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ZBB > SEC Filings for ZBB > Form 10-Q on 13-Nov-2012All Recent SEC Filings

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Form 10-Q for ZBB ENERGY CORP


13-Nov-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

ZBB Energy Corporation ("We," "Us," "Our," "ZBB" or the "Company") develops and manufactures modular, scalable and environmentally friendly power systems (ZBB EnerSystem™) based upon the Company's proprietary zinc bromide rechargeable electrical energy storage technology.

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.

On August 30, 2011, we entered into agreements providing for establishment of a joint venture to develop, produce, sell, distribute and service advanced storage batteries and power electronics in China (the "Joint Venture"). Joint Venture partners include PowerSav, Inc., AnHui Xinlong Electrical Co. and Wuhu Huarui Power Transmission &Transformation Engineering Co.

The Joint Venture was established in November 2011 and operates through a jointly-owned company located in Wuhu City, Anhui Province named Anhui Meineng Store Energy Co., Ltd. (the "JV Company"). The JV Company will initially assemble and ultimately manufacture the Company's products for sale in the power management industry on an exclusive basis in mainland China and on a non-exclusive basis in Hong Kong and Taiwan.

The JV Company has been capitalized with approximately $13.6 million of equity capital, which includes approximately $9.5 million of cash and a contribution of technology from us to the JV Company via a license agreement (the "License Agreement") valued at approximately $4.1 million by the JV Company. Our indirect interest in the JV Company equals approximately 33%.

Our investment in the JV Company was made through ZBB PowerSav Holdings Limited, a Hong Kong limited liability company, a holding company formed with PowerSav ("Hong Kong Holdco"). We own 60% of Hong Kong Holdco's equity interests. We have the right to appoint a majority of the members of the Board of Directors of Hong Kong Holdco and Hong Kong Holdco has the right to appoint a majority of the members of the Board of Directors of the JV Company.

Pursuant to a management services agreement Hong Kong Holdco will provide certain management services to the JV Company in exchange for a management services fee equal to five percent of the JV Company's net sales for the first five years and three percent of the JV Company's net sales for the subsequent three years.


Pursuant to the License Agreement, the Company has granted to the JV Company (1) an exclusive royalty-free license to manufacture and distribute our Version 3 battery Module and ZBB EnerSection™ POWR PECC (up to 250KW) (the "Products") in mainland China in the power supply management industry and (2) a non-exclusive royalty-free license to manufacture and distribute the Products in Hong Kong and Taiwan in the power supply management industry.

Pursuant to a research and development agreement, the JV Company may request us to provide research and development services upon commercially reasonable terms and conditions. The JV Company would pay our fully-loaded costs and expense incurred in providing such services.

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, 2012. 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 may need additional financing.

? Our industry is highly competitive and we may be unable to successfully compete.

? Our ability to achieve significant revenue growth will be depended on the successful commercialization of our new products, including our third generation ZBB EnerStore™, zinc bromide flow batter and ZBB EnerSection™ power and energy control center.

? To achieve profitability, we will need to lower our costs and increase our margins, which we may not be able to do.

? If our products do not perform as promised, we could experience increased costs, lower margins and harm to our reputation.

? To succeed, we will need to rapidly grow and we may not be successful in managing this rapid growth.

? 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.

? 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 manufacturing facilities.

? Our China joint venture could be adversely affected by the laws and regulations of the Chinese government, our lack of decision-making authority and disputes between us and the Joint Venture.

? Business practices in Asia may entail greater risk and dependence upon the personal relationships of senior management than is common in North America, and therefore some of our agreements with other parties in China and South Korea could be difficult or impossible to enforce.

? Our success depends on our ability to retain our managerial personnel and to attract additional personnel.

? 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.

? Our financial results may vary significantly from period-to-period due to long and unpredictable sales cycles for some of our products and the cyclical nature of certain end-markets into which we sell our products, which may in turn lead to volatility in our stock price.

? 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.

? 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.

? If our shareholders' equity falls below the minimum requirement, our common stock may be delisted from the NYSE MKT, which would cause our common stock to become less liquid.

? We may engage in acquisitions that could disrupt our business, cause dilution to our stockholder and reduce our financial resources.

? We have never paid cash dividends and do not intend to do so.


For further information concerning these risks and uncertainties see the Risk Factors sections of our Annual Report on Form 10-K for the year ended June 30, 2012 and in any subsequently filed Quarterly Reports on Form 10-Q.

New Accounting Pronouncements

Refer to Note 1 of the Notes to Condensed Consolidated Financial Statements for a discussion of recently issued accounting pronouncements.

Critical Accounting Policies and Estimates

The preparation of our financial statements conforms to accounting principles generally accepted in the United States of America, which requires management, in applying our accounting policies, to make estimates and judgments that have an important impact on our reported amounts of assets, liabilities, revenue, expenses and related disclosures at the date of our financial statements. On an on-going basis, management evaluates its estimates including those related to bad debts, inventory valuations, warranty obligations and income taxes. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from management's estimates. During the current reporting period we adopted the new guidance related to the reporting of other comprehensive income (loss). Since June 30, 2012, there have been no other significant changes to our critical accounting policies discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012. 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.

Results of Operations

Three months ended September 30, 2012 compared with the three months ended September 30, 2011

Revenue:

Our revenues for the three months ended September 30, 2012 and September 30, 2011 were $1,823,321 and $1,637,857, respectively. The increase of $185,464 was the result of a $1,379,031 increase in commercial product sales and a $1,193,567 decrease in engineering and development revenues as compared to the three months ended September 30, 2011. The increase in commercial product sales principally consisted of sales of ZBB EnerStore and ZBB EnerSection systems which we began selling in the quarter ended March 31, 2012 and engineering and development revenues related to the Company's joint development and license agreement with a global technology company. Engineering and development revenues for the 2012 period consisted primarily of revenue recognized under the Honam Collaboration agreement which was recognized over the performance period through June 2012.

Costs and Expenses:

Total costs and expenses for the three months ended September 30, 2012 and September 30, 2011 were $4,719,380 and $3,334,339, respectively. This increase of $1,385,041 in the three months ended September 30, 2012 was primarily due to the following factors:

? a $1,335,721 increase in costs of product sales was due to an increase in commercial product sales;

? a $436,042 decrease in costs of engineering and development sales was due to diminished activities related to engineering and development agreements;

? a $460,356 increase in advanced engineering and development expenses due to a shift from engineering contracts to product development and pilot plant operation for the Company's ZBB Enerstore and ZBB Enersection products.

Other Expense:

Total Other Expense for the three months ended September 30, 2012 increased by $74,689 to $123,655 from $48,996 for the three months ended September 30, 2011 primarily as a result of a $76,481 equity in loss of investee company.


Income Taxes (Benefit):

Benefit for income taxes during the three months ended September 30, 2012 decreased by $70,000 to $0 from $70,000 for the three months ended September 30, 2011. Benefit for income taxes represents an estimate of a refundable research and development tax credit we expect to receive from the government of Australia for the fiscal year ending June 30, 2012 related to the qualified expenditures we incurred during the year ended June 30, 2012.

Net Loss:

Our net loss for the three months ended September 30, 2012 increased by $1,207,342 to $2,882,790 from the $1,675,448 net loss for the three months ended September 30, 2011. This increase in loss was primarily the result of increases in expenses as described above. For the three months ended September 30, 2012 there was a net loss of $136,924 attributable to noncontrolling interest.

Liquidity and Capital Resources

Since our inception, our research, advanced engineering and development, and operations have been primarily financed through debt and equity financings, and government and other research and development contracts. Total paid in capital as of September 30, 2012 was $82,931,121 and $81,093,292 as of June 30, 2012. We had a cumulative deficit of $71,936,699 as of September 30, 2012 compared to a cumulative deficit of $69,053,909 as of June 30, 2012. At September 30, 2012 we had working capital of $4,764,439 compared to June 30, 2012 working capital of $5,727,309. Our shareholders' equity as of September 30, 2012 and June 30, 2012 was $9,409,742 and $10,454,462, respectively.

At September 30, 2012, our principal sources of liquidity were our cash and cash equivalents which totaled $4,637,014 and accounts receivable of $1,189,722.

In June 2012 we completed an underwritten public offering of 31,600,000 shares of common stock at a price to the public of $0.38 per share for net proceeds of $10.7 million. In connection with the offering, the Company granted the underwriter warrants to purchase 2,895,303 shares of common stock at an exercise price of $0.475 per share. These warrants expire on June 13, 2017. The estimated fair value of these warrants was $1,024,726, as determined using the Black-Scholes methodology (assuming estimated volatility of 100.86%, risk-free interest rate of 0.71%, expected dividend yield of 0.0%). This amount was recorded as both an increase to additional paid in capital and as a non-cash issuance cost of the financing transaction. During the year ended June 30, 2012 we also sold an additional 11,478,666 shares of common stock in various transactions for net proceeds of $4.8 million.

On August 30, 2010 we entered into an amended and restated securities purchase agreement (the "Socius Agreement") with Socius CG II, Ltd. ("Socius") pursuant to which we had the right over a term of two years, subject to certain conditions, to require Socius to purchase up to $10 million of 10% redeemable subordinated debentures and/or shares of 10% redeemable Series A preferred stock in tranches. Under the Socius Agreement, in connection with each tranche Socius was obligated to purchase a 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. We cancelled the Socius agreement on May 7, 2012.

During the year ended June 30, 2012 we delivered a total of three tranche notices under the Socius Agreement pursuant to which Socius purchased $2,197,240 of shares of Series A preferred stock. In connection with the tranches, Socius purchased 4,132,553 shares of common stock for a total purchase price of $2,966,275 and at a weighted average per share purchase price of $0.72. Socius paid for the shares of common stock it purchased with secured promissory notes.

In June 2012, we entered into a redemption agreement with Socius pursuant to which we acquired and redeemed all the shares of Series A Preferred Stock issued to Socius under the Socius Agreement in exchange for the cancellation of the secured promissory notes issued by Socius to us under the Socius Agreement. Following completion of the June 2012 redemption and the retirement and cancellation of the Shares, no shares of Series A Preferred Stock remain outstanding. Subsequent to June 30, 2012, we cancelled the Series A preferred stock.

In July 2012 the underwriter for the Company's June 2012 underwritten public offering exercised substantially all of its over-allotment option and purchased an additional 4,591,287 shares of the Company's common stock. The net proceeds to the Company from this issuance were $1.6 million after deducting approximately $143,000 in offering expenses.

If we are able to signficantly grow our product revenues in the remaining quarters of fiscal 2013 we believe that cash and cash equivalents on hand at September 30, 2012 and other sources of cash will be sufficient to fund our operations through the end of fiscal 2013. However, if our product revenues remain at current levels we will likely require additional investment capital or other funding during the third quarter of fiscal 2013 to maintain our current operations. If we are unable to obtain such needed funds, our financial condition and results of operations may be materially adversely affected and we may not be able to continue operations. Accordingly, we are currently implementing certain plans designed to generate additional sales and reduce costs and are exploring various alternatives including strategic partnership transactions that may be available to us.


Operating Activities

Our operating activities used net cash of $4,583,595 for the three months ended September 30, 2012. Cash used in operations resulted from a net loss of $3,019,714 reduced by $576,782 in non-cash adjustments and increased by $2,217,143 in net changes to working capital. Non-cash adjustments included $236,150 of stock-based compensation expense, and $340,632 of depreciation and amortization expense. Net changes in working capital were primarily due to increases in accounts receivable of $709,159, inventories of $919,521 and a decrease in customer deposits of $400,126 offset by an increase in accounts payable of $18,761 and accrued expenses of $20,465.

Investing Activities

Our investing activities used net cash of $87,691 for the three months ended September 30, 2012, due to the use of $87,691 for the purchase of property and equipment.

Financing Activities

Our financing activities provided net cash of $1,462,027 for the three months ended September 30, 2012. Net cash provided by financing activities was comprised primarily of $1,744,689 in proceeds from issuance of common stock less repayments of $141,153 of principal on bank loans and notes payable, and $143,009 in common stock issuance costs.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements as of September 30, 2012.

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