| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | Description of Business EnSync, Inc. and its subsidiaries ("EnSync,"
"we," "us," "our," or the "Company") develop, license, and manufacture innovative energy
management systems solutions serving the commercial and industrial ("C&I") building, utility, and off-grid markets.
Incorporated in 1998, EnSync is headquartered in Menomonee Falls, Wisconsin, USA with offices in Madison, Wisconsin, San Francisco,
California, Honolulu, Hawaii, Shanghai, China and Perth, Western Australia. In August 2015, we changed our corporate name
from ZBB Energy Corporation to EnSync, Inc., and we regularly use the name EnSync Energy Systems for marketing and branding purposes. EnSync develops and commercializes application
solutions for advanced energy management systems critical to the transition from a "coal-centric economy" to one reliant
on renewable energy sources. EnSync synchronizes conventional utility, distributed generation and storage assets to seamlessly
ensure the least expensive and most reliable electricity available, thus enabling the future of energy networks. These advanced
systems directly connect wind and solar equipment to the grid and other systems that can form various levels of micro-grids as
well as power quality regulation solutions. EnSync brings vital power control and energy storage solutions to problems caused
by incorporation of increasingly pervasive renewable energy generating assets that are part of the grid power transmission and
distribution network used in commercial, industrial, and multi-tenant buildings. The Company also develops and commercializes
energy management systems for off-grid applications such as island or remote power. The condensed consolidated financial statements
include the accounts of the Company and those of its wholly-owned subsidiaries ZBB Energy Pty Ltd. (formerly known as ZBB Technologies,
Ltd.) located in Perth, Australia, Century West PNL LLC, Kona CE, LLC, various other PPA subsidiaries, its eighty-five percent
owned subsidiary Holu Energy LLC, and its sixty percent owned subsidiary ZBB PowerSav Holdings Limited located in Hong Kong, which
was formed in connection with the Company's investment in a China joint venture. Interim Financial Data The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("US
GAAP") for interim financial data 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 US 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 three and six month periods ended
December 31, 2015 are not necessarily indicative of the results that might be expected for the year ending June 30, 2016. The condensed consolidated balance sheet
at June 30, 2015 has been derived from audited financial statements at that date, but does not include all of the information and
disclosures required by US 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, 2015 filed with the Securities and Exchange
Commission on September 28, 2015. Basis of Presentation The accompanying condensed consolidated
financial statements include the accounts of the Company and its wholly and majority-owned subsidiaries and have been prepared
in accordance with US GAAP. All significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements
in conformity with US GAAP 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;
· allocation of purchase price in the business combination;
· the allowance for doubtful accounts;
· provisions for excess and obsolete inventory;
· the lives and recoverability of property, plant and equipment and other long-lived assets, including goodwill;
· contract costs, losses, and reserves;
· warranty obligations;
· income tax valuation allowances;
· stock-based compensation; and
· valuation of equity instruments and warrants. Fair Value of Financial Instruments The Company's financial instruments consist
of cash and cash equivalents, restricted cash on deposit, accounts receivable, a note receivable, accounts payable, bank loans
and notes payable, and equity instruments. The carrying amounts of the Company's financial instruments approximate their
respective fair values due to the relatively short-term nature of these instruments, except for the bank loans and notes payable,
equity instruments, and warrants. The carrying amount of the bank loans and notes payable approximates fair value due to
the interest rate and terms approximating those available to us for similar obligations. The fair value of the nonconvertible
attribute and conversion option of the Series C Preferred Stock and related Warrant was determined using the Option-Pricing Method
("OPM") as described in the AICPA Accounting and Valuation Guide entitled Valuation of Privately-Held-Company Equity
Securities Issued as Compensation and a "with" and "without" methodology to bifurcate the Series C Preferred
conversion feature. The OPM model treats the various equity securities as call options on the total equity value contingent
upon each security's strike price or participation rights. The Black-Scholes inputs utilized for the OPM model were: (i)
an aggregate equity value estimated based on the back-solve methodology to reconcile the closing common stock price as of the valuation
date; (ii) a term in alignment with the terms of the Supply Agreement; (iii) a risk free rate from the Federal Reserve Board's
H.15 release as of the transaction date; (iv) the volatility of the Company's publicly traded stock price; and (v) the performance
vesting requirements of the equity instruments that were expected to be met. The Company accounts for the fair value
of financial instruments in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification
("ASC") Topic 820, "Fair Value Measurements and Disclosures." Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. The degree of judgment utilized in measuring the fair value of assets and liabilities generally correlates
to the level or pricing observability. FASB ASC Topic 820 describes a fair value hierarchy based on the following three levels
of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value: Level 1 inputs are quoted prices (unadjusted)
in active markets for identical assets or liabilities that the reporting entity can access at the measurement date. Level 2 inputs are inputs other than quoted
prices that are observable for the asset or liability, either directly or indirectly, for similar assets or liabilities in active
markets. Level 3 inputs are unobservable inputs for
the asset or liability. As such, the prices or valuation techniques require inputs that are both significant to the fair
value measurement and are unobservable. Cash and Cash Equivalents The Company considers all highly liquid
investments with maturities of three months or less to be cash equivalents. The Company maintains its cash deposits at financial
institutions predominately in the United States, Australia, and Hong Kong. The Company has not experienced any losses in
such accounts. Restricted Cash on Deposit The Company had $60,223 and $60,193 in restricted
cash on deposit as of December 31, 2015 and June 30, 2015, respectively, as collateral for certain credit arrangements. Accounts Receivable Credit is extended based on an evaluation
of a customer's financial condition. Accounts receivable are stated at the amount the Company expects to collect from outstanding
balances. The Company records allowances for doubtful accounts based on customer-specific analysis and general matters such
as current assessments of past due balances and economic conditions. The Company writes off accounts receivable against the
allowance when they become uncollectible. Accounts receivable are stated net of an allowance for doubtful accounts of $10,878
as of December 31, 2015 and $11,074 as of June 30, 2015. The composition of accounts receivable by aging category is as follows
as of:
December 31, 2015 June 30, 2015
Current $ 41,153 $ 4,291
30-60 days 18,811 -
60-90 days 23,157 3,555
Over 90 days 2,587 105,248
Total $ 85,708 $ 113,093 Inventories Inventories are stated at the lower of cost
or market. Cost is computed using standard cost, which approximates actual cost, on a first-in, first-out basis. The
Company provides inventory write-downs based on excess and obsolete inventories determined primarily by future demand forecasts.
The write-down is measured as the difference between the cost of the inventory and market based upon assumptions about future demand
and charged to the provision for inventory, which is a component of cost of sales. At the point of the loss recognition,
a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the
restoration or increase in that newly established cost basis. Customer Intangible Asset Customer intangible assets are reviewed
quarterly for impairment due to the expected short-term nature of the asset. The customer intangible asset is amortized as
revenue from the acquired contracts is recognized in our condensed consolidated statements of operations. To date, there
have been no write-offs recorded for impairments. As of December 31, 2015, the gross carrying
value of the customer intangible asset is $169,321 and the accumulated amortization is $14,447. Amortization expense recognized
during the three and six months ended December 31, 2015 was $8,447 and $14,447, respectively. There was no amortization expense
recognized during the three or six months ended December 31, 2014. Note Receivable The Company has one note receivable from
an unrelated party. On December 18, 2015, the Company and the unrelated party amended the terms of the note receivable.
The note matures on the earlier of (a) the date on which the unrelated party has secured a total of $500,000 or more in additional
financing from any source or (b) June 30, 2016 and is classified as "Note receivable" in the financial statements.
We regularly evaluate the financial condition of the borrower to determine if any reserve for an uncollectible amount should be
established. To date, no such reserve is required. Deferred Project Costs Deferred project costs represents the costs
that the Company capitalizes as project assets for arrangements that we accounted for as real estate transactions after we have
entered into a definitive sales arrangement, but before the sale is completed or before we have met all criteria to recognize the
sale as revenue. We classify deferred project costs as current if the completion of the sale and the meeting of all revenue
recognition criteria are expected within the next 12 months. If a project is completed and begins commercial
operation prior to entering into or the closing of a sales agreement, the completed project will remain in project assets or deferred
project costs until the sale of such project closes. Any income generated by such project while it remains within project
assets or deferred project costs is accounted for as a reduction in our basis in the project, which at the time of sale and meeting
all revenue recognition criteria will be recorded within cost of sales. Project Assets Project assets consist primarily of capitalized
costs which are incurred by the Company prior to the sale of the photovoltaic, storage or energy management systems and power purchase
agreement to a third-party. These costs are typically for the construction, installation and development of these projects.
Construction and installation costs include primarily material and labor costs. Development fees can include legal, consulting,
permitting, and other similar costs. Once we enter into a definitive sales agreement, we reclassify project assets to deferred
project costs on our condensed consolidated balance sheet until the sale is completed and we have met all of the criteria to recognize
the sale as revenue, which is typically subject to real estate revenue recognition requirements. We expense project assets
to cost of sales after each respective project asset is sold to a customer and all revenue recognition criteria have been met (matching
the expensing of costs to the underlying revenue recognition method). We classify project assets as current as the time required
to develop, construct, and sell the projects is expected within the next 12 months. We review project assets for impairment
whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We consider a project
commercially viable or recoverable if it is anticipated to be sold for a profit once it is either fully developed or fully constructed.
We consider a partially developed or partially constructed project commercially viable or recoverable if the anticipated selling
price is higher than the carrying value of the related project assets. We examine a number of factors to determine if the
project will be recoverable, the most notable of which include whether there are any changes in environmental, ecological, permitting,
market pricing, or regulatory conditions that impact the project. Such changes could cause the costs of the project to increase
or the selling price of the project to decrease. If a project is not considered recoverable, we impair the respective project
assets and adjust the carrying value to the estimated recoverable amount, with the resulting impairment recorded within operating
expenses. The Company did not record any impairment charges during the three or six months ended December 31, 2015. Property, Plant and Equipment Land, building, equipment, computers, furniture
and fixtures are recorded at cost. Maintenance, repairs and betterments are charged to expense as incurred. Depreciation
is provided for all plant and equipment on a straight-line basis over the estimated useful lives of the assets. The estimated
useful lives used for each class of depreciable asset are:
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, equipment and intangible assets 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 in 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 were no long-lived assets impaired
as of December 31, 2015 and June 30, 2015. Investment in Investee Company Investee companies that are not consolidated,
but over which the Company exercises significant influence, are accounted for under the equity method of accounting. Whether
or not the Company exercises significant influence with respect to an investee depends on an evaluation of several factors including,
among others, representation on the investee company's board of directors and ownership level, which is generally a 20% to 50%
interest in the voting securities of the investee company. Under the equity method of accounting, an investee company's accounts
are not reported in the Company's condensed consolidated balance sheets and statements of operations; however, the Company's share
of the earnings or losses of the investee company is reflected in the caption ''Equity in loss of investee company" in the
condensed consolidated statements of operations. The Company's carrying value in an equity method investee company is reported
in the caption ''Investment in investee company'' in the Company's condensed consolidated balance sheets. When the Company's carrying value in an
equity method investee company is reduced to zero, no further losses are recorded in the Company's condensed consolidated financial
statements unless the Company guaranteed obligations of the investee company or has committed additional funding. When the
investee company subsequently reports income, the Company will not record its share of such income until it equals or exceeds the
amount of its share of losses not previously recognized. 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. The first step of the impairment test requires
the comparing of a reporting unit's 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.
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, 2015 and June 30, 2015. Accrued Expenses Accrued expenses consist of the Company's
present obligations related to various expenses incurred during the period and includes a reserve for estimated contract losses,
other accrued expenses, and warranty obligations. Included in accrued expenses as of December 31, 2015 and June 30, 2015
is a reserve of approximately $203,000 and $685,000, respectively, for a product upgrade initiative established in the fourth quarter
of fiscal 2014. Subsequent to commercialization, installation
and commissioning of units in the field, the Company garnered meaningful insights that resulted in system design modifications
and other general upgrades, which improved the performance, efficiency, and reliability of its systems. In the interest of
enhancing customer satisfaction, the Company launched the product upgrade initiative to implement these improvements at certain
locations of its installed base through fiscal year 2016. Warranty Obligations The Company typically warrants its products
for the shorter of twelve months after installation or eighteen months after date of shipment. Warranty costs are provided
for estimated claims and charged to cost of product sales as revenue is recognized. Warranty obligations are also 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 within the warranty period. 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 liability for warranty obligations.
In addition, from time to time, specific warranty accruals may be made if unforeseen technical problems arise. As of December 31, 2015 and June 30, 2015,
included in the Company's accrued expenses were $113,827 and $176,967, respectively, related to warranty obligations. The
following is a summary of accrued warranty activity as of:
December 31, 2015 June 30, 2015
Beginning balance $ 176,967 $ 731,910
Accruals for warranties during the period 33,883 167,901
Settlements during the period (219,222 ) (480,683 )
Adjustments relating to preexisting warranties 122,199 (242,161 )
Ending balance $ 113,827 $ 176,967 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. From time to time, the Company may enter
into separate agreements at or near the same time with the same customer. The Company evaluates such agreements to determine
whether they should be accounted for individually as distinct arrangements or whether the separate agreements are, in substance,
a single multiple element arrangement. The Company evaluates whether the negotiations are conducted jointly as part of a
single negotiation, whether the deliverables are interrelated or interdependent, whether the fees in one arrangement are tied to
performance in another arrangement, and whether elements in one arrangement are essential to another arrangement. The Company's
evaluation involves significant judgment to determine whether a group of agreements might be so closely related that they are,
in effect, part of a single arrangement. Our collaboration agreements typically involve
multiple elements or deliverables, including upfront fees, contract research and development, milestone payments, technology licenses
or options to obtain technology licenses, and royalties. For these arrangements, revenues are recognized in accordance with
FASB ASC Topic 605-25, The portion of revenue related to engineering
and development is recognized ratably upon delivery of the goods or services pertaining to the underlying contractual arrangement,
or revenue is recognized as certain activities are performed by the Company over the estimated performance period. The Company recognizes revenue for the sales
of power purchase agreement ("PPA") systems following the guidance in FASB ASC Topic 360, "Accounting for Sales
of Real Estate." We record the sale as revenue after the initial and continuing investment requirements have been met
and whether collectability from the buyer is reasonably assured. We may align our revenue recognition and release our project
assets or deferred project costs to cost of sales with the receipt of payment from the buyer if the sale has been consummated and
we have transferred the usual risks and rewards of ownership to the buyer. The Company charges shipping and handling
fees when products are shipped or delivered to a customer, and includes such amounts in product revenues and shipping costs in
cost of sales. The Company reports its revenues net of estimated returns and allowances. Total revenues of $382,261 and $655,237
were recognized for the three and six months ended December 31, 2015, respectively. Revenues for the three months ended December
31, 2015 were comprised of two significant customers (76% of revenues) and revenues for the six months ended December 31, 2015
were comprised of two significant customers (75% of revenues). Total revenues of $300,654 and $865,515 were recognized for
the three and six months ended December 31, 2014, respectively. Revenues for the three months ended December 31, 2014 were
comprised of three significant customers (94% of revenue) and revenues for the six months ended December 31, 2014 were comprised
of two significant customers (86% of revenue). The Company had three significant customers with outstanding receivable balances
of $31,000, $26,000, and $16,000 (37%, 31% and 19% of accounts receivable, net) as of December 31, 2015. The Company had
two significant customers with outstanding receivable balances of $77,000 and $31,000 (68% and 28% of accounts receivable, net)
as of June 30, 2015. Engineering, Development, and License Revenues We assess whether a substantive milestone
exists at the inception of our agreements. In evaluating if a milestone is substantive we consider whether:
· Substantive uncertainty exists as to the achievement of the milestone event at the inception of the arrangement;
· The achievement of the milestone involves substantive effort and can only be achieved based in whole or in part on our performance or the occurrence of a specific outcome resulting from our performance;
· The amount of the milestone payment appears reasonable either in relation to the effort expended or the enhancement of the value of the delivered item(s);
· There is no future performance required to earn the milestone; and
· The consideration is reasonable relative to all deliverables and payment terms in the arrangement. If any of these conditions are not met,
we do not consider the milestone to be substantive and we defer recognition of the milestone payment and recognize it as revenue
over the estimated period of performance, if any. On April 8, 2011, the Company entered into
a Collaboration Agreement (the "Collaboration Agreement") with Honam Petrochemical Corporation, now known as Lotte Chemical
Corporation ("Lotte"), pursuant to which the Company and Lotte collaborated on the technical development of the Company's
third generation zinc bromide flow battery module (the "Version 3 Battery Module") and Lotte received a fully paid-up,
exclusive and royalty-free license to sell and manufacture the Version 3 Battery Module in South Korea and a non-exclusive royalty-bearing
license to sell the Version 3 Battery Module in Japan, Thailand, Taiwan, Malaysia, Vietnam and Singapore. On December 16, 2013, the Company and Lotte
entered into a Research and Development Agreement (the "R&D Agreement") pursuant to which the Company has agreed
to develop and provide to Lotte a 500kWh zinc bromide flow battery system, including a zinc bromide chemical flow battery module
and related software (the "Product"), on the terms and conditions set forth in the R&D Agreement (the "Lotte
Project"). The Lotte Project is scheduled to continue until December 16, 2015, unless extended by the mutual agreement
of the Company and Lotte. Subject to the satisfaction of certain specified milestones, Lotte is required to make payments
to the Company under the R&D Agreement totaling $3,000,000 over the term of the Lotte Project. We recognize revenue based
upon a Performance Based Method pursuant to the model described in FASB ASC Subtopic 980-605-25, where revenue is recognized based
on the lesser of the amount of nonrefundable cash received or the amounts due based on the proportional amount of the total effort
expected to be expended on the contract that has been provided to date as there does not exist substantial doubt that the milestones
will be achieved. The Company recognized $46,567 and $169,007 of revenue under this agreement for the three and six months
ended December 31, 2015, respectively. The Company recognized $186,477 and $201,997 of revenue under the R&D Agreement
for the three and six months ended December 31, 2014, respectively. Additionally, on December 16, 2013, we entered
into an Amended License Agreement with Lotte (the "Amended License Agreement"). Pursuant to the Amended License
Agreement, we granted to Lotte, (1) an exclusive and royalty-free limited license in South Korea to use the Company's zinc bromide
flow battery module, zinc bromide flow battery stack and the technical information and know how related to the intellectual property
arising from the Lotte Project (collectively, the "Technology") to manufacture or sell a zinc bromide flow battery (the
"Lotte Product") in South Korea and (2) a non-exclusive (a) royalty-free limited license for Lotte and its affiliates
to use the Technology internally in all locations other than China and South Korea to manufacture the Lotte Product and (b) royalty-bearing
limited license to sell the Lotte Product in all locations other than China, the United States and South Korea. Lotte is required
to pay us a total license fee of $3,000,000 under the Amended License Agreement plus up to an additional $1,000,000 if certain
specific milestones are successfully achieved. In addition, Lotte is required to make ongoing royalty payments to the Company
equal to a single digit percentage of Lotte's sales of the Lotte Product outside of South Korea until December 31, 2019.
The original license fees were subject to a 16.5% non-refundable Korea withholding tax. Overall since December 16, 2013 through
December 31, 2015 there were $5,250,000 of payments received and $5,049,836 of revenue recognized under the Lotte R&D and Amended
License Agreements. Engineering and development costs related
to the R&D Agreement totaled $82,020 and $136,167 for the three and six months ended December 31, 2015, respectively.
Engineering and development costs related to the R&D Agreement totaled $59,982 and $169,145 for the three and six months ended
December 31, 2014, respectively. As of December 31, 2015 and June 30, 2015,
the Company had no unbilled amounts from engineering and development contracts in process. The Company had received $200,000
and $370,000, which is included in "Customer deposits" in the condensed consolidated balance sheets, of customer payments
for engineering and development contracts, representing deposits in advance of performance of the contracted work, as of December
31, 2015, and June 30, 2015, respectively. Advanced Engineering and Development
Expenses In accordance with FASB ASC Topic 730, "Research
and Development," the Company expenses advanced engineering and development costs as incurred. These costs consist primarily
of materials, labor, and allocable indirect costs incurred to design, build, and test prototype units, as well as the development
of manufacturing processes for these units. Advanced engineering and development costs also 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 are shown
separately on the condensed consolidated statements of operations as a "Cost of engineering and development." Stock-Based Compensation The Company measures all "Share-Based
Payments," including grants of stock options, restricted shares and restricted stock units in its condensed consolidated statement
of operations based on their fair values on the grant date, which is 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 recognizes 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 the shares at grant, and calculated based on the Black-Scholes valuation model. The Company compensates its outside directors
with restricted stock units ("RSUs") and cash. The grant date fair value of the RSU awards is
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 vesti |
