Attached files
file | filename |
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EX-10.8 - EnSync, Inc. | v210932_ex10-8.htm |
EX-31.2 - EnSync, Inc. | v210932_ex31-2.htm |
EX-31.1 - EnSync, Inc. | v210932_ex31-1.htm |
EX-32.2 - EnSync, Inc. | v210932_ex32-2.htm |
EX-32.1 - EnSync, Inc. | v210932_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, 2010
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. x
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 x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
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 x
|
|||
(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 14, 2011
|
|||
Common
Stock, $.01 par value per share
|
26,230,810
|
ZBB
Energy Corporation
Form
10-Q
TABLE OF
CONTENTS
|
Page
|
||
PART I. FINANCIAL INFORMATION (*)
|
|||
Item 1.
|
Condensed
Consolidated Financial Statements
|
1
|
|
Condensed
Consolidated Balance Sheets (unaudited), December 31, 2010 and June 30,
2010
|
1
|
||
Condensed
Consolidated Statements of Operations (unaudited), Three and Six Months
Ended December 31, 2010 and 2009
|
2
|
||
Condensed
Consolidated Statements of Changes in Shareholders' Equity (unaudited),
Six Months Ended December 31, 2010 and year ended June 30,
2010
|
3
|
||
Condensed
Consolidated Statements of Cash Flows (unaudited), Six Months Ended
December 31, 2010 and 2009
|
4
|
||
Notes
to Condensed Consolidated Financial Statements (unaudited)
|
5
|
||
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
18
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
25
|
|
Item
4.
|
Controls
and Procedures
|
26
|
|
PART II. OTHER INFORMATION
|
|||
Item
1.
|
Legal
Proceedings
|
27
|
|
Item
1A.
|
Risk
Factors
|
27
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
28
|
|
Item
3.
|
Defaults
upon Senior Securities
|
28
|
|
Item
4.
|
(Removed
and Reserved)
|
28
|
|
Item
5.
|
Other
Information
|
28
|
|
Item
6.
|
Exhibits
|
28
|
|
Signatures
|
29
|
(*) All of the financial statements contained in this Quarterly Report are unaudited with the exception of the financial information at June 30, 2010, 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, 2010 and for the year then ended, and the notes thereto, can be found in our Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on September 10, 2010.
ZBB
ENERGY CORPORATION
|
|||||
Condensed
Consolidated Balance Sheets
|
December 31, 2010
(Unaudited)
|
June 30, 2010
|
|||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 611,489 | $ | 1,235,635 | ||||
Accounts
receivable
|
674 | 7,553 | ||||||
Inventories
|
772,390 | 702,536 | ||||||
Prepaid
and other current assets
|
329,561 | 149,098 | ||||||
Total
current assets
|
1,714,114 | 2,094,822 | ||||||
Long-term
assets:
|
||||||||
Property,
plant and equipment, net
|
3,727,706 | 3,568,823 | ||||||
Goodwill
|
803,079 | 803,079 | ||||||
Total
assets
|
$ | 6,244,899 | $ | 6,466,724 | ||||
Liabilities
and Shareholders' Equity
|
||||||||
Current
liabilities:
|
||||||||
Bank
loans and notes payable
|
$ | 355,154 | $ | 395,849 | ||||
Accounts
payable
|
1,012,542 | 869,179 | ||||||
Accrued
expenses
|
484,810 | 539,100 | ||||||
Deferred
revenues
|
540,303 | 325,792 | ||||||
Accrued
compensation and benefits
|
228,120 | 765,106 | ||||||
Total
current liabilities
|
2,620,929 | 2,895,026 | ||||||
Long-term
liabilities:
|
||||||||
Bank
loans and notes payable
|
3,241,615 | 2,120,421 | ||||||
Total
liabilities
|
5,862,544 | 5,015,447 | ||||||
Shareholders'
equity
|
||||||||
Series
A preferred stock ($0.01 par value, $10,000 face value) 10,000,000
authorized 101.4678 and 0 shares issued
|
1,025,732 | - | ||||||
Common
stock ($0.01 par value); 150,000,000 authorized 21,393,236
and 14,915,389 shares issued
|
213,932 | 149,155 | ||||||
Additional
paid-in capital
|
52,531,869 | 49,770,987 | ||||||
Notes
receivable - common stock
|
(1,024,070 | ) | - | |||||
Treasury
stock - 13,833 shares
|
(11,136 | ) | (11,136 | ) | ||||
Accumulated
other comprehensive (loss)
|
(1,586,720 | ) | (1,563,052 | ) | ||||
Accumulated
(deficit)
|
(50,767,252 | ) | (46,894,677 | ) | ||||
Total
shareholders' equity
|
382,355 | 1,451,277 | ||||||
Total
liabilities and shareholders' equity
|
$ | 6,244,899 | $ | 6,466,724 |
See
accompanying notes to condensed consolidated financial statements
-1-
ZBB
ENERGY CORPORATION
Condensed
Consolidated Statements of Operations (Unaudited)
Three months ended December 31,
|
Six months ended December 31,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Revenues
|
||||||||||||||||
Product
sales and revenues
|
$ | 49,742 | $ | 271,060 | $ | 49,742 | $ | 937,786 | ||||||||
Engineering
and development revenues
|
184,939 | 284,395 | 184,939 | 429,582 | ||||||||||||
Total
Revenues
|
234,681 | 555,455 | 234,681 | 1,367,368 | ||||||||||||
Costs
and Expenses
|
||||||||||||||||
Cost
of product sales
|
79,058 | 253,185 | 79,058 | 899,287 | ||||||||||||
Cost
of engineering and development revenues
|
- | 872,322 | - | 1,166,777 | ||||||||||||
Advanced
engineering and development
|
586,582 | 140,764 | 1,425,855 | 465,471 | ||||||||||||
Selling,
general, and administrative
|
1,278,261 | 1,734,403 | 2,356,989 | 2,607,770 | ||||||||||||
Depreciation
|
85,178 | 125,431 | 171,261 | 249,648 | ||||||||||||
Impairment
and other equipment charges
|
- | 780,231 | - | 780,231 | ||||||||||||
Total
Costs and Expenses
|
2,029,079 | 3,906,336 | 4,033,163 | 6,169,184 | ||||||||||||
Loss
from Operations
|
(1,794,398 | ) | (3,350,881 | ) | (3,798,482 | ) | (4,801,816 | ) | ||||||||
Other
Income (Expense)
|
||||||||||||||||
Interest
income
|
2,420 | 20,593 | 4,210 | 47,089 | ||||||||||||
Interest
expense
|
(46,869 | ) | (30,862 | ) | (78,876 | ) | (62,894 | ) | ||||||||
Other
income (expense)
|
573 | - | 573 | (19,760 | ) | |||||||||||
Total
Other Income (Expense)
|
(43,876 | ) | (10,269 | ) | (74,093 | ) | (35,565 | ) | ||||||||
Loss
before provision for Income Taxes
|
(1,838,274 | ) | (3,361,150 | ) | (3,872,575 | ) | (4,837,381 | ) | ||||||||
Provision
for Income Taxes
|
- | - | - | - | ||||||||||||
Net
Loss
|
$ | (1,838,274 | ) | $ | (3,361,150 | ) | $ | (3,872,575 | ) | $ | (4,837,381 | ) | ||||
Net
Loss per share-
|
||||||||||||||||
Basic
and diluted
|
$ | (0.09 | ) | $ | (0.27 | ) | $ | (0.22 | ) | $ | (0.40 | ) | ||||
Weighted
average shares-basic and diluted:
|
||||||||||||||||
Basic
|
20,196,322 | 12,409,964 | 17,803,353 | 11,962,047 | ||||||||||||
Diluted
|
20,196,322 | 12,409,964 | 17,803,353 | 11,962,047 |
See
accompanying notes to condensed consolidated financial
statements.
-2-
ZBB
Energy Corporation
|
Condensed
Consolidated Statements of Changes in Shareholders' Equity
(unaudited)
|
Number of
Shares
|
Series A
Preferred Stock
|
Number of
Shares
|
Common Stock
|
Additional Paid-
in Capital
|
Notes
Receivable - Common Stock
|
Treasury Stock
|
Accumulated
Other
Comprehensive
(Loss)
|
Accumulated
Deficit
|
Total
Shareholders'
Equity
|
Comprehensive
Loss
|
||||||||||||||||||||||||||||||||||
Balance:
July 1, 2009
|
10,618,297 | $ | 106,183 | $ | 45,549,079 | $ | - | $ | - | $ | (1,601,576 | ) | $ | (37,287,851 | ) | $ | 6,765,835 | |||||||||||||||||||||||||||
Issuance
of common stock, net of costs
and underwriting fees
|
4,035,417 | 40,355 | 3,661,495 | 3,701,850 | ||||||||||||||||||||||||||||||||||||||||
Equity
offering costs
|
(244,409 | ) | (244,409 | ) | ||||||||||||||||||||||||||||||||||||||||
Stock-based
compensation
|
527,439 | 527,439 | ||||||||||||||||||||||||||||||||||||||||||
Settlement
of stock purchase agreement
|
(28,750 | ) | (287 | ) | 287 | |||||||||||||||||||||||||||||||||||||||
Retired
restricted stock
|
(46,921 | ) | (469 | ) | 469 | |||||||||||||||||||||||||||||||||||||||
Issuance
of restricted common stock
offering
|
337,346 | 3,373 | 276,627 | 280,000 | ||||||||||||||||||||||||||||||||||||||||
Purchase
of treasury stock
|
(11,136 | ) | (11,136 | ) | ||||||||||||||||||||||||||||||||||||||||
Net
loss
|
(9,606,826 | ) | (9,606,826 | ) | $ | (9,606,826 | ) | |||||||||||||||||||||||||||||||||||||
Net
translation adjustment
|
38,524 | 38,524 | 38,524 | |||||||||||||||||||||||||||||||||||||||||
Balance:
June 30, 2010
|
14,915,389 | 149,155 | 49,770,987 | - | (11,136 | ) | (1,563,052 | ) | (46,894,677 | ) | 1,451,277 | (9,568,302 | ) | |||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||
Issuance
of common stock, net of costs
and underwriting fees
|
5,399,260 | 53,992 | 2,279,389 | (1,001,883 | ) | 1,331,498 | ||||||||||||||||||||||||||||||||||||||
Issuance
of commitment fee shares
|
893,097 | 8,930 | 579,306 | 588,236 | ||||||||||||||||||||||||||||||||||||||||
Equity
issuance costs
|
180,000 | 1,800 | (747,346 | ) | (745,546 | ) | ||||||||||||||||||||||||||||||||||||||
Conversion
of debenture notes payable
to preferred stock
|
52.4678 | 524,678 | 524,678 | |||||||||||||||||||||||||||||||||||||||||
Issuance
of preferred stock, net of issuance
costs
|
49.0000 | 490,000 | 490,000 | |||||||||||||||||||||||||||||||||||||||||
Conversion
of cash settled RSU's to
stock settled RSU's
|
315,833 | 315,833 | ||||||||||||||||||||||||||||||||||||||||||
Stock-based
compensation
|
310,788 | 310,788 | ||||||||||||||||||||||||||||||||||||||||||
Interest
on notes receivable -
common
stock
|
22,187 | (22,187 | ) | |||||||||||||||||||||||||||||||||||||||||
Accretion
of dividends on preferred
stock
|
11,054 | (11,054 | ) | |||||||||||||||||||||||||||||||||||||||||
Issuance
of warrants
|
11,834 | 11,834 | ||||||||||||||||||||||||||||||||||||||||||
Other
|
5,490 | 55 | (55 | ) | ||||||||||||||||||||||||||||||||||||||||
Net
loss
|
(3,872,575 | ) | (3,872,575 | ) | (3,872,575 | ) | ||||||||||||||||||||||||||||||||||||||
Net
translation adjustment
|
(23,668 | ) | (23,668 | ) | (23,668 | ) | ||||||||||||||||||||||||||||||||||||||
Balance:
December 31, 2010
|
101.4678 | $ | 1,025,732 | 21,393,236 | $ | 213,932 | $ | 52,531,869 | $ | (1,024,070 | ) | $ | (11,136 | ) | $ | (1,586,720 | ) | $ | (50,767,252 | ) | $ | 382,355 | $ | (3,896,243 | ) |
See
accompanying notes to consolidated financial statements
-3-
ZBB
ENERGY CORPORATION
Condensed
Consolidated Statements of Cash Flows (Unaudited)
Six months ended December 31,
|
||||||||
2010
|
2009
|
|||||||
Cash
flows from operating activities
|
||||||||
Net
loss
|
$ | (3,872,575 | ) | $ | (4,837,381 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Depreciation
|
171,261 | 249,648 | ||||||
Change
in inventory allowance
|
29,699 | |||||||
Impairment
and other equipment charges
|
780,231 | |||||||
Stock-based
compensation
|
310,788 | 174,353 | ||||||
(Increase)
decrease in operating assets:
|
||||||||
Accounts
receivable
|
6,879 | 459,555 | ||||||
Inventories
|
(69,854 | ) | 609,383 | |||||
Prepaids
and other current assets
|
(180,463 | ) | 23,541 | |||||
Other
receivables-interest
|
- | 19,746 | ||||||
Increase
(decrease) in operating liabilities:
|
||||||||
Accounts
payable
|
143,363 | (65,604 | ) | |||||
Accrued
compensation and benefits
|
(221,153 | ) | 370,376 | |||||
Accrued
expenses
|
(79,034 | ) | 336,645 | |||||
Deferred
revenues
|
214,511 | (749,022 | ) | |||||
Net
cash used in operating activities
|
(3,576,277 | ) | (2,598,830 | ) | ||||
Cash
flows from investing activities
|
||||||||
Expenditures
for property and equipment
|
(318,310 | ) | (131,091 | ) | ||||
Bank
certificate of deposit
|
- | 1,000,000 | ||||||
Net
cash (used in) provided by investing activities
|
(318,310 | ) | 868,909 | |||||
Cash
flows from financing activities
|
||||||||
Proceeds
from bank loans and notes payable
|
1,300,000 | 156,000 | ||||||
Repayments
of bank loans and notes payable
|
(219,501 | ) | (229,516 | ) | ||||
Proceeds
from issuance of debenture notes payable
|
517,168 | - | ||||||
Proceeds
from issuance of Series A preferred stock
|
490,000 | - | ||||||
Proceeds
from issuance of common stock net of issuance costs
|
1,174,187 | 1,900,276 | ||||||
Net
cash provided by financing activities
|
3,261,854 | 1,826,760 | ||||||
Effect
of exchange rate changes on cash and cash equivalents
|
8,587 | 10,691 | ||||||
Net
(decrease) increase in cash and cash equivalents
|
(624,146 | ) | 107,530 | |||||
Cash
and cash equivalents - beginning of period
|
1,235,635 | 2,970,009 | ||||||
Cash
and cash equivalents - end of period
|
$ | 611,489 | $ | 3,077,539 | ||||
Cash
paid for interest
|
$ | 26,749 | $ | 62,894 | ||||
Supplemental
schedule of non-cash investing and financing activities:
|
||||||||
Conversion
of debenture notes payable to Series A preferred stock
|
$ | 524,678 | $ | - | ||||
Issuance
of common stock for discounted notes receivable
|
1,001,883 | - | ||||||
Issuance
of common stock as consideration for equity issuance costs
|
683,634 | - | ||||||
Conversion
of cash settled RSU's to stock settled RSU's
|
315,833 | - | ||||||
Issuance
of warrants for purchase of property and equipment
|
11,834 | - |
See
accompanying notes to condensed consolidated financial
statements.
-4-
ZBB
ENERGY CORPORATION
Notes
to Condensed Consolidated Financial Statements (unaudited)
December
31, 2010
NOTE 1 —
NATURE OF ORGANIZATION
ZBB
Energy Corporation (“ZBB” or the “Company”) develops and manufactures
distributed energy storage solutions based upon the Company’s proprietary
zinc-bromide rechargeable electrical energy storage technology. A
developer and manufacturer of modular, scalable and environmentally friendly
power systems (“ZESS POWR™”), ZBB Energy was founded in 1998 and is
headquartered in Wisconsin, USA with offices also located in Perth, Western
Australia. As described in Note 12 in January 2011 the Company acquired
substantially all of the net assets of Tier Electronics LLC.
The
Company provides advanced electrical power management platforms targeted at the
growing global need for distributed renewable energy, energy efficiency, power
quality, and grid modernization. ZBB and its power electronics subsidiary,
Tier Electronics, have developed a portfolio of intelligent power management
platforms that directly integrate multiple renewable and conventional onsite
generation sources with rechargeable zinc bromide flow batteries and other
storage technology. The Company also offers advanced systems to directly connect
wind and solar equipment to the grid and systems that can form various levels of
micro-grids. Tier Electronics participates in the energy efficiency
markets through its hybrid vehicle control systems, and power quality markets
with its line of regulation solutions. Together, these platforms solve a wide
range of electrical system challenges in global markets for utility,
governmental, commercial, industrial and residential end customers.
The
condensed consolidated financial statements include the accounts of the Company
and those of its wholly owned subsidiaries, ZBB Technologies, Inc. which
operates a manufacturing facility in Menomonee Falls, Wisconsin, and ZBB
Technologies, Ltd. which has its advanced engineering and development facility
in Perth, Australia.
NOTE
2 – GOING CONCERN
The
consolidated financial statements as of December 31, 2010 and for the six months
then ended have been prepared on the basis of a going concern which contemplates
that ZBB Energy Corporation and subsidiaries will be able to realize assets and
discharge liabilities in the normal course of business. Accordingly, they do not
give effect to adjustments that would be necessary should the Company be
required to liquidate its assets. The Company incurred a net loss of $3,872,575
for the six months ended December 31, 2010 and as of December 31, 2010 has an
accumulated deficit of $50,767,252 and shareholders’ equity of
$382,355. The ability of the Company to meet its total liabilities
of $5,862,544 and to continue as a going concern is dependent upon
the availability of future funding and achieving profitability. The
accompanying financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
The
Company believes, with the financing sources in place and with other potential
financing sources, that it will be able to raise the capital necessary to fund
operations through the remainder of fiscal year 2011. The Company’s
sources of additional capital in the remainder of the year ending June 30, 2011
include the raising of additional capital pursuant to an agreement with Socius
CG II, Ltd. (“Socius”), as described in Note 9. As of December 31, 2010 there
was approximately $9 million of availability under this facility. However,
this facility places certain restrictions on our ability to draw on it.
For example, our ability to submit a tranche notice under the Socius Agreement
is subject to certain conditions including that: (1) a registration statement
covering our sale of shares of common stock to Socius in connection with the
tranche is effective and (2) the issuance of such shares would not result in
Socius and its affiliates beneficially owning more than 9.99% of our common
stock. These limitations have been carefully considered by the Company and
notwithstanding such limitations management has successfully utilized this
facility and believes it will continue to be able to do so. As described
in Note 9, during the six month period ending December 31, 2010, the Company
delivered the first and second tranche notices to Socius pursuant to which
Socius purchased $517,168 of debentures and $490,000 of Series A preferred
stock, respectively. As described in Note 12, the Company successfully
drew on this facility again in January 2011, raising an additional $2,020,000
through the sale of Series A preferred stock to Socius under the
agreement. However, there can be no assurances that unforeseen
circumstances will not jeopardize the Company’s ability to draw on this and
other potential financing sources.
Accordingly,
the Company is currently exploring various alternatives including debt and
equity financing vehicles, strategic partnerships, and/or government programs
that may be available to the Company, as well as trying to generate additional
sales and increase margins. As described in Note 12 in January 2011 the
Company raised an additional $2 million through the sale of shares of Company
common stock to certain investors. However, the Company has no commitments
to obtain any additional funds, and there can be no assurance such funds will be
available on acceptable terms or at all. If the Company is unable to
obtain additional funding and improve its operations, the Company’s financial
condition and results of operations may be materially adversely affected and the
Company may not be able to continue operations.
-5-
NOTE 3 —
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim
Financial Data
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States (“GAAP”) for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and notes required by GAAP for complete
financial statements. In the opinion of management, all adjustments (consisting
only of adjustments of a normal and recurring nature) considered necessary for
fair presentation of the results of operations have been included. Operating
results for the six month period ended December 31, 2010 are not necessarily
indicative of the results that might be expected for the year ending June 30,
2011.
The
condensed consolidated balance sheet at June 30, 2010 has been derived from
audited financial statements at that date, but do not include all of the
information and disclosures required by GAAP. For a more complete discussion of
accounting policies and certain other information, refer to the Company’s annual
report filed on Form 10-K for the fiscal year ended June 30, 2010.
Basis
of Presentation
The
accompanying condensed consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries and have been prepared in
accordance with GAAP. All significant intercompany accounts and transactions
have been eliminated upon consolidation.
Foreign
Currency
The
Company uses the United States dollar as its functional and reporting currency,
while the Australian dollar is the functional currency of one of its foreign
subsidiaries. Assets and liabilities of the Company’s foreign subsidiary are
translated into United States dollars at exchange rates that are in effect 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 condensed consolidated balance sheets. No gain or
loss on translation is included in the net loss.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amount of revenues and
expenses during the reporting period. It is reasonably possible that the
estimates we have made may change in the near future. Significant estimates
underlying the accompanying condensed consolidated financial statements include
those related to:
|
·
|
the
timing of revenue recognition;
|
|
·
|
the
allowance for doubtful accounts;
|
|
·
|
valuations
of excess and obsolete inventory;
|
|
·
|
the
lives and recoverability of equipment and other long-lived assets such as
goodwill;
|
|
·
|
restructuring,
reorganization, relocation and severance
costs;
|
|
·
|
contract
costs;
|
|
·
|
warranty
liabilities;
|
|
·
|
tax
valuation allowances; and
|
|
·
|
stock-based
compensation.
|
Income
Taxes
The
Company records deferred income taxes in accordance with Financial Accounting
Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 740,
“Accounting for Income Taxes.” This ASC requires recognition of deferred income
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 income tax assets to the
amount expected to be realized. There were no net deferred income tax
assets recorded as of December 31, 2010 and June 30, 2010.
The
Company applies a more-likely-than-not recognition threshold for all tax
uncertainties as required under ASC Topic 740, which only allows the recognition
of those tax benefits that have a greater than fifty percent likelihood of being
sustained upon examination by the taxing authorities. The Company’s management
has reviewed the Company’s tax positions and determined there were no
outstanding or retroactive tax positions with less than a 50% likelihood of
being sustained upon examination by the taxing authorities as of December 31,
2010 and June 30, 2010.
-6-
The
Company’s U.S. Federal, Wisconsin, and Australian income tax returns for the
years ended June 30, 2005 through June 30, 2010 are subject to examination by
major taxing authorities.
Property,
Plant and Equipment
Land,
building, equipment, computers and furniture and fixtures are recorded at
cost. Maintenance, repairs and betterments are charged to
expense.
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:
Estimated
Useful
Lives
|
|
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 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. Management has determined that there
are no long-lived assets impaired as of December 31, 2010 and June 30,
2010.
Goodwill
Goodwill
is recognized as the excess cost of an acquired entity over the net amount
assigned to assets acquired and liabilities assumed. Goodwill is not amortized
but reviewed for impairment annually as of June 30, 2010 or more frequently if
events or changes in circumstances indicate that its carrying value may be
impaired. These conditions could include a significant change in the
business climate, legal factors, operating performance indicators, competition,
or sale or disposition of a significant portion of a reporting
unit.
Testing
for the impairment of goodwill involves a two step process. The first step of
the impairment test requires the comparing of a reporting units fair value to
its carrying value. If the carrying value is less than the fair value, no
impairment exists and the second step is not performed. If the carrying value is
higher than the fair value, there is an indication that impairment may exist and
the second step must be performed to compute the amount of the impairment. In
the second step, the impairment is computed by estimating the fair values of all
recognized and unrecognized assets and liabilities of the reporting unit and
comparing the implied fair value of reporting unit goodwill with the carrying
amount of that unit’s goodwill. Based on this method, the Company
determined fair value as evidenced by market capitalization, and concluded that
there was no need for an impairment charge as of December 31, 2010 and June 30,
2010.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with maturities of six 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.
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.
-7-
Costs
incurred in bringing each product to its present location and conditions are
accounted for as follows:
·
|
Raw
materials – purchased cost of direct
material
|
·
|
Finished
goods and work-in-progress – purchased cost of direct material plus direct
labor plus a proportion of manufacturing
overheads.
|
The
Company evaluates the recoverability of its slow moving or obsolete inventories
at least quarterly. The Company estimates the recoverable cost of such inventory
by product type while considering factors such as its age, historic and current
demand trends, the physical condition of the inventory as well as assumptions
regarding future demand. The Company’s ability to recover its cost for slow
moving or obsolete inventory can be affected by such factors as general market
conditions, future customer demand and relationships with
suppliers.
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 SEC 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.
Revenues
from government funded research and development contracts are recognized
proportionally as costs are incurred and compared to the estimated total
research and development costs for each contract. In many cases, the Company is
reimbursed only a portion of the costs incurred or to be incurred on the
contract. Government funded research and development contracts are generally
multi-year, cost-reimbursement and/or cost-share type contracts. The Company is
reimbursed for reasonable and allocable costs up to the reimbursement limits set
by the contract.
Total
revenues of $234,681 and $234,681 were recognized for the three and six months
ended December 31, 2010, respectively, and were comprised of two significant
customers (100% of total revenues). Total revenues of $555,455 and
$1,367,368 were recognized for the three and six months ended December 31, 2009,
respectively, and were comprised of three and four significant customers,
respectively (100% of total revenues).
Advanced
Engineering and Development Expenses
The
Company expenses advanced engineering and development costs as incurred. These
costs consist primarily of labor, overhead, and materials to build prototype
units, materials for testing, develop manufacturing processes and include
consulting fees and other costs.
To the
extent these costs are separately identifiable, incurred and funded by advanced
engineering and development type agreements with outside parties; they will be
shown separately on the consolidated statements of operations as a “cost of
engineering and development revenues”.
Engineering
and Development Revenues
On June
29, 2007, ZBB Technologies Ltd (“ZBB Technologies”), an Australian subsidiary of
the Company, and the Commonwealth of Australia (the “Commonwealth”) represented
by and acting through the Department of Environment and Water Resources (the
“Department”), entered into an agreement for project funding under the Advanced
Electricity Storage Technologies (“AEST”) program (the “Agreement”) whereby the
Department agreed to provide funding to ZBB Technologies for the development of
an energy storage system to be used to demonstrate the storage and supply of
renewable energy generated from photovoltaic solar panels and wind turbines
already operational at the Commonwealth Scientific and Industrial Research
Organization’s (“CSIRO”) Newcastle Energy Centre in New South Wales,
Australia.
-8-
The
Agreement provided for a three year term under which the Commonwealth provided
$2.6 million (A$3.1 million) in project funding over several periods, totaling
$1.35 million in year one, $1.01 million in year two and $0.24 million in year
three, as certain development progress “milestones” were met by ZBB Technologies
to the satisfaction of the Commonwealth.
The
Company owns any assets, including battery storage systems, acquired with the
funding from the contract. The Company grants the government of Australia
a free, non-exclusive license to intellectual property created in the project
for their own internal use.
The AEST
project had 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) was 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 $2.6 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. Management of the Company believes
it has fulfilled its required contributions to the project in cash and in-kind
contributions as of December 31, 2010. As of December 31, 2010, the
Company had received the full $2.6 million of payments due from the Australian
Government under the Agreement.
Included
in engineering and development revenues was $184,939 for the three and six
months ended December 31, 2010, respectively, and $159,384 and $304,572 for the
three and six months ended December 31, 2009, respectively, related to the
Agreement. Included in cost of engineering and development revenues was $0
for the three and six months ended December 31, 2010, respectively, and $422,508
and $716,963 for the three and six months ended December 31, 2009, respectively,
related to the Agreement.
As of
December 31, 2010 and June 30, 2010, the Company had no unbilled amounts from
engineering and development contracts. The Company had no customer payments from
engineering and development contract revenue, representing deposits in advance
of performance of the allowable work as of December 31, 2010 and June 30,
2010.
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 six months 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, 2010 and June 30, 2010, included in the Company’s accrued expenses
were approximately $472,200 and $520,000, respectively, in warranty
reserves.
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.
In accordance with the FASB ASC topic 260, any anti-dilutive effects on net
income (loss) per share are excluded. For the three and six months ended
December 31, 2010 there were 5,547,719 of underlying options, restricted stock
units and warrants that are excluded. For the three and six months ended
December 31, 2009 there were 2,609,050 of underlying options and warrants that
are excluded.
-9-
Stock-Based
Compensation
The
Company measures all “Share-Based Payments", including grants of stock options,
restricted shares, and restricted stock units to be recognized in its
consolidated statement of operations 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 has agreed to compensate its directors with restricted stock units
(“RSUs”) rather than cash. The RSUs were classified as liability awards as
of June 30, 2010 because the RSUs were to be paid in cash upon vesting. The RSU
award liability was measured at its fair value at the end of each reporting
period and, therefore, will fluctuate based on the performance of the Company’s
stock. As of November 10, 2010, the June 30, 2010 RSU’s were converted to
stock based RSU’s and were credited to additional paid-in capital. The grant
date fair value of the restricted stock unit awards was determined using the
closing stock price of the Company’s common stock on the day prior to the date
of the grant, with the compensation expense amortized over the vesting period of
restricted stock unit awards, net of estimated
forfeitures.
The
Company only recognizes expense to its statements 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, for all other awards. See Note 7.
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 three and six months ended December 31, 2010 and 2009 and is
presented in the Consolidated Statements of Changes in Shareholders’
Equity.
Concentrations
of Credit Risk and Fair Value
Financial
instruments that potentially subject the Company to concentrations of credit
risk consist principally of cash and U.S. treasury investments, and bank
certificates of deposit, and accounts receivable.
The
Company maintains significant cash deposits primarily with three or four
financial institutions, which at times may exceed federally insured limits. The
Company has not previously experienced any losses on such deposits.
Additionally, the Company performs periodic evaluations of the relative credit
rating of these institutions as part of its investment strategy.
Concentrations
of credit risk with respect to accounts receivable are limited due to
accelerated payment terms in current customer contracts and creditworthiness of
the current customer base.
The
carrying amounts of cash and cash equivalents, short-term investments, trade
receivables, other current assets and accounts payable approximate fair value
due to the short-term nature of these instruments. The carrying value of bank
loans and notes payable approximate fair value based on their terms which
reflect market conditions existing as of December 31, 2010 and June 30,
2010.
Reclassifications
Certain
amounts previously reported have been reclassified to conform to the current
presentation.
Recent
Accounting Pronouncements
In
September 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-13,
“Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”), and ASU 2009-14,
“Certain Revenue Arrangements That Include Software Elements” (“ASU 2009-14”).
ASU 2009-13 amends the revenue guidance under Subtopic 605-25, “Multiple Element
Arrangements,” and addresses how to determine whether an arrangement involving
multiple deliverables contains more than one unit of accounting and how
arrangement consideration shall be measured and allocated to the separate units
of accounting in the arrangement. ASU 2009-14 excludes tangible products
containing software components and non-software components that function
together to deliver the product’s essential functionality from the scope of
Subtopic 985-605, “Revenue Recognition.” ASU 2009-13 and ASU 2009-14 are
effective for fiscal periods beginning on or after June 15, 2010, which for
the Company is the first quarter of fiscal 2011. The adoption of ASU 2009-13 and
ASU 2009-14 had no impact on the Company’s consolidated financial
statements.
-10-
In April
2010, the FASB issued ASU 2010-17, Revenue Recognition - Milestone Method (Topic
605): Milestone Method of Revenue Recognition. This ASU codifies the
consensus reached in EITF Issue No. 08-9, “Milestone Method of Revenue
Recognition.” The amendments to the Codification provide guidance on defining a
milestone and determining when it may be appropriate to apply the milestone
method of revenue recognition for research or development transactions.
Consideration that is contingent on achievement of a milestone in its entirety
may be recognized as revenue in the period in which the milestone is achieved
only if the milestone is judged to meet certain criteria to be considered
substantive. Milestones should be considered substantive in their entirety and
may not be bifurcated. An arrangement may contain both substantive and
nonsubstantive milestones, and each milestone should be evaluated individually
to determine if it is substantive. The Company adopted ASU 2010-17 during the
six months ended December 31, 2010. The adoption had no impact on the
Company’s consolidated financial statements.
NOTE
4 - INVENTORIES
Inventory
balances are comprised of the following amounts as of December 31, 2010 and June
30, 2010:
December 31,
2010
|
June 30, 2010
|
|||||||
Raw
materials
|
$ | 519,240 | $ | 417,456 | ||||
Work
in progress
|
253,150 | 285,080 | ||||||
Total
|
$ | 772,390 | $ | 702,536 |
NOTE
5– PROPERTY, PLANT & EQUIPMENT
Property,
plant, and equipment balances are comprised of the following amounts as of
December 31, 2010 and June 30, 2010:
December 31,
2010
|
June 30, 2010
|
|||||||
Land
|
$ | 217,000 | $ | 217,000 | ||||
Building
and improvements
|
1,996,134 | 1,996,134 | ||||||
Manufacturing
equipment
|
3,623,214 | 3,591,508 | ||||||
Office
equipment
|
132,936 | 119,779 | ||||||
Construction
in process
|
324,270 | - | ||||||
Total,
at cost
|
6,293,554 | 5,924,421 | ||||||
Less,
accumulated depreciation
|
(2,565,848 | ) | (2,355,598 | ) | ||||
Property,
Plant & Equipment, Net
|
$ | 3,727,706 | $ | 3,568,823 |
NOTE
6 – BANK LOANS AND NOTES PAYABLE
The
Company's debt consisted of the following as of December 31, 2010 and June 30,
2010:
December 31,
2010
|
June 30, 2010
|
|||||||
Bank
loans and notes payable-current
|
$ | 355,154 | $ | 395,849 | ||||
Bank
loans and notes payable-long term
|
3,241,615 | 2,120,421 | ||||||
Total
|
$ | 3,596,769 | $ | 2,516,270 |
On April
7, 2010 the Company entered a loan agreement for $1.3 million with the Wisconsin
Department of Commerce. Payments of principal and interest under this loan
are deferred until May 31, 2012. The interest rate is 2%. Payments
of $22,800 per month are required starting June 1, 2012 with a final payment due
on May 1, 2017. Borrowings were not received until July 2011. The
loan is collateralized by equipment purchased with loan proceeds and with a
General Business Security Agreement on all assets of the Company. The
Company is required to maintain and increase a specified number of employees,
and the interest rate is increased in certain cases for failure to meet this
requirement. The outstanding principal balance was $1,300,000 at December
31, 2010.
On July
1, 2009 the Company entered into a loan agreement to finance new production
equipment. The $156,000 bank note is collateralized by specific equipment,
requiring monthly payments of $4,736 in principal and interest; at 5.99% per
annum; through December 1, 2013. The outstanding principal balance was $81,634
and $107,155 at December 31, 2010 and June 30, 2010, respectively.
On May
14, 2008 the Company entered into two loan agreements to refinance its building
and land in Menomonee Falls, Wisconsin:
-11-
The first
loan requires a fixed monthly payment of principal and interest at a rate of
.25% below the prime rate, subject to a prime rate floor of 5.25%, with any
principal balance due at maturity on June 1, 2018 and is collateralized by
the building and land. The outstanding principal balance was $784,641 and
$805,084 at December 31, 2010 and June 30, 2010, respectively.
The
second loan is a secured promissory 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. The outstanding principal balance was
$808,025 and $821,595 at December 31, 2010 and June 30, 2010,
respectively. The loan is collateralized by a mortgage on the building and
land.
On
November 28, 2008 the Company entered into a loan agreement with a bank..
The note is collateralized 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. The outstanding principal balance was $622,468 and $733,536 at
December 31, 2010 and June 30, 2010, respectively.
On
January 27, 2007 the Company refinanced its equipment loan. This loan
was paid in full as of December 31, 2010. The outstanding principal
balance was $48,900 at June 30, 2010.
Maximum
aggregate annual principal payments for years subsequent to
December 31, 2010 are as follows:
2011
|
$ | 355,154 | ||
2012
|
488,718 | |||
2013
|
484,854 | |||
2014
|
341,694 | |||
2015
|
351,385 | |||
2016
and thereafter
|
1,574,964 | |||
$ | 3,596,769 |
The loan
agreements with the bank require the Company to maintain a minimum amount of
tangible net worth and meet certain operating ratios. The Company was not
in compliance with such covenants as of December 31, 2010, for which a waiver
was obtained from the bank on November 9, 2010 which waived the covenants
through June 29, 2011.
NOTE
7 – EMPLOYEE/DIRECTOR EQUITY INCENTIVE PLANS
For the
six months ended December 31, 2010 and 2009, the Company’s results of operations
include 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 $214,338 and $174,353, based
on the grant date fair value of all options vested during the six months ended
December 31, 2010 and 2009, respectively.
At the
annual of meeting of shareholders held on November 10, 2010, the Company’s
shareholders approved the Company’s 2010 Omnibus Long-Term Incentive Plan (the
“Omnibus Plan”). The Omnibus Plan authorizes the board of directors or a
committee thereof, to grant the following types of equity awards under the
Omnibus Plan: Incentive Stock Options (“ISOs”), Non-qualified Stock
Options (“NSOs”), Stock Appreciation Rights (“SARs”), Restricted Stock,
Restricted Stock Units (“RSUs”), cash- or stock-based Performance awards (as
defined in the Omnibus Plan) and other stock-based awards. Four million shares of
common stock are reserved for issuance under the Omnibus Plan. In
connection with the adoption of the Omnibus Plan the Company’s Board of
Directors froze the Company’s other stock option plans and no further grants may
be made under those plans.
On
November 10, 2010, (1) a total of 511,143 RSUs were granted to the Company’s
directors in payment of directors fees through November 2011 pursuant to the
Company’s Director Compensation Policy, (2) a total of 574,242 RSUs previously
issued to the Company’s directors pursuant to this policy and which provided for
cash settlement were converted to stock settled RSUs, and (3) 115,000 RSUs were
granted in total to a consultant and to the Company’s President and CEO.
During the six months ended December 31, 2010 options to purchase 220,000 shares
were granted to employees exercisable at prices from $0.57 to $0.59 and
exercisable at various dates through November 2018. As of December 31,
2010, options to purchase an additional 2,579,615 shares are available to be
issued under the Omnibus Plan.
During
2007 the Company established the 2007 Equity Incentive Plan (the “2007 Plan”)
that authorized 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. During the year ended June 30, 2010 options to purchase
821,500 shares were granted to employees and directors under the 2007 Plan
exercisable at prices from $0.95 to $1.39 and exercisable at various dates
through April 2018. During the six months ended December 31, 2010, 74,500
options were granted to employees at exercise prices from $0.46 to $0.64 and
expiration dates from August 2018 to October 2018 and 50,189 options were
forfeited. As of December 31, 2010, there were no options available to be
issued under the 2007 Plan.
-12-
During
2005 the Company established an Employee Stock Option Scheme (the “2005 Plan”)
that authorized the board of directors or a committee thereof to grant options
to employees and directors of the Company. The maximum number of options
available to be granted in aggregate at any time under the 2005 Plan was the
number equivalent to 5% of the total number of issued shares of the Company
including all shares in underlying options under the Company’s stock option and
incentive plans. No options were issued under the 2005 Plan during year ended
June 30, 2010 and the six months ended December 31, 2010. During the year
ended June 30, 2010, 200,000 options were forfeited. At December 31, 2010,
options to purchase 50,000 shares with an exercise price of $3.82 and an
expiration date of June 2012 were outstanding. As of December 31, 2010,
there were no options available to be issued under the 2005 Plan.
In 2002
the Company established the 2002 Stock Option Plan (the “SOP”) whereby a stock
option committee was given the discretion to grant up to 579,107 options to
purchase shares to key employees of the Company. During the year ended
June 30, 2010, 150,000 options to purchase shares were granted under the SOP to
employees exercisable at prices from $0.49 to $0.75 and exercisable through June
2018, options for 87,907 shares forfeited, and options for 162,907 shares were
forfeited. During the six month period ended December 31, 2010 there were
100,000 options forfeited. No options were issued under the SOP during the
six month period ended December 31, 2010. At December 31, 2010 there were
375,000 options outstanding with exercise prices from $0.49 to $3.59 and
exercise dates up to June 2018. As of December 31, 2010, there were no
options available to be issued under the SOP.
The
Compensation Committee of the Company’s Board of Directors awarded two
inducement option grants to the Company’s new President and CEO in January
2010. The first grant is an option to purchase 400,000 shares of common
stock which vests as to one-third of the shares on January 7, 2011 and as to the
balance in 24 monthly installments beginning on January 31, 2011 and ending on
December 31, 2012. This option vests in full upon a “change of control.”
The second grant is an option to purchase 100,000 shares of common stock which
vests in two equal installments based on the achievement of certain performance
targets. Both options have an exercise price of $1.33 per share which was
equal to the closing price of the Company’s common stock on January 7, 2010 and
are not exercisable as to any portion of the option after the fifth anniversary
of the date on which that portion vests. The options are subject to other
terms and conditions specified in the related option agreements.
In
aggregate for all plans, at December 31, 2010, the Company has a total of
2,461,303 options outstanding, 1,200,385 RSUs outstanding, and 2,579,615 shares
available for future grant under the Omnibus Plan.
Information
with respect to stock option activity under the employee and director plans is
as follows:
Stock Option Activity
|
Number of
Options
|
Weighted-
Average
Exercise Price
Per Share
|
||||||
Balance
at July 1, 2009
|
1,424,354 | $ | 3.24 | |||||
Options
granted
|
1,471,500 | 1.22 | ||||||
Options
forfeited
|
(578,862 | ) | 3.49 | |||||
Options
exercised
|
- | |||||||
Balance
at June 30, 2010
|
2,316,992 | 1.92 | ||||||
Options
granted
|
294,500 | 0.58 | ||||||
Options
forfeited
|
(150,189 | ) | 3.21 | |||||
Options
exercised
|
- | |||||||
Balance
at December 31, 2010
|
2,461,303 | $ | 1.68 |
The
following table summarizes information relating to the stock options outstanding
at December 31, 2010:
Outstanding
|
Exercisable
|
|||||||||||||||||||
Range of Exercise Prices
|
Number of
Options
|
Average
Remaining
Contractual Life
(in years)
|
Weighted
Average
Exercise Price
|
Number of
Options
|
Weighted
Average
Exercise Price
|
|||||||||||||||
$0.49
to $1.69
|
1,936,303 | 6.3 | $ | 1.16 | 870,136 | $ | 1.33 | |||||||||||||
$3.59
to $3.82
|
525,000 | 3.5 | 3.61 | 481,250 | 3.61 | |||||||||||||||
Balance
at December 31, 2010
|
2,461,303 | $ | 1.68 | 1,351,386 | $ | 2.14 |
During
the six months ended December 31, 2010 options to purchase 294,500 shares were
granted to employees exercisable at prices from $0.46 to $0.64 per
share based on various service based vesting terms from August 2011 through
November 2013 and exercisable at various dates through December
2018.
-13-
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 using the Black-Scholes option-pricing
model:
2010
|
2009
|
|||||||
Expected
life of option (years)
|
2.5
|
2.5-4.75
|
||||||
Risk-free
interest rate
|
.52%
- .685%
|
1.2
- 1.4%
|
||||||
Assumed
volatility
|
62
- 114%
|
62
- 70%
|
||||||
Expected
dividend rate
|
0
|
0
|
||||||
Expected
forfeiture rate
|
0
|
0
|
Time-vested
and performance-based stock awards, including stock options, restricted stock
and restricted stock units, are accounted for at fair value at date of
grant. Compensation expense is recognized over the requisite service and
performance periods.
A summary
of the status of unvested employee stock options as of December 31, 2010 and
June 30, 2010 and changes during the six months and year then ended, is
presented below:
Unvested Stock Option Activity
|
Number of
Options
|
Weighted-
Average
Grant Date
Fair Value Per
Share
|
||||||
Balance
at July 1, 2009
|
371,533 | $ | 0.77 | |||||
Granted
|
1,471,500 | 0.58 | ||||||
Vested
|
(662,328 | ) | 0.49 | |||||
Forfeited
|
(193,205 | ) | 0.29 | |||||
Balance
at June 30, 2010
|
987,500 | 0.62 | ||||||
Granted
|
294,500 | 0.37 | ||||||
Vested
|
(172,083 | ) | 0.61 | |||||
Forfeited
|
- | - | ||||||
Balance
at December 31, 2010
|
1,109,917 | $ | 0.55 |
Total
fair value of options granted in the six months ended December 31, 2010 and 2009
was $107,689 and $317,937, respectively. At December 31, 2010 there was
$290,210 in unrecognized compensation cost related to unvested stock options,
which is expected to be recognized over the next 3 years.
During
the fourth quarter of fiscal 2010 the Company agreed to compensate its directors
with restricted stock units (“RSUs”) rather than cash. As a result
included in accrued compensation and benefits at June 30, 2010 was $182,500
related to these awards. The RSUs were classified as liability awards because
the RSUs were expected to be paid in cash upon vesting. These RSU’s were
converted to 574,242 stock settled RSU’s in November 2010 and $182,500 was
transferred from accrued compensation and benefits to additional paid-in
capital. The cash settled RSU’s that were converted to stock settled RSU’s
were 100% vested upon conversion. There were also $222,783 in directors
fees expense and $7,000 in consulting fees expense settled with RSU’s for the
six month period ended December 31, 2010. As of December 31, 2010
there are 488,357 unvested RSU’s which will vest through November 2011. At
December 31, 2010 there was $341,850 in unrecognized compensation cost related
to unvested RSU’s, which is expected to be recognized through November
2011. The vested RSU’s are exercisable six months after the holder’s
separation from service with the Company.
A summary
of the status of restricted stock units to be settled in stock as of December
31, 2010 and changes during the six months then ended, is presented
below:
Restricted Stock Unit Activity
|
Number of
Restricted Stock
Units
|
Weighted-
Average
Valuation Price
Per Unit
|
||||||
Conversion
of cash settled RSU's
|
574,242 | $ | 0.55 | |||||
RSU's
granted
|
626,143 | 0.70 | ||||||
RSU's
forfeited
|
- | - | ||||||
Balance
at December 31, 2010
|
1,200,385 | $ | 0.63 |
-14-
NOTE
8 - NON RELATED PARTY WARRANTS
At
December 31, 2010 there were outstanding warrants to purchase 40,000 shares
issued by the Company to an equipment supplier in November 2010 exercisable at
$0.56 per share and which expire in January 2014. The fair value of
the warrants was $11,834 and is included in the cost of the property and
equipment.
At
December 31, 2010 there were outstanding warrants to purchase 1,121,875 shares
acquired by certain purchasers of Company shares in March 2010 exercisable at
$1.04 per share and which expire in September 2015.
At
December 31, 2010 there were outstanding warrants to purchase 358,333 shares
acquired by certain purchasers of Company shares in August 2009 exercisable at
$1.33 per share and which expire in August 2015.
At
December 31, 2010 there were outstanding warrants to purchase 120,023 shares
acquired by Empire Financial Group, Ltd. in 2006 exercisable at $3.23 per share
and which expire on in September 2011.
At
December 31, 2010 there were outstanding warrants to purchase 50,000 shares
acquired by 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 in September 2012.
At
December 31, 2010 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
September 2012 and with exercise prices of between $3.75 and $7.20.
The table
below summarizes non-related party warrant balances:
Stock Warrants
Non-related parties
|
Number of
Warrants
|
Weighted-
Average
Exercise Price
Per Share
|
||||||
Balance
at July 1, 2009
|
365,823 | $ | 4.41 | |||||
Warrants
granted
|
1,480,208 | 1.11 | ||||||
Warrants
expired
|
- | |||||||
Warrants
exercised
|
- | |||||||
Balance
at June 30, 2010
|
1,846,031 | 1.76 | ||||||
Warrants
granted (See Note 9)
|
576,613 | 0.65 | ||||||
Warrants
expired
|
- | |||||||
Warrants
exercised (See Note 9)
|
(536,613 | ) | (0.66 | ) | ||||
Balance
at December 31, 2010
|
1,886,031 | 1.73 |
NOTE
9 – SHAREHOLDERS’ EQUITY
On August
30, 2010, the Company entered into an amended and restated securities purchase
agreement (“Socius Agreement”) with Socius CG II, Ltd. (“Socius”). Pursuant to
the Socius Agreement the Company has the right over a term of two years, subject
to certain conditions, to require Socius to purchase up to $10 million of
redeemable subordinated debentures and/or shares of redeemable Series A
preferred stock in one or more tranches. The debentures bear interest at
an annual rate of 10% and the shares of Series A preferred stock accumulate
dividends at the same rate. Both the debentures and the shares of Series A
preferred stock are redeemable at the Company’s election at any time after the
one year anniversary of issuance. Neither the debentures nor the Series A
preferred shares are convertible into common stock.
On
November 10, 2010, the Company’s Board of Directors approved a certificate of
designation of preferences, rights and limitations to authorize shares of Series
A preferred stock in accordance with the terms of the Socius Agreement.
Upon the authorization of Series A preferred stock and in accordance with the
terms of the Socius Agreement, the $517,168 of outstanding debentures issued by
the Company to Socius CG II, Ltd. on September 2, 2010, and $7,510 of accrued
interest were exchanged into 52.468 shares of Series A preferred stock. In
addition, in accordance with the Socius Agreement, any future tranches under the
Socius Agreement will involve shares of Series A preferred stock instead of
debentures.
Under the
Socius Agreement, in connection with each tranche Socius is obligated to
purchase that number of shares of our common stock equal in value to 135% of the
amount of the tranche at a per share price equal to the closing bid price of the
common stock on the trading day preceding our delivery of the tranche
notice. Socius may pay for the shares it purchases at its option, in cash
or a collateralized promissory note. Any such promissory note will bear
interest at 2.0% per year and is collateralized by Series A preferred stock
owned by Socius with a fair market value equal to the principal amount of the
promissory note. The entire principal balance and interest on the promissory
note is due and payable on the later of the fourth anniversary of the date of
the promissory note or when we have redeemed all the Series A preferred stock
issued by us to Socius under the Socius Agreement, and may be applied by us
toward the redemption of the shares of Series A preferred stock held by
Socius.
-15-
Our
ability to submit a tranche notice is subject to certain conditions including
that: (1) a registration statement covering our sale of shares of common stock
to Socius in connection with the tranche is effective and (2) the issuance of
such shares would not result in Socius and its affiliates beneficially owning
more than 9.99% of our common stock.
Under the
terms of the Socius Agreement, the Company was obligated to pay Socius a
commitment fee in the form of shares of common stock or cash, at the option of
the Company, in the amount of $500,000 if it is paid in cash and $588,235 if it
is paid in shares of common stock. Payment of the commitment fee occurred 50% at
the closing of the first tranche and 50% at the closing of the second
tranche.
On
September 2, 2010 the Company delivered the first tranche notice under the
Socius Agreement pursuant to which on September 20, 2010 Socius purchased
$517,168 of debentures. In connection with this tranche, (1) Socius
purchased 1,163,629 shares of common stock for a total purchase price of
$698,177 and at a per share purchase price of $0.60 and (2) the Company issued
to Socius 490,196 shares of common stock in payment of the commitment fee
payable in connection with the tranche. As consideration for the common stock it
purchased, Socius issued a collateralized promissory note maturing, the later of
September 2, 2014 or when the Series A preferred shares are redeemed by the
Company. Management expects to redeem the Series A preferred stock on
September 2, 2014. The promissory note was recorded at a discount of
$183,922 determined by discounting the promissory note at a rate of 10%.
The promissory note is reported in the stockholders equity section of the
Company’s December 31, 2010 condensed consolidated balance sheet because the
promissory note was received in exchange for the issuance of common
stock.
On
November 12, 2010 the Company delivered the second tranche notice under the
Socius Agreement pursuant to which on November 29, 2010 Socius purchased
$490,000 of Series A preferred stock. In connection with this tranche, (1)
Socius purchased 906,165 shares of common stock for a total purchase price of
$661,500 and at a per share purchase price of $0.73 and (2) the Company issued
to Socius 402,901 shares of common stock in payment of the commitment fee
payable in connection with the tranche. As consideration for the common stock it
purchased, Socius issued a collateralized promissory note maturing, the later of
November 12, 2014 or when the Series A preferred shares are redeemed by the
Company. Management expects to redeem the Preferred Shares on November 29,
2014. The promissory note was recorded at a discount of $173,872
determined by discounting the promissory note at a rate of 10%. The
promissory note is reported in the stockholders equity section of the Company’s
December 31, 2010 condensed consolidated balance sheet because the promissory
note was received in exchange for the issuance of common stock.
The
Company’s accounting for the 2% notes receivable – common stock is to accrue
interest on the discounted notes receivable at 10% as a credit to additional
paid in capital. The Company’s accounting for the Series A preferred stock
is to accrete dividends at 10% as a charge to additional paid in
capital.
In the
event of liquidation, dissolution or winding up (whether voluntary or
involuntary) of the corporation, the holders of shares of Series A preferred
stock shall be entitled to be paid the full amount payable on such shares upon
the liquidation, dissolution or winding up of the corporation fixed by the Board
of Directors with respect to such shares, if any, before any amount shall be
paid to the holders of the Common Stock. The liquidation preference of the
outstanding Series A preferred stock was $1,025,732 as of December 31,
2010.
See Note
12 for information concerning the third tranche under the Socius Agreement which
closed on January 27, 2011.
On
October 12, 2010, we entered into Stock Purchase Agreements with certain
investors providing for the sale of a total of 3,329,467 shares of the Company’s
common stock for an aggregate purchase price of $1,435,000 at a price per share
of $0.431 which was the closing price of the Company’s common stock on October
12, 2010. $425,000 of these shares were purchased by members of the
Company’s Board of Directors. 2,111,369 of these shares were offered by
the Company pursuant to its universal shelf registration statement on Form
S-3. The balance of the shares were sold in a private placement
transaction.
-16-
NOTE
10 – COMMITMENTS
The
Company leases its Australian research and development facility from a
non-related Australian company expiring October 31, 2011. The current
rental is $72,170 per annum (A$72,431) and is subject to an annual CPI
adjustment. Rent expense was $18,763 and $39,355 for the three and six months
ended December 31, 2010, respectively. Rent expense was $16,799 and
$31,987 for the three and six months ended December 31, 2009, respectively. The
future payments required under the terms of the lease are as
follows:
Fiscal
Year 2011
|
$ | 50,649 | ||
Fiscal
Year 2012
|
6,300 | |||
Total
|
$ | 56,949 |
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 six 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.
NOTE
11 - RETIREMENT PLANS
All
Australian based employees are entitled to varying degrees of benefits on
retirement, disability, or death. The Company contributes to an
accumulation fund on behalf of the employees under an award which is legally
enforceable. For U.S. employees, the Company has a 401(k)
plan. All active participants are 100% vested
immediately. Expenses under these plans were $12,548 and $22,404 for
the three and six months ended December 31, 2010. Expenses under
these plans were $21,109 and $43,804 for the three and six months ended December
31, 2009, respectively.
NOTE 12 -
SUBSEQUENT EVENTS
On
December 29, 2010 and January 3, 2011 the Company entered into Stock Purchase
Agreements with certain investors providing for the issuance of a total of
2,103,532 shares of the Company’s common stock for an aggregate purchase price
of $2,000,000 at a weighted average price per share of $0.95. The
closing took place on January 12, 2011. $200,000 of these shares were
purchased by members of the Company’s Board of Directors. $1,800,000
of these shares were offered by the Company pursuant to its universal shelf
registration statement on Form S-3. The net proceeds to ZBB, after
deducting $57,000 of offering costs, were $1,943,000.
On
January 12, 2011 the Company delivered the third tranche notice under the Socius
Agreement (see Note 9) pursuant to which on January 27, 2011 Socius purchased
from the Company $2,020,000 of Series A preferred stock. In
connection with the tranche, (1) Socius purchased 1,934,042 shares of common
stock for a total purchase price of $2,727,000 and at a per share purchase price
of $1.41. As consideration for the Common Stock Socius purchased, Socius issued
a secured promissory note maturing, the later of January 12, 2015 or when the
Series A preferred shares are redeemed by the Company.
On
January 21, 2011 (“Closing Date”), the Company entered into an Asset Purchase
Agreement under which the Company acquired substantially all of the net assets
of Tier Electronics, LLC (“Seller”) used in connection with Seller’s business of
developing, manufacturing, marketing and selling power electronics products for
and to original equipment manufacturers in various industries. The
purchase price was comprised of (1) a $1.35 million promissory note issued by
the Company, (2) 800,000 shares of the Company’s common stock, (3) payment of
approximately $183,000 of Seller’s bank debt and (4) assumption of approximately
$900,000 of Seller’s liabilities. The promissory note is in the
principal amount of $1,350,000 and bears interest at a fixed annual rate equal
to eight percent. The principal balance of the note is payable in
three equal installments of $450,000 on the first, second and third
anniversaries of the Closing Date. Accrued interest is payable
monthly. Tier Electronics, LLC will operate as a wholly owned
subsidiary of the Company. Tier Electronics, LLC will lease its
facility from the former owner of the Seller under a lease agreement expiring
December 31, 2014. The first year rental is $84,000 per annum and is
subject to an annual CPI adjustment. The Company is required to pay
real estate taxes and other occupancy costs related to the
facility.
In
connection with this acquisition the Company awarded inducement options to
purchase a total of 750,000 shares of the Company’s common stock at an exercise
price of $1.26 to certain members of management of Tier Electronics,
LLC. The options vest as follows: (1) 420,000 will vest in three
equal annual installments beginning on December 31, 2011 based on achievement of
certain revenue targets, (2) 330,000 vest in three equal annual installments
beginning on the one-year anniversary of the Closing Date.
-17-
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
the audited financial statements and notes thereto and Management’s Discussion
and Analysis of Financial Condition and Results of Operations contained in our
Annual Report on Form 10-K for the fiscal year ended June 30, 2010 as filed by
us with the SEC on September 10, 2010. ZBB Energy Corporation (“We,”
“Us,” “Our,” “ZBB” or the “Company”) develops and manufactures distributed
energy storage solutions based upon the Company’s proprietary zinc-bromide
rechargeable electrical energy storage technology.
On
January 21, 2011 (“Closing Date”), we entered into an Asset Purchase Agreement
under which we acquired substantially all of the assets of Tier Electronics, LLC
(“Seller”) used in connection with Seller’s business of developing,
manufacturing, marketing and selling power electronics products for and to
original equipment manufacturers in various industries. The purchase
price was comprised of (1) a $1.35 million promissory note issued by the
Company, (2) 800,000 shares of the Company’s common stock, (3) payment of
approximately $183,000 of Seller’s bank debt and (4) assumption of approximately
$900,000 of Seller’s liabilities. The promissory note is in the
principal amount of $1,350,000 and bears interest at a fixed annual rate equal
to eight percent. The principal balance of the note is payable in
three equal installments of $450,000 on the first, second and third
anniversaries of the Closing Date. Accrued interest is payable
monthly. Tier Electronics, LLC will operate as a wholly owned
subsidiary of the Company.
We
provide advanced electrical power management platforms targeted at the growing
global need for distributed renewable energy, energy efficiency, power quality,
and grid modernization. We and our power electronics subsidiary, Tier
Electronics, have developed a portfolio of intelligent power management
platforms that directly integrate multiple renewable and conventional onsite
generation sources with rechargeable zinc bromide flow batteries and other
storage technology. We also offer advanced systems to directly connect wind and
solar equipment to the grid and systems that can form various levels of
micro-grids. Tier Electronics participates in the energy efficiency
markets through its hybrid vehicle control systems, and power quality markets
with its line of regulation solutions. Together, these platforms solve a wide
range of electrical system challenges in global markets for utility,
governmental, commercial, industrial and residential end customers. A developer
and manufacturer of its modular, scalable and environmentally friendly power
systems (“ZESS POWR™”), ZBB Energy was founded in 1998 and is headquartered in
Wisconsin, USA with offices also located in Perth, Western
Australia.
Risks
and Uncertainties
The
following discussion of the consolidated financial position and results of
operations of the Company should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this form 10-Q and
the Company’s annual report filed on form 10-K for the fiscal year ended June
30, 2010. In addition to historical information, this discussion contains
forward-looking statements such as statements of the Company’s expectations,
plans, objectives and beliefs. These statements use such words as “may,” “will,”
“expect,” “anticipate,” “believe,” “plan,” and other similar
terminology.
In
addition to the risks and uncertainties faced generally by participants in the
renewable energy industry, we face the following risks and
uncertainties:
|
·
|
Our
stock price could be volatile and our trading volume may fluctuate
substantially.
|
|
·
|
We
have incurred losses and anticipate incurring continuing
losses.
|
|
·
|
We
will need additional financing.
|
|
·
|
If
we fail to adequately manage our resources, it could have a severe
negative impact on our financial results or stock
price.
|
|
·
|
We
may be unsuccessful in our efforts to obtain federal government grants
which could harm our business and results of operations. We
also may be unsuccessful in our efforts to monetize government tax credits
and other off balance sheet assets.
|
|
·
|
Our
success depends on our ability to retain our managerial personnel and to
attract additional personnel.
|
|
·
|
Businesses
and consumers might not adopt alternative energy solutions as a means for
obtaining their electricity and power needs, and therefore our revenues
may not increase, and we may be unable to achieve and then sustain
profitability.
|
|
·
|
Our
industry is highly competitive and we may be unable to successfully
compete.
|
|
·
|
Unless
we keep pace with changing technologies, we could lose existing customers
and fail to win new customers.
|
|
·
|
If
our products do not perform as promised, we could experience increased
costs, lower margins and harm to our
reputation.
|
|
·
|
Our
relationships with our strategic partners may not be successful and we may
not be successful in establishing additional partnerships, which could
adversely affect our ability to commercialize our products and
services.
|
-18-
|
·
|
Shortages
or delay of supplies of component parts may adversely affect our operating
results until alternate sources can be
developed.
|
|
·
|
We
have no experience manufacturing our products on a large-scale basis and
may be unable to do so at our current
facility.
|
|
·
|
We
market and sell, and plan to market and sell, our products in numerous
international markets. If we are unable to manage our international
operations effectively, our business, financial condition and results of
operations could be adversely
affected.
|
|
·
|
Currency
translation and transaction risk may adversely affect our business,
financial condition and results of
operations.
|
|
·
|
The
success of our business depends on our ability to develop and protect our
intellectual property rights, which could be
expensive.
|
|
·
|
We
may be subject to claims that we infringe the intellectual property rights
of others, and unfavorable outcomes could harm our
business.
|
|
·
|
We
may experience difficulties in integrating the business of Tier
Electronics LLC and could fail to realize the potential benefits of this
acquisition.
|
|
·
|
If
our common stock is de-listed from the NYSE AMEX, the common stock will
become less liquid.
|
|
·
|
We
have never paid cash dividends and do not intend to do
so.
|
New
Accounting Pronouncements
None
Critical
Accounting Policies and Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America and related disclosures
require management to make estimates and assumptions.
We
believe that the following are our most critical accounting estimates and
assumptions the Company must make in the preparation of its condensed
consolidated financial statements and related disclosures:
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amount of revenues and
expenses during the reporting period. It is reasonably possible that the
estimates we have made may change in the near future. Significant estimates
underlying the accompanying condensed consolidated financial statements include
those related to:
|
·
|
the
timing of revenue recognition;
|
|
·
|
the
allowance for doubtful accounts;
|
|
·
|
valuations
of excess and obsolete inventory;
|
|
·
|
the
lives and recoverability of equipment and other long-lived assets such as
goodwill;
|
|
·
|
restructuring,
reorganization, relocation and severance
costs;
|
|
·
|
contract
costs;
|
|
·
|
warranty
liabilities;
|
|
·
|
tax
valuation allowances; and
|
|
·
|
stock-based
compensation.
|
Income
Taxes
The
Company records deferred income taxes in accordance with Financial Accounting
Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 740,
“Accounting for Income Taxes.” This ASC requires recognition of deferred income
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 income tax assets to the
amount expected to be realized. There were no net deferred income tax
assets recorded as of December 31, 2010.
The
Company applies a more-likely-than-not recognition threshold for all tax
uncertainties as required under ASC Topic 740, which only allows the recognition
of those tax benefits that have a greater than fifty percent likelihood of being
sustained upon examination by the taxing authorities. The Company’s management
has reviewed the Company’s tax positions and determined there were no
outstanding or retroactive tax positions with less than a 50% likelihood of
being sustained upon examination by the taxing authorities as of December 31,
2010 and June 30, 2010.
-19-
The
Company’s U.S. Federal, Wisconsin, and Australian income tax returns for the
years ended June 30, 2005 through June 30, 2010 are subject to examination by
major taxing authorities.
Property,
Plant and Equipment
Land,
building, equipment, computers and furniture and fixtures are recorded at
cost. Maintenance, repairs and betterments are charged to
expense.
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:
|
Estimated
Useful Lives
|
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 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. Management has determined that
there are no long-lived assets impaired as of December 31, 2010 and June 30,
2010.
Goodwill
Goodwill
is recognized as the excess cost of an acquired entity over the net amount
assigned to assets acquired and liabilities assumed. Goodwill is not amortized
but reviewed for impairment annually as of June 30 or more frequently if events
or changes in circumstances indicate that its carrying value may be
impaired. These conditions could include a significant change in the
business climate, legal factors, operating performance indicators, competition,
or sale or disposition of a significant portion of a reporting
unit.
Testing
for the impairment of goodwill involves a two step process. The first step of
the impairment test requires the comparing of a reporting units fair value to
its carrying value. If the carrying value is less than the fair value, no
impairment exists and the second step is not performed. If the carrying value is
higher than the fair value, there is an indication that impairment may exist and
the second step must be performed to compute the amount of the impairment. In
the second step, the impairment is computed by estimating the fair values of all
recognized and unrecognized assets and liabilities of the reporting unit and
comparing the implied fair value of reporting unit goodwill with the carrying
amount of that unit’s goodwill. Based on this method, the Company
determined fair value as evidenced by market capitalization, and concluded that
there was no need for an impairment charge as of December 31, 2010 and June 30,
2010.
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.
|
-20-
The
Company evaluates the recoverability of its slow moving or obsolete inventories
at least quarterly. The Company estimates the recoverable cost of such inventory
by product type while considering factors such as its age, historic and current
demand trends, the physical condition of the inventory as well as assumptions
regarding future demand. The Company’s ability to recover its cost for slow
moving or obsolete inventory can be affected by such factors as general market
conditions, future customer demand and relationships with
suppliers.
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 SEC 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.
Revenues
from government funded research and development contracts are recognized
proportionally as costs are incurred and compared to the estimated total
research and development costs for each contract. In many cases, the Company is
reimbursed only a portion of the costs incurred or to be incurred on the
contract. Government funded research and development contracts are generally
multi-year, cost-reimbursement and/or cost-share type contracts. The Company is
reimbursed for reasonable and allocable costs up to the reimbursement limits set
by the contract.
Advanced
Engineering and Development Expenses
The
Company expenses advanced engineering and development costs as incurred. These
costs consist primarily of labor, overhead, and materials to build prototype
units, materials for testing, develop manufacturing processes and include
consulting fees and other costs.
To the
extent these costs are separately identifiable, incurred and funded by advanced
engineering and development type agreements with outside parties; they will be
shown separately on the condensed consolidated statements of operations as a
“cost of engineering and development revenues”.
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 six months 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.
-21-
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. In accordance with the FASB ASC topic 260, any anti-dilutive
effects on net income (loss) per share are excluded.
Stock-Based
Compensation
The
Company measures all “Share-Based Payments", including grants of stock options,
restricted shares and restricted stock units, to be recognized in its condensed
consolidated statement of operations 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 has agreed to compensate its directors with restricted stock units
(“RSU’s”) rather than cash. The grant date fair value of the restricted stock
unit awards was determined using the closing stock price of the Company’s common
stock on the day prior to the date of the grant, with the compensation expense
amortized over the vesting period of restricted stock unit awards, net of
estimated forfeitures.
The
Company only recognizes expense to its statements of operations for those
options, shares or RSU’s 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, for all other awards.
Results
of Operations
Three
months ended December 31, 2010 compared with the three months ended December 31,
2009:
Revenue
and Other income:
Our
revenues for the three months ended December 31, 2010 and 2009 were $234,681 and
$555,455, respectively. This decrease of $320,774 was the result of a
decrease in revenues of $221,318 from commercial product sales and revenues, and
a $99,456 decrease in engineering and development revenues as compared to the
three months ended December 31, 2009. The decrease in commercial
product sales and revenues was primarily the result of a delay in certain orders
due to the need for PECC inverter certification to UL standard 1741, which is
expected in early calendar year 2011. The decrease in engineering and
development revenues was due to the Company completing all final accounting and
the final research report to complete the entire Advanced Electricity Storage
Technologies project ("AEST") with the Commonwealth of
Australia. Final submission of the required financial information to
the Commonwealth of Australia was completed in November 2010, and the Company
received the final payment from the Commonwealth of Australia in November 2010
of $184,939.
Other
income for the three months ended December 31, 2010 reflects a decrease in
interest income of $18,173 compared to the three months ended December 31, 2009,
due primarily to decreasing investment balances and lower interest rates on
invested funds.
Cost
and Expenses and Other Expense:
Total
costs and expenses for the three months ended December 31, 2010 and 2009 were
$2,029,079 and $3,906,336, respectively. This decrease of $1,877,257 in the
three months ended December 31, 2010 was primarily due to the
following:
|
·
|
decreased
costs of product sales of $174,127 because product shipments decreased in
the quarter ended December 31, 2010 due to the need for PECC inverter
certification to UL standard 1741 for certain orders and a decrease in
cost of engineering and development revenues of $872,322 due to the
completion of activities required under the AEST contract during
the year ended June 30, 2010 and decreases in other engineering and
development contracts; and
|
|
·
|
increases
in advanced engineering and development expenses of $445,818 primarily due
to an increase in engineering and development expense of $646,656 for an
increase in engineering and development activities in our Australian
subsidiary after the completion of the AEST project and a decrease in
rework expense of $203,838 related to battery stack manufacturing issues;
and
|
|
·
|
decrease
in employee severance pay expense of $390,000 and decrease in fund raising
expense of $120,000; and
|
|
·
|
decrease
in impairment and other equipment charges of
$780,231.
|
-22-
Other
expenses for the three months ended December 31, 2010 and 2009 consisted
primarily of interest expenses of $46,869 and $30,862,
respectively.
Net
Loss:
Our net
loss for the three months ended December 31, 2010 decreased by $1,522,876 to
$1,838,274 from the $3,361,150 net loss for the three months ended December 31,
2009. This decrease in loss was primarily the result of decreases in
expenses as described above.
Six months
ended December 31, 2010 compared with the six months ended December 31,
2009:
Revenue
and Other income:
Our
revenues for the six months ended December 31, 2010 and 2009 were $234,681 and
$1,367,368, respectively. This was the result of a decrease in
revenues of $888,044 from commercial product sales and revenues, and a $244,643
decrease in engineering and development revenues as compared to the six months
ended December 31, 2009. The decrease in commercial product sales and
revenues is primarily the result of a delay in certain orders due to the need
for PECC inverter certification to UL standard 1741, which is expected in early
calendar year 2011, and some temporary installation issues with an order shipped
during the six months ended December 31, 2010. The decrease in
engineering and development revenues is primarily due to the Company completing
all final accounting and the final research report to complete the entire AEST
project with the Commonwealth of Australia. Final submission of the
required financial information to the Commonwealth of Australia was completed in
November 2010, and the Company received the final payment from the Commonwealth
of Australia in November 2010 of $184,939.
Other
income for the six months ended December 31, 2010 reflects a decrease in
interest income of $42,879 compared to the six months ended December 31, 2009,
due primarily to decreasing investment balances and lower interest rates on
invested funds.
Cost
and Expenses and Other Expense:
Total
costs and expenses for the six months ended December 31, 2010 and 2009 were
$4,033,163 and $6,169,184, respectively. This decrease of $2,136,021 in the six
months ended December 31, 2010 was primarily due to the following:
|
·
|
decreased
costs of product sales of $820,229 due
to a decease in product shipments and because products that shipped
in the six months ended December 31, 2010 were not fully commissioned and
accepted by the customer and a decrease in cost of engineering and
development revenues of $1,166,777 due to the completion
of activities required under the AEST contract during
the year ended June 30, 2010 and a decrease in other engineering and
development contracts; and
|
|
·
|
increases
in advanced engineering and development expenses of approximately $960,000
primarily due to an increase in the Company’s engineering and development
activities for its next generation battery module and the PECC systems,
less decreases in rework expense of approximately $200,000;
and
|
|
·
|
decrease
in employee severance pay expense of $390,000 and decrease in fund raising
expense of $120,000
|
|
·
|
legal
and accounting fees increase of approximately $130,000 related to certain
accounting matters; and
|
|
·
|
decrease
in impairment and other equipment charges of
$780,231.
|
Other
expenses for the six months ended December 31, 2010 and 2009 consisted primarily
of interest expenses of $78,876 and $62,894, respectively.
Net
Loss:
Our net
loss for the six months ended December 31, 2010 decreased by $964,806 to
$3,872,575 from the $4,837,381 net loss for the six months ended December 31,
2009. This decrease in loss was primarily the result of the decreases
in expenses as described above partially offset by the reduction in
revenues.
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
research contracts. Total paid in capital as of December 31, 2010 was
$53,771,533. We had a cumulative deficit of $50,767,252 as of
December 31, 2010 compared to a cumulative deficit of $46,894,677 as of June 30,
2010. At December 31, 2010 we had a working capital deficit of
$906,815 compared to a June 30, 2010 working capital deficit of
$800,204. Our shareholders’ equity as of December 31, 2010 and June
30, 2010 was $382,355 and $1,451,277, respectively.
-23-
On August
30, 2010 we entered into an amended and restated securities purchase agreement
(“Socius Agreement”) with Socius CG II, Ltd. (“Socius”). Pursuant to the Socius
Agreement we have the right over a term of two years, subject to certain
conditions, to require Socius to purchase up to $10 million of redeemable
subordinated debentures and/or shares of redeemable Series A preferred stock in
one or more tranches. The debentures bear interest at an annual rate
of 10% and the shares of Series A preferred stock accumulate dividends at the
same rate. Both the debentures and the shares of Series A preferred
stock are redeemable at our election at any time after the one year anniversary
of issuance. Neither the debentures nor the Series A preferred shares
are convertible into common stock. Shares of Series A preferred stock
were subsequently authorized. Upon authorization, the outstanding
debentures were automatically converted into shares of Series A preferred stock.
Under the Socius Agreement, in connection with each tranche Socius will be
obligated to purchase that number of shares of our common stock equal in value
to 135% of the amount of the tranche at a per share price equal to the closing
bid price of the common stock on the trading day preceding our delivery of the
tranche notice. Socius may pay for the shares it purchases at its option, in
cash or with a secured promissory note. Our ability to submit a tranche notice
is subject to certain conditions including that: (1) a registration statement
covering our sale of shares of common stock to Socius in connection with the
tranche is effective and (2) the issuance of such shares would not result in
Socius and its affiliates beneficially owning more than 9.99% of our common
stock.
During
the six months ended December 31, 2010 we delivered the first and second tranche
notice under the Socius Agreement pursuant to which Socius purchased from us
$517,168 of debentures and $490,000 of preferred stock. In
connection with the tranches, (1) Socius purchased 2,069,793 shares of common
stock for a total purchase price of $1,359,677 and at a per share weighted
average purchase price of $0.66 and (2) we issued to Socius 893,097 shares of
common stock in payment of the commitment fee payable by us to Socius in
connection with the initial tranche under the Socius Agreement. Socius paid for
the shares of common stock it purchased with secured promissory notes maturing
the later of four years or when we have redeemed all preferred stock issued by
us to Socius under the Socius Agreement.
On
October 12, 2010, we entered into Stock Purchase Agreements with certain
investors providing for the sale of a total of 3,329,467 shares of the Company’s
common stock for an aggregate purchase price of $1,435,000 at a price per share
of $0.431 which was the closing price of the Company’s common stock on October
12, 2010. $425,000 of these shares were purchased by members of the
Company’s Board of Directors. 2,111,369 of these shares were offered
by the Company pursuant to its universal shelf registration statement on Form
S-3 described below. The balance of the shares were sold in a private
placement transaction.
On May 1,
2009 we filed a Registration Statement on Form S-3 with the Securities and
Exchange Commission (SEC) for a $10 million universal shelf, which was declared
effective by the SEC on May 13, 2009. We took this action as a
measure in anticipation of our possible future needs to raise additional
investment capital to fund additional working capital and further capital
expenditures. On August 18, 2009, we used this universal shelf
registration statement to complete a registered direct sale of 1,791,667 units
at $1.20 per unit consisting of an aggregate of 1,791,667 shares of common stock
and warrants to purchase 358,333 shares of common stock at an exercise price of
$1.33 per share. The proceeds to the Company after deducting
placement agent fees and offering expenses were approximately $1.9
million. On March 9, 2010, we used this universal shelf registration
statement to complete a registered direct sale 2,243,750 units at $.80 per unit
consisting of an aggregate of 2,243,750 shares of common stock and warrants to
purchase 1,121,875 shares of common stock at an exercise price of $1.04 per
share. The proceeds to ZBB after deducting placement agent fees and
offering expenses were approximately $1.6 million.
In
December 2009 we were awarded a $1.3 million Wisconsin Clean Energy Business
Loan through the American Recovery and Reinvestment Act. We closed
this loan transaction in May 2010 and we had received $1,300,000 under the loan
as of December 31, 2010.
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,
and 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. However, there can be no assurance we will receive any
government funding through these activities.
We also
have $38 million of net operating loss carryforwards and $14.675 million of
Department of Energy sponsored tax credits. The tax credits require the Company
to invest approximately $50 million in plant and equipment, which the Company
has
started but has not completed. We are exploring ways to
monetize or to use these benefits. However, there can be no assurance
that these efforts will prove successful.
Our
investment capital requirements will depend upon numerous factors, including our
ability to control expenses, the progress of our engineering and development
programs, the success of our marketing and sales efforts and our ability to
obtain alternative funding sources such as government grants. In
order to actively manage financing risk, the board of directors has worked with
management to carefully consider financing alternatives and to implement cost
containment measures. Actions taken by the board of directors and
management in fiscal 2011 to date include: 1) execute an overall reduction in
controllable expenses to preserve cash resources including continuing our
revised non-employee director compensation policy under which fees are paid
primarily with equity instead of cash; 2) actively pursue additional sources of
capital to fund working capital and operating needs; 3) pursue government grant
and federal stimulus package opportunities; 4) file a new $25 million universal
shelf registration statement with the SEC as described in further detail below;
and 5) pursue potential strategic transactions such as the Tier acquisition
through which we may grow our business and/or obtain non-dilutive
financing.
-24-
As
described above, in January 2011 we consummated the acquisition of substantially
all of the assets of Tier Electronics, LLC (“Seller”) used in connection with
Seller’s business of developing, manufacturing, marketing and selling power
electronics products for and to original equipment manufacturers in various
industries. This acquisition significantly expands our product
portfolio, customer base and served market and is expected to add significantly
to revenue growth and be accretive to operating cash flows.
On
January 31, 2011 we filed with the SEC a universal shelf registration statement
on Form S-3 covering the offer and sale from time to time of up to $25 million
of securities, which may include additional securities issued pursuant to the
Socius Agreement as well as other equity, debt and other securities as described
in the registration statement. While we do not have any immediate plans to offer
securities under this shelf registration, it is intended to give the Company the
flexibility to take advantage of financing opportunities as needed or deemed
desirable in light of market or other conditions.
We
believe we have the necessary financing vehicles in place, including the Socius
Agreement described above, to fund the Company for the remainder of this fiscal
year. However, there can be no assurances that unforeseen
circumstances will not jeopardize the Company’s ability to draw on these
financing vehicles. Therefore, we are continuing to seek additional
sources of funds to add to the financing vehicles already in
place. However, we have no commitments to obtain any additional
funds, and there can be no assurance such funds will be available on acceptable
terms or at all. If we are unable to obtain such needed capital, our
financial condition and results of operations may be materially adversely
affected and we may not be able to continue operations.
Operating
Activities
For the
six months ended December 31, 2010, net cash used in operations was
$3,576,277. Cash used in operations resulted from a net loss of
$3,872,575, reduced by $482,049 in non-cash adjustments and increased by
$185,751 in net changes to working capital. Increases in inventories of $69,854
were required to restock for production start-up, offset by an increase in
accounts payable of $143,363 due to the extension of payment terms with
suppliers. Accrued compensation and benefits decreased by $221,153,
primarily due to the payment of the balance due under the severance agreement
with a former CEO of the Company. Accrued expenses decreased by $79,034 due to
the timing of payments, less increases in accrued warranty. Working
capital increased by $214,511 due to a net increase in deferred revenue relating
to customer deposits. Non-cash adjustments to operations included
$310,788 of stock based compensation expense, and $171,261 of depreciation
expense.
Investing
Activities
For the
six months ended December 31, 2010, net cash used by investing activities was
$318,310, resulting from cash used for the purchase of property and
equipment.
Financing
Activities
For the
six months ended December 31, 2010, net cash provided by financing activities
was $3,261,854 resulting from $1,300,000 in proceeds from the issuance of a note
payable, offset by repayments of $219,501 of principal on bank loans and notes
payable, proceeds from issuance of debentures notes payable and preferred stock
under the Socius Agreement of $1,007,168 and proceeds from issuance of common
stock, net of issuance costs totaling $1,174,187.
Off-Balance
Sheet Arrangements
We have
no off-balance sheet arrangements as of December 31, 2010.
Item
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not applicable for smaller reporting
companies.
-25-
Item
4. CONTROLS AND PROCEDURES
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 effective to ensure that information required to be disclosed by
us in reports that we file or submit under the Securities Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the SEC, and that material information relating to the
Company is accumulated and communicated to management, including our principal
executive officer and our principal financial officer, as appropriate to allow
timely decisions regarding required disclosures.
Changes
in Internal Controls
As
previously reported in the Company’s Form 10-Q for the period ended September
30, 2010, management determined that the Company did not have procedures in
place as of September 30, 2010 for the review of compliance with debt
covenants. The Company remediated this deficiency during the period
covered by this quarterly report on 10-Q, by establishing a procedure under
which compliance with debt covenants is reviewed at each financial reporting
date. Other than the change to its internal control over financial
reporting discussed in the preceding sentence, during the period covered by this
quarterly report on Form 10-Q, the Company has not made any changes to its
internal control over financial reporting (as referred to in Paragraph 4(b) of
the Certifications of the Company’s principal executive officer and principal
financial officer included as exhibits to this report) that have materially
affected, or are reasonably likely to affect the Company’s internal control over
financial reporting.
-26-
PART
II
OTHER
INFORMATION
ITEM
1. LEGAL
PROCEEDINGS
None
ITEM
1A. RISK FACTORS
We
operate in a rapidly changing environment that involves a number of risks that
could materially affect our business, financial condition or future results,
some of which are beyond our control. In addition to the other
information set forth in this report, the risks and uncertainties that we
believe are most important for you to consider are discussed in Part I, “Item
1A. Risk Factors” in our most recent Annual Report on Form 10-K and in any
subsequent Quarterly Reports on Form 10-Q. Other than the factors set
forth below, there have been no material changes to the risk factors described
in those reports.
We
may experience difficulties in integrating the business of Tier Electronics LLC
and could fail to realize the potential benefits of the
acquisition.
In
January 2011 we acquired substantially all of the assets of Tier Electronics,
LLC (“Seller”) used in connection with Seller’s business of developing,
manufacturing, marketing and selling power electronics products for and to
original equipment manufacturers in various industries. This
acquisition significantly expands our product portfolio, customer base and
served market and is expected to add significantly to revenue growth and be
accretive to operating cash flows. However, these expectations are
based on preliminary projections which may materially
change. Achieving the anticipated benefits of the acquisition is
subject to a number of uncertainties including:
|
·
|
our
ability to integrate certain of Seller’s operations or take advantage of
expected growth opportunities;
|
|
·
|
general
market and economic conditions;
|
|
·
|
general
competitive factors in the marketplace;
and
|
|
·
|
potentially
higher than expected costs required to achieve the anticipated benefits of
the acquisition.
|
Our
inability to realize the potential benefits of the acquisition, as well as any
delay in successfully integrating Seller’s business, could have an adverse
effect upon our revenues, level of expenses and operating results.
If
our stockholders’ equity continues to remain below the minimum requirement, our
common stock may be delisted from the NYSE Amex, which would cause our common
stock to become less liquid.
Our
shares have been listed on the NYSE Amex (formerly the American Stock Exchange)
since June 18, 2007. We are required to comply with all reporting and
listing requirements on a timely manner and maintain our corporate governance
and independent director standards. The NYSE Amex imposes, among other
requirements, listing maintenance standards including minimum stockholders’
equity, minimum price and market capitalization requirements.
On
December 2, 2010, we received notice from the NYSE Amex staff indicating that we
were noncompliant with the requirements of Section 1003(a)(i) of the NYSE Amex’s
company guide with respect to minimum stockholders’ equity based on our annual
report for the period ended June 30, 2010, and our quarterly report for the
period ended September 30, 2010. The notice provided that we should
submit a plan that would reestablish compliance with the listing
requirements. We submitted a compliance plan to the NYSE Amex staff,
and on February 4, 2011, the NYSE Amex staff notified us that they had accepted
our compliance plan. The NYSE Amex staff granted us an extension
until June 12, 2012, to regain compliance with the continued listing
standards. We will be able to continue our listing during the plan
period pursuant to the extension and will be subject to periodic review by the
NYSE Amex staff. Failure to make progress consistent with the plan or
to regain compliance with the continued listing standards by the end of the
applicable extension periods could result in our shares being delisted from the
NYSE Amex.
If the
NYSE Amex delists our common stock from trading for this reason or for failing
to meet any other ongoing listing requirements, among other things, it could
lead to a number of negative implications, including reduced liquidity in our
common stock and greater difficulty in obtaining financing. There can be no
assurance that our common stock will remain eligible for trading on the NYSE
Amex.
-27-
ITEM
2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM
3. DEFAULTS
UPON SENIOR SECURITIES
None
ITEM
4. (REMOVED
AND RESERVED)
ITEM
5. OTHER
INFORMATION
None
ITEM
6. EXHIBITS
The
exhibits required to be filed as a part of this report are listed in the Exhibit
Index.
-28-
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
14, 2011
|
By:
|
/s/Eric C. Apfelbach
|
Name:
|
Eric
C. Apfelbach
|
|
Title:
|
Chief
Executive Officer
|
|
(Principal
Executive Officer)
|
||
February
14, 2011
|
By:
|
/s/ Will Hogoboom
|
Name:
|
Will
Hogoboom
|
|
Title:
|
Chief
Financial Officer
|
|
(Principal
financial officer and
|
||
Principal
accounting officer)
|
-29-
EXHIBIT
INDEX
Item 15(c)
Exhibits:
Exhibit
No.
|
Description
|
Incorporated by Reference to
|
||
4.1
|
Amendment
to Articles of Incorporation
|
Incorporated
by reference to Appendix B attached to the Company’s Definitive Proxy
Statement filed on September 24, 2010
|
||
4.2
|
Certificate
of Designation of Preferences, Rights and Limitations of Series A
Preferred Stock
|
Incorporated
by reference to Appendix C attached to the Company’s Definitive Proxy
Statement filed on September 24, 2010
|
||
10.1
|
2010
Omnibus Long-term Incentive Plan
|
Incorporated
by reference to Appendix A attached to the Company’s Definitive Proxy
Statement filed on September 24, 2010
|
||
10.2
|
Form
of Stock Purchase Agreement, dated October 12, 2010
|
Incorporated
by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed on October 13, 2010
|
||
10.3
|
Form
of Stock Purchase Agreement, dated October 12, 2010
|
Incorporated
by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K
filed on October 13, 2010
|
||
10.4
|
Independent
contractor agreement dated December 1, 2010 between ZBB Energy Corporation
and Will Hogoboom
|
Incorporated
by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K
filed on December 6, 2010
|
||
10.5
|
Form
of Stock Purchase Agreement, dated December 29, 2010
|
Incorporated
by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed on December 30, 2010
|
||
10.6
|
Form
of Stock Purchase Agreement, dated December 29, 2010
|
Incorporated
by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K
filed on December 30, 2010
|
||
10.7
|
Financial
Advisory Agreement between ZBB Energy Corporation and Stonegate
Securities, Inc., dated December 29, 2010
|
Incorporated
by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K
filed on December 30, 2010
|
||
10.8
|
ZBB
Energy Corporation Director Compensation Policy dated November 10,
2010
|
|
||
31.1
|
Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|||
31.2
|
Certification
of Principal Financial and Accounting Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
|
|||
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
|
|||
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
|
-30-