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| ZBB > SEC Filings for ZBB > Form 10-Q on 13-Feb-2009 | All Recent SEC Filings |
13-Feb-2009
Quarterly Report
Introduction
The following information should be read in conjunction with the financial
statements and notes thereto in Part I,
Item 1 of this Quarterly Report and with Management's Discussion and Analysis of
Financial Condition and Results of
Operations contained in our Annual Report on Form 10-KSB for the year ended June
30, 2008.
Forward-Looking and Cautionary Statements
Information provided by us or statements made by our employees may, from time to
time, contain "forward-looking" information that involves risks and
uncertainties. In particular, statements contained in this Quarterly Report that
are not historical facts constitute forward-looking statements and are made
under the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements involve substantial risks and uncertainties.
You can identify these statements by forward-looking words such as "may",
"expect", "anticipate", "believe", "estimate", "continue", and similar words.
You should read and use our forward-looking statements carefully because they:
(1) discuss our future expectations; (2) contain projections of our future
operating results or financial condition; or (3) state other "forward-looking"
information. Various factors described below, as well as any other instances of
cautionary language in this Quarterly Report, refer to or provide examples of
risks, uncertainties and events that may cause our actual results to be
materially different than the expectations described in our forward-looking
statements. You should be aware that the occurrence of any of the events or
factors described below and elsewhere in this Quarterly Report could materially
and adversely affect our business. All forward-looking statements included in
this Quarterly Report are based on information available to us on the date
hereof, and we assume no obligation to update any such forward-looking
statements.
In addition to the risks and uncertainties faced generally by participants in
the renewable energy industry, we face
the following risks and uncertainties:
· We have incurred losses and anticipate incurring continuing losses for the immediate future.
· Undetected and unanticipated defects in our energy storage systems could increase our costs and harm our reputation.
· We will be required to regularly devote capital to updating, refining and expanding our energy storage systems technology and there is no assurance that we will be able to make improvements to remain competitive with new technologies.
· The market for our products is currently evolving and a viable market may take longer to develop than we anticipate.
· Our products must compete against both existing and newly developed technologies.
· We face competition from larger, more well-established companies and technologies.
· We may not be able to protect important intellectual property.
· We face risks associated with our plans to market, distribute and service our products internationally.
· Sales of our common stock by a major stockholder may have an adverse effect on the market price of our common stock.
Overview
Company Background
We design, develop, manufacture and distribute renewable energy storage systems under the recently trademarked names, ZESS 50 and ZESS 500. Our ZESS systems are built using a proprietary process based upon our zinc-bromide rechargeable electrical energy storage technology. The modular nature of our zinc-bromide regenerative fuel cells allows it to be sized and packaged into fully customized, large format energy storage systems. Our systems combine these modules with computer hardware and software that interface with a customer's power source to recharge during off peak times and discharge power as needed.
The Company completed a public offering on the Australian Stock Exchange (the "ASX") in March of 2005. Our securities traded on the ASX from March 2005 to August 9, 2007 when they were delisted in connection with our United States public offering.
On June 18, 2007, in connection with our initial United States public offering of 3,333,333 shares of our common stock at an initial offering price of $6.00 per share, our shares began trading on the NYSE Alternext US (formerly the American Stock Exchange) under the symbol "ZBB".
Since our inception, until fiscal 2005, when we completed the Australian public offering and began our first major production contract, we were primarily a research and development company with little or no revenues. We have historically funded our operations primarily through debt and equity financings, government grants and joint ventures.
In 2008 we completed production under a multi-year contract with the California Energy Commission ("CEC") to produce the first two ZESS 500 kWh commercial energy storage systems for utility use. We also developed, produced, and shipped the first ZESS 50, a smaller capacity modular version of the ZESS 500 energy storage system.
In the current quarter we are in production on multiple ZESS 50 and ZESS 500 kWh renewable energy systems contracted for delivery to Ireland and Australia within the next twelve months.
Our production capacity currently remains somewhat limited, though the delivery of new production equipment in December 2008 has significantly increased capacity. Since our IPO we have commenced implementation of our business plan including the repayment of certain indebtedness, initiating manufacturing commercialization and capacity increases, and commenced initial commercial marketing of our products into target markets.
We are currently working in the California energy market, in association with the CEC, Pacific Gas & Electric and the US Department of Energy amongst others, to install products into the local transmission and distribution network. In addition we are currently addressing numerous opportunities in the renewable energy markets within the United States along with a diverse international marketplace with the intention of introducing products and services into these markets.
Results of Operations
Six months ended December 31, 2008 and 2007:
Revenue and Other income:
Our revenues for the six months ended December 31, 2008 and 2007 were $513,885 and $561,681, respectively, a decrease of $47,796. This was result of a decrease in revenues of $121,355 from the CEC contract which was completed in March 2008, offset by a $73,559 increase in revenues resulting from the Australian AEST project as compared to the six month period ending December 31, 2008. Revenues include estimates based on the percentage-of-completion method of accounting for long-term contracts.
Other income for the six months ended December 31, 2008 represents interest income of $95,341 compared to $324,924 in the six months ended December 31, 2007, which also included $25,000 of rental income. This decrease of $268,152 in the six months ended December 31, 2008 resulted primarily a $25,000 reduction in rental income and a $229,583 decrease in interest income from the investment of proceeds from the Company's U.S. public offering in June 2007. Interest income is expected to continue to decrease in future periods as proceeds from the public offering are utilized for capital expenditures and operational purposes and from lower interest rates on the funds invested.
Cost and Expenses and Other Expense:
Total costs and expenses for the six months ended December 31, 2008 and 2007 were $3,162,350 and $2,562,791, respectively. This increase of $599,559 in the six months ended December 31, 2008 was primarily due to the Australian (AEST) contract activities which began in July 2007 resulting in increases of $522,012 in advanced engineering and development expenses compared to the six month period ended December 31, 2007 and increases in selling, general, and administrative costs of $198,987. These increases in costs were offset by a $102,975 reduction in cost of product sales and a decrease of $18,465 in depreciation expense.
Other expenses for the six months ended December 31, 2008 and 2007 were $73,666 and $147,119, respectively. The decrease of $73,453 in other expenses for six month period ending December 31, 2008 was primarily due to the decrease in finance costs as compared to costs incurred during the comparable six month period of the prior fiscal year which included a significant reduction of the Company's debt. Also, decreases in interest rates in the period ending December 31, 2008 resulting in $34,236 less interest expense, despite additional equipment financing, than was incurred in the six months ended December 31, 2007.
Cost of product sales. Our cost of product sales for the six months ended December 31, 2008 and 2007 were $-0- and $102,975, respectively. The decrease in expense in the six month period ended December 31, 2008 was due to the completion of the CEC sales contract which expired March 31, 2008.
Selling, General and Administrative. Our selling, general and administrative expense for the six months ended December 31, 2008 and 2007 was $1,666,818 and $1,467,831, respectively. The expense during the current six month period reflected an increase of $198,987 compared to the six month period ending December 31, 2007. This was primarily result of establishing a sales and marketing department, increased investor and public relations costs, additional financial and administrative personnel, and overall cost increases.
Travel costs were approximately $126,000 and $160,000 for the six month periods ending December 2008 and 2007, respectively. The prior period included travel costs related to installation and testing of energy storage systems sold in California. We expect overall travel related to marketing and business development to increase as our sales efforts and installations increase, but decrease as a percentage of sales.
Insurance costs include insurance benefits for employees of $60,885, general insurance of $22,971, and directors and officers insurance of $20,250.
Advanced engineering and development. Our engineering and development costs for the six months ended December 31, 2008 and 2007 were $1,360,666 and $838,654, respectively. The increase during the six month period ending December 31, 2008 of $522,012 from the comparable 2007 period was primary due to the increase in advanced engineering and development costs and materials consumed under the AEST project contract which commenced in July 2007. Expenses were partially offset by $126,997 received from the Australian government during the six months ended December 31, 2008 as tax concession funding for research and development expenditures. The costs incurred under the current AEST contract have been classified as advanced engineering and development expenditures, and have not been specifically identified and classified in cost of sales.
Net Loss. Our net loss for the six months ended December 31, 2008 and 2007 was $2,626,790 and $1,798,305, respectively, resulting in an $828,485 increase in net loss as compared to the six months ended December 31, 2007.
Three months ended December 31, 2008 and 2007:
Revenue and Other income:
Our revenues for the three months ended December 31, 2008 and 2007 were $222,188 and $175,259, respectively. The increase of $46,929 in the three months ended December 31, 2008 is attributable to a $59,347 increase in revenues from the AEST project with an Australian government agency which began in July 2007 and a reduction in revenues of $12,418 in the contract with CEC was substantially completed in prior periods. Revenues include estimates based on the percentage-of-completion method of accounting for long-term contracts.
Other income for the three months ended December 31, 2008 and 2007 was $42,951 and $158,562, respectively. The decrease of $115,611 in the three months ended December 31, 2008 resulted from a decrease in interest income from the investment of proceeds from the Company's public offering in June 2007. Interest income is expected to decrease in future periods as proceeds from the public offering are utilized for capital expenditures and operational purposes and from lower interest rates on the funds invested, based on current market rates.
Cost and Expenses and Other expense:
Total operating expenses for the three months ended December 31, 2008 and 2007 were $1,565,223 and $1,434,307, respectively. The total operating expense increase in three months ended December 31, 2008 included increases of $29,268 in selling, general and administrative expense, and advanced engineering and development costs of $137,649, offset by decreases of $13,562 in cost of products sales and $22,439 in depreciation expense.
Other expenses for the three months ended December 31, 2008 and 2007 were $32,697 and $41,512, respectively. The decrease of $8,815 in the three month period ending December 31, 2008 was due to significant reductions in interest rates on equipment and building loans.
Cost of product sales. Our cost of product sales for three months ended December 31, 2008 and 2007 was $-0- and $156,782, respectively. The decrease in expense in the three month period ended December 31, 2008 resulted from completion of the final tasks related to the CEC contract in prior periods.
Selling, general and administrative. Our selling, general and administrative expense for the three months ended December 31, 2008 and 2007 was $881,737 and $852,469, respectively. This expense during the current three month period was $29,268 higher than the three month period ending December 31, 2007 mostly related to implementation of our sales and marketing department as well as additional engineering personnel, and overall cost increases.
Travel costs were approximately $60,000 and $68,000 for the three month periods ending December 2008 and 2007, respectively. Decreases are related to reductions in investor relations activities. We expect travel related to marketing and business development to increase as our sales efforts and installations increase.
Insurance costs include insurance benefits for employees of $30,674, general liability insurance of $17,656 and $10,125 in directors and officers insurance during the three months ended December 31, 2008. During the comparable three month period ending December 31, 2007, insurance costs include insurance benefits for employees of $33,778, general liability insurance of $16,550 and $9,875 in directors and officers insurance costs were incurred.
Advanced engineering and development. Our engineering and development costs for the three months ended December 31, 2008 and 2007 were $623,521 and $485,872, respectively. The increase during the three month period ending December 31, 2008 of $137,649 from the comparable 2007 period was primary due to additional engineering staffing and materials costs incurred under the AEST project contract, as well as further development and improvements to the energy storage system manufacturing processes. The AEST project will continue to affect future expenditures through June 2010, the term of the contract, to the extent the costs are allowable and required under the contract. We intend to maintain our Australian staff and facility for the purposes of facilitating further marketing in Australia and Asia and for advanced engineering and development projects as needed.
Net loss. Our net loss for the three months ended December 31, 2008 and 2007 was $1,332,781 and $1,141,998, respectively. In the three months ended December 31, 2008 there was a $190,783 increase in net loss, resulting from a $130,916 increase in costs and expenses, a decrease of $106,796 in other income; offset by a $46,929 increase 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, government grants and joint ventures. Total paid in capital as of December 31, 2008 was $45,325,340. We had a cumulative deficit of $34,353,585 as of December 31, 2008 compared to a cumulative deficit of $31,726,795 as of June 30, 2008. At December 31, 2008 we had a working capital surplus of $6,609,111 and as of June 30, 2008 a working capital surplus of $8,611,872. Our shareholders' equity as of December 31, 2008 and June 30, 2008 was $9,260,466 and $12,016,118, respectively.
As a result of consummation of our initial U.S. public offering and our receipt of $18,410,000 proceeds (net of underwriter's costs) on June 20, 2007, our working capital increased by $17,267,365 (net proceeds less $1,142,635 in capital raising costs).
Additional funding continues to be generated with funding from the AEST agreement entered into on June 29, 2007 by ZBB Technologies, Ltd, our subsidiary based in Western Australia, and the Commonwealth of Australia (administered by the Department of Environment and Water Resources), whereby, among other things, the Department has agreed to provide funding to us for the development and delivery of an energy storage system to be used to store and supply renewable energy generated from photovoltaic solar panels and wind turbines already operational at the Commonwealth Scientific and Industrial Research Organization's Newcastle Energy Centre in New South Wales.
The AEST agreement provides for $2.2 million (A$3.1 million) in project funding through June 2010 totaling $1.1 million in year one, $0.9 million in year two and $0.2 million in year three, as certain development progress "milestones" are met by us. The AEST project has total budgeted expenditure for operating and capital items of approximately $4.2 million (A$5.9 million) exclusive of any Australian taxes. The Company's contribution of approximately $2.0 million (A$2.8 million) is the value of any cash and in-kind contributions to be provided to the project by the Company (balance remaining in Company contributions is approximately $1.1 million as of December 31, 2008) in undertaking the project activities.
We believe that we will have sufficient capital necessary to meet our operating and capital commitments through at least December 2009. This is based on a conservative business plan that does not include any new sales contracts and a rate of expenditure that supports our current operations, including product development and production readiness without additional funding from project financing or equity transactions. However, if sales do increase substantially, we believe additional capital is required in order to expand our production capacity and inventory levels. Conversely, under current economic conditions and absent a substantial increase in new orders, the board of directors has requested that management implement increased cost containment measures.
Material Commitments for Capital Expenditures
From the proceeds of our June 2007 United States initial public offering, we retired an aggregate of $4,523,060 in indebtedness in July and August 2007. In addition, approximately $5 million in investments in plant improvements, product development and increased capacity have occurred. We intend to apply approximately $600,000 towards the acquisition of new vibration welding and production equipment ($400,000), infra-red welding equipment ($100,000) and other production line tools and sundry equipment ($100,000) over the next twelve months.
Operating Activities
For the six months ended December 31, 2008, net cash used in operations was $2,486,191. Cash used in operations resulted primarily from a net loss of $2,626,790. Net working capital changes increased the cash used in operations by $540,796 resulting from decreases in accrued compensation and benefits of $67,144, deferred revenues of $350,850; and increases to inventory of $240,333, and an increase in accounts receivable of $100,393. Cash used in operations was reduced by an increase in accounts payable of $195,975; and reductions in other receivables of $5,070, and in and prepaid and other current assets of $16,879. Other non-cash adjustments to cash included equipment of $210,855 charged to advanced engineering and development costs, $100,000 of non-cash consulting fees, $108,942 of stock options compensation expense, a $126,732 change in inventory allowance, and $134,866 of depreciation expense.
For the six months ended December 31, 2007, net cash used in operations was $2,660,215 after adding back non-cash items of $153,331 of depreciation, non-cash charges of $100,000, and equipment of $118,000 charged to advanced engineering and development costs. Cash used in operations resulted from decreases in accounts payable of $412,917, accrued expenses of $78,919, deferred revenues of $102,937; and increases to inventory of $422,565, and in accounts receivable of $40,700. Cash provided from operations was generated from a decrease in prepaid and other current assets of $87,873.
Investing Activities
For the six months ended December 31, 2008, net cash used in investing activities was $1,580,217. Cash used in investing activities resulted from $580,217 in purchases of property and equipment, and $1,000,000 in net increases in bank certificates of deposits with maturities greater than three months.
For the six months ended December 31, 2007, net cash used in investing activities was $258,077 due to purchases of manufacturing equipment and computer hardware.
Financing Activities
For the six months ended December 31, 2008, net cash used in financing activities was $965,512 consisting of repayments of $104,488 principal on notes payable, and $1,070,000 in additional financing on manufacturing equipment.
For the six months ended December 31, 2007, net cash used in financing activities was $4,194,149 consisting primarily of $4,047,822 in repayments of principal on notes payable, additional public offering costs of $100,000 and $46,327 reduction in principal on bank loans.
Known Trends, Market Opportunities and Challenges
We believe that there are specific existing and rapidly emerging market opportunities for the Company's energy storage products.
We believe that in North America the electric utilities markets' increasing energy demands on an increasingly fragile transmission and distribution network is forcing both utilities and commercial and industrial customers to adopt distributed storage and delivery systems to increase the reliability and the capacity of the electrical grid. Network reliability depends on both energy storage systems, and delivery products that are lower in cost, have greater life span and are lower in emission with minimal disposal costs. We have designed our products to meet these needs in that they can be combined for use in larger storage applications and we believe that our products will cost less with competing products, based on a life of product basis and on energy density and delivery. We believe that the increasing importance of renewable energy generating sources for future energy supply is now being enhanced with Federal and State Government initiatives to lessen the United States greenhouse gas emissions and dependency on oil. Increasing concerns surrounding CO2 emissions are also driving this market sector. We believe that solar and wind energy has grown over the past five years and will continue to grow for so long as fossil fuel prices are increasing. Because both solar and wind are intermittent primary energy sources, both grid connected and off-grid installations require energy storage devices to optimize their capabilities.
We continue to advance the sales and marketing process in the areas of sales network structure, direct key accounts, strategic relationships, marketing and industry/policy involvement.
We continue to build a direct market pipeline of opportunities which include several electric utilities; companies involved in renewable energy; large renewable energy integrators involved in on-grid and off-grid applications, government facilities and other commercial and industrial opportunities such as "big box" store chains.
We have advanced the ZBB presence and awareness in the market through increased involvement in various market conferences (energy storage, wind, and solar, electric utility), increased direct marketing, advancing the marketing materials and web content, as well as continued efforts in media channels and highly visible applications such as the Future House USA installation at the Beijing Olympic Games in China, the LifeVillage project with Envision Solar International for the purpose of transporting village power systems to remote areas in Central and West Africa, and the first large scale wind/storage test facility on a college campus at the Dundalk Institute of Technology in the Republic of Ireland. ZBB is in the process of furthering these marketing and networking efforts with additional marketing activities that will continue to raise the profile of ZBB and the ZESS brands.
We continue to work in the California energy and utility markets through the CEC (under a May 2008 agreement), and pursue opportunities with Pacific Gas & Electric and the U.S. Department of Energy amongst others, to install products into the local transmission and distribution network. In November 2008 the State of California amended certain renewable energy rebate programs to include energy storage systems, such as those manufactured and sold by us, when our systems are incorporated as part of either new or existing renewable energy installation.
We are currently addressing opportunities and engaged in fulfilling orders targeted to renewable energy markets in the United States, Europe, Australia, and Africa with the intention of introducing products and services into these markets. The United States and governments throughout the world are implementing renewable energy mandates, tax credits, investments, and other incentives related to renewable energy and energy efficiency including the energy storage sector. As of this report, the current Senate version of The American Recovery and Reinvestment Act of 2009 includes provisions for over $14 billion in amounts to be available for "Energy Efficiency and Renewable Energy" until September 30, 2010, with $2 billion targeted towards grants for the manufacturing of advanced batteries and components.
Our current contracts include a collaborative project (Advanced Electricity Storage Technologies project) with the Commonwealth of Australia which commenced July 2007 and running through July 2010, which includes the payment to the Company of $2.7 million for future development costs and which includes the production and delivery of one 500kWh energy storage system for installation into a renewable energy site in Australia. In December 2008 we received an order for a Zess 500 system to be installed in conjunction with existing wind energy assets as the Centre for Renewable Energy, Dundalk Institute of Technology in the Republic of Ireland.
In addition to the other risk factors stated above, and other information relating to our business as referenced in our "Company Background" section, we believe that some of the biggest challenges we face will be gaining market acceptance for our newer products and reaching the utility and renewable energy companies that we target. In order to be successful we must also develop a reputation of reliability and quality service.
Our systems compete with both traditional energy storage technologies, such as lead acid batteries, as well as emerging energy storage technologies, such as . . .
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