Attached files
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EX-32.2 - EnSync, Inc. | v174038_ex32-2.htm |
EX-23.1 - EnSync, Inc. | v174038_ex23-1.htm |
EX-31.2 - EnSync, Inc. | v174038_ex31-2.htm |
EX-32.1 - EnSync, Inc. | v174038_ex32-1.htm |
EX-31.1 - EnSync, Inc. | v174038_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K/A
(Amendment
No. 1 to Form 10-K)
x Annual Report Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the
fiscal year ended June 30,
2009
or
¨ Transition Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the
transition period
from to
Commission
file number
001-33540
(Exact
name of registrant as specified in its charter)
Wisconsin
|
39-1987014
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
N93
W14475 Whittaker Way, Menomonee Falls, Wisconsin
|
53051
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code:
|
(262)
253-9800
|
Securities
registered pursuant to Section 12(b) of the
Act:
|
Title
of each class
|
Name
of each exchange on which registered
|
Common
Stock, $0.01 Par Value
|
NYSE
Amex
|
Securities
registered pursuant to Section 12(g) of the Act:
|
||
None
|
||
(Title
of Class)
|
||
Indicate
by check mark whether the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act.
Yes
¨
No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes
¨
No x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x
No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.x
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act (check one).
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yeso Nox
The
aggregate market value of the voting stock held by non-affiliates, computed by
reference to the last sales price on June 30, 2009 was
$10,535,443.
Indicate
the number of shares outstanding of each of the registrant’s classes of Common
Stock, as of the latest practicable date. 12,381,214 Common Shares ($0.01 par
value) as of February 10, 2010.
DOCUMENTS
INCORPORATED BY REFERENCE
In Part
III, portions of the registrant’s 2009 Proxy Statement to be filed with the
Securities and Exchange Commission within 120 days of the Registrant’s fiscal
year end.
Part
III – Items 10, 11, 12, 13 and 14
|
In
the Company’s Definitive Proxy Statement in connection with its
2009
annual
meeting of shareholders to be filed with the Securities and
Exchange
Commission
no later than October 28, 2009.
|
|
Part
IV - Certain exhibits listed in response to Item 15(a)
|
Prior
filings made by the Company under the Securities Act of 1933 and
the
Securities
Exchange Act of 1934.
|
ZBB
ENERGY CORPORATION
2009
FORM 10-K/A ANNUAL REPORT
TABLE OF
CONTENTS
Page
|
||
Explanatory
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Note
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3
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PART
I
|
3
|
|
Item 1.
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Business
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3
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Item 1A.
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Risk
Factors
|
14
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Item 1B.
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Unresolved
Staff Comments
|
16
|
Item 2.
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Properties
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16
|
Item 3.
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Legal
Proceedings
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16
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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16
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PART II
|
17
|
|
Item 5.
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Market
for Common Equity and Related Stockholder Matters and Issuer Purchases of
Equity Securities
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17
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Item 6.
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Selected
Financial Data
|
18
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Item 7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operation.(restated)
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18
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Item 7A.
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Quantitative
Disclosures About Market Risk
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26
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Item 8.
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Financial
Statements and Supplementary Data (restated)
|
26
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Item 9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
44
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Item 9A.
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Controls
and Procedures (restated)
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44
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Item 9B.
|
Other
Information
|
45
|
PART III
|
46
|
|
Item 10.
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Directors,
Executive Officers and Corporate Governance
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46
|
Item
11.
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Executive
Compensation
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46
|
Item 12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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46
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
46
|
Item 14.
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Principal
Accountant Fees and Services
|
46
|
PART IV
|
46
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
46
|
Signatures
|
48
|
- 2
-
EXPLANATORY
NOTE
This
Amendment No. 1 on Form 10-K/A (“Form 10-K/A”) to the Company’s Annual Report on
Form 10-K for the year ended
June 30, 2009, initially filed with the Securities Exchange Commission (the
“SEC”) on September 18, 2009, (the “Original
Filing”) reflects a restatement of the consolidated financial statements of ZBB
Energy Corporation for the year ended June 30, 2009 as discussed in Note 16 to
the consolidated financial statements. The determination to restate these
financial statements and other financial information was made as a result of
management’s identification of an error in the recording of revenue on a product
shipped on June 30, 2009. The above stated adjustments had no effect on the
Company’s cash and cash equivalents balance maintained as of June 30,
2009.
The
Company originally recognized approximately $619,000 in revenue in the fourth
quarter of fiscal 2009 on a sale of an energy storage system to a customer in
Dundalk, Ireland. Although the product was substantially completed, shipped, had
received customer factory acceptance and payment in full as of June 30, 2009,
transfer of risk and title had not been achieved based on contracted freight
terms and as required per Staff Accounting Bulletin 101 prior to the recognition
of revenue. The revenue and related costs of $604,000 have therefore
been deferred until the first quarter of fiscal 2010.
This Form
10-K/A amends and restates Items 7, 8 and 9A of Part II of the Original Filing
and Part III of the Original Filing as it relates to the supplement to the
Company’s definitive proxy statement filed on November 6, 2009. No
attempt has been made in this Form
10-K/A to modify or update other disclosures presented in the Original Filing,
except as required to reflect the effects of the restatement and the filing of
such supplement. This Form 10-K/A does not reflect events after the date of the
Original Filing of the Form 10-K or modify or update those disclosures,
including the exhibits to the Form 10-K affected by subsequent events, except as
stated above. Information not affected by the restatement is unchanged and
reflects the disclosure made at the time of the Original Filing. Accordingly,
this Form 10-K/A should be read in conjunction with Part I -Items 1, 1A, 1B, 2,
3, and 4, Part II - Items 5, 6, 7A, 9, and Part III – Items 10, 11,
12, 13 of the Original Filing which were not amended in this Form
10-K/A.
In
addition, pursuant to the rules of the SEC, Item 15 of Part IV of the Original
Filing has been amended to include an updated
consent of the Company’s independent registered public accounting firm and
currently dated certifications from the Company’s
Chief Executive Officer and Chief Financial Officer, as required by sections 302
and 906 of the Sarbanes-Oxley Act of 2002.
The
Amendment does not reflect events occurring after the filing of the Original
Filing and unless otherwise stated herein, the information contained in the
Amendment is current only as of the time of the Original
Filing. Except as described above, no other changes have been made to
the Original Filing. Accordingly, the Amendment should be read in conjunction
with the Company’s filings made with the Securities and Exchange Commission
subsequent to the filing of the Original Filing, including the Company’s
definitive proxy statement filed on September 25, 2009 and supplemented on
November 6, 2009.
PART 1
Item
1.
|
Business
|
ZBB
Energy Corporation (“ZBB” or the “Company”) develops and manufactures
distributed energy storage solutions based upon the Company’s proprietary
zinc-bromine rechargeable electrical energy storage and power management
technologies. The Company was incorporated under the laws of
Wisconsin in 1998.
The
consolidated financial statements include the accounts of the Company and those
of its wholly owned subsidiaries, ZBB Technologies, Inc. which operates a
manufacturing facility in Menomonee Falls, Wisconsin, and ZBB Technologies, Ltd.
which has its advanced engineering and development facility in Perth,
Australia. The Corporate website address is
www.zbbenergy.com.
Products
We
design, develop, manufacture and distribute energy storage systems and solutions
under the trade names ZESS 50, ZESS 500 and ZESS POWR. Our ZESS 50 and ZESS 500
energy storage systems are built using a proprietary process based upon our
zinc-bromide rechargeable electrical energy storage technology while our patent
pending ZESS POWR hybrid power conversion system is manufactured by our power
electronics partners utilizing their standard proven components. The integrated
modular nature of our zinc-bromide regenerative fuel cells is a philosophy that
has carried through to the ZESS POWR product both in terms of electrical
interfaces and packaging which allows our solutions to be sized and packaged
into fully configurable energy storage systems of any size and integrated with
or without any generating source. Our systems combine the ZESS 50 and/or ZESS
500 modules with the ZESS POWR, integrated computer hardware and
software; and fully integration with customer control systems including remote
monitoring and control options for the integration with the customer’s existing
electrical power system or as a complete independent power plant. The
complete ZBB portfolio provides the advanced energy storage aspects of
recharging during off peak times from any renewable or conventional energy
source and discharge power as needed to meet the customer load demand regardless
of the connected generation source real time status. Our energy storage
solutions address issues related to grid stability and renewable energy
intermittency, including:
- 3
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|
o
|
Distributed
storage of electrical energy during off peak
periods.
|
|
■
|
Re-supply on high demand providing grid
reliability and economic
benefits.
|
|
o
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Smoothing /
shifting intermittent renewable energy
generation.
|
|
■
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Controlled generation, grid
stability and optimal use
|
|
o
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Enabling
energy independence and off-grid
applications
|
|
o
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Green back
up power and
power quality.
|
|
■
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Reduce CO2 emission, 24/7 renewable
energy availability
|
Industry
Overview
We
believe that our ZESS products are available at a time when major changes are
occurring in electricity supply and demand. Modern economies are highly
dependent on the performance and reliability of the electricity grid. Electric
utilities now face real and immediate challenges in providing reliable power.
These challenges exist mainly because of ever growing demand combined with aged
centralized electric utility generation and transmission and distribution grids
that are increasingly unable to accommodate the peak, or highest demand for
power required by its customers. This generation, transmission and distribution
delivery system must be able to meet the highest expected demand; however that
highest expected demand is only experienced on an infrequent basis or for a
short daily duration, leaving the system significantly underutilized for much of
the day, week or year. Refurbishment by utility companies of their
infrastructures for these intermittent periods of time would also take years and
require major capital expenditures in comparison to deploying ZESS units.
Additionally, generation capacity would need to be increased to meet the
generation demand during these peak periods which would require additional
fossil fuel facilities given that renewable generation presently being utilized
cannot guarantee supply availability during these peak demand
periods. During peak periods the losses in the transmission and
distribution system are amplified since the losses are proportional as function
to the load, again contributing to unnecessary emissions as generators must
supply this additional energy to compensate for these losses in the
system. The Edison Electric Institute states that “underinvestment in
transmission and distribution is estimated to cost the American economy at least
$20 billion a year — a figure certain to grow if transmission and distribution
infrastructure investment does not keep pace with demand.” (Why Are Electricity
Prices Increasing? — An Industry Wide Perspective, June 2006). The Wall Street
Journal quoting Global Information Inc., reported that storage can help increase
the usefulness of currently installed transmission and distribution assets by
making existing equipment capable of meeting the expected future energy demand
and deferring the need for additional investment in new “higher capacity”
assets. Additionally, while expensive long term refurbishment of the systems may
increase reliability of the energy supply, it can only do so to the projected
consumption as it is known today. Thus, it would not
necessarily solve problems associated with spikes in energy demand that can only
be satisfied by the release of excess energy that has been previously stored
from the generation source.
We
anticipate that the primary users of our energy storage systems will be utility
companies, commercial/industrial users and our systems will be combined with
renewable energy (solar, wind and other power generators) for such providers
with space or capital constraints for the reasons stated above. We also intend
to target customers that already have lead acid or similar systems in place that
are nearing the end of their life cycle or that will need additional storage
capacity. Energy storage itself is not new for the utility companies and storage
systems in the form of hydro-electric reservoirs that pump during off-peak
periods and release water to create energy for the peak demand periods, have
been utilized in this industry for some time. However, use of these technologies
requires the right natural landscape as well as significant capital, and space
resources, have environmental impacts including displacement of the existing
environment (people, homes, land) and in most cases are located away from the
load centers or consumers and thus address only the generation portion of the
peak demand problem and do not address the transmission and distribution sector,
nor do they alleviate losses in the transmission and distribution system or
address elevated operating temperatures of system equipment which is an
important factor in equipment life expectancy. Because of
capacity constraints and aging infrastructure of electricity grids in the United
States and many other countries, electricity can be delivered most efficiently
by placing energy storage systems near customers with variable power demands and
at substations closest to the areas of greatest electricity
usage.
- 4
-
In
addition to ZESS deployment in the electric utility grid, ZESS is also the key
to establishing “off grid” electrical systems. Other than emission
producing diesel generator sets that are polluting and costly to maintain, the
uncertainty of rising fuel costs has accelerated interest toward renewable
generation. However, these intermittent renewable sources cannot be
controlled effectively and certainly cannot be a guaranteed source of
electricity. As such the combination of renewable energy along
with ZESS provides the complete power plant concept that provides continuous
power regardless of wind or solar variations due to naturally occurring events
such as cloud cover, still air or even nightfall.
A
combination of ZESS with solar power, being deployed as a kit power plant
results in a reliable turnkey system capable of being independent from a utility
grid. Such systems can be used anywhere including remote areas of the
world where either no electricity exists or where there are severe outages
through poor supply and inconsistent delivery, or for any consumer who prefers
to be self sufficient.
Key areas
for the use of ZESS systems include the off grid Telco installations whether
with our without renewable energy generation as well as off grid power
generation systems for residential or small community power
systems. Combined with renewable energy generation provides a
complete back up power system for grid tied applications.
Product
Benefits
Distributed
Energy Applications
Performance
problems in electricity distribution grids vary in nature and severity. One way
for a utility company to address deficiencies in the electricity grid is by
using the back-up energy provided by energy storage systems to provide
uninterrupted power supply. The term “distributed energy” generally refers to
the deployment of energy generation and energy storage resources in the
transmission and distribution networks of the electricity grid. These assets are
sited past a bottleneck, the point of congestion, where they can provide a
source of energy to allow a “ride through” for the infrequent peak demands
experienced by the system during the month or the season and thus allowing the
utility to avoid or defer an expensive capital upgrade to its system until a
later time when the increased demand becomes more regular. For electric
utilities our products provide a means to augment the functionality and
performance of the electricity grid on a localized and “as needed” basis.
Typically, distributed energy solutions are deployed close to the customer base,
at the utility substation level or at the lower voltage levels in the
distribution network. This allows deployment of optimized equipment to address
the local supply problem, rather than relying on large scale centralized
solutions.
Capital
deferment
We
believe that increases in demand will necessitate expensive modernization and
capacity upgrade programs for the infrastructure of aging electricity grids.
These improvements will be needed to update utility companies’ electricity grids
around the country as a result of previous underinvestment in this utility grid
sector. According to Edison Electric Institute estimates (Why Are Electricity
Prices Increasing? — An Industry Wide Perspective, June 2006), “investor owned
utilities plan to spend $29 billion in transmission infrastructure from 2004 to
2008”. This same report suggests that “a continued load growth will require
continued expansion in distribution system capacity. If recent investment trends
persist, distribution investment will average $14 billion per year over the next
10 years”. We believe that the use of our energy storage systems to store unused
energy for use during peak times that would not otherwise be deliverable on the
electricity grid, postpones the need for major capital expenditures by utility
companies.
Load
management
Utility
companies attempt to even-out the on-demand supply of electricity from the
energy transmission grid by the storage of electricity during low-load (low
demand) periods, and the subsequent supply of stored electricity during
high-load (high demand) periods. In the industry, these techniques are known as
load shifting, peak shaving and peaking capacity. Our energy storage systems are
designed to be used by utility companies to manage demand for energy in the
above applications.
Power
quality
Energy
storage systems provide a means to alleviate or eliminate power quality problems
by supplying power locally to either infill or compensate line disturbances on
the utility (rather than the customer’s) side. The scale of the avoided costs
provides an indicator of the potential value of using distributed energy systems
in the grid to address power quality problems.
Benefits
to “green power” energy providers
Renewable
energy providers would use our products to store as much power as possible
during times of peak generation. This energy is then re-sold or distributed at a
later time as needed.
Typically,
renewable energy sources such as wind and solar and hydro are interconnected to
the utility company’s energy transmission grid for the subsequent purchase of
this green power by customers. Alternatively, renewable generation is installed
at customer sites, with arrangements to purchase excess power exported from the
customer to the grid. Distributed energy storage enhances the value of the
renewable resource by time-shifting the use of the energy and by reducing the
fluctuation of power delivered to the grid.
- 5
-
Benefits
to industrial and commercial users
Large
factory and industrial operators that are energy intensive or energy users that
rely on an uninterrupted power supply may utilize our products for both back up
and power management. Industrial users also use energy storage systems to employ
a technique known as demand charge management, to reduce the amount of energy
drawn from utility companies during peak times.
Markets
ZBB
technology fits hand-in-hand with alternative energy growth and deployment.
Specifically, we address the following issues in our target
markets:
Renewable
Energy
■ Store
and re-supply generated power during high-demand periods
■ Smooth
power delivery from the generator to the grid
ZESS
provides the necessary means to control intermittent renewable power generation
and to optimize energy utilization. ZESS allows photovoltaic (PV) technology to
store energy when the sun is shining and provide power when sunlight is limited
by cloud cover or during the night. The ZESS can be used to store
power from solar panels and shift the distribution of that power to align with
the customers peak demand requirements (typically later in the
day).
ZESS is
designed with capabilities of connecting with wind turbines and either storing
over-supplied energy or supplying stored energy as needed to smooth the
intermittency of wind power generation. As penetration of wind energy
increases on the utility grid, the intermittent nature will have negative
impacts on grid stability. Integrating ZESS minimizes the
intermittent nature and allows wind generation to be more predictable and
therefore a more valuable generation asset.
Smart
Grid
■ Goal
of the Smart Grid - to maximize the efficiency of existing generating facilities
and accommodate the integration of renewable power resources.
■ Evolution
of the Smart Grid will depend on cost effective energy storage
With the
evolution of the electrical system toward the smart grid and the use of
distributed generation and energy storage, the ZESS system will be a key element
in the advancement of the smart grid. The presence of ZESS in the
smart grid is essential to achieve the Micro-grid capability, the
dispatchability of distributed renewable energy and to control the power and
energy on a distributed basis.
Industrial
and Commercial Users
■ Implement
smart metering to use grid-power when cost efficient (e.g. peak
shaving)
■ Remote
& off-grid applications
■ Reduce
environmental impact (“going green”)
ZESS
units can be charged during low cost off-peak periods (at night) when energy
rates (kWh) and peak demand charges (kW) are low and can be discharged during
higher cost on-peak hours. Demand charges per kWh and the
differential between on peak and off peak charges per kW are the leading factors
in the cost/benefit of the ZESS. The economic advantages result from
the reduction of peak demand/capacity charges deferred during on peak hours and
the difference in energy prices from off peak to on peak.
The ZESS,
when placed on the load side of fixed electrical assets will also eliminate
damage or extend the life of the power infrastructure by reducing the loading on
the equipment. This defers the need for additional capital
expenditures that would be needed to upgrade the power infrastructure to
accommodate the peak demand period.
The ZESS
not only reduces the capacity demand on the facility, but also on the utility
distribution system. As a result, there is less need for additional
generation to address peak loads and there is a reduction in distribution
losses, both of which effectively reduce emissions to the
environment. Further, the ZESS regenerative fuel cell is a
“green” asset helping make the institution an environmentally friendly
organization. The reduction of stress on the utility grid provides
additional assurance to the institution that the probability of blackouts or
brownouts due to an overload on the utility system is reduced.
- 6
-
Utility
Applications for Transmission & Distribution Network Support
■ Mitigates
congestion
■ Defers
sub-station capex
■ Distributed
Energy Resource
■ Implement
peak shaving and manage cost efficiency
■ Renewable
energy regulation and generation shifting
■ Reduce
grid vulnerability
Electric
utility companies maintain a generating system consisting of base generation as
well as spinning reserve generation and peaking units to meet daily demand
peaks. The system is designed for a base load generation which
results in underutilized consumption while during the peak periods the base
generation must be supplemented by the spinning reserve and peaking units to
deliver the peak demand, where the distributed ZESS near the load centers
provide a means to accomplish the collective benefits from central generation of
spinning reserve and peaking units through the transmission and distribution
systems to the load center.
The ZESS
system stores excess energy being produced during these non-peak times and
returns this energy back to the electric utility during peak periods thus
reducing the need for the reserve generation (plant deferral) and/or providing a
means of stability and reliability to the electric utility by reducing the risk
of blackouts. This is also important as the increasing penetration of
intermittent renewable energy comes on line into the utility grid and the need
to regulate or control this new generation becomes pertinent for system
stability.
The ZESS
units have distribution benefits to assist power sources that are constricted by
a maximum amount of power distribution capacity. When located
near the end user, the stored energy is used to supplement the load demand,
reducing the stress on the distribution network and/or preventing overloads that
may cause blackouts or brownouts as well in addition to potentially eliminating
the need to upgrade the distribution system supplying the customer
load.
History
ZBB
Energy Corporation was formed in 1998 in Wisconsin as a holding company for ZBB
Technologies, Limited and ZBB Technologies, Inc. ZBB Technologies, Limited, our
Australian subsidiary, was formed in 1982 to develop commercial applications for
the zinc-bromide research being conducted by Murdoch University in Western
Australia. ZBB Technologies, Inc., our U.S. operating subsidiary, was
established in 1994 in Wisconsin to acquire the zinc-bromide technology assets
of Johnson Controls, Inc. which was engaged in research to manufacture energy
storage systems based upon the zinc-bromide technology.
Up until
2004 we were primarily engaged in research and development and through that
prior period had developed a number of prototype energy storage systems for
field trialing and evaluation by certain power utilities and other commercial
operators. Principal amongst these were large scale systems deployed with
Detroit Edison in Michigan, USA and with United Energy in Melbourne,
Australia.
In May
2004, we entered into a sales contract (contract completed March 31, 2008) to
provide our 500kWh energy storage systems to our
first commercial customer, the California Energy Commission (CEC). Under a
contract extension the two systems now owned by CEC have recently had control
system upgrades retrofitted and will be redeployed by the owner to additional
sites within California on an as needed basis. ZBB continues to maintain this
equipment under terms of the original agreement.
In March
2005, we formed ZBB China Pty Ltd., a joint venture company with China Century
Group Ltd. of which we held 49%. In October 2008 we reached an agreement in
which we now own 100% of this subsidiary.
In March
2005, we completed an initial public offering in Australia of our common stock
and options to purchase common stock. Our
securities were traded on the Australian Stock Exchange Ltd. through August
2007. We received gross proceeds of approximately US$4.5 million (A$6.0 million)
in the Australian stock offering.
Effective
as of June 15, 2007, we completed a 1-for-17 reverse split of our outstanding
shares of common stock. On June 20, 2007, we completed the initial public
offering in the United States through the sale of 3,333,333 shares of our common
stock at an initial offering price of $6.00 per share, and listed our shares for
trading on the NSYE (formerly the American Stock Exchange). Effective as of
August 9, 2007, we de-listed our shares from the Australian Stock Exchange and
all of our common stock became tradable in the United States. As of June 30 2009
we had approximately 10.6 million shares listed for trading on the NYSE Amex
exchange.
- 7
-
In June
2007, ZBB Technologies, Ltd, our subsidiary based in Western Australia, and the
Commonwealth of Australia entered into an agreement for project funding under
the Advanced Electricity Storage Technologies (AEST) program, whereby, among
other things, the Department has agreed to provide funding to ZBB Technologies
Ltd. for the development and delivery of an energy storage system that will be
used to store and supply renewable energy generated from photovoltaic solar
panels and wind turbines already operational at the Commonwealth Scientific and
Industrial Research Organization’s Newcastle Energy Centre in New South Wales.
The agreement requires ZBB to contribute approximately $2.3 million (A$2.8
million) of any cash and in-kind contributions to the project including a newly
developed 500KwH energy storage system This agreement provides for a three year
term under which the Commonwealth of Australia will provide $2.5 million (A$3.1
million) in project funding over several periods through June 2010.
During
the year ended June 2009 we completed the necessary certification process to be
awarded ISO 9001:08 compliance for our Milwaukee manufacturing facility. We also
worked in conjunction with one of Eaton’s supply chain partners to ensure that
our ZESS module control system that is fitted to all of our battery modules is
certified by Underwriters Laboratory and bears the necessary UL508 certification
stamp mark. These two items were key objectives to be achieved from our 2007
IPO.
Technology
The ZBB
Zinc Energy Storage System (ZESS) is a proprietary and patented regenerative
fuel cell based on zinc/bromide technology,
which is very different in concept and design from more traditional methods of
energy storage such as the lead/acid battery.
The ZESS technology is based on the reaction between the two chemicals, zinc and
bromide. ZESS is a trade mark protected name owned by ZBB Energy
Corporation.
Unlike
the lead acid and most other batteries, the ZESS uses electrodes that cannot and
do not take part in the reactions but merely serve as substrates for the
reactions. There is therefore no loss of performance, unlike most rechargeable
batteries, from repeated cycling causing electrode material deterioration.
During the charge cycle metallic zinc is plated from the electrolyte solution
onto the negative electrode surfaces in the cell stacks. Bromide is
then converted to Bromine at the positive electrode surface of the cell stack
and is immediately stored as a safe chemically complexed organic phase in the
electrolyte tank. When the ZESS discharges, the metallic zinc
plated on the negative electrode dissolves in the electrolyte and is available
to be plated again at the next charge cycle. In the fully discharged state the
ZESS can be left indefinitely.
The ZESS
offers two to three times the energy density (75 to 85 watt-hours per kilogram)
with associated size and weight savings over present lead/acid batteries. The
power characteristics of the ZESS can be modified, for selected applications.
Therefore, the ZESS has operational capabilities which make it extremely useful
as a multi-purpose energy storage option.
In
addition to the ZESS energy storage products, ZBB has developed the power
electronics topology to manage the energy and power within a single
product. Where this product may be used purely for the integrated
combination of multiples of the ZESS products to provide a single point of
connection with a high level of modularity for maximum system availability; or
it may be used for the integration of renewable sources directly in combination
with the ZESS products in the form of a controlled and dispatch able power
plant. The ZESS POWR product is uniquely designed to maintain the ZBB
philosophy of modularity of standard product to achieve a configurable
system. This modular approach allows interfacing any renewable energy
with any number of ZESS units.
Product
Design
The ZESS
technology is composed of a module or a series of modules for increased power.
The ZESS 50 delivers 50 kWh of electrical energy, which would be equivalent to
roughly power a home for two days, and includes three cell stacks, each
containing 60 cells. The module dimensions are 4’ x 4’ x 6.5’, weighing 3,200
pounds. The ZESS 500 is comprised of ten of the standard ZESS 50 modules and
delivers 500kWh of electrically energy from a full state of charge at a
continuous rate of 250kW. The ZESS 500 is utilized in systems
that require higher levels of energy storage and output power capabilities, such
as Utility scale applications, larger renewable energy applications, commercial
and industrial applications where as the ZESS 50 is well suited for large
residential applications, commercial application with and without renewable
energy sources. Both the ZESS 50 and the ZESS 500 have rapid charging
capabilities and fully charges from 0% State of Charge to 100% in approximately
four hours.
Both
energy storage products, ZESS 50 and ZESS 500, are designed products have the
benefit “Turnkey” capabilities at a product level based on the ease of
transporting, site locating and connecting the systems into the grid or other
alternative energy generating sources. Along with ZBB’s most
recent addition to the product portfolio, the ZESS POWR PECC, ZBB now provides
the unique ability to automatically optimize the energy from the generating
source, manages the power and energy in the system and provides the customer
required output whether that is to the electric grid, or off grid.
- 8
-
Our
systems provide a fully integrated energy storage solution for direct connect
and integration of multiple units of ZESS and or multiple types and quantities
of energy generating sources including all renewable and conventional sources;
while providing the customer with a single point of connection and thus
eliminating system integration complexity and issues arising from variable
devices and coordinating/integrating such devices in an efficient and optimal
way.
The
products are predominantly manufactured with recyclable plastics, allowing for
low production costs and economical mass production while being environmentally
friendly both in the manufacturing process as well as throughout the products
lifecycle.
Other
Products in Development
We have
also used our zinc bromide and manufacturing technologies to develop a non-flow
battery product that, unlike the ZESS, does not require a circulating
electrolyte system. This non-flow battery product is now known as the ZESS EV
battery. The ZESS EV provides less power and is much simpler in its construction
as it does not require the electrolyte storage and circulation systems of the
ZESS products. Prototypes of the ZESS EV have passed over 3,000 cycles in
lifecycle tests and still achieve total return energy efficiency of over 70%.
However, sales of a viable commercial product require further refinements in the
manufacture and design of this product. This battery is designed for use in
small electric vehicles such as golf carts, materials handling equipment, wheel
chairs, electric scooters and lawn mowers and in other applications such as
telecommunication applications.
We are
not actively marketing this product as we have elected to allocate our current
resources towards the manufacture and sale of our ZESS flow batteries. During
the coming year we will be reviewing strategic alternatives to advance the
commercialization of the ZESS-EV battery, including the possibility of joint
venture research, development, manufacturing and sales of any potential future
products of this type. We will also investigate any licensing opportunities for
this technology but will pay particular attention to the protection of our
intellectual property so far developed.
Competition
Our
energy storage systems are protected by U.S. and international patents and trade
secrets law covering certain aspects of our manufacturing process and our
zinc-bromine technology. We have been granted 16 patents to date and have
additional patent applications pending.
Our
systems compete with both traditional energy storage technologies, such as lead
acid batteries, as well as emerging energy storage technologies, such as
vanadium redox and sodium sulfur batteries and other advanced energy storage,
however believe our factory built and tested modular system configurations are
unique and target market applications are interested in optimizing the complete
energy storage solution. For our target markets, we believe our energy storage
solutions have significant advantages over competing companies’ products and
solutions in terms of:
•
Superior technical attributes in terms of the amount of energy that can be
stored in a system of a given weight and size or “energy density” (sometimes
measured in Watt Hours per Kilogram or Wh/kg), recharge cycle and overall cycle
life
•
Competitive cost, based on dollars per Kilowatt Hours (kWh), as well as life of
the module components
• Modular
construction allowing portable applications of varying size, as compared to the
large scale, fixed site emerging alternatives.
Competing
Technologies
The
Electricity Storage Association (ESA) identifies eleven specific energy storage
technologies. Our summary below is based on the more detailed information
available about these technologies on the ESA’s website at
www.electricitystorage.org. The information contained on the web site is not
incorporated into and does not constitute a part of this report.
Lead-acid — Lead-acid is one of the oldest and
most developed battery technologies. It is a low cost and popular choice for
energy storage, but its suitability for energy management is very limited in
applications that require deep discharge, long cycle life and longer term energy
storage. Furthermore, the base components (lead and sulfuric
acid) used in this type of battery are neither desirable to handle and recycle
or to have installed in a facility without more extensive infrastructure and
precautions.
- 9
-
Compared
to modern lead-acid battery technology, we believe the zinc-bromine regenerative
fuel cell provides superior technical performance at a significantly lower
overall cost while utilizing materials that are more environmentally friendly
and providing a safer surrounding.
We
believe that our product has certain superior functionality characteristics over
the leading lead acid technology of comparable 50kWh system,
including:
Zinc-Bromide
|
Lead Acid
|
|||
Discharge
|
Ability
to discharge 100% of its power and maintain a level of energy regardless
of the discharge rate.
|
Discharges
approximately 65% of its energy, however will be different depending upon
the rate in which the energy is discharged
|
||
Recharge
|
4
to 4 ½ hours for full recharge
|
Up
to 20 hours for full recharge
|
||
Cycle
Life
|
2,000
full charge/deep discharge cycles from 100% SOC and up to 15,000 with less
than 100% SOC,
|
750
full charge/regular discharge
|
||
maintains
some functionality after
|
cycles,
almost no functionality at end
|
|||
cycle
life, requires replacement of
|
of
cycle life; requires complete field
|
|||
cell
stack components only
|
replacement
and proper disposal.
|
|||
Composition
|
Plastic
components
|
Lead
|
||
(corrosion
free, lower weight)
|
(heavy
weight, corrosion of grids)
|
|||
Space
Requirements
|
Less
|
Substantially
more
|
||
Design
Format
|
Modular
|
Not
modular, requires large balance of
|
||
plant
and infrastructure development.
|
||||
Environmental
|
Recyclable;
zinc-bromine is a non-toxic,
|
Contains
lead; difficult to recycle and
|
||
water
based solution
|
dispose
of; toxicity issues,
|
|||
Maintenance
|
Negligible,
modular configuration allows
|
10%-15%
(estimated) of capital cost per
|
||
easy
replacement of parts
|
annum
|
Zinc Bromine — this technology uses two
different electrolytes that flow past carbon-plastic composite electrodes in two
compartments separated by a micro porous polyolefin membrane. This is the
technology that we utilize for our energy storage systems. The
ZESS products and systems are modular in nature, designed for minimal on site
civil works or installation. The products are designed complete for
direct placement and the modular nature allows the total system design to
achieve any size using standard ZESS 50 and/or ZESS 500 building blocks which
may easily be relocated, removed from a system or addition of additional modules
at any time.
Vanadium Redox — A flow battery that stores
energy by use of vanadium dissolved in sulfuric acid
solutions. Larger system foot print, toxicity, higher installation
effort, custom designed construction project.
Sodium Sulphur (NaS) — A battery consisting of
molten liquid sulfur at the positive electrode and molten metallic sodium at the
negative electrode, separated by a solid beta alumina ceramic electrolyte. The
battery for this device must always be maintained at high temperatures of
approximately 300° C to allow the process to occur. This solution
consists of significant installation effort and is typically of much larger or
centralized type of energy storage as opposed to a distributed approach.
.
Polysulfide Bromide (PSB) — A flow battery
system based on a regenerative fuel cell technology that provides a reversible
electrochemical reaction between two salt solution electrolytes (sodium bromide
and sodium polysulphide).
Metal-Air — Potential high energy density and
low cost battery, but electrical recharging is very difficult and is still in
development.
Lithium Ion — also known as Li-ion, these
batteries offer high energy density and high efficiency. Li-ion is
widely used in small portable markets, but high manufacturing cost presently
prohibits large scale industrial applications.
- 10
-
Flywheels — These primarily consist of a
massive rotating cylinder operating in a low vacuum environment to improve
efficiency. The main use for flywheels is for short-term uninterruptible power
supply (UPS) and aerospace applications. Large scale applications would require
a flywheel “farm” approach.
Pumped Hydro Storage — Pumped hydro storage is
not a battery device, but rather, uses two reservoirs to create a limited amount
of energy on demand. During off peak hours water is pumped from the lower
reservoir to the upper; the water flow is reversed to generate electricity. This
method is widely used but characterized by long construction times and high
capital expenditure and requires a large geographic area and water
supply.
CAES — A peaking gas turbine power plant using
compressed air stored in large underground caverns inside salt
rocks.
Super Capacitor Storage — These are devices
with high power density and primarily designed for shorter duration higher power
ratio of operation. Current focus is on small scale applications. Large scale
applications are still under development.
Recent
Developments
During
the 2009 fiscal year:
Our
current AEST project with CSIRO, an agency of the Australian Federal Government,
has continued throughout the year, as planned. At the core of this project is
the development of the next generation of our ZESS 50kWh module. As a
development project the work program is therefore set as a series of milestones
that measure and report upon the progress toward a successful outcome. It is
very pleasing to report that this project has achieved and reported every
milestone on time and on budget. The system modules have now been manufactured
and assembled and this system will ship to site in late September for
commissioning the following month. The project will run through to the end of
June 2010.
In
December 2008 ZBB announced that it received an order for a ZESS 500 energy
storage system to be installed in conjunction with existing wind energy assets
at the Centre for Renewable Energy, at Dundalk Institute of Technology in the
Republic of Ireland. The system was shipped to Ireland on June 30, 2009 and is
presently undergoing pre-commissioning installation on site where it will work
in partnership with an 850kW wind turbine to provide a significant portion of
the daily power requirements for the Institute’s campus.
In March
2009 ZBB announced that it received an order for a ZESS 50 energy storage system
incorporating ZBB’s new and proprietary ZESS POWR power electronics system, from
Likusasa Engineering and Contracting Pty Ltd of South Africa. Likusasa operates
throughout the sub-Sahara and lower regions of continental Africa and has been
working closely with ZBB to integrate the ZESS 50 into telecommunications base
station infrastructure in Sub Saharan Africa. This system was shipped to South
Africa in late June 2009 and Likusasa are now completing the installation at
their customer’s site in Zambia. This is an entirely new market and application
for our ZESS 50 product and one which we believe can become a worldwide market
in the very near future.
Other
recent project includes an order for two standard, modular, ZESS 50 energy
storage systems), from Envinity Inc. a renewable energy design and installation
company located in State College, Pennsylvania. The two fully integrated ZESS
storage modules will be utilized in an off-grid, multi-source renewable energy
power system for a 15,000 square foot private residence in central Pennsylvania.
The Company also received an order for a ZESS 50 energy storage unit from Oregon
State University. The ZESS power system will be used on campus at the Wallace
Energy Systems and Renewables Facility. This fully integrated ZESS power system
will be used in an on grid configuration with simulated wind and hydro electric
sources.
Our
earlier projects are all continuing. Most notable is our initiatives in
California with the California Energy Commission and the two ZESS 500 systems
owned by that group. We have continued to keep these systems maintained,
upgraded in terms of control software and operational for continued evaluation.
Currently the CEC are identifying new site locations for both systems and we
anticipate this relocation to occur during the coming months. We are also
continuing our initiatives to establish an integrated solar and storage village
power system for off-grid applications in Africa and other strategic locations.
This should be enhanced during the coming year by our relationship with Likusasa
and their capabilities to handle installation, maintenance and monitoring
throughout regional Africa. Our demonstration unit installed at Future House USA
in Beijing continues to give us a promotional presence in China. Most recently
the United States Secretary for Energy, Mr. Steven Chu, visited the Future House
site as a part of his trade mission to that country.
We
appointed several new Distributors and Manufacturers Representatives during the
year, in the United States and for Australia and New Zealand. We anticipate
making more of these appointments to expand our sales and marketing initiatives
in the coming year. We were also pleased to announce in December 2008 that we
had entered into a Memorandum of Understanding with Eaton Corporation that
provides for an original equipment manufacturer (OEM) relationship between the
companies. This has been a successful relationship for ZBB and has helped us
further refine our products through the utilization of Eaton components as well
as the matching of our storage systems with Eaton’s power electronics platform.
The companies have also been working on joint marketing
initiatives.
- 11
-
In
October 2008 we announced the appointment of Mr. Bill Mundell as the Chairman of
our Board and we appointed Mr. Marc Marotta as legal counsel to the Board.
During the same month we also hosted at our Menomonee Falls facility an Energy
Forum with Governors Richardson (New Mexico) and Doyle (Wisconsin) introducing
energy reform plans to reduce America’s dependence on foreign oil and to invest
in alternative sources of energy.
In March
2009 the Company was awarded a development grant of $229,000 from the Wisconsin
Energy Independence Fund to help fund the development of our new power and
energy control center (PECC), a proprietary energy management platform that is
now subject to a new patent pending application. The trademarked ZESS POWR PECC
system controls energy and power inputs from multiple power sources and then
delivers energy out through an integrated inverter. ZBB is required
to demonstrate two 50 kwh systems under this grant. Subsequent to the
end of the financial year we have recently incorporated the first test system
for off grid applications into a self contained purpose built mobile container
that includes wind, solar and conventional generating units to provide an
emergency back-up power system and command post for disaster relief agencies.
This test system has most recently been on display in the State of Washington
and will soon be displayed at ZBB before being used for display at other test
sites. The second system is currently being developed and will be
produced and deployed at a test site by December 2009.
As
mentioned above, we extended our intellectual property (IP) portfolio during the
year with a new patent application filed for the ZESS POWR PECC system. The
Company is active in reviewing its IP portfolio together with other key
engineering designs to ensure we protect our intellectual position and to
maintain this valuable technology as a cornerstone of our enterprise
valuation.
During
2008 and into 2009, the Company developed, prototyped and produced the first
commercial units of its proprietary ZESS POWR Hybrid power electronics product
for integrating ZESS energy storage technology directly with all sizes, types
and numbers of renewable energy sources in a single product. This
product performs the renewable energy functions that traditional inverters have
done over the past while integrating with energy storage in an optimal way with
a single “power plant” output for use on the electric utility grid or as an off
grid power plant. With this, integrators, Independent Power Producers (IPP’s),
commercial customers and electric utilities can leverage all the existing ZESS
system benefits of peak demand shifting with the addition of providing a
controlled and regulated renewable energy power plant. After these
confirming technology efforts with our proven power electronics partners and
product research in the market, the Company filed for patent in January of
2009. The combined flexibility and modularity of the ZESS energy
storage combined with the flexibility and modularity of the ZESS POWR Power and
Energy Control Center (PECC) has provide the Company and its customers with a
“game changing solution” as stated by multiple system integrators and by its
power electronic partners.
Marketing
and Sales
We
currently have established a dedicated sales and marketing staff, which although
small at this time, will grow in response to the growth of the
market. As such, several strategic relationships have been
established with additional strategic relationships in the process of being
established in the different market sectors in the form of key system integrator
relationships, distributors, sales representative organizations and OEM
arrangements. We are and have been focusing our sales efforts on the Energy
storage integration with Renewable Energy for Electric utilities, large system
integrators and IPP’s, large commercial and industrial
customers. Additionally, we continue our focus in developing the
Remote Area power systems as well as the peak shaving applications for Utilities
and commercial customers. ZBB has introduced a fully integrated ZESS
offering that provides customers with additional value to utilize a modular
format for energy storage applications and/or when integrating different
renewable energy resources. We do not believe that all distribution networks are
appropriate for the sale of our products to utility or renewable energy
companies and we therefore deal directly or through key distributors with our
customers.
The
technical characteristics of the ZESS flowing electrolyte zinc bromide
regenerative fuel cell make it a strong candidate for a wide range of energy
markets. Some markets are well established and clearly defined, and others are
still developing. Our strategy in reaching these markets is based on exceeding
performance and cost thresholds of competing technologies. We plan to continue
pursuing appropriate distribution and sales arrangements with suitably qualified
channel partners with established operations capable of selling, installing and
maintaining our products. At present, ZBB has established
relationship in geographical areas in the northwest, the southwest, the
northeast and Hawaii as well as an extension of key channels through our
relationship with Eaton Corporation.
As we
have commercialized our systems for smaller remote area power systems we have
established distributor relationships in key areas of developing areas that have
proven to benefit from the ZBB Advanced Energy Storage system utilizing ZBB’s
ZESS energy storage products as well as its patent pending ZESS POWR PECC
integrated energy storage with other renewable and conventional generating
sources. Commercial and home owner use we may be required to
utilize services of distributors that sell to regional and national chain stores
and home energy product re-sellers. We do not currently have any distribution
relationships for our products in this market; however these are presently being
developed.
- 12
-
We have
completed the process to achieve ISO 9000 certification for our Wisconsin plant
and operations and are now certified as ISO 9000-2008. We have also
completed the process of UL certification for our ZESS controls and in process
of achieving the UL certification in the power electronics portion of the ZESS
products via our power electronic supplier. We intend to pursue
this market and continue to assess the demand for our products in this market
however there can be no assurance that we will be able to achieve this strategic
objective. To address the lower power/energy applications such
as residential and some remote power systems applications such as
telecommunications (“TELCO”), we are in the process of evaluating an optimal
product configuration that will address these markets in the
future.
Our
long-term strategic goal of the expansion of our customer base beyond public
utilities and utility companies to enable us to ultimately produce and sell
energy storage systems to the private sector, including business and residential
customers who want to possess an alternative energy system for their businesses
or homes; are now in place utilizing ZBB’s complete product and solution
portfolio. Alternative energy applications has driven the marketplace
to seek energy storage solutions and to lead the way by its continued growth as
well as the continued awareness of the renewable energy limitations and to seek
solutions to manage the power and energy being produced for either on or off
grid applications.
The
multi-faceted value of the ZESS product portfolio and system solutions for
renewable energy, utility grid demand management, commercial and off grid remote
power systems or back up power systems as well as Smart Grid applications has
been demonstrated by the increase in customer contracts through the second half
of fiscal year 2009.
Intellectual
Property
A
description of the current patented technologies, process number of patents and
patent applications, along with the jurisdiction of patent application/grant is
as follows:
Date
of Grant
|
Expiration
|
||||||
Description
of Patents and Patent Applications
|
Jurisdiction(s)
|
or
Application
|
Date
|
||||
Issued
Patents and patent applications:
|
|
||||||
Battery
Circulation System with improved
|
|||||||
four-way
valve
|
Australia
|
June
20, 2003
|
|||||
Carbon
Coating for an Electrode
|
United
States
|
May
6, 1997
|
October
12, 2015
|
||||
Compact
Energy Storage System
|
Australia
|
November
26, 1998
|
May
21, 2016
|
||||
Japan
|
May
21, 1996
|
(pending)
|
|||||
United
States
|
March
11, 1997
|
May
23, 2015
|
|||||
Composite
End Block for a Battery
|
United
States
|
March
26, 1991
|
January
10, 2010
|
||||
End
Block Constructions for Batteries
|
United
States
|
May
3, 1994
|
January
15, 2013
|
||||
Friction
Welded Battery Component
|
United
States
|
July
31, 1990
|
September
20, 2008
|
||||
Method
of Electrode Reconditioning
|
Australia
|
November
5, 1998
|
June
4, 2016
|
||||
Japan
|
June
4, 1996
|
(pending)
|
|||||
United
States
|
July
22, 1997
|
June
7, 2015
|
|||||
Method
of Joining Bipolar Battery Frames
|
United
States
|
July
30, 1991
|
September
10, 2010
|
||||
Spill
and Leak Containment System for Zinc
|
|||||||
Bromide
battery
|
Australia
|
February
2, 2004
|
May
3, 2019
|
||||
United
States
|
July
17, 2001
|
May
4, 2019
|
|||||
Terminal
Electrode
|
United
States
|
September
15, 1990
|
June
30, 2009
|
||||
Zinc
Bromine Battery with Non-Flowing
|
|||||||
Electrolyte
|
Australia
|
.
|
July
2, 2016
|
||||
Japan
|
July
2, 2006
|
(pending)
|
|||||
Malaysia
|
June
30, 2006
|
June
30, 2021
|
|||||
Method
and apparatus for controlling a hybrid power system
|
United
States
|
March
18, 2009
|
(pending)
|
While we
have not patented our flow channel technology, management believes that the
technology is sufficiently difficult to develop
and would require years of research to replicate. Our cell technology for
example, is based, in part, on the alignment and precise
placement of multiple plates in series, prior to welding. Our welding utilizes
highly technical friction welding methods that require
specific pressure settings, temperature settings, friction welding frequencies
and amplitudes as well as proper use of materials. While the friction welding
process is not patented by us, certain of the components are patented and we
require persons and subcontractors who participate in this process to execute
non-disclosure agreements. This process alone has taken us over 12 years to
develop. To the extent possible, we also limit the information available to
persons who work on this process. Therefore, we have elected not to file a
patent for our flow channel technology at this time as we believe that the
public disclosure of the details relating to this technology that would have to
be made in connection with applying for such patent would be detrimental to the
proprietary nature of our know-how and would provide potential competitors with
insight into our technology and manufacturing processes. We believe that our
continued in-house research and development relating to the zinc bromide flow
technology will provide an on-going source of competitive
advantage.
- 13
-
So far,
we have not seen any competitor be successful in implementing the technologies
necessary for manufacturing zinc bromide systems. If a competitor is able to
discover this process and manufacture this product on a commercial level, we may
be materially and adversely affected. Therefore, management revisits its patent
application process from time to time and may in the future file one or more
patents relating to our flow channel technology as well as other technologies
that we develop if it determines that the risks of disclosure are outweighed by
the risks of non-protection of the patent in question.
ZBB has
recently filed for patent (patent pending) “Method and apparatus for controlling
a hybrid power system” for its unique modular, flexible and standardized power
electronics topology known as the ZESS POWR Power and Energy Control Center
(PECC) for providing a single product integration of any combination of ZESS
products, any combination of renewable energy sources and any combination of
conventional generating sources; while providing a single or multiple outputs
for a customers use, whether that be a grid connect system, and off grid system
or a DC distribution system at any voltage level or a combination of all of the
above.
Employees
We
currently have an aggregate of 35 full time employees, of which 28 are located
at our U.S. manufacturing and corporate headquarters in Wisconsin, and seven
employed at our Research and Development facility in Australia. Currently ZBB
has a total of 22 professional staff and 13 non professional staff. We expect
staffing numbers to significantly increase as our business grows and new
production equipment is deployed in accordance with our business expansion
plans.
Sources
and Availability of Raw Materials
We have
developed products composed of low-cost components and materials. We believe
that our components are assembled using well-understood manufacturing concepts
that require relatively low capital cost and are readily scalable to achieve
high quality. With the exception of the electrolyte and micro porous separator
which are purchased, all other ZBB product components are either injection
molded according to our proprietary designs or are standard off-the-shelf
pieces. Currently, zinc and bromide, the elements used in our electrolyte, are
widely available commodity minerals with numerous alternate
suppliers.
We
believe that the chemicals used in the electrolyte that we acquire are readily
available and that the mixing of these substances in accordance with our
specifications can be outsourced to various blending facilities. Currently, we
outsource our electrolyte sorting and blending to a company in New Jersey,
however, other blending facilities are also available in the United States.
Similar, basic chemical raw materials are secured from Israel by the blending
company on our behalf, however, the ingredients that comprise our electrolyte
are not rare substances and we believe that other suppliers are
available.
To
improve manufacturing process efficiency, we outsource all basic manufacturing
processes, such as injection and rotational molding for elementary component
parts, and the mixing of our zinc bromide electrolyte solution, and devote our
production capacity to the proprietary “value added” manufacturing of the cell
stacks. We have patented designs and own all molds for all of the major parts of
our cell stacks and tanks. All companies to which we outsource our manufacturing
work are subject to confidentiality agreements.
We have
developed unique, and in several cases, proprietary process technology and
equipment for high volume automated manufacturing of our energy storage
products, the principal product components of which are electrodes, separators,
flow frames and end blocks. The core manufacturing undertaken by us is the
construction of hermetically sealed, leak proof cell stacks, which consist of
nearly 100% plastic materials. The equipment and general techniques used by our
manufacturers are generally well-known manufacturing techniques employed in
several fields, including the automotive industry, and we believe that
alternative sources of manufacturing are available.
Item
1A. Risk
Factors
We
have incurred losses and anticipate incurring continuing losses
As of the
year ended June 30, 2009 we had an accumulated deficit of $37.3 million. We
anticipate that we will continue to incur losses until we can produce and sell a
sufficient number of our systems to be profitable. However, we cannot predict
when we will operate profitably, if ever. Even if we do achieve profitability,
we may be unable to sustain or increase our profitability in the
future.
- 14
-
If we fail to adequately manage our
resources, it could have a severe negative impact on our financial results or
stock price.
We could
be subject to fluctuations in technology spending by existing and potential
customers. Accordingly, we will have to actively manage expenses in a rapidly
changing economic environment. This could require reducing costs during economic
downturns and selectively growing in periods of economic expansion. If we do not
properly manage our resources in response to these conditions, our results of
operations could be negatively impacted.
Unless
we keep pace with changing technologies, we could lose existing customers and
fail to win new customers.
Our
future success will depend upon our ability to develop and introduce a variety
of new products and services and enhancements to these new products and services
in order to address the changing needs of the marketplace. We may not be able to
accurately predict which technologies customers will support. If we do not
introduce new products, services and enhancements in a timely manner, if we fail
to choose correctly among technical alternatives or if we fail to offer
innovative products and services at competitive prices, customers may forego
purchases of our products and services and purchase those of our
competitors.
The
inability to maintain adequate levels of liquidity may have an adverse affect on
the working capital of the Company.
The
Company believes that its present working capital provided by operations along
with recently completed equity offerings are adequate to meet its current needs
as a going concern for at least the next twelve to eighteen months. However,
should current global economic conditions continue to deteriorate, additional
working capital financing may be required which may be difficult to obtain due
to restrictive credit markets.
To remain
competitive, we must continue to develop market and sell new and enhanced
products at competitive prices, which will require significant research and
development expenditures. If we do not develop new and enhanced products or if
we are not able to invest adequately in our research and development activities,
our business, financial condition and results of operations could be negatively
impacted.
If our products do not perform as
promised, we could experience increased costs, lower margins and harm to our
reputation.
The
failure of our products to perform as promised could result in increased costs,
lower margins and harm to our reputation. This could result in contract
terminations and have a material adverse effect on our business and financial
results.
Shortages
or delay of supplies of component parts may adversely affect our operating
results until alternate sources can be developed.
Our
operations are dependent on the ability of suppliers to deliver quality
components, devices and subassemblies in time to meet critical manufacturing and
distribution schedules. If we experience any constrained supply of any such
component parts, such constraints, if persistent, may adversely affect operating
results until alternate sourcing can be developed. There may be an increased
risk of supplier constraints in periods where we are increasing production
volume to meet customer demands. Volatility in the prices of these component
parts, an inability to secure enough components at reasonable prices to build
new products in a timely manner in the quantities and configurations demanded
or, conversely, a temporary oversupply of these parts, could adversely affect
our future operating results.
We
could face competition from larger, more well-established
companies.
Many of
our competitors are much larger than we are, have significantly greater capital
resources, have proven products and technologies, have already developed
relationships with utility and renewable energy companies and, may have the
manufacturing, marketing and sales capabilities to complete research,
development and commercialization of commercially viable energy storage products
more quickly and effectively than we can.
We
have no experience manufacturing our products on a large-scale basis and may be
unable to do so at our current facility.
To date,
we have achieved only very limited production of our energy storage systems and
have no experience manufacturing our products on a large-scale basis. In
February 2006 we acquired a building we were previously leasing in Menomonee
Falls, Wisconsin which provides up to 72,000 square feet for use as a
manufacturing facility. This facility is currently producing at less than 10% of
its expected capacity after our allocation of certain proceeds of our United
States equity offering to fully staff and equip it. However, we do not know
whether our current manufacturing facility, even if operating at full capacity,
will be adequate to enable us to produce the energy storage systems in
sufficient quantities to meet hoped for future orders. If there is demand for
our products, our inability to manufacture a sufficient number of units on a
timely basis would have a material adverse effect on our business prospects,
financial condition and results of operations.
- 15
-
If
our common stock is de-listed from the AMEX, the common stock will become less
liquid.
Our
shares have been listed on the NYSE Amex (formerly the American Stock Exchange)
since June 18, 2007. We are required to comply with all
reporting and listing requirements on a timely manner and maintain our corporate
governance and independent director standards. If the NYSE Amex delists our
common stock from trading if we fail to satisfy their ongoing listing
requirements including, without limitation, corporate governance, financial
condition, and financial reporting rules and minimum price and market
capitalization rules, we will be adversely affected and our stock will become
less liquid. There can be no assurance that our securities will remain eligible
for trading on the NYSE Amex. If our common stock is delisted, our stockholders
would not be able to sell the common stock on the NYSE Amex, and their ability
to sell any of their common stock would be severely if not completely
limited.
Item
1B. Unresolved Staff
Comments
Not
Applicable to smaller reporting companies.
Item
2. Properties
Wisconsin
U.S.A. Property
In
February 2006 ZBB Energy Corporation acquired the property on which its
manufacturing facility is located at N93 W14475 Whittaker Way, Menomonee Falls,
Wisconsin. The Company has occupied a portion of this space since 2002 pursuant
to a sub-lease arrangement and acquired the property in February 2006 for
$2.2 million pursuant to a land purchase option with the owner. The
appraised fair market value of this property at the time of acquisition was
$2.4 million. In connection with the purchase of this property, the Company
initially incurred mortgage indebtedness from Investors Bank in Milwaukee in the
amount of $1.8 million and on May 14, 2008 entered into loan agreements to
convert the indebtedness into two long-term loans with Investors Bank and
Wisconsin Business Development Corporation which are guaranteed in part by the
US Small Business Administration.
The
property is approximately 3.4 acres and has a facility with approximately
72,000 square feet of rentable manufacturing space, of which the Company
occupied approximately 35,000 square feet at the time of its acquisition.
This property is used to house our U.S. production, assembly and
administration headquarters. The existing facility in Menomonee Falls is
suitable to accommodate manufacturing capacity to up to 32MWh
annually.
Bibra
Lake, Western Australia (Leasehold)
In 2001
our Australian subsidiary, moved into new, leased, self-contained research and
development facilities in Bibra Lake, Western Australia after previously
occupying sub-leased laboratory and workshop facilities. This facility also
provides the engineering support for Australian and South East Asia sales as
well as a marketing base for the Company in this region. The current rental is
$51,766 per annum (A$68,230), subject to annual CPI adjustments and which was
based on a rental valuation obtained in November 2006 by an independent
certified real estate appraisal company. In October of 2006, ZBB Technologies,
Ltd exercised its option to renew the lease for five years, expiring on
October 31, 2011.
Item
3. Legal
Proceedings
None.
Item
4. Submission of Matters to a
Vote of Securities Holders
None.
- 16
-
PART II
Item
5.
|
Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity
Securities
|
The
Common Stock of the Company has traded on the NYSE Amex (formerly the American
Stock Exchange) under the name ZBB Energy Corporation (Symbol: ZBB) since June
20, 2007. The following table sets forth the high and low sales prices of the
Company’s Common Stock for the periods indicated as reported on the NYSE
Amex.
2009
Fiscal Year
|
High
|
Low
|
||||||
1st
Quarter
|
$ | 4.05 | $ | 2.22 | ||||
2nd
Quarter
|
2.30 | 0.86 | ||||||
3rd
Quarter
|
1.55 | 0.80 | ||||||
4th
Quarter
|
1.58 | 0.84 | ||||||
2008
Fiscal Year
|
||||||||
1st
Quarter
|
$ | 5.94 | $ | 3.27 | ||||
2nd
Quarter
|
4.25 | 1.98 | ||||||
3rd
Quarter
|
3.15 | 1.75 | ||||||
4th
Quarter
|
4.19 | 2.80 |
On June
30, 2009, the closing price of the common stock of the Company as reported was
$1.20. As of August 31, 2009, the Company had 907 shareholders of record. These
shareholders of record do not include non-registered stockholders whose shares
are held in “nominee” or “street name”.
The
Company has not declared quarterly dividends for the past two
years.
Recent
Sales of Unregistered Securities; Use of Proceeds from Registered
Securities
As a
result of consummation of our initial United States public offering 3,333,333
shares of our common stock, par value $0.01 was effected through a Registration
Statement on Form SB-2 (Reg. No. 333-138243) which was declared effective by the
SEC on June 20, 2007 resulting in receipt of $18,410,000 (net of underwriter’s
costs) proceeds on June 20, 2007. The managing underwriter of our
offer was Empire Financial Group, Inc.
From
the proceeds of our June 2007 United States initial public offering, we incurred
approximately $1.2 million in additional offering expenses and retired an
aggregate of $4.5 million in indebtedness. Approximately $11 million
of the net proceeds has been used for working capital and investments in
manufacturing assets, including expanding our selling and marketing efforts and
compliance costs, additional manufacturing capacity, and improvements to the
product and manufacturing operations. The remaining net proceeds have
all been applied to temporary investments in bank certificates of deposits and
money market funds.
The
following table sets forth information as of June 30, 2009 about the shares of
the Company’s Common Stock outstanding and available for issuance under the
Company’s existing compensation plans.
Plan
category
|
Number
of securities
to
be issued upon
exercise
of
outstanding options,
warrants,
and rights
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
|
Number
of securities
remaining
available for
future
issuance under
equity
compensation
plan
(excluding
securities
reflected in
the
previous columns)
|
|||||||||
Equity
compensation plans approved by security holders
|
1,424,354 | (1)(2)(3) | $ | 3.24 | 798,749 | (1)(2) | ||||||
Equity
compensation plans not approved by security holders
|
— | — | — | |||||||||
Total
|
1,424,354 | $ | 3.24 | 798,749 |
- 17
-
Options
issued and available to be issued under the existing Company equity plans are
described below:
(1) In
2002 the Company established the 2002 Stock Option Plan (“SOP”) whereby a stock
option committee was given the discretion to grant up to 882,353 options to
purchase shares to key employees of the Company at exercise prices and dates to
be determined by the directors. During the year ended June 30, 2008 400,000
options to purchase shares were granted to employees and directors exercisable
at $3.59 (110% of the market closing price on June 6, 2008) based on vesting
terms of June 2008 through January 2009, and exercisable at various dates
through June 2014. No options were exercised and 16,793 options
expired during the year ended June 30, 2009. At June 30, 2009 there
remains 487,907 options outstanding with exercise prices of not less than $3.59
and exercise dates up to June 30, 2014. A further 91,200 options are
available to be issued under the SOP.
(2)
During 2005 the Company established an Employee Stock Option Scheme (the “2005
Plan”) that authorizes the board of directors or a committee thereof, to grant
options to employees and directors of the Company or any affiliate of the
Company. The maximum number of options that may be granted in aggregate at any
time under this option scheme or under any other employee option or share plan
is the number equivalent to 5% of the total number of issued shares of the
Company including all shares underlying options under the Company’s stock option
and incentive plans. Options issued expire five years after the vesting date. No
options were exercised in fiscal 2008 or during the year ended June 30,
2009. At June 30, 2009, options to purchase 250,000 shares with an
exercise price of $3.82 and an expiration date of June 2012 remain
outstanding.
(3)
During 2007 the Company established the 2007 Equity Incentive Plan (the “2007
Plan”) that authorizes the board of directors or a committee thereof, to grant
options to purchase up to a maximum of 1,500,000 shares to employees and
directors of the Company at exercise prices to be determined by the
administrator but not less than 100% (110% for a 10% shareholder) of the market
value on the date granted. During the year ended June 30,
2008 options to purchase 275,000 shares were granted to employees and directors
exercisable at $3.59 based on vesting terms of June 2008 through January 2011
and exercisable at various dates through January 2016. During the
year ended June 30, 2009 options to purchase 451,410 shares were granted to
employees and directors exercisable at prices from $1.35 to $1.69 based on
vesting terms of July 2009 through January 2012 and exercisable at various dates
through December 2016. Included in the year ended June 30, 2009
grants were options to purchase 266,410 shares which vest upon certain
contingent performance criteria, of which 93,248 vested and 39,963
forfeited during the period. 185,000 service based options were
issued in fiscal 2009. Options to purchase an additional 707,549 shares are
available to be issued under the 2007 plan.
In
aggregate for all plans, at June 30, 2009, the Company has a total of 1,424,354
options outstanding and 798,749 options available for future grant under the
SOP, 2005 and the 2007 Plans.
Item
6. Selected Financial
Data
Not
applicable.
Item
7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations
Introduction
ZBB
Energy Corporation, and its operating subsidiaries, (collectively, the
“Company”), design, develop, manufacture and market renewable energy storage
systems under the recently trademarked names, ZESS 50 and ZESS 500. Our ZESS
systems are built using a proprietary process based upon our zinc-bromide
rechargeable electrical energy storage technology. The modular nature of our
zinc-bromide regenerative fuel cells allows it to be sized and packaged into
fully customized, large format energy storage systems. Our systems combine these
modules with computer hardware and software that interface with a customer’s
power source to recharge during off peak times and discharge power as
needed.
The
financial information presented herein gives effect to the restatements
discussed in Note 16 to the consolidated financial statements, and includes: (i)
Consolidated Balance Sheets as of June 30, 2009 (restated) and 2008
(ii) Consolidated Statements of Operations for the years ended June 30, 2009
(restated) and 2008 (iii) Consolidated Statement of Changes in Shareholders’
Equity for the years ended June 30, 2009 (restated) and 2008 (iv) Consolidated
Statements of Cash Flows for the years ended June 30, 2009 (restated) and
2008.
- 18
-
Forward-Looking
Statements
The
statements contained in this Annual Report on Form 10-K/A that are not
historical facts, including, without limitation, the statements under
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” are forward-looking statements as defined in the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements may be identified
by, among other things, the use of forward-looking terminology such as
“believes,” “expects,” “intends,” “plans,” “may,” “will,” “should,”
“anticipates” or “continues” or the negative thereof of other variations thereon
or comparable terminology, or by discussions of strategy that involve risks and
uncertainties. These statements are based on the Company’s current expectations
of future events and are subject to a number of risks and uncertainties that may
cause the Company’s actual results to differ materially from those described in
the forward-looking statements. These risks and uncertainties include, continued
ability to maintain positive cash flow from results of operations, continued
evaluation of goodwill for impairment and the Company’s development and
production of competitive technologies in our market sector, among others.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, estimated or projected. These risks and uncertainties are
disclosed from time to time in the Company’s filings with the Securities and
Exchange Commission, the Company’s press releases and in oral statements made by
or with the approval of authorized personnel. The Company assumes no obligation
to update any forward-looking statements as a result of new information or
future events or developments.
Company
Background
We
design, develop, manufacture and distribute renewable energy storage systems
under the recently trademarked names, ZESS POWR, ZESS 50 and ZESS 500. Our ZESS
systems are built using a proprietary process based upon our zinc-bromide
rechargeable electrical energy storage technology. The modular nature of our
zinc-bromide regenerative fuel cells allows it to be sized and packaged into
fully customized, large format energy storage systems. Our systems combine these
modules with computer hardware and software that interface with a customer’s
power source to recharge during off peak times and discharge power as
needed.
The
Company completed a public offering on the Australian Stock Exchange (the “ASX”)
in March of 2005. Our securities traded on the ASX from March 2005 to
August 9, 2007 when they were delisted in connection with our United States
public offering.
On
June 18, 2007, in connection with our initial United States public offering
of 3,333,333 shares of our common stock at an initial offering price of
$6.00 per share, our shares began trading on the NYSE Amex (formerly the
American Stock Exchange) under the symbol “ZBB”.
Since our
inception, until fiscal 2005, when we completed the Australian public offering
and began our first major production contract, we were primarily a research and
development company with little or no revenues. We have
historically funded our operations primarily through debt and equity financings,
government grants and joint ventures.
In 2008
we completed production under a multi-year contract with the California Energy
Commission (“CEC”) to produce the first two ZESS 500 kWh commercial energy
storage systems for utility use. We also developed, produced, and
shipped the first ZESS 50, a smaller capacity modular version of the ZESS 500
energy storage system.
In the
current quarter we are in production on multiple ZESS 50 and ZESS 500 kWh
renewable energy systems for delivery under various domestic contracts as well
as international contracts to ship systems to destinations in Ireland, South
Africa, and Australia within the next few months.
Wisconsin
based initiatives include an agreement signed during the quarter with the
Wisconsin Energy Independence Fund to secure $229,000 in support grant funding
for the development of our own proprietary power conversion systems for both AC
to DC and DC to DC renewable energy applications. We have contracted with a
Wisconsin based partner to build and package the power electronics components
for two ZESS 50 units that are required to be built under this
grant.
Our
production capacity has substantially increased through the delivery of new
production equipment purchased during the year ended June 2009. This new
equipment, along with manufacturing ramp-up and automation plans are underway
that would enable a significant increase in production capability within several
months. Since our IPO we have continued implementation of our
business plan including the repayment of certain indebtedness, initiating
manufacturing commercialization and capacity increases, ISO certification and UL
listings, and commenced initial commercial marketing of our products into target
markets.
We are
currently working in the California energy market, in association with the
California Energy Commission, Pacific Gas & Electric and the US Department
of Energy amongst others, to install products into the local transmission and
distribution network. In addition we are currently addressing numerous
opportunities in the renewable energy markets within the United States along
with a diverse international marketplace with the intention of introducing
products and services into these markets.
- 19
-
The
Company is actively involved in submitting proposals to the Federal Government
in response to Funding Opportunity announcements issued as a result of the
American Recovery and Reinvestment Act. These proposals cover opportunities for
plant expansion, Smart Grid initiative, Renewable Energy Initiatives as well as
research and development opportunities for applications where the Company’s
technology could bring a transformational change to market applications that we
currently do not address. We are in the process or have applied for
approximately 36 Mwh of Smart Grid energy storage projects through various
strategic partners and prospective customers under various Department of Energy
programs, such as FOA 36.
On
January 26, 2009 we filed an S-3 Registration Statement with the Securities and
Exchange Commission. Amendments to the S-3 Registration Statement were filed on
March 30, 2009 and May 1, 2009 and was declared effective by the SEC on May 13,
2009. We took this action as a proactive measure in anticipation of
our possible future needs for additional working capital and further capital
expenditures. On August 18, 2009 we announced the closing of our
public offering, pursuant to this S-3 shelf registration. ZBB sold 1,791,667
units at $1.20 per unit, consisting of an aggregate of 1,791,667 shares of its
common stock and warrants to purchase 358,333 shares of its common stock at an
exercise price of $1.33 per share. The proceeds to ZBB after
deducting placement agent fees and offering expenses were approximately $1.9
million.
In
December 2008 ZBB received an order for a ZESS 500 energy storage system to be
installed in conjunction with existing wind energy assets at the Centre for
Renewable Energy, at Dundalk Institute of Technology in the Republic of Ireland.
The system was shipped to Ireland on June 30, 2009 and is presently undergoing
pre-commissioning installation on site where it will work in partnership with an
850kW wind turbine to provide a significant portion of the daily power
requirements for the Institute’s campus.
Critical
Accounting Policies
Estimates
and assumptions
Management’s
discussion and analysis of the financial condition and results of operations are
based upon the consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires the Company to
make estimates and judgments that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses for
each period. The following represents a summary of the Company’s critical
accounting policies, defined as those policies that the Company believes are:
(a) the most important to the portrayal of our financial condition and results
of operations, and (b) that require management’s most difficult, subjective or
complex judgments, often as a result of the need to make estimates about the
effects of matters that are inherently uncertain. Estimates and assumptions are
made by management to assess the overall likelihood that an accounting estimate
or assumption may require adjustment. Management assumptions have been
reasonably accurate in the past, and future estimates or assumptions are likely
to be calculated on the same basis.
Foreign
Currency
The
Company uses the United States dollar as its functional and reporting currency,
while the Australian dollar is the functional currency of one of its foreign
subsidiaries. Assets and liabilities of the Company’s foreign subsidiary are
translated into United States dollars at exchange rates that are in effect as at
the balance sheet date while equity accounts are translated at historical
exchange rates. Income and expense items are translated at average exchange
rates which were applicable during the reporting period. Translation adjustments
are accumulated in Accumulated Other Comprehensive (Loss) as a separate
component of Shareholders’ Equity in the consolidated balance
sheet.
Revenue
Recognition
The
Company currently contracts with its customers to develop, manufacture, install
and service its energy storage systems under short and
long-term contracts. These contracts have resulted in two distinct
arrangements and revenue recognition policies. The first type of contract is for
the production, delivery and installation of energy storage
systems. The second type of contract is for product engineering and
development activities.
Product
sales orders that have relatively short duration (typically less than one year)
normally use the completed-contract method of revenue recognition rather than
the percentage-of-completion method. Revenues are recognized when the
sales price is fixed, collectability is reasonably assured, the product has
received customer acceptance and either title or risk of loss has transferred to
the customer. Typically, these conditions are met at the time the product is
delivered to the customer. The Company charges shipping and handling fees when
products are shipped or delivered to a customer, and includes such amounts in
net sales. The Company reports its sales net of actual sales
returns.
- 20
-
Revenue
recognition on energy storage system long-term contracts utilizes the
percentage-of-completion method which recognizes revenue proportionally as costs
are incurred and compared to the estimated total costs for each
contract. This has been the predominant method used in estimating
revenues recognized in past reporting periods.
Engineering
and development contracts are typically collaborative agreements to further
develop renewable energy technologies and are often sponsored and partially
funded in various amounts between government agencies and the Company. Often
multi-year agreements which contain several elements and provide for varying
consideration based on allowable costs, milestones and similar payment
provisions and may provide for future licensing and royalties beyond the term of
the arrangement. Revenue associated with these types of contracts are
typically of longer duration and recognized under the percentage-of-completion
method.
Inventories
Inventories
are stated at the lower of cost (first-in, first-out method) or market and
consist of raw materials, work in progress and finished goods held for
resale.
Costs
incurred in bringing each product to its present location and conditions are
accounted for as follows:
●
|
Raw
materials – purchased cost of direct
material
|
●
|
Finished
goods and work-in-progress – purchased cost of direct material plus direct
labor plus a proportion of manufacturing
overheads.
|
The
Company evaluates the recoverability of its slow moving or obsolete inventories
at least quarterly. The Company estimates the recoverable cost of such inventory
by product type while considering factors such as its age, historic and current
demand trends, the physical condition of the inventory as well as assumptions
regarding future demand. The Company’s ability to recover its cost for slow
moving or obsolete inventory can be affected by such factors as general market
conditions, future customer demand and relationships with suppliers.
Historically, the Company’s inventories have demonstrated long shelf lives, are
not highly susceptible to obsolescence and are eligible for return under various
supplier return programs.
Property,
Plant and Equipment
Land,
building, office and manufacturing equipment, and test units are recorded at
cost. Maintenance, repairs and betterments are charged to
expense.
Finished
goods normally held for sale to customers may sometimes be used in demonstration
and testing by customers. During the periods that the units are
transferred from inventory to plant and equipment they are depreciated over the
period in use. Since the intent is for these units to be eventually sold they
are returned to Inventory upon the completion of customer demonstration and
testing at their written down value.
Depreciation
is provided for all plant and equipment on a straight line basis over estimated
useful lives of the assets.
Stock-Based
Compensation
The
Company follows the provisions of "Share-Based Payment" ("SFAS No. 123(R)"),
which requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their
fair values.
Accordingly,
the Company measures share-based compensation cost for all share-based awards at
the fair value on the grant date and recognition of share-based compensation
over the service period for awards that are expected to vest. The fair value of
stock options is determined based on the number of shares granted and the price
of our ordinary shares, and calculated based on the Black-Scholes valuation
model. Black Scholes valuation attributes used in the model include
expected volatility, term, and risk-free interest rate. Expected volatility is
based on the historical volatility of the Company’s share price for the period
prior to option grant equivalent to the expected life of the options. The
expected term is based upon management’s estimate of when the option will be
exercised. The risk-free interest rate for periods within the contractual life
of the option is based upon the U.S. Treasury yield curve in effect at the time
of grant.
The
Company only recognizes expense to its consolidated statement of operations for
those options or shares that are expected ultimately to vest, using two
attribution methods to record expense, the straight-line method for grants with
only service-based vesting or the graded-vesting method, which considers each
performance period or tranche separately, for all other awards.
- 21
-
Advanced
engineering and development
The
Company expenses advanced engineering and development costs as incurred. These
costs consist primarily of labor, overhead, and materials to build prototype
units, materials for testing, develop manufacturing processes and include
consulting fees and other costs.
To the
extent these costs are separately identifiable, incurred and funded by advanced
engineering and development type agreements with outside parties, they will be
shown separately on the statement of operations as a “cost of engineering and
development contract”.
Goodwill
Goodwill
is recognized as the excess cost of an acquired entity over the net amount
assigned to assets acquired and liabilities assumed. Goodwill is not amortized
but reviewed for impairment annually as of June 30 or more frequently if events
or changes in circumstances indicate that its carrying value may be
impaired. These conditions could include a significant change in the
business climate, legal factors, operating performance indicators, competition,
or sale or disposition of a significant portion of a reporting
unit.
Testing
for the impairment of goodwill involves a two step process. The first step of
the impairment test requires the comparing of a reporting units fair value to
its carrying value. If the carrying value is less than the fair value, no
impairment exists and the second step is not performed. If the carrying value is
higher than the fair value, there is an indication that impairment may exist and
the second step must be performed to compute the amount of the impairment. In
the second step, the impairment is computed by estimating the fair values of all
recognized and unrecognized assets and liabilities of the reporting unit and
comparing the implied fair value of reporting unit goodwill with the carrying
amount of that unit’s goodwill.
Recent
Accounting Pronouncements
See Note
2 in the accompanying notes to consolidated financial statements.
Known
Trends, Market Opportunities and Challenges
We
believe that there are specific existing and rapidly emerging market
opportunities for the Company’s energy storage products.
We
believe that in North America the electric utilities markets’ increasing energy
demands on an increasingly fragile transmission and distribution network is
forcing both utilities and commercial and industrial customers to adopt
distributed storage and delivery systems to increase the reliability and the
capacity of the electrical grid. We have designed our products to meet these
needs in that they can be combined for use in larger storage applications.
Federal and State Government initiatives to lessen the United States greenhouse
gas emissions and dependency on oil and increasing concerns surrounding CO2
emissions are also driving this market sector.
We
believe that solar and wind energy has grown over the past five years and will
continue to grow for so long as fossil fuel prices are increasing. Because both
solar and wind are intermittent primary energy sources, both grid connected and
off-grid installations require energy storage devices to optimize their
capabilities.
We
continue to advance the sales and marketing process in the areas of sales
network structure, direct key accounts, strategic relationships, marketing and
industry/policy involvement.
We
continue to build a direct market pipeline of opportunities which include
several electric utilities; companies involved in renewable energy; large
renewable energy integrators involved in on-grid and off-grid applications,
government facilities and other commercial and industrial opportunities such as
“big box” store chains.
We have
advanced the ZBB presence and awareness in the market through involvement in
various market conferences (energy storage, wind, and solar, electric
utility), direct marketing, marketing materials and web
content, as well as continued efforts in media channels and highly visible
applications such as the Future House USA installation in Beijing,
China, the Likusasa power systems to remote areas in Africa, and the
sale of the first large scale wind/storage facility on a college campus at the
Dundalk Institute of Technology in the Republic of Ireland. ZBB is in
the process of furthering these marketing and networking efforts with additional
marketing activities that will continue to raise the profile of ZBB and the ZESS
brands.
- 22
-
We
continue to work in the California energy and utility markets through the
California Energy Commission and pursue opportunities with Pacific Gas &
Electric and the U.S. Department of Energy amongst others, to install products
into the local transmission and distribution network. In November 2008 the State
of California amended certain renewable energy rebate programs to include energy
storage systems, such as those manufactured and sold by us, when our systems are
incorporated as part of either new or existing renewable energy
installation.
We are
currently addressing opportunities and engaged in fulfilling orders targeted to
renewable energy markets in the United States, Europe, Australia, and Africa
with the intention of introducing products and services into these
markets. The United States and governments throughout the world are
implementing renewable energy mandates, tax credits, investments, and other
incentives related to renewable energy and energy efficiency including the
energy storage sector. The American Recovery and Reinvestment Act of
2009 includes provisions for over $14 billion in amounts to be available for
“Energy Efficiency and Renewable Energy” until September 30, 2010, with $10
billion targeted towards grants and loan guarantees for the manufacturing of
advanced batteries and components.
We are
actively involved in submitting proposals to the Federal Government in response
to Funding Opportunity announcements issued as a result of the American Recovery
and Reinvestment Act of 2009. These proposals cover opportunities for plant
expansion, Smart Grid initiative, Renewable Energy Initiatives as well as
research and development opportunities for applications where the Company’s
technology could bring a transformational change to market applications that we
currently do not address. We are in the process or have applied for
approximately 36 Mwh of Smart Grid energy storage projects through various
strategic partners and prospective customers under various Department of Energy
programs, such as FOA 36.
We have
substantially increased production capacity through the delivery of new
production equipment received during the year ended June 30,
2009. This new equipment, along with manufacturing ramp-up and
automation plans are underway that will enable a significant increase in
production capability within several months.
Our
current contracts include a collaborative project (Advanced Electricity Storage
Technologies project) with the Commonwealth of Australia which commenced July
2007 and running through July 2010, which includes the payment to the Company of
$2.6 million for future development costs and which includes the production and
delivery of one 500kWh energy storage system for installation into a renewable
energy site in Australia. In December 2008 we received an order for a Zess 500
system to be installed in conjunction with existing wind energy assets at the
Dundalk Institute of Technology in the Republic of Ireland, which was produced
and shipped during the year ended June 30, 2009 (revenue to be recognized in
fiscal 2010).
During
fiscal 2009 we signed a contract with the Wisconsin Energy Independence Fund to
secure $229,000 in support grant funding for the development of our own
proprietary power conversion systems for both AC to DC and DC to DC renewable
energy applications. We have contracted with a Wisconsin based partner to build
and package the power electronics components for two units for evaluation with
two ZESS 50 systems contracted to be built under this grant.
In
addition to the other risk factors stated above, and other information relating
to our business as referenced in our “Company Background” section, we believe
that some of the biggest challenges we face will be gaining market acceptance
for our newer products and reaching the utility and renewable energy companies
that we target. In order to be successful we must also develop a reputation of
reliability and quality service.
Our
systems compete with both traditional energy storage technologies, such as lead
acid batteries, as well as emerging energy storage technologies, such as
vanadium redox and sodium sulfur batteries. For our target markets, we believe
our product has a significant advantage over competing products and technologies
in terms of:
|
•
|
Superior
technical attributes in terms of the amount of energy that can be stored
in a system of a given weight and size or “energy density” (sometimes
measured in Watt Hours per Kilogram or Wh/kg), recharge cycle and overall
cycle life;
|
|
•
|
Competitive
cost, based on dollars per Kilowatt Hours (kWh), as well as life of the
module components;
|
|
•
|
Modular
construction allowing portable applications of varying size, as compared
to the large scale, fixed site emerging
alternatives.
|
We
believe additional capital is necessary to continue our mid-to-long term growth
plans. Actions taken by the board of directors and management in the
current fiscal year include: 1.) increase in cost saving measures to
ensure adequate cash resources to continue growing the company, assuming no new
sources of capital funding; 2.) actively pursue various fund raising
arrangements including engaging investment bankers to assist with equity based
financing; 3.) focusing the Chief Executive Officer efforts on fund raising and
federal stimulus package opportunities; and 4.) filing a “shelf” S-3
Registration Statement as a potential vehicle and to assist in fund raising
efforts.
- 23
-
Results
of Operations
Years
ended June 30, 2009 and 2008:
Revenue
and Other income:
Our
revenues for the years ended June 30, 2009 and 2008 were $1,156,792 and
$1,279,599, respectively, a decrease of $122,807. This was the result
of a decrease in revenues of $235,068 from commercial product sales and
revenues, and an $112,261 increase in engineering and development revenues as
compared to the year ending June 30, 2008. Revenues include estimates
based on the percentage-of-completion method of accounting for long-term
contracts.
Other
income for the year ended June 30, 2009 reflects a decrease in interest income
of $360,585 compared to the year ended June 30, 2008, and a decrease of $54,595
in other income, primarily due to reductions in rental income. The
decrease in interest income is a result of decreasing cash balances invested
from the proceeds of the Company’s U.S. public offering in June
2007. Interest income is expected to continue to decrease
in future periods as proceeds from the public offering are utilized for capital
expenditures and operational purposes and from lower interest rates on the funds
invested.
Cost and Expenses and Other
Expense:
Total
costs and expenses for the year ended June 30, 2009 and 2008 were $6,667,934 and
$6,525,444, respectively. This increase of $142,490 in the year ended June 30,
2009 was primarily due to increased costs of $300,671
related to additional engineering and development activities as required under
the AEST , and increases in selling, general, and administrative costs of
$124,146, and reductions of $244,283 in cost of product sales. These
increases in costs were partially offset by a decrease of $38,044 in
depreciation expense.
Other
expenses for the years ended June 30, 2009 and 2008 were $182,074 and $206,158,
respectively. This decrease of $24,084 in other expenses for the period ended
June 30, 2009 was primarily due to a $52,813 decrease in finance costs incurred
during the comparable period of the prior fiscal year which included a early
debt retirement charges from the proceeds of the public offering, offset by
increases to interest expense of $28,729 in the period ended June 30, 2009
primarily from additional equipment financing.
Cost of product
sales. Our cost of product sales for the years ended
June 30, 2009 and 2008 were $56,468 and $300,751, respectively. The
decrease in expense in the year ended June 30, 2009 was primarily due to the
reductions in revenue recognized and the related cost of product sales on units
completed and shipped under the completed contract method of revenue
recognition. Revenue recognition and related production expenses
incurred on the 500 Kwh system shipped to Dundalk Institute of Technology,
Ireland on June 30, 2009 has been deferred until the first quarter of
2010.
Selling, General and
Administrative. Our selling, general and administrative
expense for the years ended June 30, 2009 and 2008 was $3,474,476 and
$3,350,330, respectively. The expense during the current twelve month
period reflected an increase of $124,146 compared to the year ended June 30,
2008 resulting from the establishment of the sales and marketing department,
increases in non-cash charges related to share based compensation to
key management and directors, and partially offset by salary reduction and other
cost saving strategies implemented during the period.
Travel
costs were $206,581 and $296,341 for the years ended June 30, 2009 and 2008,
respectively, an $89,760 reduction. The costs were reduced by cost
saving measures in the current period as well as a reduction in customer based
travel related to installation and testing of energy storage systems sold in
California incurred during the previous annual period. We expect overall travel
related to marketing and business development to increase as our sales efforts
and installations increase, but decrease as a percentage of
sales.
Insurance
costs include insurance benefits for employees of $120,329, general insurance of
$55,843, and directors and officers insurance of $40,500. During the comparable
twelve month period ended June 30, 2008, insurance costs include insurance
benefits for employees of $120,821, general insurance of $64,816 and $39,500 in
directors and officers insurance costs were incurred.
Advanced engineering and
development. Our engineering and
development costs for the years ended June 30, 2009 and 2008 were $2,859,094 and
$2,558,423, respectively. The increase during the year ended June 30,
2009 of $300,671 from the comparable 2008 period was primary due to the increase
in advanced engineering and development costs and materials under the AEST
project contract which commenced in July 2007. Expenses were
partially offset by $126,997 received from the Australian government during the
year ended June 30, 2009 as tax concession funding for research and development
expenditures. The costs incurred under the current AEST contract have
been classified as advanced engineering and development expenditures, and have
not been allocated or included in cost of sales.
- 24
-
Net
Loss. Our net loss for the years ended June 30, 2009 and 2008
was $5,561,056 and $4,904,663, respectively, resulting in a $656,393 increase in
net loss as compared to the year ended June 30, 2008. In summary,
this increase in loss was primarily the result of a $122,807 decrease in
revenues, $142,490 increase in operating costs, a reduction of $360,585 in
interest income, and reductions in other income and expense of
$30,511.
Liquidity and Capital
Resources
Since our
inception, our research, development, and operations were primarily financed
through debt and equity financings and government grants and
projects. Total paid in capital as of June 30, 2009 was
$45,655,262. We had a cumulative deficit of $37,287,851 as
of June 30, 2009 compared to a cumulative deficit of $31,726,795 as of June
30, 2008. At June 30, 2009 we had a working capital surplus of
$3,784,491 and as of June 30, 2008 a working capital surplus of
$8,611,872. Our shareholders’ equity as of June 30, 2009 and June 30,
2008 was $6,765,835 and $12,016,118, respectively.
We believe that we will have
sufficient capital necessary to meet our operating and capital commitments for
at least the next twelve months. This is based on a conservative
forecast that includes only current sales contracts which generate positive cash
flows, and a rate of expenditure that supports our current operations, including
product development and production readiness without additional funding from
project financing or equity transactions. However, we believe additional capital
is necessary to continue our mid-to-long term growth plans. Under
current economic conditions and absent a substantial increase in new orders and
additional debt or equity financing, the board of directors has requested that
management implement increased cost containment measures. Actions
taken by the board of directors and management during this fiscal year included:
1.) increase in cost saving measures to preserve cash resources; 2.) actively
pursue fund raising arrangements, including engaging investment bankers to
assist with equity based financing; 3.) focusing the Chief Executive Officer’s
efforts on fund raising and federal stimulus spending plan opportunities; and
4.) filing a “shelf” S-3 Registration Statement to assist in fund raising
efforts.
We are
actively involved in submitting proposals to various State and Federal
government agencies such as our response to Funding Opportunity announcements
issued as a result of the American Recovery and Reinvestment Act. These
proposals cover opportunities for plant expansion, Smart Grid initiative,
renewable energy initiatives as well as research and development opportunities
for applications where the Company’s technology could bring a transformational
change to market applications that we currently do not
address.
On
January 26, 2009 we filed an S-3 Registration Statement with the Securities and
Exchange Commission. Amendments to the S-3 Registration Statement
were filed on March 30, 2009 and May 1, 2009 and were declared by the SEC
effective on May 13, 2009. We took this action as a proactive measure in
anticipation of our possible future needs for additional working capital and
further capital expenditures. On August 18, 2009, we announced the
closing of our public closing pursuant to this S-3 shelf registration. ZBB sold
1,791,667 units at $1.20 per unit, consisting of an aggregate of 1,791,667
shares of its common stock and warrants to purchase 358,333 shares of its common
stock at an exercise price of $1.33 per share. The proceeds to ZBB
after deducting placement agent fees and offering expenses were approximately
$1.9 million.
Operating
Activities
For
the year ended June 30, 2009, net cash used in operations was
$4,223,478. Cash used in operations resulted from a net loss of
$5,561,056, reduced by $236,662 in net changes to working capital and also
reduced by other net adjustments to reconcile net loss to cash of
$1,100,916. Changes to working capital providing cash to operations
resulted from decreases in other receivables of $61,083, and
increases to accounts payable of $247,499, accrued compensation of $22,092,
accrued expenses of $25,765, and deferred revenues of $717,539. Cash
used in operations resulted from increases to accounts receivable of $609,987,
prepaid and other current assets of $41,799, and inventories of
$185,530. Other adjustments increasing the net cash used in
operations was $277,896 of depreciation, $372,855 of equipment costs
reclassified to expenses, $200,000 of consulting fees applied to note
receivable, and $338,864 of stock based compensation; and a decrease to cash
resulting from an $88,699 reduction in the inventory
allowance.
For the
year ended June 30, 2008, net cash used in operations was $4,379,777 after
adding back non-cash items of $888,230 consisting primarily of depreciation,
stock based compensation, consulting fees applied to shareholder note
receivable, and equipment used in operations. Sources of cash
provided by operations resulted from a decrease in accounts receivable of
$188,602; and increases in accrued expenses of $45,603 and deferred revenues of
$308,395. Cash used in operations resulted from increases in
inventory (net of $234,000 increase in inventory allowance) of $40,318, prepaid
and other current assets of $235,485, and interest receivable of $44,227; and
decreases in accounts payable of $228,664 and accrued expenses of
$357,250.
- 25
-
Investing
Activities
For the year ended June 30, 2009, net
cash used in investing activities was $1,889,658. Cash used in
investing activities resulted from $889,658 in purchases of property and
equipment, and $1,000,000 in net increases in bank certificates of deposits with
maturities greater than three months.
For the
year ended June 30, 2008, net cash used in investing activities was
$721,468 due to increases in capital expenditures for manufacturing and testing
equipment, building improvements, and computer software and
hardware.
Financing
Activities
For the
year ended June 30, 2009, net cash from financing activities was $763,016
consisting of $1,070,000 in financing on manufacturing equipment less repayments
of $306,984 principal.
For the
year ended June 30, 2008, net cash used by financing activities was
$4,270,457. Cash was used in the repayment of $1,882,634 in
bank loans and notes payable of $4,047,823, and additional costs related to the
June 2007 public offering of $100,000. Financing sources were provided from the
refinancing of a bank loan in the amount of $1,760,000.
Item
7A. Quantitative and Qualitative
Disclosures About Market Risk
We are a
smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are
not required to provide the information under this item.
Item
8. Financial Statements and
Supplementary Data
INDEX
TO FINANCIAL STATEMENTS
ZBB
ENERGY CORPORATION
TABLE
OF CONTENTS
Page
|
||||
Report
of Independent Registered Public Accounting Firm
|
27
|
|||
Consolidated
Balance Sheets as of June 30, 2009 (restated) and 2008
|
28
|
|||
Consolidated
Statements of Operations for the years ended June 30, 2009 (restated) and
2008
|
29
|
|||
Consolidated
Statements of Changes in Shareholders’ Equity for the Years ended June 30,
2009 (restated) and 2008
|
30
|
|||
Consolidated
Statements of Cash Flows for the years ended June 30, 2009 (restated) and
2008
|
31
|
|||
Notes
to Consolidated Financial Statements (restated)
|
32
|
- 26
-
Report of Independent
Registered Public Accounting Firm
To the
Board of Directors and Stockholders
ZBB
Energy Corporation
Milwaukee,
Wisconsin
We have
audited the accompanying consolidated balance sheets of ZBB Energy Corporation
and subsidiaries as of June 30, 2009 and 2008 and the related consolidated
statements of operations, changes in shareholders’ equity and cash flows for the
years then ended. These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of ZBB Energy Corporation and
subsidiaries at June 30, 2009 and 2008 and the results of their operations and
their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
As
discussed in note 16 to the consolidated financial statements, the Company has
restated the accompanying consolidated financial statements as of and for the
year ended June 30, 2009.
/s/PKF
|
Certified
Public Accountants
|
A
Professional Corporation
|
New York,
New York
September
16, 2009, except as to Note 16, which is as of February 10,
2010
- 27
-
ZBB
ENERGY CORPORATION
Consolidated
Balance Sheets
(As restated -
|
||||||||
See Note 16)
|
||||||||
June 30, 2009
|
June 30, 2008
|
|||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 2,970,009 | $ | 8,451,320 | ||||
Bank
certificate of deposit
|
1,000,000 | - | ||||||
Accounts
receivable
|
614,154 | 4,167 | ||||||
Interest
receivable
|
19,746 | 80,829 | ||||||
Inventories-net of $145,301 and $234,000
allowance
|
1,587,113 | 1,312,885 | ||||||
Prepaids
and other current assets
|
143,173 | 316,274 | ||||||
Total
current assets
|
6,334,195 | 10,165,475 | ||||||
Long-term
assets:
|
||||||||
Property,
plant and equipment, net
|
4,578,180 | 4,240,640 | ||||||
Investment
in joint venture
|
- | 242,350 | ||||||
Goodwill
|
803,079 | 803,079 | ||||||
Total
assets
|
$ | 11,715,454 | $ | 15,451,544 | ||||
Liabilities
and Shareholders' Equity
|
||||||||
Current
liabilities:
|
||||||||
Bank
loans
|
416,558 | 171,634 | ||||||
Accounts
payable
|
827,001 | 607,520 | ||||||
Accrued
expenses
|
25,765 | - | ||||||
Deferred
revenues
|
1,128,539 | 644,700 | ||||||
Accrued
compensation and benefits
|
151,841 | 129,749 | ||||||
Total
current liabilites
|
2,549,704 | 1,553,603 | ||||||
Long-term
liabilities:
|
||||||||
Bank
loans
|
2,399,915 | 1,881,823 | ||||||
Total
liabilities
|
4,949,619 | $ | 3,435,426 | |||||
Shareholders'
equity
|
||||||||
Common
stock ($0.01 par value);
150,000,000 authorized 10,618,297 and 10,512,283 shares issued and
outstanding
|
106,183 | 105,123 | ||||||
Additional
paid-in capital
|
45,549,079 | 45,619,608 | ||||||
Note
receivable from shareholders
|
- | (608,333 | ) | |||||
Accumulated
other comprehensive (loss)
|
(1,601,576 | ) | (1,373,485 | ) | ||||
Accumulated
(deficit)
|
(37,287,851 | ) | (31,726,795 | ) | ||||
Total
shareholders' equity
|
$ | 6,765,835 | $ | 12,016,118 | ||||
Total
liabilities and shareholders' equity
|
$ | 11,715,454 | $ | 15,451,544 |
See
accompanying notes to consolidated financial statements
- 28
-
ZBB
ENERGY CORPORATION
Consolidated
Statements of Operations
For the year ended
|
||||||||
(As Restated -
|
||||||||
See Note 16)
|
||||||||
June 30, 2009
|
June 30, 2008
|
|||||||
Revenues
|
||||||||
Product
sales and revenues
|
$ | 67,995 | $ | 303,063 | ||||
Engineering
and development revenues
|
1,088,797 | 976,536 | ||||||
Total
Revenues
|
1,156,792 | 1,279,599 | ||||||
Costs
and Expenses
|
||||||||
Cost
of product sales
|
56,468 | 300,751 | ||||||
Advanced
engineering and development
|
2,859,094 | 2,558,423 | ||||||
Selling,
general, and administrative
|
3,474,476 | 3,350,330 | ||||||
Depreciation
|
277,896 | 315,940 | ||||||
Total
Costs and Expenses
|
6,667,934 | 6,525,444 | ||||||
Loss
from Operations
|
(5,511,142 | ) | (5,245,845 | ) | ||||
Other
Income (Expense)
|
||||||||
Interest
income
|
145,088 | 505,673 | ||||||
Interest
expense
|
(182,074 | ) | (153,345 | ) | ||||
Finance
costs
|
- | (52,813 | ) | |||||
Other
income (expense)
|
(12,928 | ) | 41,667 | |||||
Total
Other Income (Expense)
|
(49,914 | ) | 341,182 | |||||
Loss
before provision for Income Taxes
|
(5,561,056 | ) | (4,904,663 | ) | ||||
Provision
for Income Taxes
|
- | - | ||||||
Net
Loss
|
$ | (5,561,056 | ) | $ | (4,904,663 | ) | ||
Net
Loss per share-
|
||||||||
Basic
and diluted
|
$ | (0.53 | ) | $ | (0.47 | ) | ||
Weighted
average shares-basic and diluted:
|
||||||||
Basic
|
10,547,621 | 10,463,579 | ||||||
Diluted
|
10,547,621 | 10,463,579 |
See
accompanying notes to consolidated financial statements.
- 29
-
ZBB
Energy Corporation
Consolidated
Statements of Changes in Shareholders' Equity (restated)
Note Receivable
|
Accumulated Other
|
TOTAL
|
||||||||||||||||||||||||||||||
Number of
|
Add'l Paid-in
|
from
|
Comprehensive
|
Shareholders'
|
Comprehensive
|
|||||||||||||||||||||||||||
Shares
|
Common Stock
|
Capital
|
Shareholders
|
(Loss)
|
Accumulated Deficit
|
Equity
|
(Loss)
|
|||||||||||||||||||||||||
Balance:
June 30, 2007
|
10,087,090 | $ | 100,871 | $ | 44,994,333 | $ | (808,333 | ) | $ | (1,546,537 | ) | $ | (26,822,131 | ) | $ | 15,918,203 | ||||||||||||||||
Issuance
of common stock-
|
||||||||||||||||||||||||||||||||
note
conversions
|
159,256 | 1,593 | 473,644 | 475,237 | ||||||||||||||||||||||||||||
Issuance
of common stock -
|
||||||||||||||||||||||||||||||||
Montgomery
warrants
|
265,937 | 2,659 | (2,659 | ) | ||||||||||||||||||||||||||||
Reduction
of note receivable
|
||||||||||||||||||||||||||||||||
from
stockholder
|
200,000 | 200,000 | ||||||||||||||||||||||||||||||
Public
offering costs
|
(100,000 | ) | (100,000 | ) | ||||||||||||||||||||||||||||
Stock
options expensed
|
254,290 | 254,290 | ||||||||||||||||||||||||||||||
Net
Loss
|
(4,904,663 | ) | (4,904,663 | ) | $ | (4,904,663 | ) | |||||||||||||||||||||||||
Net
Translation Adjustment
|
173,051 | 173,051 | 173,051 | |||||||||||||||||||||||||||||
Balance:
June 30, 2008
|
10,512,283 | $ | 105,123 | $ | 45,619,608 | $ | (608,333 | ) | $ | (1,373,485 | ) | $ | (31,726,795 | ) | $ | 12,016,118 | $ | (4,731,612 | ) | |||||||||||||
Stock
options expensed
|
294,114 | 294,114 | ||||||||||||||||||||||||||||||
Issuance
of restricted stock in
|
||||||||||||||||||||||||||||||||
payment
of compensation
|
101,014 | 1,010 | 72,167 | 73,177 | ||||||||||||||||||||||||||||
Deferred
stock compensation
|
(72,167 | ) | (72,167 | ) | ||||||||||||||||||||||||||||
Amortization
of deferred
|
||||||||||||||||||||||||||||||||
stock
compensation
|
30,490 | 30,490 | ||||||||||||||||||||||||||||||
Issuance
of restricted stock-
|
||||||||||||||||||||||||||||||||
in
payment of
|
||||||||||||||||||||||||||||||||
consulting
fees
|
5,000 | 50 | 13,200 | 13,250 | ||||||||||||||||||||||||||||
Reduction
of note receivable
|
(408,333 | ) | 608,333 | 200,000 | ||||||||||||||||||||||||||||
Net
Loss, as restated
|
(5,561,056 | ) | (5,561,056 | ) | $ | (5,561,056 | ) | |||||||||||||||||||||||||
Net
Translation Adjustment
|
(228,091 | ) | (228,091 | ) | (228,091 | ) | ||||||||||||||||||||||||||
Balance:
(restated)
|
||||||||||||||||||||||||||||||||
June
30, 2009
|
10,618,297 | $ | 106,183 | $ | 45,549,079 | $ | - | $ | (1,601,576 | ) | $ | (37,287,851 | ) | $ | 6,765,835 | $ | (5,789,147 | ) |
See
accompanying notes to consolidated financial statements.
- 30
-
ZBB Energy Corporation
|
For the year ended
|
|||||||
(As Restated -
|
||||||||
See Note 16)
|
||||||||
Consolidated Statements of Cash Flows
|
June 30, 2009
|
June 30, 2008
|
||||||
Cash
flows from operating activities:
|
||||||||
Net
loss
|
$ | (5,561,056 | ) | $ | (4,904,663 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Depreciation
|
277,896 | 315,940 | ||||||
Change
in inventory allowance
|
(88,699 | ) | 234,000 | |||||
Equipment
costs reclassified to expenses
|
372,855 | 118,000 | ||||||
Payments
applied to note receivable for consulting fees
|
200,000 | 200,000 | ||||||
Stock
based compensation
|
338,864 | 254,290 | ||||||
(Increase)
decrease in operating assets:
|
||||||||
Accounts
receivable
|
(609,987 | ) | 188,602 | |||||
Inventories
|
(185,530 | ) | (274,318 | ) | ||||
Prepaids
and other current assets
|
(41,799 | ) | (235,485 | ) | ||||
Other
receivables-interest
|
61,083 | (44,227 | ) | |||||
Increase
(decrease) in operating liabilities:
|
||||||||
Accounts
payable
|
247,499 | (228,664 | ) | |||||
Accrued
compensation and benefits
|
22,092 | 45,603 | ||||||
Accrued
expenses
|
25,765 | (357,250 | ) | |||||
Deferred
revenues
|
717,539 | 308,395 | ||||||
Net
cash (used) in operating activities
|
(4,223,478 | ) | (4,379,777 | ) | ||||
Cash
flows from investing activities
|
||||||||
Capital
expenditures
|
(889,658 | ) | (721,468 | ) | ||||
Bank
certificate of deposit
|
(1,000,000 | ) | - | |||||
Net
cash (used) in investing activities
|
(1,889,658 | ) | (721,468 | ) | ||||
Cash
flows from financing activities
|
||||||||
Proceeds
from refinancing of bank loan
|
1,070,000 | 1,760,000 | ||||||
Repayments
of bank loans
|
(306,984 | ) | (1,882,634 | ) | ||||
Proceeds
(repayments) of notes payable
|
- | (4,047,823 | ) | |||||
Additional
public offering costs
|
- | (100,000 | ) | |||||
Net
cash provided (used) by financing activities
|
763,016 | (4,270,457 | ) | |||||
Effect
of exchange rate changes on cash and cash equivalents
|
(131,192 | ) | - | |||||
Net
(decrease) in cash and cash equivalents
|
(5,481,311 | ) | (9,371,702 | ) | ||||
Cash
and cash equivalents - beginning of year
|
8,451,320 | 17,823,022 | ||||||
Cash
and cash equivalents - end of period
|
$ | 2,970,009 | $ | 8,451,320 | ||||
Cash
paid for interest
|
$ | 121,468 | $ | 153,345 | ||||
Supplemental
schedule of non-cash investing and financing activities:
|
||||||||
Issuance
of common stock pursuant to conversion of convertible
notes
|
- | 475,237 | ||||||
Investment
in joint venture offset by unfulfilled deferred revenue
|
160,000 | - | ||||||
Equipment
expensed to cost of contracts
|
372,855 | 118,000 | ||||||
Stock
based compensation
|
338,864 | 254,290 |
See
accompanying notes to consolidated financial statements.
- 31
-
ZBB
ENERGY CORPORATION
Notes
to Consolidated Financial Statements (restated)
June
30, 2009
NOTE 1 —
NATURE OF ORGANIZATION
ZBB
Energy Corporation (“ZBB” or the “Company”) develops and manufactures
distributed energy storage solutions based upon the Company’s proprietary
zinc-bromine rechargeable electrical energy storage technology. The
Company was incorporated under the laws of Wisconsin in 1998.
The
Company develops, manufactures and markets energy storage systems with electric
utility applications as its initial market. This scalable, mobile system is
ideally suited for a number of market applications including:
—
Load management for generation, transmission and distribution utilities, energy
service companies and large industrial customers allowing peak shaving and
deferral of capital expenditures that otherwise would be required to alleviate
utility system constraints.
—
Storage of renewable wind and solar energy production in both grid connected and
grid independent environments.
—Power
quality to alleviate downtime caused by voltage sags, voltage swells, frequency
fluctuations, and combined with uninterruptible power supply (UPS) to eliminate
power outages.
Since our
inception, our research, advanced engineering and development, and operations
were primarily financed through debt and equity financings, government grants
and joint ventures.
The
consolidated financial statements include the accounts of the Company and those
of its wholly owned subsidiaries, ZBB Technologies, Inc. which operates a
manufacturing facility in Menomonee Falls, Wisconsin, and ZBB Technologies, Ltd.
which has its advanced engineering and development facility in Perth,
Australia.
NOTE 2 —
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries and have been prepared in accordance
with accounting principles generally accepted in the United States of America
(GAAP). All significant intercompany accounts and transactions have been
eliminated upon consolidation.
Foreign
Currency
The
Company uses the United States dollar as its functional and reporting currency,
while the Australian dollar is the functional currency of one of its foreign
subsidiaries. Assets and liabilities of the Company’s foreign subsidiary are
translated into United States dollars at exchange rates that are in effect as at
the balance sheet date while equity accounts are translated at historical
exchange rates. Income and expense items are translated at average exchange
rates which were applicable during the reporting period. Translation adjustments
are accumulated in Accumulated Other Comprehensive (Loss) as a separate
component of Shareholders’ Equity in the consolidated balance sheet. No gain or
loss on translation is included in the net loss.
Use
of Estimates
The
preparation of financial statements and related disclosures in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and
revenues and expenses during the period covered by the report. Actual results
could differ from those estimates. Estimates are used in accounting for, amongst
other things, revenue and losses recognized under the percentage of completion
method for sales, impairment and realizability of assets, depreciation, and
valuations of equity instruments. Estimates and assumptions are
reviewed periodically and the effects of any revisions are reflected in the
consolidated financial statements in the period they are determined to be
necessary.
- 32
-
Income
Tax
Provisions
for income taxes are based on taxes payable or refundable for the current year
and deferred tax assets and liabilities are included in the financial statements
at currently enacted income tax rates applicable to the period in which the
deferred tax assets and liabilities are expected to be realized or settled as
prescribed in FASB Statement No. 109, “Accounting for Income Taxes”. As
changes in tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted through the provision for income taxes. There were no
deferred tax assets recorded as of June 30, 2009.
Property,
Plant and Equipment
Land,
building, equipment, computers and furniture and fixtures are recorded at
cost. Maintenance, repairs and betterments are charged to
expense.
Finished
goods normally held for sale to customers may sometimes be used in demonstration
and testing by customers. During the periods that the units are
transferred from Inventory to Plant and Equipment they are depreciated over the
period in use. Since the intent is for these units to be eventually sold they
are returned to Inventory upon the completion of customer demonstration and
testing at their written down value.
Depreciation
Depreciation
is provided for all plant and equipment on a straight line basis over estimated
useful lives of the assets. The depreciation rate used for each class
of depreciable asset is:
Depreciation Rate
|
||
Manufacturing
Equipment and test units
|
3 –
15 years
|
|
Office
Equipment
|
3 –
8 years
|
|
Building
|
40
years
|
Impairment
of Long-Lived Assets
In
accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal Of Long-Lived Assets," the Company
assesses potential impairments to its long-lived assets including property,
plant and equipment when there is evidence that events or changes in
circumstances indicate that the carrying value may not be
recoverable.
If such
an indication exists, the recoverable amount of the asset, being the higher of
the asset’s fair value less costs to sell and value in use, is compared to the
asset’s carrying value. Any excess of the asset’s carrying value over its
recoverable amount is expensed to the statement of operations. In assessing
value in use, the estimated future cash flows are discounted to their present
value using a pre-tax discount rate.
Goodwill
Goodwill
is recognized as the excess cost of an acquired entity over the net amount
assigned to assets acquired and liabilities assumed. Goodwill is not amortized
but reviewed for impairment annually as of June 30 or more frequently if events
or changes in circumstances indicate that its carrying value may be
impaired. These conditions could include a significant change in the
business climate, legal factors, operating performance indicators, competition,
or sale or disposition of a significant portion of a reporting
unit.
Testing
for the impairment of goodwill involves a two step process. The first step of
the impairment test requires the comparing of a reporting units fair value to
its carrying value. If the carrying value is less than the fair value, no
impairment exists and the second step is not performed. If the carrying value is
higher than the fair value, there is an indication that impairment may exist and
the second step must be performed to compute the amount of the impairment. In
the second step, the impairment is computed by estimating the fair values of all
recognized and unrecognized assets and liabilities of the reporting unit and
comparing the implied fair value of reporting unit goodwill with the carrying
amount of that unit’s goodwill. Based on this method, the Company
determined fair value as evidenced by market capitalization, and concluded that
there was no need for an impairment charge.
- 33
-
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with maturities of three months
or less to be cash equivalents. The Company maintains its cash
deposits with a few high credit quality financial institutions predominately in
the United States. At times such balances may exceed federally
insurable limits. The Company has not experienced any losses in such
accounts.
Investments
The
Company occasionally invests in bank certificates of deposits with maturities of
more than three months. As of June 30, 2009 the Company held a nine
month certificate of deposit, interest accruing at 3.96%, and a maturity date of
September 30, 2009.
Inventories
Inventories
are stated at the lower of cost (first-in, first-out method) or market and
consist of raw materials, work in progress and finished goods held for
resale.
Costs
incurred in bringing each product to its present location and conditions are
accounted for as follows:
·
|
Raw
materials – purchased cost of direct
material
|
·
|
Finished
goods and work-in-progress – purchased cost of direct material plus direct
labor plus a proportion of manufacturing
overheads.
|
The
Company evaluates the recoverability of its slow moving or obsolete inventories
at least quarterly. The Company estimates the recoverable cost of such inventory
by product type while considering factors such as its age, historic and current
demand trends, the physical condition of the inventory as well as assumptions
regarding future demand. The Company’s ability to recover its cost for slow
moving or obsolete inventory can be affected by such factors as general market
conditions, future customer demand and relationships with suppliers.
Historically, the Company’s inventories have demonstrated long shelf lives, are
not highly susceptible to obsolescence and are eligible for return under various
supplier return programs.
Revenue
Recognition
The
Company currently contracts with its customers to develop, manufacture, install
and service its energy storage systems under short and
long-term contracts. These contracts have resulted in two distinct
arrangements and revenue recognition policies. The first type of contract is for
the production, delivery and installation of energy storage
systems. The second type of contract is for product engineering and
development activities.
Product
sales orders that have relatively short duration (typically less than one year)
normally use the completed-contract method of revenue recognition rather than
the percentage-of-completion method. Revenues are recognized when the
sales price is fixed, collectability is reasonably assured, the product has
received customer acceptance and either title or risk of loss has transferred to
the customer. Typically, these conditions are met at the time the product is
shipped to the customer in accordance with stated shipping terms. The Company
charges shipping and handling fees when products are shipped or delivered to a
customer, and includes such amounts in net sales. The Company reports its sales
net of actual sales returns.
Revenue
recognition on energy storage system long-term contracts utilizes the
percentage-of-completion method which recognizes revenue proportionally as costs
are incurred and compared to the estimated total costs for each
contract. This has historically been the predominant method used in
estimating revenues recognized by the Company.
Engineering
and development contracts are typically collaborative agreements to further
develop renewable energy technologies and are often sponsored and partially
funded in various amounts between government agencies and the Company. Often
multi-year agreements which contain several elements and provide for varying
consideration based on allowable costs, milestones and similar payment
provisions and may provide for future licensing and royalties beyond the term of
the arrangement. Revenue associated with these types of contracts are
typically of longer duration and recognized under the percentage-of-completion
method.
In July
2007 the Company commenced engineering and product development activities
pursuant to the collaborative Advanced Electricity Storage Technologies project
(“AEST”) with the Commonwealth of Australia through July 2010 which terms
include the receipt of funding of A$3.1 million (approximately US$2.3 million)
toward development costs and include the production and delivery of a 500kWh
energy storage system. During the years ended June 30, 2009 and 2008,
$984,807 and $976,536, respectively, was recognized as revenue based on progress
toward completion as specified in the contract.
- 34
-
Total
revenues of $1,156,792 and $1,279,599 were recognized for the years ended June
30, 2009 and 2008, respectively, and were comprised of two significant customers
in 2009 and one significant customer in 2008.
Loss
per Share
The
Company follows the provisions of SFAS No. 128 which requires the reporting of
both basic and diluted earnings (loss) per share. Basic earnings
(loss) per share is computed by dividing net income (loss) available to common
stockholders by the weighted average number of common
shares outstanding for the period. Diluted earnings (net
loss) per share reflect the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock. In accordance with FASB 128, any anti-dilutive effects
on net income (loss) per share are excluded (as of the years ended June 30, 2009
and 2008 there were 1,790,167 and 1,395,523 underlying options and warrants that
are excluded).
Stock-Based
Compensation
The
Company follows the provisions of "Share-Based Payment" ("SFAS No. 123(R)"),
which requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their
fair values.
Accordingly,
the Company measures share-based compensation cost for all share-based awards at
the fair value on the grant date and recognition of share-based compensation
over the service period for awards that are expected to vest. The fair value of
stock options is determined based on the number of shares granted and the price
of our ordinary shares, and calculated based on the Black-Scholes valuation
model. Black Scholes valuation attributes used in the model include
expected volatility, term, and risk-free interest rate. Expected volatility is
based on the historical volatility of the Company’s share price for the period
prior to option grant equivalent to the expected life of the options. The
expected term is based upon management’s estimate of when the option will be
exercised. The risk-free interest rate for periods within the contractual life
of the option is based upon the U.S. Treasury yield curve in effect at the time
of grant.
The
Company only recognizes expense to its consolidated statement of operations for
those options or shares that are expected ultimately to vest, using two
attribution methods to record expense, the straight-line method for grants with
only service-based vesting or the graded-vesting method, which considers each
performance period or tranche separately. See Note 15 below.
Advanced
engineering and development
The
Company expenses advanced engineering and development costs as incurred. These
costs consist primarily of labor, overhead, and materials to build prototype
units, materials for testing, develop manufacturing processes and include
consulting fees and other costs.
To the
extent these costs are separately identifiable, incurred and funded by advanced
engineering and development type agreements with outside parties, they will be
shown separately on the statement of operations as a “cost of engineering and
development contract”.
Comprehensive
income (loss)
The
Company reports its comprehensive income (loss) in accordance with SFAS No. 130,
“Reporting Comprehensive Income”, which requires presentation of the components
of comprehensive earnings. Comprehensive income (loss) consists of net income
(loss) for the period plus or minus any net currency translation adjustments
applicable for the periods ended June 30, 2009 and 2008 and is presented in the
Consolidated Statements of Changes in Shareholders’ Equity.
Concentrations
of Credit Risk and Fair Value:
Financial
instruments that potentially subject the Company to concentrations of credit
risk consists principally of cash and U.S. treasury investments, and bank
certificates of deposit, and accounts receivable.
The
Company maintains significant cash investments primarily with three or four
financial institutions, which at times may exceed federally insured limits. The
Company has not previously experienced any losses on such deposits.
Additionally, the Company performs periodic evaluations of the relative credit
rating of these institutions as part of its investment strategy.
Concentrations
of credit risk with respect to accounts receivable are limited due to
accelerated payment terms in current customer contracts and creditworthiness of
the current customer base. However, at June 30, 2009, primarily all of the
Company’s receivables pertain to one customer and revenues were concentrated
among two customers during for the year then ended.
- 35
-
The
carrying amounts of cash and cash equivalents, short-term investments, trade
receivables, other current assets and accounts payable approximate fair value
due to the short-term nature of these instruments. The carrying value of bank
loans and mortgage payable approximate fair value based on their terms which
reflect market conditions existing as of June 30, 2009.
Recent
Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141R (revised 2007), “Business
Combinations. SFAS No.141R among other things, establishes principles and
requirements for how the acquirer in a business combination (i) recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the
acquired business, (ii) recognizes and measures the goodwill acquired in the
business combination or a gain from a bargain purchase and (iii) determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS No.141R is
effective for fiscal years beginning on or after December 15, 2008, with early
adoption prohibited. The adoption of this statement is not expected to have a
material effect on the Company's financial statements.
In
December 2007, FASB issued SFAS No. 160, “Non-controlling Interests
in Consolidated Financial Statements”. This statement
requires the ownership interests in
subsidiaries held by parties other than the parent and the amount of
consolidated net income attributable to the parent and to
the non-controlling interest be clearly
identified and presented on the face of the consolidated
statements. SFAS No. 160 is effective for fiscal years, and interim periods
within those fiscal years beginning on or after December 15, 2008. The adoption
of this statement is not expected to have a material effect on the Company's
financial statements.
In
June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles. SFAS
168 replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles, and establishes the FASB Accounting Standards Codification
(Codification) as the source of authoritative U.S. generally accepted accounting
principles (GAAP) recognized by the FASB to be applied by nongovernmental
entities in the preparation of financial statements. SFAS 168 is effective for
financial statements issued for interim periods and annual periods ending after
September 15, 2009. We do not expect the adoption of SFAS 168 to have a material
impact on our consolidated financial statements.
Effective
July 1, 2008, the Company adopted FASB issued SFAS No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS No.
159 gives entities the option to measure eligible financial assets and financial
liabilities at fair value on an instrument by instrument basis, that are
otherwise not permitted to be accounted for at fair value under other accounting
standards. The election to use the fair value option is available when an entity
first recognizes a financial asset or financial liability. Subsequent changes in
fair value must be recorded in earnings. SFAS 159 became effective with no
impact to the Company’s financial position or results of operations, since it
chose not to report any additional items at fair value.
In May
2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165"). SFAS 165
is intended to establish general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. It requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for
selecting that date, that is, whether that date represents the date the
financial statements were issued or were available to be issued. SFAS 165 is
effective for interim or annual financial periods ending after June 15, 2009.
The Company adopted this standard on June 30, 2009. See Note 16.
NOTE
3 - INVENTORIES
Inventory
balances are comprised of the following amounts as of June 30:
Restated 2009
|
2008
|
|||||||
Raw
materials
|
$ | 766,871 | $ | 1,013,467 | ||||
Work
in progress
|
402,001 | 253,714 | ||||||
Finished
goods
|
563,532 | 279,704 | ||||||
Inventory
valuation allowance
|
(145,301 | ) | (234,000 | ) | ||||
TOTAL
|
$ | 1,587,113 | $ | 1,312,885 |
- 36
-
NOTE
4– PROPERTY, PLANT & EQUIPMENT
Property,
plant, and equipment balances are comprised of the following amounts as of June
30:
2009
|
2008
|
|||||||
Office
equipment
|
$ | 115,809 | $ | 127,196 | ||||
Manufacturing
equipment
|
4,091,587 | 3,430,095 | ||||||
Test
units
|
534,591 | 707,470 | ||||||
Building
|
1,996,134 | 1,996,134 | ||||||
Land
|
217,000 | 217,000 | ||||||
6,955,121 | 6,477,895 | |||||||
Less
accumulated depreciation
|
(2,376,941 | ) | ( 2,237,255 | ) | ||||
Net
Property, Plant & Equipment
|
$ | 4,578,180 | $ | 4,240,640 |
NOTE
5 – INVESTMENT IN JOINT VENTURE
In March
2005, the Company acquired a 49% interest in ZBB China Pty Ltd for a cost of
$175,000 (estimated for current period foreign exchange rates). The joint
venture company was licensed to distribute ZBB energy storage systems into the
Chinese market.
On
October 2, 2008 a mutual agreement was reached to terminate the co-operative
joint venture agreement between ZBB and China Century Capital
Limited. The effect of this termination is to cancel the exclusive
manufacturing, marketing, and distribution rights granted by ZBB to the joint
venture company, ZBB China Pty Ltd, and provided for ZBB to hold 100%
ownership in this subsidiary.
During
the year ended June 30, 2009 the Company dissolved the joint venture, realizing
a loss on the investment of $15,369.
NOTE
6 – GOODWILL
The
Company through a series of transactions in March 1996 acquired ZBB
Technologies, Inc., a wholly-owned subsidiary. The goodwill amount of
$1.134 million, the difference between the price paid for ZBB Technologies, Inc.
and the net assets of the acquisition, amortized through fiscal 2002, resulted
in the net goodwill amount of $803,079 as of June 30, 2009.
The
Company accounts for goodwill in accordance with SFAS No. 142, “Goodwill
and Other Intangible Assets” under which goodwill and other intangible assets
deemed to have indefinite lives are not amortized but are subject to annual
impairment tests. The implied fair value of goodwill is the amount determined by
deducting the estimated fair value of all tangible and identifiable intangible
net assets of the reporting unit to which goodwill has been allocated from the
estimated fair value of the reporting unit. If the recorded value of goodwill
exceeds its implied value, an impairment charge is recorded for the
excess.
NOTE
7 – NOTE RECEIVABLE-Shareholder
In July
2006, the Company entered into a common stock purchase agreement with 41
Broadway Associates, LLC. Under the terms of the agreement the
Company sold to 41 Broadway Associates, LLC a total of 294,118 shares for a
total consideration of $1,000,000. Payments were to be paid in annual
installments of $200,000 plus accrued interest at 4% over a five year
period.
Both
parties also entered into a five year consulting agreement, which would have
provided approximately $200,000 of annual services including assistance with
debt and equity financing, investor introductions, marketing,
etc. During 2009 the Company determined the service agreement to be a
minimal future value and effectively cancelled the agreement as of June 30,
2009.
In
accordance with the terns of the note agreement, the cancellation of the service
agreement, in effect relieved the remaining balance of the note
receivable. Accordingly, the $408,333 remaining balance of the note
receivable was written off and applied to additional paid in capital at June 30,
2009.
- 37
-
NOTE
8 – BANK LOANS AND NOTES PAYABLE
The
Company's debt consisted of the following as of June 30:
|
2009
|
2008
|
||||||
Bank
loans-current
|
$ | 416,558 | $ | 171,634 | ||||
Bank
loans-long term
|
2,399,915 | 1,881,823 | ||||||
Total
|
$ | 2,816,473 | $ | 2,053,457 |
On
November 28, 2008 the Company entered into a loan agreement to finance new
production equipment. The $1,070,000 bank note is secured by specific
equipment, requiring monthly payments of $21,000 of principal and
interest; rate equal to the prime rate; maturity date of December 1,
2013. Principal balance is $948,441 at June 30, 2009.
On May
14, 2008 the Company entered into two loan agreements to refinance the building
and land in Menomonee Falls, Wisconsin:
—The
first loan requires a fixed monthly payment of principal and interest at a rate
of .25% below the prime rate, with any principal balance due at maturity on June
1, 2018, and secured by the building and land. Principal balance is
$853,661 at June 30, 2009.
—The
second loan is a secured promissary note guaranteed by the U.S. Small Business
Administration, requiring monthly payments of principal and interest at
a rate of 5.5% until May 1, 2028. Principal balance
is $847,628 at June 30, 2009.
On
January 22, 2007 the Company refinanced its equipment loan. The new
loan term requires monthly payments of principal and an interest rate equal to
the prime rate, maturity date of February 1, 2011. The loan is
secured by a first lien on all business personal property. Principal
balance is $166,743 at June 30, 2009.
Maximum
aggregate annual principal payments for the 12 month periods subsequent to June
30, 2009 are as follows:
2010
|
$ | 416,558 | ||
2011
|
360,070 | |||
2012
|
324,338 | |||
2013
|
338,016 | |||
2014
|
124,228 | |||
2015 and thereafter:
|
1,253,263 | |||
$ | 2,816,473 |
NOTE
9 - EMPLOYEE/DIRECTOR EQUITY INCENTIVE PLANS
In 2002
the Company established the 2002 Stock Option Plan (“SOP”) whereby a stock
option committee was given the discretion to grant up to 882,353 options to
purchase shares to key employees of the Company at exercise prices and dates to
be determined by the directors. During the year ended June 30, 2008 400,000
options to purchase shares were granted to employees and directors exercisable
at $3.59 (110% of the market closing price on June 6, 2008) based on vesting
terms of June 2008 through January 2009, and exercisable at various dates
through June 2014. No options were exercised and 16,793 options
expired during the year ended June 30, 2009. At June 30, 2009 there
remains 487,907 options outstanding with exercise prices of not less than $3.59
and exercise dates up to June 30, 2014. A further 91,200 options are
available to be issued under the SOP.
During
2005 the Company established an Employee Stock Option Scheme (the “2005 Plan”)
that authorizes the board of directors or a committee thereof, to grant options
to employees and directors of the Company or any affiliate of the Company. The
maximum number of options that may be granted in aggregate at any time under
this option scheme or under any other employee option or share plan is the
number equivalent to 5% of the total number of issued shares of the Company
including all shares underlying options under the Company’s stock option and
incentive plans.. Options issued expire five years after the vesting date. No
options were exercised in fiscal 2008 or during the year ended June 30,
2009. At June 30, 2009, options to purchase 250,000 shares with an
exercise price of $3.82 and an expiration date of June 2012 remain
outstanding.
During
2007 the Company established the 2007 Equity Incentive Plan (the “2007 Plan”)
that authorizes the board of directors or a committee thereof, to grant options
to purchase up to a maximum of 1,500,000 shares to employees and directors of
the Company at exercise prices to be determined by the administrator but not
less than 100% (110% for a 10% shareholder) of the market value on the date
granted. During the year ended June 30, 2008 options to
purchase 275,000 shares were granted to employees and directors exercisable at
$3.59 based on vesting terms of June 2008 through January 2011 and exercisable
at various dates through January 2016. During the year ended June 30,
2009 options to purchase 451,410 shares were granted to employees and directors
exercisable at prices from $1.35 to $1.69 based on vesting terms of July 2009
through January 2012 and exercisable at various dates through December
2016. Included in the year ended June 30, 2009 options were granted
to purchase 266,410 shares which vest upon certain contingent performance
criteria, of which 93,248 vested and 39,963 forfeited during the
period. The remaining 185,000 options issued in fiscal 2009 are
service based. Options to purchase an additional 707,549 shares are available to
be issued under the 2007 plan.
- 38
-
In
aggregate for all plans, at June 30, 2009, the Company has a total of 1,424,354
options outstanding and 798,749 options available for future grant under the
SOP, 2005 and the 2007 Plans.
Information
with respect to stock option activity under the employee and director plans is
as follows:
Weighted-Average
|
||||||||
Stock Option Activity
|
Number of Options
|
Exercise Price Per Share
|
||||||
Balance
at June 30, 2007
|
460,611 | $ | 4.81 | |||||
Options
granted
|
675,000 | 3.59 | ||||||
Options
expired
|
(105,911 | ) | 5.61 | |||||
Options
exercised
|
- | - | ||||||
Balance
at June 30, 2008
|
1,029,700 | $ | 4.03 | |||||
Options
granted
|
451,410 | 1.49 | ||||||
Options
expired
|
(16,793 | ) | 5.61 | |||||
Options
forfeited
|
(39,963 | ) | 1.35 | |||||
Options
exercised
|
- | - | ||||||
Balance
at June 30, 2009
|
1,424,354 | $ | 3.24 |
The
following table summarizes information relating to the stock options outstanding
at June 30, 2009:
Outstanding
|
Exercisable
|
|||||||||||||||||||
Weighted-
|
||||||||||||||||||||
Average
|
Weighted-
|
Weighted-
|
||||||||||||||||||
Number of
|
Remaining
|
Average
|
Average
|
|||||||||||||||||
Options
|
Contractual Life
|
Exercise
|
Number of
|
Exercise
|
||||||||||||||||
Range of Exercise Prices
|
Outstanding
|
(in years)
|
Price
|
Options
|
Price
|
|||||||||||||||
$1.35
to $1.69
|
411,447 | 6.9 | $ | 1.50 | 93,248 | $ | 1.35 | |||||||||||||
$3.59
to $3.82
|
925,000 | 4.1 | $ | 3.65 | 871,666 | $ | 3.66 | |||||||||||||
$3.83
and higher
|
87,907 | 0.7 | $ | 6.97 | 87,907 | $ | 6.97 | |||||||||||||
Balance
at June 30, 2009
|
1,424,354 | 4.7 | $ | 3.24 | 1,052,821 | $ | 3.73 |
In
addition, under the “2007 Plan” and in conjunction with a salary reduction plan
implemented during 2009, 101,014 restricted shares were granted as payment of
compensation, of which vesting is 75% service based and 25% performance
based. During the year ended June 30, 2009, $30,490 was recognized as
expense, with a balance of up to $42,687 to be recognized as expense during the
year ended June 30, 2010.
NOTE
10 - NON RELATED PARTY WARRANTS
At June
30, 2009 there are warrants to purchase 120,023 shares issued and outstanding to
Empire Financial Group, Ltd. in connection with certain capital raising
activities in 2006, exercisable at $3.23 per share and which expire on September
30, 2011.
At June
30, 2009 there are warrants to purchase 50,000 shares issued and outstanding to
Empire Financial Group, Ltd. as part of the underwriting compensation in
connection with our United States public offering which are exercisable at $7.20
per share and which expire on June 20, 2012.
At June
30, 2009 there are warrants to purchase 195,800 shares issued and outstanding to
Strategic Growth International in connection with capital raising activities in
2006 and 2007, with expiration dates between March 2011 and June 2012 and
exercise prices of between $3.75 and $7.20.
- 39
-
The table
below summarizes non-related party warrant balances:
Stock Warrants
|
Weighted-Average
|
|||||||
Non-related party activity
|
Number of Warrants
|
Exercise Price Per Share
|
||||||
Balance
at June 30, 2007
|
1,084,411 | $ | 5.41 | |||||
Warrants
expired
|
(600,941 | ) | 8.50 | |||||
Warants
exercised
|
(117,647 | ) | 3.40 | |||||
Balance
at June 30, 2008
|
365,823 | $ | 4.41 | |||||
Warrants
granted
|
- | - | ||||||
Warrants
expired
|
- | - | ||||||
Warants
exercised
|
- | - | ||||||
Balance
at June 30, 2009
|
365,823 | $ | 4.41 |
NOTE
11 – COMMITMENTS
In July
2007 the Company commenced engineering and product development activities
pursuant to a collaborative project entitled the Advanced Electricity Storage
Technologies (“AEST”) project, with the Commonwealth of Australia, through July
2010. The terms of the project provide for the receipt of funding by
the Company for future development costs which include the production and
delivery of one 500kWh energy storage system.
The
AEST project has total budgeted expenditure for operating and capital items of
approximately $4.7 million (A$5.9 million) exclusive of any Australian taxes.
The Company’s contribution of approximately $2.3 million (A$2.8 million) is the
value of any cash and in-kind contributions provided to the project by the
Company in undertaking the project activities. The Australian Government is
providing the project funding of approximately $2.5 million (A$3.1 million) to
be paid in accordance with the completion of contracted project milestones and
subject to the Company’s compliance with project reporting requirements and
demonstrating that the funds already provided to it have been fully spent or
will be fully spent in the near future. There is a balance of
approximately $0.6 million in contributions due by the Company to the project in
cash and in-kind contributions as of June 30, 2009.
The
Company had leased its Australian office facility from an entity affiliated with
three of the Company’s officers. In January 2008 the facility was
sold to a non-related Australian company, eliminating the related party
relationship between the Company and its landlord. The current rental
is $54,302 per annum (A$71,572) and is subject to an annual CPI
adjustment.
Rent
expense was $53,456 and $49,875 for the years ended June 30, 2009 and
2008.
The
future payments required under the terms of the lease are as
follows:
For the years ended June
30,
|
||||
2010
|
$ | 54,302 | ||
2011
|
$ | 54,302 | ||
2012
|
$ | 18,101 | ||
TOTAL:
|
$ | 126,705 |
NOTE
12 - EMPLOYMENT CONTRACTS
The
Company has entered into employment contracts with executives and management
personnel. The contracts provide for salaries,
bonuses and stock option grants, along with other employee benefits. The
employment contracts generally have no set term and can be terminated by either
party. There is a provision for payments of three months to eighteen months of
annual salary as severance if we terminate a contract without cause, along with
the acceleration of certain unvested stock option grants.
- 40
-
NOTE
13 - RETIREMENT PLANS
All
Australian based employees are entitled to varying degrees of benefits on
retirement, disability, or death. The Company contributes to an
accumulation fund on behalf of the employees under an award which is legally
enforceable. For U.S. employees, the Company has a 401(k)
plan. All active participants are 100% vested
immediately. Expenses under these plans were $76,303 and $64,714 for
the years ended June 30, 2009 and 2008.
NOTE 14 —
STOCK-BASED COMPENSATION
The
Company issues stock options and other stock-based awards to executive
management, key employees, and directors under its stock-based compensation
plans (see Note 9).
For the
years ended June 30, 2009 and 2008, the Company’s results of operations reflect
compensation expense for equity based awards vested under its equity incentive
plans. The amount recognized in the financial statements related to stock-based
compensation was $338,864 and $254,290, based on the fair value of all awards
vested during the years ended June 30, 2009 and 2008 respectively.
During
the year ended June 30, 2009 options to purchase 451,410 shares were granted to
employees and directors exercisable at prices from $1.35 to $1.69 based on
vesting terms of July 2009 through January 2012, and exercisable at various
dates through December 2016 and contingent on various continuous service and
performance measurements, of which 39,963 options were forfeited. In
addition 101,014 restricted shares were issued as payment of compensation and
consulting services during the year ended June 30, 2009 (see Note 9 for
additional details).
The fair
value of each option granted is estimated on the date of grant using the
Black-Scholes option-pricing method. The Company uses historical data to
estimate the expected price volatility, the expected option life and the
expected forfeiture rate. The Company has not made any dividend payments nor
does it have plans to pay dividends in the foreseeable future.
The
following assumptions were used to estimate the fair value of options granted
during the years ended June 30, 2009 and 2008 using the Black-Scholes
option-pricing model:
2009
|
2008
|
|||||||
Expected
life of option (years)
|
2.5 | 3.0 | ||||||
Risk-free
interest rate
|
1.2 | % | 3.7 | % | ||||
Assumed
volatility
|
70 | % | 37 | % | ||||
Expected
dividend rate
|
0 | % | 0 | % | ||||
Expected
forfeiture rate
|
0 | % | 10 | % |
Time-vested
and performance-based stock awards, including stock options and restricted
stock, are accounted for at fair value at date of grant. Compensation
expense is recognized over the requisite service and performance
periods.
A summary
of the status of unvested employee stock options as of June 30, 2008 and changes
during the period then ended, is presented below:
Weighted-Average
|
||||||||
Grant Date
|
||||||||
Unvested Stock Option Activity
|
Number of Options
|
Fair Value Per Share
|
||||||
Balance
at June 30, 2007
|
-0- | -0- | ||||||
Granted
|
675,000 | 0.70 | ||||||
Vested
|
(391,000 | ) | 0.65 | |||||
Balance
at June 30, 2008
|
284,000 | $ | 0.77 | |||||
Granted
|
451,410 | 0.30 | ||||||
Vested
|
(323,914 | ) | 0.63 | |||||
Forfeited
|
(39,963 | ) | 0.30 | |||||
Balance
at June 30, 2009
|
371,533 | $ | 0.37 |
- 41
-
As of
June 30, 2009, there remains a total of $118,807 in unrecognized
compensation cost related to unvested stock options which through 2012 vest
pending certain service based ($81,159 unvested) and performance based ($37,648
unvested) criteria. In addition, future costs of $42,687 could be
recognized during the year ended June 30, 2010 related to the restricted shares
issued during the current fiscal year.
NOTE 15 —
INCOME TAXES
The
Company did not record a provision for federal, state or foreign income taxes
for the years ended June 30, 2009 and 2008. The Company has not recorded a
benefit for deferred tax assets as its realizability is uncertain.
The
Company’s combined effective income tax rate differed from the U.S federal
statutory income tax rate as set forth below:
2009
|
2008
|
|||||||
Income
tax benefit computed at the federal statutory rate
|
-34 | % | -34 | % | ||||
Foreign
rate differential
|
4 | % | 4 | % | ||||
Change
in valuation allowance
|
30 | % | 30 | % | ||||
Total
|
0 | % | 0 | % |
Significant
components of the Company's net deferred tax assets as of June 30, 2009 and 2008
were as follows:
2009
|
2008
|
|||||||
Net
operating loss carryforwards
|
$ | 9,812,303 | $ | 8,255,175 | ||||
Foreign
loss carryforwards
|
1,114,442 | 971,952 | ||||||
Deferred
tax asset valuation allowance
|
(10,926,745 | ) | (9,227,127 | ) | ||||
Total
deferred tax assets
|
$ | - | $ | - |
As of
June 30, 2009, the Company had U.S net operating loss carry forwards of
approximately $28,900,000 which begins to expire in 2014 for federal tax
purposes. The Company also has gross foreign tax loss carry forwards of
approximately $3,700,000 that are available to offset future liabilities for
foreign income taxes. Substantially all of the foreign tax losses are carried
forward indefinitely, subject to certain limitations.
A
valuation allowance has been established for certain future income tax benefits
related to income tax loss carry forwards and temporary tax adjustments based on
an assessment that it is more likely than not that these benefits will not be
realized. During the twelve months ended June 30, 2009 the valuation allowance
increased by $1,699,618.
- 42
-
NOTE 16 —
RESTATEMENT
The
Company is restating its previously issued consolidated financial statements as
of and for the year ended June 30, 2009 due to an accounting error related to
revenue recognition.
The
Company originally recognized approximately $619,000 in revenue in the fourth
quarter of fiscal 2009 on an international shipment of equipment to Dundalk,
Ireland. Although the product was tested, accepted, shipped and payment was
received in full as of June 30, 2009, transfer of risk and title had
not been achieved based on the contracted freight terms, therefore all the
criteria as specified in SEC Staff Accounting Bulletin 101 had not been
achieved.
As a
result, the Company has restated the accompanying consolidated financial
statement as of and for the fiscal year ended June 30, 2009. The effects of the
restatement are as follows:
Effects
on Consolidated Balance Sheet as of June 30, 2009
As Previously
|
||||||||
Reported
|
As Restated
|
|||||||
Inventory
|
$ | 1,023,571 | $ | 1,587,113 | ||||
Total
current assets
|
5,770,653 | 6,334,195 | ||||||
Total
assets
|
11,151,911 | 11,715,454 | ||||||
Accrued
expenses
|
66,650 | 25,765 | ||||||
Deferred
revenues
|
509,627 | 1,128,539 | ||||||
Total
current liabilities
|
1,971,677 | 2,549,704 | ||||||
Total
liabilities
|
4,371,592 | 4,949,619 | ||||||
Accumulated
(deficit)
|
(37,273,367 | ) | (37,287,851 | ) | ||||
Total
shareholders’ equity
|
6,780,319 | 6,765,835 | ||||||
Total
liabilities and shareholders’ equity
|
11,151,911 | 11,715,454 |
Effects
on Consolidated Statement of Operations for the fiscal year ended June 30,
2009
As Previously
|
||||||||
Reported
|
As Restated
|
|||||||
Product
sales and revenues
|
$ | 686,906 | $ | 67,995 | ||||
Total
Revenues
|
1,775,703 | 1,156,792 | ||||||
Cost
of product sales
|
640,710 | 56,468 | ||||||
Loss
from Operations
|
(5,476,473 | ) | (5,511,142 | ) | ||||
Other
income (expense)
|
(70,099 | ) | (49,914 | ) | ||||
Net
Loss
|
(5,546,572 | ) | (5,561,056 | ) |
NOTE 17 —
SUBSEQUENT EVENTS
Subsequent
events have been evaluated through September 16, 2009, the date these financial
statements were issued.
On August
18, 2009, the Company announced the closing of its public offering of common
stock and warrants. ZBB sold 1,791,667 units at $1.20 per unit,
consisting of an aggregate of 1,791,667 shares of its common stock and warrants
to purchase 358,333 shares of its common stock at an exercise price of $1.33 per
share. The proceeds to ZBB after deducting placement agent fees and
offering expenses were approximately $1.9 million.
- 43
-
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
None.
Item 9A.
|
Controls
and Procedures
|
Restatement of Previously
Issued Financial Statements
On
February 4, 2010 the Company announced that its Audit Committee and Management
determined a customer contract recorded in June 2009 did not properly meet the
delivery criteria under Staff Accounting Bulletin No. 101 to qualify for revenue
recognition and that other contract arrangements were not considered when
revenue was recorded. As a result, the Company announced that the previously
issued consolidated financial statement for the fiscal year ended June 30, 2009
included in the Company's Form 10-K, and the consolidated financial statement
for the fiscal quarter ended September 30, 2009 included in the Company's Form
10-Q, should no longer be relied upon.
In
recording the revenue transaction for the fiscal year ended June 30, 2009
management analyzed the customer contract and used the following judgments in
considering if the revenue recognition criteria was met 1) the equipment was
shipped on or prior to June 30, 2009, 2) the customer had paid for the equipment
in full prior to shipment and 3) the customer had signed off on the
functionality of the equipment prior to shipment. Delivery terms CIF (cost,
insurance, and freight) were not met, however, management had originally
determined delivery was met by a “Bill and Hold” arrangement. In addition, the
Company's procedures failed to identify the existence of a maintenance agreement
and a commissioning charge that were separately stated in the customer
agreement.
Evaluation of
Disclosure Controls and Procedures (restated)
At the
time the Company’s Annual Report on Form 10-K for the fiscal year ended June 30,
2009 was filed on September 18, 2009, the former Chief Executive Officer and
current Chief Financial Officer concluded that the disclosure controls and
procedures were effective as of June 30, 2009. Subsequent to that evaluation,
management, including the present Chief Executive Officer and Chief Financial
Officer, have re-evaluated the effectiveness of the design and operation of the
disclosure controls and procedures (as defined under Rules 13a-15(e) and
15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as
of the end of the period covered by this report. Based upon that evaluation, the
present Chief Executive Officer and Chief Financial Officer have concluded that
the Company’s disclosure controls and procedures were not effective to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements because of the identification of material
weaknesses in the Company’s internal control over financial reporting described
further below.
Management’s
Report on Internal Control over Financial Reporting
(restated)
The
management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in
Exchange Act Rule 13a-15(f). The Company’s internal control over financial
reporting is a process designed by, or under the supervision of, the Chief
Executive Officer and Chief Financial Officer, to provide reasonable
assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. Internal control over financial reporting includes those
policies and procedures that:
—pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
Company;
—provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and
— provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the Company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, have been detected.
- 44
-
As a
result of the misstatement discussed above and in Note 16 to the consolidated
financial statements in this Form 10-K/A and the material weaknesses discussed
below, management, including the Company’s present Chief Executive Officer and
Chief Financial Officer reassessed the effectiveness of the Company’s internal
control over financial reporting as of June 30, 2009. In making this
re-assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal
Control-Integrated Framework. A material weakness is a deficiency, or a
combination of deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement of the
Company’s annual or interim financial statements will not be prevented or
detected on a timely basis. Based on management’s re-assessment, management is
restating its original report and has concluded that the Company’s internal
control over financial reporting was not effective as of June 30, 2009 due to
the fact that there was a material weakness in its internal control over
financial reporting as discussed below.
Specifically,
management identified: (i) control deficiencies in its internal controls
associated with revenue recognition processes that constitute a material
weakness, and (ii) the need to restate prior period financial statements. The
material weakness in internal control over financial reporting identified is as
follows:
Revenue
Recognition - The control over the timing of the recording of equipment sales
was improperly designed and was not effective in capturing the accuracy,
completeness, and timing of equipment shipped at the end of a reporting period
and identifying any other arrangements within a customer agreement. The controls
that had been in place focused primarily on the review of internal Company
documentation to ensure customers’ agreements were valid and authorized;
however, the controls were not effective in recording completely and accurately
the arrangements in the appropriate accounting periods.
Changes in Internal Controls
over Financial Reporting
There
were no changes in internal control over financial reporting during the quarter
ended June 30, 2009 that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial
reporting.
Remediation
Plan
Management
has implemented procedures to improve the identification, capture, review,
approval, and recording of all customer contracts in the appropriate accounting
period. The Company has contracted with an independent accounting consultant to
assist in implementing revenue recognition procedures which has since been
instituted. In addition, under the direction of the Audit Committee, management
will continue to review and make necessary changes to the overall design of the
Company’s internal control environment, as well as to policies and procedures to
improve the overall effectiveness of internal control over financial
reporting.
Management
believes the foregoing efforts will effectively remediate this material
weakness. As the Company continues to evaluate and work to improve its internal
control over financial reporting, management may determine to take additional
measures to address control deficiencies or determine to modify the remediation
plan described above.
Item 9B.
|
Other
Information
|
None.
- 45
-
PART
III
Item 10.
|
Directors and
Executive Officers of the
Registrant
|
The
information required under this item is set forth in the Company’s Definitive
Proxy Statement relating to the Company’s 2009 annual meeting of shareholders to
be held on November 16, 2009 and is incorporated herein, as supplemented, by
reference.
Item 11.
|
Executive
Compensation
|
The
information required under this item is set forth in the Company’s Definitive
Proxy Statement relating to the Company’s 2009 annual meeting of shareholders to
be held on November 16, 2009 and is incorporated herein, as supplemented, by
reference.
Item 12.
|
Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters
|
The
information required under this item is set forth in the Company’s Definitive
Proxy Statement relating to the Company’s 2009 annual meeting of shareholders to
be held on November 16, 2009 and is incorporated herein, as supplemented, by
reference.
Item 13.
|
Certain Relationships
and Related Transactions
|
The
information required under this item is set forth in the Company’s Definitive
Proxy Statement relating to the Company’s 2009 annual meeting of shareholders to
be held on November 16, 2009 and is incorporated herein, as supplemented, by
reference.
Item 14.
|
Principal Accountant
Fees and Services
|
The
information required under this item is set forth in the Company’s Definitive
Proxy Statement relating to the Company’s 2009 annual meeting of shareholders to
be held on November 16, 2009 and is incorporated herein, as supplemented, by
reference.
PART
IV
Item 15.
|
Exhibits and Financial
Statement Schedules
|
Financial
Statements
The
following financial statements are included in Item 8 of this Annual
Report:
Report
of Independent Registered Public Accounting Firm
|
|
Consolidated
Balance Sheets as of June 30, 2009 (restated) and 2008
|
|
Consolidated
Statements of Operations for the years ended June 30, 2009 (restated) and
2008
|
|
Consolidated
Statements of Changes in Shareholders’ Equity for the Years ended June 30,
2009 (restated) and 2008
|
|
Consolidated
Statements of Cash Flows for the years ended June 30, 2009 (restated) and
2008
|
Financial
Statement Schedules
Financial
statement schedules have been omitted because they either are not applicable or
the required information is included in the consolidated financial statements or
notes thereto.
- 46
-
Exhibits
The
Exhibit Index immediately preceding the exhibits required to be filed with
this report is incorporated herein by reference.
Exhibit
No.
|
Description
|
|
3.1
|
Articles
of Incorporation of ZBB Energy Corporation as amended dated
February 16, 1998, as amended.(1)
|
|
3.2
|
By-laws
of ZBB Energy Corporation.(1)
|
|
3.3
|
Amended
By-laws of ZBB Energy Corporation, as adopted on October 28,
2004.(4)
|
|
3.4
|
Audit
Committee Charter of ZBB Energy Corporation.(5)
|
|
3.5
|
Compensation
Committee Charter of ZBB Energy Corporation.(5)
|
|
3.6
|
Nominating
Committee Charter of ZBB Energy Corporation.(6)
|
|
4.1
|
Form
of Stock Certificate.(4)
|
|
10.1
|
Letter
Agreement dated as of July 13, 2006 between ZBB Energy Corporation, 41
Broadway Associates, LLC (3)
|
|
10.2
|
Contract
dated as of June 29, 2007 between ZBB Technologies Ltd and the
Commonwealth of Australia filed as an exhibit with Form 8-K filed July 11,
2007 (File No. 001-33540).
|
|
10.3
|
Employment
Agreement dated as of October 4, 2006 between ZBB Energy Corporation and
Robert J. Parry (1), and as amended and filed with the Commission on June
26, 2009 as an exhibit to the Company’s Current Report on Form 8-K and
incorporated by reference herein.
|
|
10.4
|
Employment
Agreement dated as of November 1, 2007 between ZBB Energy Corporation and
Steven Seeker (7).
|
|
10.5
|
Employment
Agreement dated as of July 1, 2008 between ZBB Energy Corporation and
Scott Scampini. (7).
|
|
10.6
|
2002
Stock Option Plan of ZBB Energy Corporation incorporated by reference to
the Company’s S-8 Registration Statement as filed April 16, 2008 (File No.
333-150268).
|
|
10.7
|
2005
Employee Stock Option Scheme of ZBB Energy Corporation
(1).
|
|
10.8
|
2007
Equity Incentive Plan of ZBB Energy Corporation incorporated by reference
to the Company’s S-8 Registration Statement as filed April 16, 2008 (File
No. 333-150268).
|
|
23.1
|
Consent
of Independent Registered Public Accounting Firm (PKF) filed herewith as
Exhibit 23.1.
|
|
31.1
|
Certification
by Chief Executive Officer, required by Rule 13a-14(a) or
Rule 15d-14(a) of the Exchange Act, promulgated to Section 302
of the Sarbanes-Oxley Act of 2002.
|
|
31.2
|
Certification
by Chief Financial Officer, required by Rule 13a-14(a) or
Rule 15d-14(a) of the Exchange Act, promulgated pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32.1
|
Certification
by Chief Executive Officer, required by Rule 13a-14(b) or
Rule 15d-14(b) of the Exchange Act and Section 1350 of
Chapter 63 of Title 18 of the United States Code, promulgated
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
32.2
|
Certification
by Chief Financial Officer, required by Rule 13a-14(b) or
Rule 15d-14(b) of the Exchange Act and Section 1350 of
Chapter 63 of Title 18 of the United States Code, promulgated
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
(1)
|
Filed
as exhibit to original filing of Registration Statement of the Company on
October 27, 2006 (File No. 333-138243).
|
|
|
(2)
|
Filed
as exhibit to Amendment No. 1 to Registration Statement of the
Company, as filed on February 13,2007 (File
No.333-138243).
|
|
|
(3)
|
Filed
as exhibit to Amendment No. 2 to Registration Statement of the
Company,as filed on March 19,2007(File
No. 333-138243).
|
|
|
(4)
|
Filed
as exhibit to Amendment No. 3 to Registration Statement of the
Company, as filed on April 13,2007(File
No. 333-138243).
|
|
|
(5)
|
Filed
as exhibit to Amendment No. 4 to Registration Statement of the
Company,as filed on April 26, 2007(File
No. 333-138243).
|
|
|
(6)
|
Filed
as exhibit to Amendment No. 6 to Registration Statement of the
Company, as filed on June 15, 2007(File
No. 333-138243).
|
|
|
(7)
|
Filed
as an exhibit to the Company’s Annual Report on Form 10-KSB for the year
ended June 30, 2008 and incorporated by reference
herein.
|
- 47
-
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this Form 10-K Annual Report to be signed on its
behalf by the undersigned on February 10, 2010, thereunto duly
authorized.
ZBB
ENERGY CORPORATION
|
||
/s/ Eric
C.Apfelbach
|
||
Eric
C.Apfelbach
|
||
Chief
Executive Officer
|
||
(Principal
Executive Officer) and Director
|
In
accordance with the requirements of the Securities Exchange Act of 1934, this
Form 10-K Annual Report has been signed by the following persons in the
capacities and on the dates indicated.
Position
|
Date
|
|||
/s/ Eric C.
Apfelbach
|
Chief
Executive Officer
|
February
10, 2010
|
||
Eric
C. Apfelbach
|
(Principal
executive officer) and
Director |
|||
/s/ Scott W.
Scampini
|
Chief
Financial Officer
|
February
10, 2010
|
||
Scott
W. Scampini
|
(Principal
financial officer and
Principal accounting officer) |
|||
/s/ William
Mundell
|
Chairman
and Director
|
February
10, 2010
|
||
William
Mundell
|
||||
/s/ Richard A.
Payne
|
Director
|
February
10, 2010
|
||
Richard
A. Payne
|
||||
/s/ Manfred
Birnbaum
|
Director
|
February
10, 2010
|
||
Manfred
Birnbaum
|
||||
/s/ Richard A.
Abdoo
|
Director
|
February
10, 2010
|
||
Richard
A. Abdoo
|
||||
/s/ Paul F.
Koeppe
|
Director
|
February
10, 2010
|
||
Paul
F. Koeppe
|
- 48
-