Attached files
file | filename |
---|---|
EX-31.2 - EnSync, Inc. | v174925_ex31-2.htm |
EX-10.1 - EnSync, Inc. | v174925_ex10-1.htm |
EX-10.3 - EnSync, Inc. | v174925_ex10-3.htm |
EX-32.2 - EnSync, Inc. | v174925_ex32-2.htm |
EX-10.5 - EnSync, Inc. | v174925_ex10-5.htm |
EX-10.4 - EnSync, Inc. | v174925_ex10-4.htm |
EX-31.1 - EnSync, Inc. | v174925_ex31-1.htm |
EX-10.2 - EnSync, Inc. | v174925_ex10-2.htm |
EX-32.1 - EnSync, Inc. | v174925_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the quarterly period ended December 31, 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
|
(I.R.S.
Employer Identification No.)
|
incorporation
or organization)
|
N93
W14475 Whittaker Way, Menomonee Falls, WI 53051
(Address
of principal executive offices)
(262)
253-9800
(Registrant’s
telephone number)
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. þ Yes ¨
No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the Registrant was required to submit and post such files). ¨
Yes ¨
No
Indicate
by check whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act.) Yes ¨ No
þ
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
the 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 R
|
(Do not check if a smaller reporting company) |
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
Class
|
Shares
Outstanding as of February 16, 2010
|
Common
Stock, $.01 par value per share
|
12,381,214
|
ZBB
Energy Corporation
Form
10-Q
TABLE OF
CONTENTS
Page
|
||
PART
I. FINANCIAL INFORMATION (*)
|
|
|
Item 1.
|
Consolidated
Financial Statements
|
1
|
Balance
Sheets
|
1
|
|
Statements
of Operations
|
2
|
|
Statements
of Changes in Shareholders’ Equity
|
3
|
|
Statements
of Cash Flows
|
4
|
|
Notes
to Financial Statements
|
5
|
|
Item
2.
|
Management’s
Discussion and Analysis and Results of Operations
|
15
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
22
|
Item
4.
|
Controls
and Procedures
|
23
|
PART II. OTHER INFORMATION
|
||
Item
1.
|
Legal
Proceedings
|
24
|
Item
1A.
|
Risk
Factors
|
24
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
24
|
Item
3.
|
Defaults
upon Senior Securities
|
24
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
24
|
Item
5.
|
Other
Information
|
25
|
Item
6.
|
Exhibits
|
25
|
Signatures
|
26
|
(*) All
of the financial statements contained in this Quarterly Report are unaudited
with the exception of the financial information at June 30, 2009, which has been
derived from our audited financial statements at that date and should be read in
conjunction therewith. Our audited financial statements as of June 30, 2009 and
for the year then ended, and the notes thereto, can be found in our Annual
Report on Form 10-K/A, which was filed with the Securities and Exchange
Commission on February 12, 2010.
PART
I. FINANCIAL INFORMATION
Item 1.
FINANCIAL STATEMENTS
ZBB
ENERGY CORPORATION
Consolidated
Balance Sheets
December 31, 2009
|
June 30, 2009
|
|||||||
(unaudited)
|
||||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 3,077,539 | $ | 2,970,009 | ||||
Bank
certificate of deposit
|
- | 1,000,000 | ||||||
Accounts
receivable
|
154,599 | 614,154 | ||||||
Interest
receivable
|
- | 19,746 | ||||||
Inventories-net of $175,000 and $145,301
allowance
|
948,030 | 1,587,113 | ||||||
Prepaids
and other current assets
|
119,632 | 143,173 | ||||||
Total
current assets
|
4,299,800 | 6,334,195 | ||||||
Long-term
assets:
|
||||||||
Property,
plant and equipment, net
|
3,679,394 | 4,578,180 | ||||||
Goodwill
|
803,079 | 803,079 | ||||||
Total
assets
|
$ | 8,782,273 | $ | 11,715,454 | ||||
Liabilities
and Shareholders' Equity
|
||||||||
Current
liabilities:
|
||||||||
Bank
loans
|
463,362 | 416,558 | ||||||
Accounts
payable
|
762,699 | 827,001 | ||||||
Accrued
expenses
|
362,410 | 25,765 | ||||||
Deferred
revenues
|
379,517 | 1,128,539 | ||||||
Accrued
compensation and benefits
|
522,217 | 151,841 | ||||||
Total
current liabilities
|
2,490,205 | 2,549,704 | ||||||
Long-term
liabilities:
|
||||||||
Bank
loans
|
2,279,595 | 2,399,915 | ||||||
Total
liabilities
|
$ | 4,769,800 | $ | 4,949,619 | ||||
Shareholders'
equity
|
||||||||
Common
stock ($0.01 par value);
150,000,000 authorized 12,381,214 and 10,618,297 shares issued
and outstanding
|
123,813 | 106,183 | ||||||
Additional
paid-in capital
|
47,606,078 | 45,549,079 | ||||||
Accumulated
other comprehensive (loss)
|
(1,592,186 | ) | (1,601,576 | ) | ||||
Accumulated
(deficit)
|
(42,125,232 | ) | (37,287,851 | ) | ||||
Total
shareholders' equity
|
$ | 4,012,473 | $ | 6,765,835 | ||||
Total
liabilities and shareholders' equity
|
$ | 8,782,273 | $ | 11,715,454 |
See
accompanying notes to consolidated financial statements
-1-
ZBB
ENERGY CORPORATION
Consolidated
Statements of Operations
Three months ended December 31,
|
Six months ended December 31,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
|||||||||||||
Revenues
|
||||||||||||||||
Product
sales and revenues
|
$ | 271,060 | $ | - | $ | 937,786 | $ | - | ||||||||
Engineering
and development revenues
|
284,395 | 222,188 | 429,582 | 513,885 | ||||||||||||
Total
Revenues
|
555,455 | 222,188 | 1,367,368 | 513,885 | ||||||||||||
Costs
and Expenses
|
||||||||||||||||
Cost
of product sales
|
253,185 | - | 899,287 | - | ||||||||||||
Advanced
engineering and development
|
1,013,086 | 623,521 | 1,632,248 | 1,360,666 | ||||||||||||
Selling,
general, and administrative
|
1,734,403 | 881,737 | 2,607,770 | 1,666,818 | ||||||||||||
Depreciation
|
125,431 | 59,965 | 249,648 | 134,866 | ||||||||||||
Impairment
and other equipment charges
|
780,231 | - | 780,231 | - | ||||||||||||
Total
Costs and Expenses
|
3,906,336 | 1,565,223 | 6,169,184 | 3,162,350 | ||||||||||||
Loss
from Operations
|
(3,350,881 | ) | (1,343,035 | ) | (4,801,816 | ) | (2,648,465 | ) | ||||||||
Other
Income (Expense)
|
||||||||||||||||
Interest
income
|
20,593 | 41,389 | 47,089 | 95,341 | ||||||||||||
Interest
(expense)
|
(30,862 | ) | (32,697 | ) | (62,894 | ) | (60,098 | ) | ||||||||
Other
income (expense)
|
- | 1,562 | (19,760 | ) | (13,568 | ) | ||||||||||
Total
Other Income (Expense)
|
(10,269 | ) | 10,254 | (35,565 | ) | 21,675 | ||||||||||
Loss
before provision for Income Taxes
|
(3,361,150 | ) | (1,332,781 | ) | (4,837,381 | ) | (2,626,790 | ) | ||||||||
Provision
for Income Taxes
|
- | - | - | - | ||||||||||||
Net
Loss
|
$ | (3,361,150 | ) | $ | (1,332,781 | ) | $ | (4,837,381 | ) | $ | (2,626,790 | ) | ||||
Net
Loss per share-
|
||||||||||||||||
Basic
and diluted
|
$ | (0.27 | ) | $ | (0.13 | ) | $ | (0.40 | ) | $ | (0.25 | ) | ||||
Weighted
average shares-basic and diluted:
|
||||||||||||||||
Basic
|
12,409,964 | 10,512,283 | 11,962,047 | 10,512,283 | ||||||||||||
Diluted
|
12,409,964 | 10,512,283 | 11,962,047 | 10,512,283 |
See
accompanying notes to consolidated financial statements.
-2-
ZBB
Energy Corporation
Consolidated
Statements of Changes in Shareholders' Equity (unaudited)
Note Receivable
|
Accumulated Other
|
TOTAL
|
||||||||||||||||||||||||||||||
Number of
|
Add'l Paid-in
|
from
|
Comprehensive
|
Accumulated
|
Shareholders'
|
Comprehensive
|
||||||||||||||||||||||||||
Shares
|
Common Stock
|
Capital
|
Shareholders
|
(Loss)
|
Deficit
|
Equity
|
(Loss)
|
|||||||||||||||||||||||||
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
|
(5,561,056 | ) | (5,561,056 | ) | $ | (5,561,056 | ) | |||||||||||||||||||||||||
Net
Translation Adjustment
|
(228,091 | ) | (228,091 | ) | (228,091 | ) | ||||||||||||||||||||||||||
Balance:
June 30, 2009
|
10,618,297 | $ | 106,183 | $ | 45,549,079 | $ | - | $ | (1,601,576 | ) | $ | (37,287,851 | ) | $ | 6,765,835 | $ | (5,789,147 | ) | ||||||||||||||
Issuance
of common stock equity offering net of underwriting fees
|
1,791,667 | 17,917 | 2,024,583 | 2,042,500 | ||||||||||||||||||||||||||||
Equity
offering costs
|
(142,224 | ) | (142,224 | ) | ||||||||||||||||||||||||||||
Amortization
of deferred equity compensation
|
174,353 | 174,353 | ||||||||||||||||||||||||||||||
Settlement
of stock purchase agreement
|
(28,750 | ) | (287 | ) | 287 | |||||||||||||||||||||||||||
Net
Loss
|
(4,837,381 | ) | (4,837,381 | ) | $ | (4,837,381 | ) | |||||||||||||||||||||||||
Net
Translation Adjustment
|
9,390 | 9,390 | 9,390 | |||||||||||||||||||||||||||||
Balance:
December 31, 2009
|
12,381,214 | $ | 123,813 | $ | 47,606,078 | $ | - | $ | (1,592,186 | ) | $ | (42,125,232 | ) | $ | 4,012,473 | $ | (4,827,991 | ) |
See
accompanying notes to consolidated financial
statements
-3-
ZBB
Energy Corporation
Consolidated
Statements of Cash Flows
Six months ended December 31,
|
||||||||
2009
|
2008
|
|||||||
(unaudited)
|
(unaudited)
|
|||||||
Cash
flows from operating activities
|
||||||||
Net
loss
|
$ | (4,837,381 | ) | $ | (2,626,790 | ) | ||
Adjustments
to reconcile net loss to net cash (used) in operating
activities:
|
||||||||
Depreciation
|
249,648 | 134,866 | ||||||
Change
in inventory allowance
|
29,699 | 126,732 | ||||||
Equipment
costs reclassified to expenses
|
- | 210,855 | ||||||
Impairment
and other equipment charges
|
780,231 | - | ||||||
Payments
applied to note receivable for consulting fees
|
- | 100,000 | ||||||
Stock
based compensation
|
174,353 | 108,942 | ||||||
(Increase)
decrease in operating assets:
|
||||||||
Accounts
receivable
|
459,555 | (100,393 | ) | |||||
Inventories
|
609,383 | (240,333 | ) | |||||
Prepaids
and other current assets
|
23,541 | 16,879 | ||||||
Other
receivables-interest
|
19,746 | 5,070 | ||||||
Increase
(decrease) in operating liabilities:
|
||||||||
Accounts
payable
|
(65,604 | ) | 195,975 | |||||
Accrued
compensation and benefits
|
370,376 | (67,144 | ) | |||||
Accrued
expenses
|
336,645 | - | ||||||
Deferred
revenues
|
(749,022 | ) | (350,850 | ) | ||||
Net
cash (used) in operating activities
|
(2,598,830 | ) | (2,486,191 | ) | ||||
Cash
flows from investing activities
|
||||||||
Capital
expenditures
|
(131,091 | ) | (580,217 | ) | ||||
Bank
certificate of deposit
|
1,000,000 | (1,000,000 | ) | |||||
Net
cash provided (used) in investing activities
|
868,909 | (1,580,217 | ) | |||||
Cash
flows from financing activities
|
||||||||
Proceeds
from bank loan
|
156,000 | 1,070,000 | ||||||
Repayments
of bank loans
|
(229,516 | ) | (104,488 | ) | ||||
Proceeds
from public offering - net of underwriter fees
|
2,042,500 | - | ||||||
Additional
public offering costs
|
(142,224 | ) | - | |||||
Net
cash provided by financing activities
|
1,826,760 | 965,512 | ||||||
Effect
of exchange rate changes on cash and cash equivalents
|
10,691 | (238,265 | ) | |||||
Net
increase (decrease) in cash and cash equivalents
|
107,530 | (3,339,160 | ) | |||||
Cash
and cash equivalents - beginning of period
|
2,970,009 | 8,451,320 | ||||||
Cash
and cash equivalents - end of period
|
$ | 3,077,539 | $ | 5,112,160 | ||||
Cash
paid for interest
|
$ | 62,894 | $ | 60,098 | ||||
Supplemental
schedule of non-cash investing and financing activities:
|
||||||||
Investment
in joint venture offset by unfulfilled deferred revenue
|
- | 160,000 | ||||||
Equipment
costs reclassified to expenses
|
- | 210,855 | ||||||
Impairment
and other equipment charges
|
780,231 | - | ||||||
Stock
based compensation
|
174,353 | 108,942 |
See
accompanying notes to consolidated financial statements.
-4-
ZBB
ENERGY CORPORATION
Notes
to Unaudited Consolidated Financial Statements
December
31, 2009
NOTE
1 - Basis of Presentation
The
accompanying unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
statements and with the instructions to Form 10-Q. Accordingly, they do not
include all of the information and disclosures required for annual financial
statements. These financial statements should be read in conjunction with the
financial statements and related footnotes for the year ended June 30,
2009.
In
the opinion of the ZBB Energy Corporation (“ZBB” or the “Company”) management,
all adjustments (consisting of normal recurring accruals) necessary to make the
Company’s financial position as of December 31, 2009 and the results of
operations and statements of cash flows for the periods shown not misleading,
have been included. Operating results for the six months ended December 31, 2009
are not necessarily indicative of the results that may be expected for the
year-ended June 30, 2010.
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated upon consolidation.
NOTE
2 - Nature of Organization
The
Company designs, develops, manufactures and distributes energy storage systems
under the product names, ZESS 50 and ZESS 500. The Company also develops and
distributes proprietary system integration power electronics under the product
name ZESS POWR PECC. The Company was incorporated under the laws of
Wisconsin in 1998.
The
Company develops, manufactures and markets energy storage systems with electric
utility and renewable energy applications as its initial market. This scalable,
mobile system is ideally suited for a number of market applications
including:
—
Storage of renewable wind and solar energy production in both grid connected and
grid independent environments.
—
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.
—Power
quality to alleviate downtime caused by voltage sags, voltage swells, frequency
fluctuations, and combined with uninterruptible power supply (UPS) to eliminate
power outages.
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
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Foreign
Currency
The
Company uses the United States dollar as its reporting currency, while the
Australian dollar is the functional currency of one of its operating
units. Assets and liabilities of the Company’s international
operations 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
U.S. 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 and debt 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.
-5-
Income
Tax
The
Company records deferred taxes in accordance with FASB Accounting Standard
Codification (“ASC”) topic 740, “Accounting for Income Taxes.” This
ASC requires recognition of deferred tax assets and liabilities for temporary
differences between the tax basis of assets and liabilities and the amounts at
which they are carried in the financial statements, based upon the enacted tax
rates in effect for the year in which the differences are expected to reverse.
The Company establishes a valuation allowance when necessary to reduce deferred
tax assets to the amount expected to be realized. There were no deferred tax
assets recorded as of December 31, 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
|
3 –
7 years
|
Office
Equipment
|
3 -
7 years
|
Building
and improvements
|
7 -
40 years
|
Impairment
of Long-Lived Assets
In
accordance with FASB ASC topic 360, "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, 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.
During
the six month period ending December 31, 2009, manufacturing equipment
previously used in production and development activities were identified as
impaired or had reached the end of their respective useful lives due to changing
product and manufacturing technologies. Upon write-down the
manufacturing equipment and accumulated depreciation accounts were adjusted
accordingly and $780,231 in charges to operations were reported as impairment
and other equipment charges.
Goodwill
Goodwill
represents the cost of acquisition of a group of assets in excess of the net
fair value of the identifiable assets.
Following
initial recognition, goodwill is measured at cost less any accumulated
impairment losses. Goodwill is not amortized but reviewed for impairment
annually or more frequently if events or changes in circumstances indicate that
its carrying value may be impaired.
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.
-6-
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.
|
Revenue
Recognition
Revenues
are recognized when persuasive evidence of a contractual arrangement exits,
delivery has occurred or services have been rendered, the seller’s price to
buyer is fixed and determinable, and collectability is reasonably assured. The
portion of revenue related to installation and final acceptance, is deferred
until such installation and final customer acceptance are completed. 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.
For sales
arrangements containing multiple elements (products or services), revenue
relating to undelivered elements is deferred at the estimated fair value until
delivery of the deferred elements. To be considered a separate element, the
product or service in question must represent a separate unit under Staff
Accounting Bulletin 104, and fulfill the following criteria: the delivered
item(s) has value to the customer on a standalone basis; there is objective and
reliable evidence of the fair value of the undelivered item(s); and, if the
arrangement includes a general right of return relative to the delivered
item(s), delivery or performance of the undelivered item(s) is considered
probable and substantially in our control. If the arrangement does not meet all
criteria above, the entire amount of the transaction is deferred until all
elements are delivered. Revenue from time and materials based service
arrangements is recognized as the service is performed.
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.
These
policies as discussed herein are not intended to be a comprehensive list of
policies to encompass the accounting for all customer contracts. Occasionally,
contracts terms may not be specifically discussed or anticipated as dictated by
U.S. GAAP and may require managements’ judgment in selecting an available
revenue recognition alternative that would not produce a materially different
result.
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 future development costs which include the production and delivery of one
500kWh energy storage system. During the six months ended December
31, 2009 and 2008, $304,572 and $513,885 respectively, was recognized as revenue
based on progress toward completion of the nine performance milestones specified
in the contract.
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 reported the revenues
of approximately $0.6 million and costs associated with this shipment in the
consolidated financial statements for the fiscal quarter ended September 30,
2009.
Total
revenues of $1,367,368 and $513,885 were recognized for the six months ended
December 31, 2009 and 2008, respectively.
-7-
Warranty
and Contract Reserves
The
Company typically warrants its products for twelve months after installation or
eighteen months after date of shipment, whichever first occurs. Warranty
reserves are evaluated quarterly to determine a reasonable estimate for the
replacement of potentially defective materials of all energy storage systems
that have been shipped to customers.
While the
Company actively engages in monitoring and improving its evolving battery and
production technologies, there is only a limited product history and relatively
short time frame available to test and evaluate the rate of product
failure. Should actual product failure rates differ from the
Company’s estimates, revisions are made to the estimated rate of product
failures and resulting changes to the warranty reserve. In addition,
from time to time, specific warranty accruals may be made if unforeseen
technical problems arise.
During
the quarter ended December 31, 2009, battery stack manufacturing issues were
discovered as result of an internal test failure. As a result, the
Company has implemented several manufacturing process changes to eliminate the
potential for future failures and will adjust its warranty reserves
accordingly. We will adjust our warranty rates in future periods as
these processes are implemented and tested.
Management
also reviews the status of all active contracts to determine if there are any
conditions due to warranty, costs to complete, and other commitments to
completing the contract. If indications are an adverse net financial
outcome is likely, a provision is made for the total loss
anticipated.
As of
December 31, 2009, included in the Company’s accrued expenses were approximately
$0.25 million in warranty reserves and $0.1 million in provision for anticipated
contract losses.
Net
Loss per Share
The
Company follows the FASB ASC topic 260 “Earnings per Share”
provisions which require 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. Anti-dilutive effects on net
income (loss) per share are excluded (as of December 31, 2009 there were
2,609,050 underlying options and warrants that are excluded).
Stock-Based
Compensation
The
Company measures all “Share-Based Payments", including grants of stock options
and restricted shares, to be recognized in the income statement based on their
fair values on the grant date, consistent with FASB ASC topic 718 “Stock
Compensation” guidelines.
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.
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. See Note 13
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 cost are
allowable costs 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.”
Costs
related to the AEST project were presented in the prior fiscal year‘s statement
of operations as “cost of engineering and development contracts” and
have subsequently been reclassified and presented as “advanced engineering and
development” costs to conform with the current fiscal year
presentation. The Company determined the AEST project agreement
did not contain adequate specificity to reasonably allocate revenues and related
expenditures between product sales, engineering and development revenues, and
general engineering and development costs to allow for separate classification
in the statement of operations.
Intellectual
property, including internally generated patents and know-how is carried at no
value.
-8-
Comprehensive
income (loss)
The
Company reports its comprehensive income (loss) in accordance with the FASB
ASC topic 220
“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 December 31, 2009 and 2008 and is presented in
the Consolidated Statements of Changes in Shareholders’ Equity.
Fair
Value Measurements
The
Company considers the carrying values reported in the consolidated balance
sheets for current assets and current liabilities qualifying as financial
instruments approximate their fair values due to the short-term maturity of such
instruments. It is the management’s opinion that the Company is not
exposed to significant interest, price, foreign currency or credit risks arising
from these financial instruments.
Recent
Accounting Pronouncements
On July
1, 2009, the Company adopted the FASB Accounting Standards Codification ("ASC").
FASB ASC topic 105, “Generally Accepted Accounting Principles”, does not
alter current U.S. GAAP but rather integrated existing accounting standards with
other authoritative guidance. The ASC provides a single source of
authoritative U.S. GAAP for nongovernmental entities and supersedes all other
previously issued non-SEC accounting and reporting guidance. The adoption
of the ASC did not change our accounting principles. All prior references
to U.S. GAAP have been revised to conform to the ASC. Updates to the ASC are
issued in the form of Accounting Standards
Updates ("ASU").
In
October 2009, the FASB issued ASU No. 2009-13 “Revenue Recognition (Topic 605):
Multiple Deliverable Revenue Arrangements - A Consensus of the FASB Emerging
Issues Task Force.” This update provides application guidance on whether
multiple deliverables exist, how the deliverables should be separated and how
the consideration should be allocated to one or more units of accounting. This
update establishes a selling price hierarchy for determining the selling price
of a deliverable. The selling price used for each deliverable will be based on
vendor-specific objective evidence, if available, third-party evidence if
vendor-specific objective evidence is not available, or estimated selling price
if neither vendor-specific or third-party evidence is available. The Company
will be required to apply this guidance prospectively for revenue arrangements
entered into or materially modified after January 1, 2011; however, earlier
application is permitted. The management is in the process of evaluating the
impact of adopting this ASU on the Company’s consolidated financial
statements.
In April
2009, new guidance, FASB ASC topic 825 “Financial Instruments” was issued which
amends the requirements for disclosures about fair value of financial
instruments in interim financial statements as well as in annual financial
statements. This guidance became effective for the Company on July 1, 2009 and
did not have a material impact on the Company’s consolidated financial
statements.
NOTE
4 - INVENTORIES
Inventory
balances are comprised of the following amounts as of December 31,
2009:
Raw
materials
|
$ | 839,311 | ||
Work
in progress
|
220,316 | |||
Finished
goods
|
63,403 | |||
Inventory
valuation allowance
|
(175,000 | ) | ||
TOTAL
|
$ | 948,030 |
NOTE
5– PROPERTY, PLANT & EQUIPMENT
Property,
plant & equipment balances are comprised of the following amounts as of
December 31, 2009:
Office
equipment
|
$ | 121,618 | ||
Manufacturing
equipment
|
3,924,937 | |||
Building
|
1,996,134 | |||
Land
|
217,000 | |||
6,259,689 | ||||
Less,
accumulated depreciation
|
(2,580,295 | ) | ||
Net
Property, Plant & Equipment
|
$ | 3,679,394 |
-9-
During
the six month period ending December 31, 2009, manufacturing equipment
previously used in production and development activities were identified as
impaired or had reached the end of their respective useful lives due to changing
product and manufacturing technologies. Upon
write-down the manufacturing equipment and accumulated depreciation
accounts were adjusted accordingly and $780,231 in charges to operations were
reported as impairment and other equipment charges.
NOTE
6 – 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, endorsed by a note receivable. Both parties
also entered into a five year consulting agreement. 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 terms 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. The cancellation agreement also required 41 Broadway
Associates, LLC to forfeit 28,750 of the Company’s common shares, reducing the
Company’s common shares issued and outstanding during the current
period.
NOTE
7 – COMMON STOCK AND WARRANT OFFERING
On April
30, 2009 the Company filed an S-3 Registration Statement with the SEC, which was
declared effective by the SEC on May 13, 2009. The Company 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, the Company completed the closing of a public offering of
common stock and warrants. The Company 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. Proceeds are to be used for capital expenditures
and general corporate purposes.
NOTE
8 – BANK LOANS AND NOTES PAYABLE
The
Company's debt consisted of the following as of December 31,
2009:
|
||||
Bank
loans-current
|
$ | 463,362 | ||
Bank
loans-long term
|
2,279,595 | |||
Total
|
$ | 2,742,957 |
On July
1, 2009 the Company entered into a loan agreement to finance new production
equipment. The $156,000 bank note is secured by specific equipment,
requiring monthly payments of $4,736 of principal and interest; rate equal to
5.99% per annum; maturity date of December 1, 2013. Principal balance is
$131,971 at December 31, 2009.
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 July 1,
2012. Principal balance is $842,517 at December 31, 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 $825,351 at December 31,
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 $834,792 at December 31, 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 $108,326 at December 31, 2009.
Maximum
aggregate annual principal payments for the 12 month periods subsequent to
December 31, 2009 are as follows:
2010
|
$ | 463,362 | ||
2011
|
370,961 | |||
2012
|
363,667 | |||
2013
|
246,258 | |||
2014
|
98,401 | |||
2015
and thereafter:
|
1,200,308 | |||
$ | 2,742,957 |
-10-
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. No options were exercised and 16,793
options expired during the year ended June 30, 2009. There was no SOP option
activity during the six month period ended December 31, 2009 At December 31,
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 2009 or during the six month period ended
December 31, 2009. At December 31, 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, 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. 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.
During
the six month period ended December 31, 2009 options to purchase 616,500 shares
were granted to directors and employees exercisable at prices from
$1.02 to $1.39 per share based on various service based vesting terms from
November 2009 through December 2012 and exercisable at various dates through
December 2017, and 239,573 options were retired or
forfeited. Options to purchase an additional 330,622 shares are
available to be issued under the 2007 plan.
In
aggregate for all plans, at December 31, 2009, the Company has a total of
1,884,894 options outstanding and 421,822 options available for future grant
under the SOP, 2005 and the 2007 Plans.
The
following table summarizes information relating to the stock options outstanding
at December 31, 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
|
|||||||||||||||
$1.02
to $1.69
|
871,987 | 6.6 | $ | 1.35 | 270,487 | $ | 1.27 | |||||||||||||
$3.59
to $3.82
|
925,000 | 3.6 | $ | 3.65 | 871,666 | $ | 3.66 | |||||||||||||
$3.83
and higher
|
87,907 | 0.2 | $ | 6.97 | 87,907 | $ | 6.97 | |||||||||||||
Balance
at December 31, 2009
|
1,884,894 | 4.8 | $ | 2.74 | 1,230,060 | $ | 3.37 |
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 six month period ended December 31, 2009, $17,088
(net of $19,500 in forfeitures) was recognized as expense, with a balance of
$6,098 to be recognized as additional expense during the year ended June 30,
2010.
-11-
NOTE
10 - NON RELATED PARTY WARRANTS
At
December 31, 2009 there are warrants to purchase 358,333 shares issued and
outstanding to various purchasers of Company shares in connection with certain
capital raising activities in August 2009, exercisable at $1.33 per share and
which expire in August 2015.
At
December 31, 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
December 31, 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
December 31, 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.
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, 2008
|
365,823 | $ | 4.41 | |||||
Warrants
granted
|
- | - | ||||||
Warrants
expired
|
- | - | ||||||
Warants
exercised
|
- | - | ||||||
Balance
at June 30, 2009
|
365,823 | $ | 4.41 | |||||
Warrants
granted
|
358,333 | 1.33 | ||||||
Warrants
expired
|
- | - | ||||||
Warants
exercised
|
- | - | ||||||
Balance
at December 31, 2009
|
724,156 | $ | 2.88 |
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 $0.8 million in contributions due by the Company to the project in
cash and in-kind contributions as of December 31, 2009.
The
Company leases its Australian research and development facility from a
non-related Australian company. The current rental is $64,415 per
annum (A$71,572) and is subject to an annual CPI adjustment.
Rent
expense was $31,987 and $27,292 for the six months ended December 31, 2009 and
2008.
The
future payments required under the terms of the lease are as
follows:
For the twelve months ended December
31,
|
||||
2010
|
$ | 64,415 | ||
2011
|
$ | 59,047 | ||
TOTAL:
|
$ | 123,462 |
-12-
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.
On
October 31, 2009, the Company entered into a Resignation and Indemnification
Agreement (the “Indemnification Agreement”) with Robert J. Parry, its outgoing
CEO. As of December 31, 2009 the Company has accrued the entire
$390,000 of severance expense to be paid to Mr. Parry, in connection with his
retirement.
NOTE
12 - RETIREMENT PLANS
All
Australian based employees are entitled to varying degrees of benefits on
retirement, disability, or death. Retirement plan contributions,
mandated at 9% of the employee’s gross compensation, are paid by the Company on
behalf of all Australian based employees.
For U.S.
employees, the Company has a 401(k) plan. The Company contributes a
maximum of a 4% in matching funds, based on the level of contributions made by
the active participants, all of which are 100% vested immediately.
Expenses
under these plans were $43,804 and $38,550 for the six months ended
December 31, 2009 and 2008.
NOTE 13 —
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
six months ended December 31, 2009 and 2008, the Company’s results of operations
reflect compensation expense for stock options granted and restricted shares
vested under its equity incentive plans. The amount recognized in the financial
statements related to stock-based compensation was $174,353 and $108,942, based
on the grant date fair value of all options vested during the six months ended
December 31, 2009 and 2008 respectively.
During
the six month period ended December 31, 2009 options to purchase 616,500 shares
were granted to directors and employees exercisable at prices from
$1.02 to $1.39 per share based on various service based vesting terms from
November 2009 through December 2012 and exercisable at various dates through
December 2017.
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
six months ended December 31, 2009 using the Black-Scholes option-pricing
model:
Expected
life of option (years)
|
2.5-4.75 | |||
Risk-free
interest rate
|
1.2 – 1.4 | % | ||
Assumed
volatility
|
62 - 70 | % | ||
Expected
dividend rate
|
0 | % | ||
Expected
forfeiture rate
|
0 | % |
The
weighted-average fair value of the 616,500 options granted during the six months
ended December 31, 2009 was approximately $.52 per option using the Black
Scholes option-pricing method as of the date of the grant.
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.
-13-
As of
December 31, 2009, there remains a total of $264,386 in unrecognized
compensation cost related to unvested stock options with various service based
vending dates through 2012.
In
addition, future costs of $6,098 could be recognized during balance of the year
ended June 30, 2010 related to the restricted shares issued during the 2009
fiscal year with vesting dates through January 2010.
NOTE 14 —
SUBSEQUENT EVENTS
Subsequent
events have been evaluated through February 17, 2010, the date these financial
statements were issued.
On
January 7, 2010, the Company announced the appointment of Eric C. Apfelbach as
President and Chief Executive Officer and member of the Board of
Directors. In connection with his appointment, the Compensation
Committee of the Company’s Board of Directors has awarded two inducement option
grants to Mr. Apfelbach. The first grant is an option to purchase
400,000 ZBB shares vesting over three years of service. The second
grant is an option to purchase 100,000 ZBB shares which vests in two equal
installments based on the achievement of certain performance targets as of June
30, 2010 and December 31, 2010.
Effective
February 3, 2010, Mr. Scott W. Scampini, the Company’s Executive Vice President
and Chief Financial Officer, was appointed to the additional position of
Executive Vice President – Operations and Chief Financial Officer. In
connection with his appointment, Mr. Scampini was granted an option effective on
that date to purchase 100,000 shares of Company common stock under the 2007 Plan
at an exercise price of $1.28 per share, the closing price of the Company’s
common stock on the NYSE Amex on February 3, 2010. The option will
vest as to one-third of the number of shares covered by the option on each of
the first three anniversaries of the date of grant and expire on the fifth
anniversary of the date on which such portion vests.
On
January 8, 2010 it was announced that the Company was awarded $14.7 million in
federal tax credits through the Federal Government’s stimulus plan to be used to
install $49.55 million worth of equipment in a new facility to be built in
southeastern Wisconsin. The Company’s application for an Advanced Energy
Manufacturing tax credit under section 48C of the Internal Revenue Code has been
authorized under the American Reinvestment and Recovery Act
(ARRA).
-14-
ZBB
ENERGY CORPORATION
Item 2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Introduction
The
following information should be read in conjunction with the financial
statements and notes thereto in Part I, Item 1 of
this Quarterly Report and with Management’s Discussion and Analysis of Financial
Condition and Results of Operations
contained in our Annual Report on Form 10-K/A for the fiscal year ended June 30,
2009 as filed on February 12, 2010.
Forward-Looking
and Cautionary Statements
Information
provided by us or statements made by our employees may, from time to time,
contain “forward-looking” information that involves risks and uncertainties. In
particular, statements contained in this Quarterly Report that are not
historical facts constitute forward-looking statements and are made under the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve substantial risks and uncertainties. You can
identify these statements by forward-looking words such as “may”, “expect”,
“anticipate”, “believe”, “estimate”, “continue”, and similar words. You should
read and use our forward-looking statements carefully because they: (1) discuss
our future expectations; (2) contain projections of our future operating results
or financial condition; or (3) state other “forward-looking” information.
Various factors described below, as well as any other instances of cautionary
language in this Quarterly Report, refer to or provide examples of risks,
uncertainties and events that may cause our actual results to be materially
different than the expectations described in our forward-looking statements. You
should be aware that the occurrence of any of the events or factors described
below and elsewhere in this Quarterly Report could materially and adversely
affect our business. All forward-looking statements included in this Quarterly
Report are based on information available to us on the date hereof, and we
assume no obligation to update any such forward-looking statements.
In
addition to the risks and uncertainties faced generally by participants in the
renewable energy industry, we face the following risks and
uncertainties:
|
·
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We have incurred losses and
anticipate incurring continuing losses for the immediate
future.
|
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·
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Undetected and unanticipated
defects in our energy storage systems could increase our costs and harm
our reputation.
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·
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We will be required to
regularly devote capital to updating, refining and expanding our energy
storage systems technology and there is no assurance that we will have the
resources to make improvements to remain competitive with new
technologies.
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·
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The inability to maintain
adequate levels of liquidity may have an adverse affect on the working
capital of the Company.
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·
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Shortages or delay of supplies
of component parts may adversely affect our operating results until
alternate sources can be
developed.
|
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·
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If our common stock is
de-listed from the NYSE Amex, (formerly the American Stock Exchange) the
common stock will become less
liquid.
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·
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The market for our products is
currently evolving and may take longer to develop than we
anticipate.
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·
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Our products must compete
against both existing and newly developed
technologies.
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We face competition from
larger, more well-established companies and
technologies.
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We face risks associated with
our plans to market, distribute and service our products
internationally.
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Sales of our common stock by a
major stockholder may have an adverse effect on the market price of our
common stock.
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-15-
Overview
Company
Background
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.
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”.
We
design, develop, manufacture and distribute energy storage systems under the
trademarked product names, ZESS 50. We also develop and distribute proprietary
system integration power electronics trademarked under the name ZESS POWR PECC
(power and energy control center). Our ZESS energy storage devices
are built using a proprietary process based upon our zinc-bromide rechargeable
electrical energy storage technology. The modular nature of our zinc-bromide
storage device and the ZESS POWR PECC allow systems to be sized to fit
applications up to about 500 kWh in storage capacity. Our systems combine these
storage devices with ZESS POWR or other power electronics, computer software
that interface with a customer’s power source(s) and distribution system to
store electricity during off peak times and deliver the stored power as
desired.
Our
production capacity has been increased through the delivery of new production
equipment received in the last fiscal year. This new equipment, along
with our automation plans would enable a significant increase in production
capability with the addition of manufacturing personnel. Since our
IPO we have continued implementation of our business plan including the
repayment of certain indebtedness, initiating manufacturing capacity increases,
ISO certification, UL listings, and commenced commercial marketing of our
products into target markets.
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.
Our
earlier projects are all continuing. Our initiatives in California with the
California Energy Commission on the two 500 kWh systems are moving forward.
Currently the CEC are identifying new upgrades and site locations for both
systems to complete the next phase of testing. 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 first African installation managed
through our relationship with Likusasa and their capabilities to handle
installation, maintenance and monitoring throughout regional Africa. Our sample
unit installed at Future House USA in Beijing continues to give us a promotional
presence in China. Units are currently in the process of being
manufactured, shipped and/or installed in South Africa, Ireland, British
Columbia(Canada), California, Oregon, and Pennsylvania.
On April
30, 2009 we filed an S-3 Registration Statement with the SEC, which 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, the Company completed the
closing of a 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.
-16-
Presentation
of 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 restated its previously issued
consolidated financial statements for the fiscal year ended June 30, 2009
included in the Company's fiscal 2009 Form 10-K, and the consolidated financial
statements for the fiscal quarter ended September 30, 2009 included in the
Company's first quarter Form 10-Q.
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.
During
the six month period ending December 31, 2009, manufacturing equipment
previously used in production and development activities were identified as
impaired or had reached the end of their respective useful lives due to changing
product and manufacturing technologies. Upon write-down the manufacturing
equipment and accumulated depreciation accounts were adjusted accordingly and
$780,231 in charges to operations were reported as impairment and other
equipment charges.
Results
of Operations
Three
months ended December 31, 2009 and 2008:
Revenue
and Other income:
Our
revenues for the three months ended December 31, 2009 and 2008 were $555,455 and
$222,188, respectively, an increase of $333,267. This was result of an
increase in revenues of $271,060 from product sales and revenues as compared to
the three month period ending December 31, 2008 and a
$62,207 increase from engineering and development revenues,
including the Australian AEST project and the Wisconsin based WEIF
project. Revenues include estimates based on the
percentage-of-completion method of accounting for long-term contracts and units
completed and shipped during the period.
Other
income for the three months ended December 31, 2009 represents interest income
of $20,593 compared to $41,389 in the three months ended December 31, 2008, a
$20,796 decrease. Interest income is expected to continue
to decrease in future periods as proceeds from the August 2009 equity
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 three months ended December 31, 2009 and 2008 were
$3,906,336 and $1,565,223, respectively. The increase of $2,341,113 in the three
months ended December 31, 2009 was primarily due to increased cost of
product sales of $253,185, increases in selling, general, and administrative
costs of $852,666, advanced engineering and development costs of $389,565,
impairments and other equipment charges of $780,231 and $65,466 in depreciation
expense.
Other
expenses for the three months ended December 31, 2009 and 2008 were $30,862 and
$31,135, respectively. The decrease of $273 in other expenses for three month
period ending December 31, 2009 was primarily due to changes in interest
expenses as compared to the period ended December 31, 2008.
Cost of product
sales. Our cost of product sales for three months ended
December 31, 2009 and 2008 were $253,185 and $-0-, respectively. The
increase in expense in the three month period ended December 31, 2009 was
due an increase in energy storage system shipments in the current
period. There was no cost of products recognized in the three month
period ended December 31, 2008. The cost of product sales remains relatively
high in relation to sales due to the limited levels of commercial activity,
resulting in less than optimal economies of scale and limited ability to obtain
favorable terms from vendors.
-17-
Advanced engineering and
development. Our engineering and development costs for the three months
ended December 31, 2009 and 2008 were $1,013,086 and $623,521,
respectively. The increase during the three month period ending
December 31, 2009 of $389,565 from the comparable 2008 period was primary due
increased costs related to the further development of our battery and modular
power electronics in the newly developed POWR PECC TM
complete energy storage systems, including contracted non-recurring engineering
and testing costs, baseline testing and focused efforts to improve the
reliability, efficiency, and commercial production of the battery
stack.
Materials,
supplies, and outside engineering and consulting costs related to the further
development of the battery technology and production processes, increased by
approximately $370,000, with other net increases of $20,000 making up the
balance of the $390,000 increase in costs.
Selling, General and
Administrative. Our selling, general and administrative
expense for the three months ended December 31, 2009 and 2008 was
$1,734,403 and $881,737, respectively. The current period included
significant corporate charges related to the resignation of the previous CEO,
related tax, legal, and interim CEO costs, financial and tax
consultants, fund raising activities and two additional paid directorship
positions compared to the three month period ending December 31,
2008.
Included in this $852,666 increase was
approximately $390,000 in severance pay, $170,000 increase in legal fees,
$123,000 increase in fund raising activities, $121,000 increase in stock options
vested, and $49,000 in other net increases in expense as compared to the three
month period ending December 31, 2008.
Impairment and other
equipment charges. During the three month period ending December 31,
2009 our audit committee determined, based on a impairment evaluation conducted
by management and an onsite observation of inventory and fixed assets conducted
by the Company’s independent auditors, that a fixed asset held by our Australian
subsidiary was impaired and would require the Company to recognize an
impairment loss of approximately $425,000. Long-term manufacturing assets at the
Wisconsin operation were also identified to have reached the end of their useful
lives. The net charge to operations, after adjusting the carrying values of
these assets, was $780,231 during this period.
Net
Loss. Our net loss for the three months ended December 31,
2009 and 2008 was $3,361,150 and $1,332,781, respectively, a $2,028,369
increase in net loss as compared to the three months ended December 31,
2008.
Results
of Operations
Six months
ended December 31, 2009 and 2008:
Revenue
and Other income:
Our
revenues for the six months ended December 31, 2009 and 2008 were
$1,367,368 and $513,885, respectively, an increase of $853,483. This was
result of an increase in revenues of $937,786 from product sales and revenues as
compared to the six month period ending December 31, 2008 and an $84,303
decrease from engineering and development revenues. Revenues include
estimates based on the percentage-of-completion method of accounting for
long-term contracts and units completed and shipped during the
period.
The
increase in product sales was substantially related to the June 2009 ZESS 500
system shipment, which under SEC revenue recognition guidelines was determined
to be a fiscal 2010 shipment based on the timing related to the
transfer of title and risk.
Other
income for the six months ended December 31, 2009 represents interest income of
$47,089 compared to $95,341 in the six months ended December 31, 2008, a $48,252
decrease. Interest income is expected to continue to
decrease in future periods as proceeds from the equity offerings 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 six months ended December 31, 2009 and 2008 were
$6,169,184 and $3,162,350, respectively. The increase of $3,006,834 in the six
months ended December 31, 2009 was primarily due to increased cost of
product sales of $899,287, increases in selling, general, and administrative
costs of $940,952, advanced engineering and development costs of $271,582,
impairments and other equipment charges of $780,231 and $114,782 in depreciation
expense.
Other
expenses for the six months ended December 31, 2009 and 2008 were $82,654 and
$73,666, respectively, an increase of $8,988 compared to the six month period
ending December 31, 2008.
-18-
Cost of product
sales. Our cost of product sales for six months ended
December 31, 2009 and 2008 were $899,287 and $-0-, respectively. The
increase in expense in the six month period ended December 31, 2009 was due
an increase in energy storage system shipments in the current
period. There were no product sales recognized during the six month
period ended December 31, 2008. The cost of product sales remains relatively
high in relation to sales due to the limited levels of commercial activity,
resulting in less than optimal economies of scale and limited ability to obtain
favorable terms from vendors.
Advanced engineering and
development. Our engineering and development costs for the six months
ended December 31, 2009 and 2008 were $1,632,248 and $1,360,666,
respectively. The increase during the six month period ending
December 31, 2009 of $271,582 from the comparable 2008 period was primary due
increased costs related to the further development of our battery and modular
power electronics in the newly developed POWR PECC TM
complete energy storage systems, including contracted non-recurring engineering
and testing costs, baseline testing and focused efforts to improve the
reliability, efficiency, and commercial production of the battery
stack.
Selling, General and
Administrative. Our selling, general and administrative
expense for the six months ended December 31, 2009 and 2008 was $2,607,770
and $1,666,818, respectively. The current period included significant
corporate charges related to the resignation of the previous CEO, related tax,
legal, and interim CEO costs, financial and tax consultants,, fund
raising activities and two additional paid directorship positions compared to
the six month period ending December 31, 2008.
Included in the $940,952 increase was
approximately $390,000 in severance pay, $163,000 increase in legal fees,
$123,000 increase in fund raising activities, $103,000 increase in stock options
vested, $67,000 increase in directors fees, $61,000 increase in advertising and
promotion, and $34,000 in other net increases in expense as compared to the six
month period ending December 31, 2008.
Impairment and other
equipment charges. During the six month period ending December 31,
2009 our audit committee determined, based on a impairment evaluation conducted
by management and an onsite observation of inventory and property, plant, and
equipment conducted by the Company’s independent auditors, equipment
held by our Australian subsidiary was impaired and would require the
Company to recognize an impairment loss of approximately $425,000. Long-term
manufacturing assets at the Wisconsin operation were also identified to have
reached the end of their useful lives. The net charge to operations, after
adjusting the carrying values of these assets, was $780,231 during this
period.
Net
Loss. Our net loss for the six months ended December 31, 2009
and 2008 was $4,837,381 and $2,626,790, respectively, a $2,210,591 increase
in net loss as compared to the six months ended December 31,
2008.
Liquidity and Capital
Resources
Since our
inception, our research, advanced engineering and development, and operations
were primarily financed through debt and equity financings, and government
grants. Total paid in capital as of December 31, 2009 was
$47,729,891. We had a cumulative deficit of $42,125,232 as
of December 31, 2009 compared to a cumulative deficit of
$37,257,851 as of June 30, 2009. At December 31,
2009 we had a working capital surplus of $1,809,595 compared to a June
30, 2009 working capital surplus of $3,784,491. Our shareholders’
equity as of December 31, 2009 and June 30, 2009 was $4,012,473 and
$6,765,835, respectively.
We
believe the Company will need to raise additional debt and equity capital to
support our current business and growth plan. The Company’s ability to
raise equity and debt capital can be dependent on financial markets remaining
healthy and open to continued institutional investment. In order to
actively manage financing risk, the board of directors has worked with
management to implement cost containment measures that match expenses to the
current business activity level and reduce net cash
consumption. Actions taken by the board of directors and management
in the previous fiscal year and continuing into the current quarter
include: 1.) execute an overall reduction in controllable expenses to preserve
cash resources; 2.) actively pursue additional sources of capital to fund
working capital and operating needs; 3.) pursue government grant and
federal stimulus package opportunities; 4.) utilize remaining
availability under the “shelf” S-3 Registration Statement for additional equity
capital; and 5.) leverage the $1.3 million Wisconsin Clean Energy Business Loan
that was awarded in December, 2009 through the American Recovery and
Reinvestment Act.
In
conjunction with our strategic partners 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.
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.
-19-
On April
30, 2009 we filed an S-3 Registration Statement with the SEC, which 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. This “Shelf
Registration” allowed the company to raise up to $10 million in equity
capital. On August 18, 2009, the Company completed the closing
of a 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.
In
connection with Mr. Parry’s retirement as director and Chief Executive Officer
of the Company, we have accrued the entire $390,000 of severance expense to be
paid to Mr. Parry. Under his employment agreement, his compensation will
continue to be paid monthly by the Company for up to eighteen
months. Certain payments could be accelerated to pay for any U.S.
based tax liabilities that are incurred by the Company. There
were also significant legal and compliance costs incurred during the second
quarter related to the retirement of Mr. Parry.
Operating
Activities
For the
six months ended December 31, 2009, net cash used in operations was
$2,598,830. Cash used in operations resulted from a net loss of $4,837,381,
reduced by $1,233,931 in non-cash adjustments and $1,004,620 in net changes to
working capital. These working capital changes increased the cash used in
operations resulting from decreases in deferred revenues of $749,022 and
accounts payable of $65,604. Cash used in operations was reduced by
decreases in accounts receivable of $459,555, decreases to inventory of $609,383
in other receivables of $19,746, and prepaid and other current assets of
$23,541; and increases in accrued compensation of $370,376 and accrued expenses
of $336,645. Non-cash adjustments to operations included $174,353 of
stock based compensation expense, $249,648 of depreciation expense, a $29,699
change in inventory allowance, and loss on disposition of equipment of
$780,231.
For the
six months ended December 31, 2008, net cash used in operations was
$2,486,191. Cash used in operations resulted primarily from a net
loss of $2,626,790. Net working capital changes increased the cash
used in operations by $540,796 resulting from decreases in accrued compensation
and benefits of $67,144, deferred revenues of $350,850; and increases to
inventory of $240,333, and an increase in accounts receivable of
$100,393. Cash used in operations was reduced by an increase in
accounts payable of $195,975; and reductions in other receivables of $5,070, and
in and prepaid and other current assets of $16,879. Other non-cash
adjustments to cash included equipment of $210,855 charged to advanced
engineering and development costs, $100,000 of non-cash consulting fees,
$108,942 of stock options compensation expense, a $126,732 change in
inventory allowance, and $134,866 of depreciation expense.
Investing
Activities
For the six months ended December 31,
2009, net cash provided by investing activities was $868,909, resulting from an
increase of $1,000,000 due to a decrease in bank certificates of deposits with
maturities greater than three months, and reduced by cash used in purchase of
property and equipment of $131,091.
For the
six months ended December 31, 2008, net cash used in investing activities was
$1,580,217. Cash used in investing activities resulted from $580,217
in purchases of property and equipment, and $1,000,000 in net increases in bank
certificates of deposits with maturities greater than three
months.
Financing
Activities
For
the six months ended December 31, 2009, net cash provided by financing
activities was $1,826,760 resulting from $2,042,500 in proceeds
from public offering, net of underwriting fees and $156,000 in
additional financing on manufacturing equipment, less $142,224 in additional
public offering costs and repayments of $229,516 of principal on notes
payable.
For the
six months ended December 31, 2008, net cash used in financing activities was
$965,512 consisting of repayments of $104,488 principal on notes payable, and
$1,070,000 in additional financing on manufacturing equipment.
-20-
Known
Trends, Market Opportunities and Challenges
We
believe that there are specific existing and rapidly emerging market
opportunities for the Company’s energy storage and hybrid power
electronic products.
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.
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. For
example, the deployment of an off grid system consisting of ZESS 50 energy
storage and ZESS POWR PECC hybrid for cell tower application in Africa via ZBB
partner Likusasa, and the deployment of the first large scale wind/storage
facility on a college campus at the Dundalk Institute of Technology in the
Republic of Ireland as well as the deployment of the ZBB Hybrid ZESS POWR PECC
and ZESS 50 energy storage to Oregon State University for the advanced study of
energy storage with Wind power and the scheduled deployment of ZBB Hybrid ZESS
POWR PECC and ZESS 50 for an off-grid application that optimizes the
use of Solar PV, Wind, Hydro, and conventional Diesel Generator as a single
power plant. 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.
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 and/or
integrated with renewable energy sources through the use of the ZBB hybrid power
electronics. 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 and in
many cases the energy storage devices are a necessity for the utilization of
renewable energy.
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.
In
conjunction with our strategic partners 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.
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.
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
$2.7 million for 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.
-21-
A
$230,000 funded project with the Wisconsin Energy Independence Fund for the
development of our own proprietary power conversion systems for both AC to DC
and DC to DC renewable energy applications is nearing completion. 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
manufactured under this grant.
We have
received and executed the order for Oregon State University for a system
consisting of ZBB ZESS 50 energy storage and it’s proprietary Hybrid Power
Electronics (ZESS POWR PECC) for the advanced study of wind power and energy
storage integration.
We have
shipped and installed an order for Envinity, a renewable system integrator, for
the delivery of two ZESS 50 energy storage devices and ZESS POWR PECC
designed to integrate two solar PV arrays, ten wind turbines, a hydro generator,
a conventional generator to provide a single output power plant for an off grid
application.
We have
received an order for ZESS 50 Energy storage device and ZESS POWR PECC from SEI
for the integration of solar PV with energy storage for an on grid dispatchable
power plant.
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 renewable energy, utility and other
markets 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;
• Modular
construction allowing portable applications of varying size, as compared to the
large scale, fixed site emerging alternatives.
• Modular
system configuration for permanently fixed installation with minimal
installation requirements.
• Complete
integrated system offering of products for overall system optimization in
performance and site integration when combining the modularity of the ZESS
energy storage products (ZESS 50) and the modularity aspect of the ZESS POWR
PECC to allow complete integration of ZESS and other energy storage
as well as renewable and traditional energy generators.
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, the board of directors has requested that management
implement increased cost containment measures. Actions taken by the
board of directors and management in the previous fiscal year and continuing
into the current quarter include: 1.) increase in cost saving measures to
preserve cash resources; 2.) actively pursue additional funding to fund working
capital and operating needs; 3.) fund raising and federal stimulus package
opportunities; 4.) utilize remaining availability under the “shelf” S-3
Registration Statement for an additional equity offering raising; and 5.)
leverage the $1.3 million Wisconsin Clean Energy Business Loan that was awarded
in December, 2009 through the American Recovery and Reinvestment
Act.
Off-Balance
Sheet Arrangements
We
have no off-balance sheet arrangements.
Item
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not applicable for smaller reporting
companies.
-22-
Item
4. 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 statements for the fiscal year ended
June 30, 2009 included in the Company's fiscal 2009 Form 10-K, and the
consolidated financial statements for the fiscal quarter ended September 30,
2009 included in the Company's first quarter 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
Our Chief
Executive Officer and Chief Financial Officer have evaluated the effectiveness
of the design and operation of our 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, our Chief Executive Officer and
Chief Financial Officer have concluded that our 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 our internal control
over financial reporting described further 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 December 31, 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.
-23-
PART
II
Item
1. Legal
Proceedings
We
are not a party to, and none of our property is the subject of, any pending
legal proceedings other than routine litigation that is incidental to our
business. To our knowledge, no governmental authority is contemplating
initiating any such proceedings.
Item
1A. Risk Factors
Not applicable for smaller reporting
companies.
Item
2. Unregistered Sales
of Equity Securities and Use of Proceeds
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.
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 $5 million in indebtedness. Approximately $14 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 money market
funds.
Item
3. Defaults Upon
Senior Securities
This Item
is not applicable.
Item
4. Submission of
Matters to a Vote of Security Holders
On
November 16, 2009, at our Annual Meeting of Shareholders (the “Annual Meeting”)
our shareholders voted on proposals to: (1) elect Manfred E. Birnbaum
and Richard A. Abdoo as Class II Directors to serve until the 2012 Annual
Meeting of Shareholders; (2) ratify the appointment of PKF as our independent
auditors for fiscal 2010; and (3) approve the amendment and restatement of the
Company’s by-laws. William A. Mundell and Paul F. Koeppe continued as Class III
directors (term expiring in 2010) and Richard A. Payne continued as a Class I
director (term expiring in 2011). The results of the proposals voted upon at the
Annual Meeting as are as follows:
For
|
Against
|
Abstain
|
Non-votes
|
||||||||||||||
1.
|
a.) Election
of Manfred E. Birnbaum
|
6,041,733 | -0- | 89,835 | -0- | ||||||||||||
b.)
Election of Richard A. Abdoo
|
6,095,979 | -0- | 35,589 | -0- | |||||||||||||
2.
|
Ratify
PKF as our auditors for fiscal 2010
|
6,106,603 | 18,470 | 6,495 | -0- | ||||||||||||
3.
|
Approve
the amendment and restatement of the Company’s by-laws,
including:
|
||||||||||||||||
a.)
Approval of advance notice provisions relating to shareholder proposed
business at an Annual Meeting
|
6,101,075 | 21,542 | 8,951 | -0- | |||||||||||||
b.)
Approval of advance notice provisions relating to shareholder director
nominations
|
6,106,134 | 21,642 | 3,792 | -0- | |||||||||||||
c.)
Approval of increase to shareholder quorum requirement
|
3,084,443 | 18,019 | 4,104 | 3,025,002 | |||||||||||||
d.)
Approval of other administrative amendments
|
6,009,567 | 110,721 | 11,280 | -0- |
-24-
Item
5. Other Information
This
Item is not applicable.
Item
6. Exhibits
Exhibit
10.1 Agreement dated January 7, 2010 by and between the Company
and Eric C. Apfelbach.
Exhibit
10.2 Restrictive Covenant Agreement dated January 7, 2010 by
and between the Company and Eric C. Apfelbach.
Exhibit
10.3 Nonstatutory Stock Option Agreement dated January 7,
2010 by and between the Company and Eric C.
Apfelbach (performance-based).
Exhibit
10.4 Nonstatutory Stock Option Agreement dated January 7,
2010 by and between the Company and Eric C.
Apfelbach (time-based).
Exhibit
10.5 Agreement dated February 3, 2010 by and between the
Company and Steven A. Seeker.
Exhibit
31.1 Certification of Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit
31.2 Certification of Principal Financial and Accounting
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit
32.1 Certification of Principal Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
Exhibit
32.2 Certification of Principal Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
-25-
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
ZBB
ENERGY CORPORATION
|
||
February
17, 2010
|
By:
|
/s/Eric C. Apfelbach
|
Name:
|
Eric
C. Apfelbach
|
|
Title:
|
Chief
Executive Officer
|
|
(Principal
Executive Officer)
|
||
February
17, 2010
|
By:
|
/s/ Scott W. Scampini
|
Name:
|
Scott
W. Scampini
|
|
Title:
|
Executive
Vice President and Chief Financial
Officer
|
|
(Principal
financial officer and
|
||
Principal
accounting officer)
|
-26-