a good position to fill subscriptions as we have plenty of off-takers as well as PPA buyers at the ready.

Finally, for the C&I independent utility systems business, we've added multiple new hires to our business development group to support increased engagement with development partners in the Eastern, Central and Western states.

In summary, it is noteworthy that we've built estimated project backlog to the company record of $16 million as of today. We're very pleased with that result, and our strong pipeline supports increasing it further as we move forward. For the fourth quarter, we believe we'll maintain or further increase the backlog number while delivering incrementally higher revenue compared to Q3.

I'll now turn the call over to Bill to discuss the Q3 2018 financials.

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William J. Dallapiazza, EnSync, Inc. - CFO [4]

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Thank you, Brad. And I would like to add my welcome to those on the call. Today, I'll go through an overview of the financial results for the third quarter of fiscal year 2018.

As Brad discussed, we are very pleased with the company's performance this year as we continue to build momentum with the expansion of our portfolio offerings with the introduction of our residential solution, the EnSync Home Energy System.

For the third quarter, we recorded total revenue of $3.1 million compared to $51,000 in the year ago period and $4.8 million in the second quarter. Revenue during the third quarter was largely derived from 10 PPA contracts we have under construction in Hawaii compared to 8 PPA contracts in the second quarter.

We continue to experience an uptrend in gross margin in the third quarter, ending at 27.2% compared to a negative margin in the year ago period and 24.2% in the second quarter. The improved gross margin is attributable to a favorable mix of projects in the current quarter and the continued efficiencies in the procurement, construction and sale process.

In particular, we sold projects in the third quarter with a weighted average gross margin of over 30%. Gross margin on a year-to-date basis was 22.4% compared to a negative 2.8% in the year ago period. The company's expectation is gross margins on future PPA sales should be in the range of 15% to 25%.

Advanced Engineering and Development costs were $1.2 million during the third quarter compared to $1.4 million in the year ago period and $1.2 million in the second quarter. Of the current quarter spend, approximately $360,000 was spent on development of the EnSync Home Energy System.

Over the past 1.5 years, approximately $1.6 million was spent on this project. We expect to spend approximately $200,000 in the fourth quarter, after which, spending levels are expected to decrease by a similar amount entering the first quarter of fiscal 2019 and thereafter. Our target is to achieve initial revenue from this program investment in the first half of fiscal 2019.

Selling, general and administrative expenses totaled $2.5 million during the third quarter compared to $2.7 million in the year ago period and $2.4 million in the second quarter. This decrease from the year ago period was largely driven by a reduction in stock-based compensation.

Total Advanced Engineering and Development costs plus selling, general and administrative expenses, excluding stock-based compensation, was $3.5 million during the third quarter compared to $3.6 million in the year ago period and $3.4 million in the second quarter. The company intends to hold at or below current levels in the fourth quarter of fiscal 2018 with an anticipated reduction in the first quarter of fiscal 2019 of approximately $200,000 related to residential product developments. Stock-based compensation was $200,000 during the third quarter compared to $500,000 in the year ago period and $200,000 in the second quarter.

Net loss attributable to common shareholders for the third quarter was a negative $3 million or $0.05 per basic and diluted share compared to a negative $4.5 million or $0.09 per basic and diluted share for the year ago period. Estimated backlog value for PPA projects, components and systems as of the day of this call is $16 million.

We continue to build a strong pipeline of projects that we look to book over the next few quarters.

In terms of our balance sheet, our cash and cash equivalents at March 31, 2018, was $5.3 million compared to $5.9 million at December 31, 2017. We use cash and operating activities of $2.2 million in the third quarter compared to a usage of cash of $5.1 million in the year ago period and $3.1 million in the second quarter.

As discussed on our last call, we closed on a sale of our corporate headquarters in the third quarter, generating net proceeds of $1.7 million after payment in full of our mortgage.

We are gaining traction with our operational execution and believe that current cash and cash equivalents, cash flows from existing and future projects in our backlog and pipeline and financing available to us will provide sufficient cash for the next 5 quarters.

With that, I'll turn the call back over to Brad.

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Bradley L. Hansen, EnSync, Inc. - CEO, President & Director [5]

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Thanks, Bill. This is truly a great time for EnSync, and I would like to provide detail on why we're so excited about the Residential Energy Systems business, our EnSync Home Energy System and the Keahumoa Place PPA announcement with The Michaels Development Company last week.

Let's start with the market. By as early as year 2021, the residential solar-plus-storage systems market segment will be larger than the C&I market. There are many reasons why, including an inherent trend towards disruption and fragmentation with large tightly controlled markets like the market for generation distribution and consumption of energy.

Examples of mature tightly controlled markets that were disrupted or fractured include music streaming, cord cutting with the cable TV providers, ridesharing with Lyft and Uber and Airbnb and VRBO for short-term lodging. This democratization and fragmentation is happening everywhere around us. There's no reason why the energy market will not follow this trend.

Second, cost reductions will drive the self-generation consumer mega-trend. There's been a 75% reduction in the cost per kilowatt hour of lithium-ion energy storage since 2010, and it will drop another 50% in the next 10 years. Installed cost per watt of solar modules for residential have dropped 50% since 2010, and they will drop another 50% in the next 10 years.

Third, government policies are in aggregate favorable. The recent decision by California Energy Commission to require solar modules on nearly all new homes is just 1 example. According to Bloomberg New Energy Finance, the cumulative amount of installed and operational energy storage will go from less than 10 gigawatt hours today to 305 gigawatts hours by 2030. Let that sink in a bit.

They also believe more than half of this will be on the customer side of the utility meter. We think residential will make up more than half of these customers' side of the meter installations. So the market will be tremendous.

Now let's talk about the EnSync Home Energy System. The business we'll initially target and why we have game-changing capability. If you look at home energy systems today, there's several major differentiation points inherent with the EnSync Home System.

First, at a standard configuration of 9 kilowatts AC power, it has the capability to supply the entire home for the vast majority of U.S. homeowners. If your utility power goes out, your home can function with all the convenience and comfort you're used to.

Second, our lithium-ion batteries use a more thermally resilient chemistry, LFP, which translates to better over-temperature and thermal runaway protection and thus, better safety.

Third, the EnSync Home System utilizes a scaled-down version of our C&I matrix, is highly modular and configurable and provides the same advantages and capabilities. This means that the product can easily be mass customized for specific homes according to their loads and amount of solar generation.

Fourth, the EnSync Home is a completely integrated system solution, not a collection of components for multiple suppliers. Each module is designed from the drawing board to work as an integrated home DER in addition to Matrix and up to 27 kilowatt hours of lithium-ion batteries that includes the AC incoming and rapid shutdown modules and our C&I market-leading DER Flex Internet of Energy solution with a plethora of user applications.

The system is certified according to all relevant UL, California, Hawaii and IEEE specifications. There's simply no comparable fully integrated system in the market. It will be an excellent product for homeowners because of its functionality, capability and safety and an outstanding product for installers because of its modularity and ease of integration into the home.

Let's talk about how trends and policies and rate structures will impact the market for solar in the residential segment. It's common knowledge that if you put solar on the roof of a home, most of the generation will occur when the occupants are outside of the home and the electricity demand is lower. The base load or demand in the home is pretty low during this time of day.

Any solar generation in excess of demand spills to the grid. Utilities have begun to scale back payments that they make for the generation that goes back to the grid. Utility net metering programs used to credit you back at retail rates for this over-generation, but this is largely changed in the market currently resides and an interim state between retail rate credit and no credit at all. Utilities implemented demand charges for the first commercial customers and now they're targeting residential customers.

Massachusetts recently approved demand charges for residential customers of Eversource, and other utilities in states will surely follow. Time of day rates will be next to get implemented. Make no mistake, average utility rates are going to go up a lot for the homeowner in the future.

The typical homeowner with a 3- or 4-bedroom house in suburbia has options. They'll be able to use our system and configure their own optimized and economical micro-utility system to self-generate for a sizable portion of their electricity needs, effectively making the traditional utility grid a secondary source of power.

But how about all the people that live in condominiums, townhouses or rental units in large properties and communities where the bulk of the units are 2 to 3 bedrooms and 4 bedrooms are a rarity? There are several major challenges to getting economically viable systems configured and installed in these types of developments.

First, if there's anything below retail rate credit for excess generation back to the grid, you can pretty much forget about deploying solar on 2-bedroom units. The baseload of these is typically so small that even a refrigerator or air conditioner turning on will pull a sudden inrush of grid electricity into the residence. This overwhelms the small solar generation capacity that once the motor's shut off, you return to a very low baseload and excess solar generation. So you have to focus on larger 3- and 4-bedroom units.

Now let's say, it's a property development with lease or rental units. Vacancy rates will heavily impact these since even for well-occupied properties, this number is likely to be 10% at any given time. And of course, they're not the same units that are always vacant. Vacancy rates can even approach 20% on a seasonal basis.

How do you ever make the economics work with this? With full net metering credit at retail levels, it's a challenge to get the numbers to work. With less than full retail rate credit, it gets more difficult still. If the utility export credit goes away entirely, there's basically no way to make this property pencil out for solar.

Once demand charges and time of day rates are adopted, this type of property will effectively be close to renewables. The easy answer is, "Oh, we'll just add storage to deal with all this challenge." But what happens when the batteries are full because nobody's home? So there's a problem with that too.

Except we have the solution. Our True Peer-to-Peer energy exchange will completely disrupt how energy is generated, distributed and utilized, particularly where residences are in communities of close proximity. When we set out to develop the EnSync Home Energy System 2 years ago, we not only targeted commercializing the best home energy system in the market for individual homes, but also one that could exploit the sizable opportunity for multi-unit community properties, either managed by a single developer as rentals or owned by individuals with an HOA. In our C&I systems, we utilize our Matrix system to manage disparate energy sources on a common DC bus to most economically serve the building load.

For our EnSync Home System, we started with the basic question, what if each residence was nothing more than another power source or load and they were interconnected with a DC-Link instead of our Auto-Sync DC bus used in our C&I Matrix? In other words, what if the network residences were just a very large Matrix connecting residential nanogrids and most effectively serving the community level load? What if, at any moment in time, each home could either be a load or a source of power and excess generation from 1 residence could be exported to a DC-Link, connecting other residences that may have demand for that electricity or have the capability to store it?

If we could do this, we could aggregate the fundamental issues like vacancy rates, individual unit load characteristics, PV sizing for small residences across the development and up to the network level. This would allow the negative economic impact to be diversified across the entire community. EnSync True Peer-to-Peer energy exchange was born from this idea, and with it, the potential to unlock a vast number of properties to highly efficient renewable energy systems.

Let's talk about our recently signed Keahumoa Place PPS as a real-world example of the deployment and benefit. This will be an affordable housing complex with a large number of units, many of which are relatively small, each being connected to an EnSync DC-Link behind their respective utility meters.

We'll deploy EnSync Home Systems with approximately 500 kilowatt hours of energy storage in a number of locations on the EnSync DC-Link, integrated with multiple solar generation sources totaling around 750 kilowatts. The entire community will be able to benefit from lower cost, high reliability, renewable electricity.

Finally, because we have a track record of being able to execute and deliver on what we claim our systems can do, we're able to wrap a 20-year PPA around this project and sell it. This is not to be undervalued. Nobody else but EnSync can do a project like this technically and execute it with the credibility to sell that PPA to a third party.

We're already engaged with multiple community-level opportunities that are similar to Keahumoa Place, including properties that are already constructed. We're well on our way to our target of contracting at least $15 million of residential systems business over the next year.

Going back to the owner of that house in the suburbs, someday, they'll be able to use our system to buy and sell electricity with other systems in another neighborhood through a network that has traceable electrons at contracted or spot market pricing. Maybe it will be in 10 years or maybe in 20 years, but that's where all this is headed. Our True Peer-to-Peer deployment at properties like Keahumoa Place is the beginning of this energy exchange based market, and it's here today.

It's truly an exciting time for us, and we'll drive hard to penetrate this great new product into the market in the next year. Our production partners are fully capable of ramping to support our success, and our initial focus will be on multi-resident properties where we can get good scale on the execution and where we have the only product in the market capable of truly serving the fundamental -- solving the fundamental problems with deploying renewables.

We worked hard to create business models and supply chain partners that leverage our core competencies of design and engineering and to execute to diverse markets. Our products such as Matrix, DER SuperModule, DER Flex and now the EnSync Home Energy Systems all leverage the same competencies and know-how.

For the customer-facing portion of the enterprise, we're working to implement the same scale by a partnership methodology that we've been successful with for our supply chain to enable rapid penetration and traction across multiple markets. This will be our focus in the coming quarters.

In summary, we're extremely happy with our performance in the third quarter as we executed well on all fronts, whether financial, operational, product development and new market penetration. Our products and execution are yielding great results and we'll build on these going forward. It's a very exciting time to be involved with EnSync. We appreciate your calling in today, and I'm happy to now take your questions. Jamie?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question today comes from Craig Irwin from Roth Capital Partners.

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Craig Edward Irwin, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [2]

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So Brad, the margins this quarter were really strong, 27.2%. You mentioned that your bookings in the quarter overall were very strong in the margin side. Can you say what's helping you get these margins? And is it possible that the 25% gross profit that you described for fiscal '19 might actually end up being on the conservative side?

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Bradley L. Hansen, EnSync, Inc. - CEO, President & Director [3]

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Yes. Thanks for the question. It's mainly attributable to just us driving down the cost of our execution. So even with the Section 201 price increase on modules, we've been able to still get good scale and drive the cost down on the new projects that are coming in. Whether we can maintain a level that is above 25%, I think that depends on how much of our business will go to the residential product where that number might be closer to 20% or penetration of new markets. Certainly, we're executing well, and I think there's good news on the margin line and we'll keep at it. But I think for right now, especially given the new product penetration for the residential systems, that 15% to 25% is still the right range to guide to.

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Craig Edward Irwin, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [4]

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Great. My second question is on the residential systems that you introduced. Can you maybe describe what your manufacturing capacity is? Do you have the ability to ramp up into the volume of many thousand units a quarter? What would you expect for deliveries in the June and September quarter? Are we likely to start off a little slow as we see the market? Anything you can share as far as color on the way this business is likely to take shape.

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Bradley L. Hansen, EnSync, Inc. - CEO, President & Director [5]

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Sure. At least for the next year, it will look a lot like our C&I business and we're addressing large properties. We're just going to be doing it with a lot of different units of energy storage and power electronics versus big SuperModules, and then we'll put a PPA around it. So it's still going to look a little bit like our C&I PPA business. The supply chain has been vetted very hard. We've been working with it for the last year to get it qualified. They're very high-volume suppliers where honestly, if we have to ramp to thousands a quarter even, it would be something that would be pretty manageable by our partners. So I think the ball is in our court to just go out and penetrate the market as well as we can. Our supply chain will support that. We're targeting, for the first year, $15 million in contracts that will be heavily weighted towards property level -- property development level contracts, so we don't really have any intention of going house by house for the market. We think -- we bring something very unique to the multi-resident property level market, and that's where, at least in the next couple of years, we're going to focus hard. So I think given that those PPAs have a reasonable cycle time to them, I think the revenue will likely, as Bill suggested, start to hit in the first half of fiscal year '19.

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Craig Edward Irwin, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [6]

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Okay, that's good to hear. Over the course of the last year, you've brought your SG&A down quite a bit. Obviously, you've been spending at the same rate for the last couple of quarters. Can you share with us -- I know it's a little early for fiscal '19, but as we exit the year, are we likely to see SG&A still constrained, maybe an uptick or downtick in spending as some of these programs take off and the heavy spending is behind them?

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Bradley L. Hansen, EnSync, Inc. - CEO, President & Director [7]

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I think we'll have a reduction in operating expenses on the engineering side. I think SG&A will be approximately flat. I think we can grow a great deal while maintaining it flat. We've done really good job on the supply chain side through partnering. And if you look at the amount of resources of the company that are loaded up on operations and manufacturing and things like that, it's really pretty small. We rely on big partners to help us do that work and we partner well with them. And I think what you'll see in the next year is us replicating that on the customer-facing side and developing channels with bigger partners that can really help project our strength and presence across the market without us necessarily adding a lot of people in SG&A. So it might tick up a little bit, but I think we're looking more at building out development partnerships that could have a number of different constructions from JVs all the way down to just marketing relationships that are sort of informal and they could run the gamut.

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Craig Edward Irwin, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [8]

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Great. And the last question, if I may, your Matrix product, pretty well known out there that it's been one of the first renewables-related products to adopt silicon carbide MOSFETs. I know that lead times are pretty long in that market right these days. Can you comment whether or not the residential product you're introducing has any silicon carbide content? And are you concerned at all about lead times on components for that product?

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Bradley L. Hansen, EnSync, Inc. - CEO, President & Director [9]

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It does. We use silicon carbon MOSFETs in our DC-DCs and DC-AC for a couple of reasons, number one being efficiency, but also heat and just thermal management and all that is good that comes with good thermal management. So far, we don't see a problem with those. It's an area of ongoing concern that we'll have to look at and evaluate. And on some things like this, you can deal with them just by locking in enough supply in advance and buying volume. We'll look at that too as we start to ramp the product. But it's really -- it was a necessity for a product like this to have the efficiency in the thermal management and thermal performance that silicon carbide MOSFETs bring. So you're right, it's an area that we'll have to watch on an ongoing basis and potentially buy some inventory.

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Operator [10]

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Your next question comes from Eric Stine from Craig-Hallum.

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Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [11]

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So just want to get back to the Peer-to-Peer product, that offering. And I know it's still early. But as you think about this going forward, I mean, how do you envision the utility stance to this? I mean, I certainly can see this viewed as being a threat, but also can envision that utility -- if they actually embrace this, that it could be a pretty useful part of their portfolio. So I mean, how do you -- maybe near term, what do you think it looks like and long term?

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Bradley L. Hansen, EnSync, Inc. - CEO, President & Director [12]

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That's the $64,000 question. I think it will be different in different locations. All of this that we're doing is behind everybody's utility meters, and that can be viewed as a positive or a negative. Some utilities are more progressive than others and looking at that as also a potential source of grid services, and there's no reason we can aggregate an entire property up through our DER Flex and use an entire property as a grid service DER even though it's deployed across hundreds of units. So I think if you look at Hawaiian Electric, and they were actually in the release on Keahumoa, they view it as an interesting and innovative technology, and they're always looking at new ways to deal with the problem of getting reliable electricity to the people in Hawaii and are fully onboard with what we're doing with the capability. That's not to say we'll go that way everywhere. I think the key thing, Eric, is if you look at programs like virtual net metering and some of the other virtual peer-to-peer programs, those have just proven to be kind of disastrous from an administrative standpoint and an execution standpoint. And the idea that you could do anything around those with the PPA is -- at least the odds are pretty remote at this point. This allows us to really make a black box out of that property. And everything going on within the black box is similar to what goes on inside of our Matrix today managing the different power sources and loads.

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Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [13]

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Got it. And you mentioned in the previous question that this could take a number of forms. Is it fair though that in the near term, you should view this as more of an enabler of increased PPA business in the longer term? I mean, do you have a -- is there an ideal way to the market? Is it project developers that get you outside of Hawaii? Just curious what would be your ideal for a channel to market.

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Bradley L. Hansen, EnSync, Inc. - CEO, President & Director [14]

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Definitely property developers and property management companies are the target-rich entities. And so things like the California, the CEC ruling that they just issued, we would approach that market through property developers and -- for new construction. So that's really the target, and we're starting to engage with those types of organizations at this point.

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Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [15]

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Got it. I mean, but I'm sure it helps that you're improving with the projects you get going on in Hawaii. Maybe the last for me...

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Bradley L. Hansen, EnSync, Inc. - CEO, President & Director [16]

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Even -- Eric, sorry, even The Michaels Development Company, Michaels Company is a property developer. So that's a good case study that we'll be able to take elsewhere and say, "Hey, this is what we did with these guys and it worked."

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Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [17]

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Great. Okay. So last one, just in California, I'm thinking about the PPA opportunity there. I know that you've been building the pipeline. Should we view the CAL FIRE project as that's kind of the starting gun, you get that up and running, and then that kind of opens up the opportunities that you've got in front of you?

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Bradley L. Hansen, EnSync, Inc. - CEO, President & Director [18]

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It does. It certainly does within state-level projects and government projects there. Those, of course, have a longer lead time associated with them, but it's definitely a proof point. I think there's other things going on there that will happen with our home energy system, again, with property developers. We've got a couple of discussions already regarding that. We've been working on the product for a long time, and so we're announcing it with it being ready to go. And it's all certified and everything's ready to go as far as shipping it into essentially any market in the U.S. So we've been having some of those discussions already. And of course, Schneider's got things going on in a number of states and also outside of the U.S., and there's projects that we'll be engaging on with them, including in California.

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Operator [19]

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(Operator Instructions) Our next question comes from Sameer Joshi from H.C. Wainwright.

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Sameer S. Joshi, H.C. Wainwright & Co, LLC, Research Division - Associate [20]

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So just a quick question on Hawaii. Has there been any effect or adverse effect because of the volcano activity there?

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Bradley L. Hansen, EnSync, Inc. - CEO, President & Director [21]

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Not so far, and that's a good question. The installations we have there are on the opposite side of the island, so, so far, there's been no interruption and no problem with our existing sites. On the sites that we're developing, those are also located a decent distance from where the volcanic activity is. And so we think the Big Island so far is okay for us. Probably 80% of our -- what we've got going on in Hawaii is on Oahu, and that hasn't been interrupted at all at this point.

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Sameer S. Joshi, H.C. Wainwright & Co, LLC, Research Division - Associate [22]

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Okay. Do you have any visibility, moving on to the mainland, any visibility on Illinois? And after the new procurement plan went into effect, do you have any more clarity on how to progress there?

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Bradley L. Hansen, EnSync, Inc. - CEO, President & Director [23]

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Yes. So they're a little bit behind on the execution side of things. And by that, probably a couple of months and hopefully, they can catch up. Honestly, that is just opportunity for us to line step up so that we can go fast. And right now, we're going pretty aggressively to locate 4 sites, which is not trivial. They can't be contiguous land parcels. They have to be near a 3-phase connection point -- or sorry, yes, 3-phase connection point on the grid. So we're going through and working through that in the Comet territory right now. We're starting to triangulate on a few locations that we think are going to work. We just need to get the land tied up, and I think they'll catch up and we'll be ready to go. We've done a lot of work on winding up off-takers as well as PPA buyers. So I think for us -- and also EPC partners, by the way. So I think for us, it all comes down to just getting the land and then getting the applications in. So we're optimistic that we'll be ready and that they'll catch up on the execution side, and we'll see first revenue from the initial PPAs in the back half of our FY 2019.

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Sameer S. Joshi, H.C. Wainwright & Co, LLC, Research Division - Associate [24]

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Okay. Moving to -- I understand, for your residential solution, there would be a lot of overlap or at least in terms of sales effort with the C&I. How are you planning to deploy the micro-utility solution? And what kind of sales efforts are in place with that initiative?

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Bradley L. Hansen, EnSync, Inc. - CEO, President & Director [25]

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Yes. I think that, Sameer, the #1 target for us is property managers, HOAs and property developers. I mean, that category of customer is where we're targeted. In some cases, we're already working with those types of customers at the C&I level, but we've actually had to pass on some opportunity at the C&I level because of the problem I articulated where you just can't get the economics to work because of a lot of small units with low load. So this just gives us another way to go aggressively attack that market, and I don't think there's a lot of cannibalization that will go on between our commercial systems business and with this product, the home energy system product. I think it just opens up a whole new market for us. But it will be heavily concentrated with property managers, property developers and HOAs over the next couple of years. And if it's a new greenfield site, it will be a property developer. If it's an existing site, it will be a property manager or HOA.

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Sameer S. Joshi, H.C. Wainwright & Co, LLC, Research Division - Associate [26]

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Okay. Just a quick bookkeeping question. I see that your inventories are lower slightly sequentially as well as year-over-year. What is the reason for that, especially given that your quarter was lower than expected?

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Bradley L. Hansen, EnSync, Inc. - CEO, President & Director [27]

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Do you want take that one, Bill?

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William J. Dallapiazza, EnSync, Inc. - CFO [28]

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Sure. Much of our inventory is drop shipped from the third-party vendor to the job site and is put into immediate use. So we -- our business model requires very nominal amounts of inventory to be kept on hand. We typically, in the case of our SuperModules, are about 2-month to 3-month lead times, and we can get in front of the -- of that with the construction schedule. So I would expect the inventory levels to remain at or around the levels that we're currently seeing today. There may be opportunities in the future to make opportunistic buys, to take advantage of pricing levels. But to this point, we have not done that.

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Bradley L. Hansen, EnSync, Inc. - CEO, President & Director [29]

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Yes. Sameer, I'll add a little bit of color to that, too. So in case of the SuperModule, those are constructed at our JV in China, Meineng Energy. But the batteries for those direct shift from the supplier to the site just because that's how you have to do it for a number of reasons. And then we put those in at the site. So we don't really touch a lot. There may be reasons for us that was, Bill said, to go out and buy some inventory. In 1 case, we've gone out and made some commitments on lithium-ion batteries for our commercial systems business so that we can make sure we have supply. Supply on lithium-ion is getting a little bit tighter than it was a year ago because of the China market ramping up logistics, car business. So we kind of look at it regularly, and it kind of goes to the same question before in silicon carbide MOSFETs. We look at our inventory and we might buy ahead for some if we think the supply will get tight. But in general, our philosophy is ship it direct to the customer and don't touch it so it doesn't really go through our books.

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Sameer S. Joshi, H.C. Wainwright & Co, LLC, Research Division - Associate [30]

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Understood. One last one, if I may. I think I meant -- I heard mentioned that the stock-based compensation was around $200,000 -- was it $500,000 year ago quarter. Is that just because you moved timing of awarding stock? Or what is the reason for this?

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William J. Dallapiazza, EnSync, Inc. - CFO [31]

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The primary reason for this is the departure of a few senior managers of -- that occurred in the third quarter, of the prior CAO as well as the VP of Sales. So that was the primary driver to the reduction in some of the expense figures for the quarter.

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Operator [32]

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So ladies and gentlemen, we have reached the end of today's question-and-answer session. I'd like to turn the conference call back over to management for any closing remarks.

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Bradley L. Hansen, EnSync, Inc. - CEO, President & Director [33]

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Thank you, Jamie, and thank you to everyone participating on the call. The market environment for our products and services continues to be positive, driven by a shifting of energy production mix from carbon-emitting sources to renewable sources and by increasingly favorable economics for solar energy, energy storage and combined solar-plus-storage systems.

We're very pleased with our progress since the February call and with our ongoing market penetration, commercialization and execution. Renewable energy policies and cost reductions for solar and battery modules are continuing to create an inflection point for the distributed energy resource market and our products, services, business models and intellectual property provide us with a great position to take advantage of and drive this disruption.

We're excited about the radical changes that will transform energy generation distribution and consumption, including our True Peer-to-Peer energy exchange. Our technology is ideal for enabling this future state of energy to be realized.

We look forward to speaking with you again after the current quarter. Thank you again for your support and interest in EnSync Energy Systems.

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Operator [34]

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Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your lines.