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| ZBB > SEC Filings for ZBB > Form 10-Q on 14-Feb-2013 | All Recent SEC Filings |
14-Feb-2013
Quarterly Report
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 will need additional financing and we do not have any commitments for additional financing at this time.
· Our industry is highly competitive and we may be unable to successfully compete.
· Our ability to achieve significant revenue growth will be dependent on the successful commercialization of our new products, including our third generation ZBB EnerStore™, zinc bromide flow battery and ZBB EnerSection™ power and energy control center.
· To achieve profitability, we will need to increase our sales, 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 December 31, 2012 compared with the three months ended December 31, 2011
Revenue:
Our revenues for the three months ended December 31, 2012 and December 31, 2011 were $2,748,007 and $440,921 respectively. The increase of $2,307,086 was the result of a $2,507,086 increase in commercial product sales and a $200,000 decrease in engineering and development revenues as compared to the three months ended December 31, 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. Engineering and development revenues for the quarter ended December 31, 2011 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 December 31, 2012 and December 31, 2011 were $5,594,078 and $3,206,257 respectively. This increase of $2,387,821 in the three months ended December 31, 2012 was primarily due to the following factors:
· a $2,077,586 increase in costs of product sales was due to an increase in commercial product sales;
· a $189,448 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; and
· a $188,732 increase in selling, general and administrative expenses due primarily to a planned increase in engineering and sales personnel.
Other Expense:
Total Other Expense for the three months ended December 31, 2012 increased by $387,681 to $501,685 from $114,004 for the three months ended December 31, 2011 primarily as a result of a $456,632 equity in loss of investee company.
Income Taxes (Benefit):
Benefit for income taxes during the three months ended December 31, 2012 decreased by $37,649 to $74,151 from $111,800 for the three months ended December 31, 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, 2013 related to the qualified expenditures we incurred during the three months ended December 31, 2012.
Net Loss:
Our net loss for the three months ended December 31, 2012 increased by $353,147 to $3,083,457 from the $2,730,310 net loss for the three months ended December 31, 2011. This increase in loss was primarily the result of increases in expenses as described above. For the three months ended December 31, 2012 there was a net loss of $190,148 attributable to noncontrolling interest.
Six months ended December 31, 2012 compared with the six months ended December 31, 2011
Revenue:
Our revenues for the six months ended December 31, 2012 and December 31, 2011 were $4,571,328 and $2,078,778 respectively. The increase of $2,492,550 was the result of a $3,886,117 increase in commercial product sales offset by a $1,393,567 decrease in engineering and development revenues as compared to the six months ended December 31, 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. 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 six months ended December 31, 2012 and December 31, 2011 were $10,313,458 and $6,540,596 respectively. This increase of $3,772,862 in the six months ended December 31, 2012 was primarily due to the following factors:
· a $3,413,307 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 $649,804 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; and
· a $192,287 increase in selling, general and administrative expenses due primarily to a planned increase in engineering and sales personnel.
Other Expense:
Total Other Expense for the six months ended December 31, 2012 increased by $462,370 to $625,340 from $162,970 for the six months ended December 31, 2011 primarily as a result of a $533,113 equity in loss of investee company.
Income Taxes (Benefit):
Benefit for income taxes during the six months ended December 31, 2012 decreased by $107,649 to $74,151 from $181,800 for the six months ended December 31, 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, 2013 related to the qualified expenditures we incurred during the six months ended December 31, 2012.
Net Loss:
Our net loss for the six months ended December 31, 2012 increased by $1,560,489 to $5,966,247 from the $4,405,758 net loss for the six months ended December 31, 2011. This increase in loss was primarily the result of increases in expenses as described above. For the six months ended December 31, 2012 there was a net loss of $327,072 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 December 31, 2012 was $83,108,581 and $81,093,292 as of June 30, 2012. We had a cumulative deficit of $75,020,156 as of December 31, 2012 compared to a cumulative deficit of $69,053,909 as of June 30, 2012. At December 31, 2012 we had working capital of $2,383,045 compared to June 30, 2012 working capital of $5,727,309. Our shareholders' equity as of December 31, 2012 and June 30, 2012 was $9,053,537 and $13,326,810, respectively.
At December 31, 2012, our principal sources of liquidity were our cash and cash equivalents which totaled $2,428,800 and accounts receivable of $1,171,485.
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.
We believe we have sufficient capital to pursue our operations through the third quarter of fiscal year 2013. We will require additional investment capital or other funding during the third quarter of fiscal 2013 to support our current business and growth plan. We are currently exploring various possible financing options that may be available to us, which may include a sale of our securities and/or strategic partnership transactions. 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 funds, our financial condition and results of operations may be materially adversely affected and we may not be able to continue operations.
Operating Activities
Our operating activities used net cash of $6,627,038 for the six months ended December 31, 2012. Cash used in operations resulted from a net loss of $6,293,319 reduced by $1,630,185 in non-cash adjustments and increased by $1,963,904 in net changes to working capital. Non-cash adjustments included $413,610 of stock-based compensation expense, and $683,462 of depreciation and amortization expense. Net changes in working capital were primarily due to an increase in accounts receivable of $690,922, a decrease in inventories of $67,723 and an increase in customer deposits of $286,957 offset by a decrease in accounts payable of $562,704 and accrued expenses of $69,222.
Investing Activities
Our investing activities used net cash of $401,690 for the six months ended December 31, 2012, for the purchase of property and equipment and deposits of restricted cash.
Financing Activities
Our financing activities provided net cash of $1,323,684 for the six months ended December 31, 2012. Net cash provided by financing activities was comprised primarily of $1,744,688 in proceeds from issuance of common stock less repayments of $283,495 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 December 31, 2012.
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