UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended June 30, 2009 |
| or |
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the transition period from to |
Commission file number 001-33540 |
(Exact name of registrant as specified in its charter)
| Wisconsin | 39-1987014 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| N93 W14475 Whittaker Way, Menomonee Falls, Wisconsin | 53051 |
| (Address of principal executive offices) | (Zip Code) |
| Registrant’s telephone number, including area code: | (262) 253-9800 |
| | | |
| Securities registered pursuant to Section 12(b) of the Act: |
| Title of each class | | Name of each exchange on which registered |
| Common Stock, $0.01 Par Value | | NYSE Amex |
| Securities registered pursuant to Section 12(g) of the Act: |
| None |
| (Title of Class) |
| | | |
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one).
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The aggregate market value of the voting stock held by non-affiliates, computed by reference to the last sales price on June 30, 2009 was $10,535,443.
Indicate the number of shares outstanding of each of the registrant’s classes of Common Stock, as of the latest practicable date. 12,409,964 Common Shares ($0.01 par value) as of August 31, 2009.
DOCUMENTS INCORPORATED BY REFERENCE
In Part III, portions of the registrant’s 2009 Proxy Statement to be filed with the Securities and Exchange Commission within 120 days of the Registrant’s fiscal year end.
| Part III – Items 10, 11, 12, 13 and 14 | | In the Company’s Definitive Proxy Statement in connection with its 2009 annual meeting of shareholders to be filed with the Securities and Exchange Commission no later than October 28, 2009. |
| | | |
| Part IV - Certain exhibits listed in response to Item 15(a) | | Prior filings made by the Company under the Securities Act of 1933 and the Securities Exchange Act of 1934. |
ZBB ENERGY CORPORATION
2009 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
| | | Page |
| PART I | 3 |
| Item 1. | Business | 3 |
| Item 1A. | Risk Factors | 14 |
| Item 1B. | Unresolved Staff Comments | 16 |
| Item 2. | Properties | 16 |
| Item 3. | Legal Proceedings | 16 |
| Item 4. | Submission of Matters to a Vote of Security Holders | 16 |
| PART II | | 17 |
| Item 5. | Market for Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities | 17 |
| Item 6. | Selected Financial Data | 18 |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operation. | 19 |
| Item 7A. | Quantitative Disclosures About Market Risk | 26 |
| Item 8. | Financial Statements and Supplementary Data | 26 |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 43 |
| Item 9A. | Controls and Procedures | 43 |
| Item 9B. | Other Information | 43 |
| PART III | 44 |
| Item 10. | Directors, Executive Officers and Corporate Governance | 44 |
| Item 11. | Executive Compensation | 44 |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 44 |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence | 44 |
| Item 14. | Principal Accountant Fees and Services | 44 |
| PART IV | | 45 |
| Item 15. | Exhibits and Financial Statement Schedules | 45 |
| Signatures | 47 |
PART 1
ZBB Energy Corporation (“ZBB” or the “Company”) develops and manufactures distributed energy storage solutions based upon the Company’s proprietary zinc-bromine rechargeable electrical energy storage and power management technologies. The Company was incorporated under the laws of Wisconsin in 1998.
The consolidated financial statements include the accounts of the Company and those of its wholly owned subsidiaries, ZBB Technologies, Inc. which operates a manufacturing facility in Menomonee Falls, Wisconsin, and ZBB Technologies, Ltd. which has its advanced engineering and development facility in Perth, Australia. The Corporate website address is www.zbbenergy.com.
Products
We design, develop, manufacture and distribute energy storage systems and solutions under the trade names ZESS 50, ZESS 500 and ZESS POWR. Our ZESS 50 and ZESS 500 energy storage systems are built using a proprietary process based upon our zinc-bromide rechargeable electrical energy storage technology while our patent pending ZESS POWR hybrid power conversion system is manufactured by our power electronics partners utilizing their standard proven components. The integrated modular nature of our zinc-bromide regenerative fuel cells is a philosophy that has carried through to the ZESS POWR product both in terms of electrical interfaces and packaging which allows our solutions to be sized and packaged into fully configurable energy storage systems of any size and integrated with or without any generating source. Our systems combine the ZESS 50 and/or ZESS 500 modules with the ZESS POWR, integrated computer hardware and software; and fully integration with customer control systems including remote monitoring and control options for the integration with the customer’s existing electrical power system or as a complete independent power plant. The complete ZBB portfolio provides the advanced energy storage aspects of recharging during off peak times from any renewable or conventional energy source and discharge power as needed to meet the customer load demand regardless of the connected generation source real time status. Our energy storage solutions address issues related to grid stability and renewable energy intermittency, including:
| | o | Distributed storage of electrical energy during off peak periods. |
| | § | Re-supply on high demand providing grid reliability and economic benefits. |
| | o | Smoothing / shifting intermittent renewable energy generation. |
| | § | Controlled generation, grid stability and optimal use |
| | o | Enabling energy independence and off-grid applications |
| | o | Green back up power and power quality. |
| | § | Reduce CO2 emission, 24/7 renewable energy availability |
Industry Overview
We believe that our ZESS products are available at a time when major changes are occurring in electricity supply and demand. Modern economies are highly dependent on the performance and reliability of the electricity grid. Electric utilities now face real and immediate challenges in providing reliable power. These challenges exist mainly because of ever growing demand combined with aged centralized electric utility generation and transmission and distribution grids that are increasingly unable to accommodate the peak, or highest demand for power required by its customers. This generation, transmission and distribution delivery system must be able to meet the highest expected demand; however that highest expected demand is only experienced on an infrequent basis or for a short daily duration, leaving the system significantly underutilized for much of the day, week or year. Refurbishment by utility companies of their infrastructures for these intermittent periods of time would also take years and require major capital expenditures in comparison to deploying ZESS units. Additionally, generation capacity would need to be increased to meet the generation demand during these peak periods which would require additional fossil fuel facilities given that renewable generation presently being utilized cannot guarantee supply availability during these peak demand periods. During peak periods the losses in the transmission and distribution system are amplified since the losses are proportional as function to the load, again contributing to unnecessary emissions as generators must supply this additional energy to compensate for these losses in the system. The Edison Electric Institute states that “underinvestment in transmission and distribution is estimated to cost the American economy at least $20 billion a year — a figure certain to grow if transmission and distribution infrastructure investment does not keep pace with demand.” (Why Are Electricity Prices Increasing? — An Industry Wide Perspective, June 2006). The Wall Street Journal quoting Global Information Inc., reported that storage can help increase the usefulness of currently installed transmission and distribution assets by making existing equipment capable of meeting the expected future energy demand and deferring the need for additional investment in new “higher capacity” assets. Additionally, while expensive long term refurbishment of the systems may increase reliability of the energy supply, it can only do so to the projected consumption as it is known today. Thus, it would not necessarily solve problems associated with spikes in energy demand that can only be satisfied by the release of excess energy that has been previously stored from the generation source.
We anticipate that the primary users of our energy storage systems will be utility companies, commercial/industrial users and our systems will be combined with renewable energy (solar, wind and other power generators) for such providers with space or capital constraints for the reasons stated above. We also intend to target customers that already have lead acid or similar systems in place that are nearing the end of their life cycle or that will need additional storage capacity. Energy storage itself is not new for the utility companies and storage systems in the form of hydro-electric reservoirs that pump during off-peak periods and release water to create energy for the peak demand periods, have been utilized in this industry for some time. However, use of these technologies requires the right natural landscape as well as significant capital, and space resources, have environmental impacts including displacement of the existing environment (people, homes, land) and in most cases are located away from the load centers or consumers and thus address only the generation portion of the peak demand problem and do not address the transmission and distribution sector, nor do they alleviate losses in the transmission and distribution system or address elevated operating temperatures of system equipment which is an important factor in equipment life expectancy. Because of capacity constraints and aging infrastructure of electricity grids in the United States and many other countries, electricity can be delivered most efficiently by placing energy storage systems near customers with variable power demands and at substations closest to the areas of greatest electricity usage.
In addition to ZESS deployment in the electric utility grid, ZESS is also the key to establishing “off grid” electrical systems. Other than emission producing diesel generator sets that are polluting and costly to maintain, the uncertainty of rising fuel costs has accelerated interest toward renewable generation. However, these intermittent renewable sources cannot be controlled effectively and certainly cannot be a guaranteed source of electricity. As such the combination of renewable energy along with ZESS provides the complete power plant concept that provides continuous power regardless of wind or solar variations due to naturally occurring events such as cloud cover, still air or even nightfall.
A combination of ZESS with solar power, being deployed as a kit power plant results in a reliable turnkey system capable of being independent from a utility grid. Such systems can be used anywhere including remote areas of the world where either no electricity exists or where there are severe outages through poor supply and inconsistent delivery, or for any consumer who prefers to be self sufficient.
Key areas for the use of ZESS systems include the off grid Telco installations whether with our without renewable energy generation as well as off grid power generation systems for residential or small community power systems. Combined with renewable energy generation provides a complete back up power system for grid tied applications.
Product Benefits
Distributed Energy Applications
Performance problems in electricity distribution grids vary in nature and severity. One way for a utility company to address deficiencies in the electricity grid is by using the back-up energy provided by energy storage systems to provide uninterrupted power supply. The term “distributed energy” generally refers to the deployment of energy generation and energy storage resources in the transmission and distribution networks of the electricity grid. These assets are sited past a bottleneck, the point of congestion, where they can provide a source of energy to allow a “ride through” for the infrequent peak demands experienced by the system during the month or the season and thus allowing the utility to avoid or defer an expensive capital upgrade to its system until a later time when the increased demand becomes more regular. For electric utilities our products provide a means to augment the functionality and performance of the electricity grid on a localized and “as needed” basis. Typically, distributed energy solutions are deployed close to the customer base, at the utility substation level or at the lower voltage levels in the distribution network. This allows deployment of optimized equipment to address the local supply problem, rather than relying on large scale centralized solutions.
Capital deferment
We believe that increases in demand will necessitate expensive modernization and capacity upgrade programs for the infrastructure of aging electricity grids. These improvements will be needed to update utility companies’ electricity grids around the country as a result of previous underinvestment in this utility grid sector. According to Edison Electric Institute estimates (Why Are Electricity Prices Increasing? — An Industry Wide Perspective, June 2006), “investor owned utilities plan to spend $29 billion in transmission infrastructure from 2004 to 2008”. This same report suggests that “a continued load growth will require continued expansion in distribution system capacity. If recent investment trends persist, distribution investment will average $14 billion per year over the next 10 years”. We believe that the use of our energy storage systems to store unused energy for use during peak times that would not otherwise be deliverable on the electricity grid, postpones the need for major capital expenditures by utility companies.
Load management
Utility companies attempt to even-out the on-demand supply of electricity from the energy transmission grid by the storage of electricity during low-load (low demand) periods, and the subsequent supply of stored electricity during high-load (high demand) periods. In the industry, these techniques are known as load shifting, peak shaving and peaking capacity. Our energy storage systems are designed to be used by utility companies to manage demand for energy in the above applications.
Power quality
Energy storage systems provide a means to alleviate or eliminate power quality problems by supplying power locally to either infill or compensate line disturbances on the utility (rather than the customer’s) side. The scale of the avoided costs provides an indicator of the potential value of using distributed energy systems in the grid to address power quality problems.
Benefits to “green power” energy providers
Renewable energy providers would use our products to store as much power as possible during times of peak generation. This energy is then re-sold or distributed at a later time as needed.
Typically, renewable energy sources such as wind and solar and hydro are interconnected to the utility company’s energy transmission grid for the subsequent purchase of this green power by customers. Alternatively, renewable generation is installed at customer sites, with arrangements to purchase excess power exported from the customer to the grid. Distributed energy storage enhances the value of the renewable resource by time-shifting the use of the energy and by reducing the fluctuation of power delivered to the grid.
Benefits to industrial and commercial users
Large factory and industrial operators that are energy intensive or energy users that rely on an uninterrupted power supply may utilize our products for both back up and power management. Industrial users also use energy storage systems to employ a technique known as demand charge management, to reduce the amount of energy drawn from utility companies during peak times.
Markets
ZBB technology fits hand-in-hand with alternative energy growth and deployment. Specifically, we address the following issues in our target markets:
Renewable Energy
§ Store and re-supply generated power during high-demand periods
§ Smooth power delivery from the generator to the grid
ZESS provides the necessary means to control intermittent renewable power generation and to optimize energy utilization. ZESS allows photovoltaic (PV) technology to store energy when the sun is shining and provide power when sunlight is limited by cloud cover or during the night. The ZESS can be used to store power from solar panels and shift the distribution of that power to align with the customers peak demand requirements (typically later in the day).
ZESS is designed with capabilities of connecting with wind turbines and either storing over-supplied energy or supplying stored energy as needed to smooth the intermittency of wind power generation. As penetration of wind energy increases on the utility grid, the intermittent nature will have negative impacts on grid stability. Integrating ZESS minimizes the intermittent nature and allows wind generation to be more predictable and therefore a more valuable generation asset.
Smart Grid
§ Goal of the Smart Grid - to maximize the efficiency of existing generating facilities and accommodate the integration of renewable power resources.
§ Evolution of the Smart Grid will depend on cost effective energy storage
With the evolution of the electrical system toward the smart grid and the use of distributed generation and energy storage, the ZESS system will be a key element in the advancement of the smart grid. The presence of ZESS in the smart grid is essential to achieve the Micro-grid capability, the dispatchability of distributed renewable energy and to control the power and energy on a distributed basis.
Industrial and Commercial Users
§ Implement smart metering to use grid-power when cost efficient (e.g. peak shaving)
§ Remote & off-grid applications
§ Reduce environmental impact (“going green”)
ZESS units can be charged during low cost off-peak periods (at night) when energy rates (kWh) and peak demand charges (kW) are low and can be discharged during higher cost on-peak hours. Demand charges per kWh and the differential between on peak and off peak charges per kW are the leading factors in the cost/benefit of the ZESS. The economic advantages result from the reduction of peak demand/capacity charges deferred during on peak hours and the difference in energy prices from off peak to on peak.
The ZESS, when placed on the load side of fixed electrical assets will also eliminate damage or extend the life of the power infrastructure by reducing the loading on the equipment. This defers the need for additional capital expenditures that would be needed to upgrade the power infrastructure to accommodate the peak demand period.
The ZESS not only reduces the capacity demand on the facility, but also on the utility distribution system. As a result, there is less need for additional generation to address peak loads and there is a reduction in distribution losses, both of which effectively reduce emissions to the environment. Further, the ZESS regenerative fuel cell is a “green” asset helping make the institution an environmentally friendly organization. The reduction of stress on the utility grid provides additional assurance to the institution that the probability of blackouts or brownouts due to an overload on the utility system is reduced.
Utility Applications for Transmission & Distribution Network Support
§ Mitigates congestion
§ Defers sub-station capex
§ Distributed Energy Resource
§ Implement peak shaving and manage cost efficiency
§ Renewable energy regulation and generation shifting
§ Reduce grid vulnerability
Electric utility companies maintain a generating system consisting of base generation as well as spinning reserve generation and peaking units to meet daily demand peaks. The system is designed for a base load generation which results in underutilized consumption while during the peak periods the base generation must be supplemented by the spinning reserve and peaking units to deliver the peak demand, where the distributed ZESS near the load centers provide a means to accomplish the collective benefits from central generation of spinning reserve and peaking units through the transmission and distribution systems to the load center.
The ZESS system stores excess energy being produced during these non-peak times and returns this energy back to the electric utility during peak periods thus reducing the need for the reserve generation (plant deferral) and/or providing a means of stability and reliability to the electric utility by reducing the risk of blackouts. This is also important as the increasing penetration of intermittent renewable energy comes on line into the utility grid and the need to regulate or control this new generation becomes pertinent for system stability.
The ZESS units have distribution benefits to assist power sources that are constricted by a maximum amount of power distribution capacity. When located near the end user, the stored energy is used to supplement the load demand, reducing the stress on the distribution network and/or preventing overloads that may cause blackouts or brownouts as well in addition to potentially eliminating the need to upgrade the distribution system supplying the customer load.
History
ZBB Energy Corporation was formed in 1998 in Wisconsin as a holding company for ZBB Technologies, Limited and ZBB Technologies, Inc. ZBB Technologies, Limited, our Australian subsidiary, was formed in 1982 to develop commercial applications for the zinc-bromide research being conducted by Murdoch University in Western Australia. ZBB Technologies, Inc., our U.S. operating subsidiary, was established in 1994 in Wisconsin to acquire the zinc-bromide technology assets of Johnson Controls, Inc. which was engaged in research to manufacture energy storage systems based upon the zinc-bromide technology.
Up until 2004 we were primarily engaged in research and development and through that prior period had developed a number of prototype energy storage systems for field trialing and evaluation by certain power utilities and other commercial operators. Principal amongst these were large scale systems deployed with Detroit Edison in Michigan, USA and with United Energy in Melbourne, Australia.
In May 2004, we entered into a sales contract (contract completed March 31, 2008) to provide our 500kWh energy storage systems to our first commercial customer, the California Energy Commission (CEC). Under a contract extension the two systems now owned by CEC have recently had control system upgrades retrofitted and will be redeployed by the owner to additional sites within California on an as needed basis. ZBB continues to maintain this equipment under terms of the original agreement.
In March 2005, we formed ZBB China Pty Ltd., a joint venture company with China Century Group Ltd. of which we held 49%. In October 2008 we reached an agreement in which we now own 100% of this subsidiary.
In March 2005, we completed an initial public offering in Australia of our common stock and options to purchase common stock. Our securities were traded on the Australian Stock Exchange Ltd. through August 2007. We received gross proceeds of approximately US$4.5 million (A$6.0 million) in the Australian stock offering.
Effective as of June 15, 2007, we completed a 1-for-17 reverse split of our outstanding shares of common stock. On June 20, 2007, we completed the initial public offering in the United States through the sale of 3,333,333 shares of our common stock at an initial offering price of $6.00 per share, and listed our shares for trading on the NSYE (formerly the American Stock Exchange). Effective as of August 9, 2007, we de-listed our shares from the Australian Stock Exchange and all of our common stock became tradable in the United States. As of June 30 2009 we had approximately 10.6 million shares listed for trading on the NYSE Amex exchange.
In June 2007, ZBB Technologies, Ltd, our subsidiary based in Western Australia, and the Commonwealth of Australia entered into an agreement for project funding under the Advanced Electricity Storage Technologies (AEST) program, whereby, among other things, the Department has agreed to provide funding to ZBB Technologies Ltd. for the development and delivery of an energy storage system that will 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 agreement requires ZBB to contribute approximately $2.3 million (A$2.8 million) of any cash and in-kind contributions to the project including a newly developed 500KwH energy storage system This agreement provides for a three year term under which the Commonwealth of Australia will provide $2.5 million (A$3.1 million) in project funding over several periods through June 2010.
During the year ended June 2009 we completed the necessary certification process to be awarded ISO 9001:08 compliance for our Milwaukee manufacturing facility. We also worked in conjunction with one of Eaton’s supply chain partners to ensure that our ZESS module control system that is fitted to all of our battery modules is certified by Underwriters Laboratory and bears the necessary UL508 certification stamp mark. These two items were key objectives to be achieved from our 2007 IPO.
Technology
The ZBB Zinc Energy Storage System (ZESS) is a proprietary and patented regenerative fuel cell based on zinc/bromide technology, which is very different in concept and design from more traditional methods of energy storage such as the lead/acid battery. The ZESS technology is based on the reaction between the two chemicals, zinc and bromide. ZESS is a trade mark protected name owned by ZBB Energy Corporation.
Unlike the lead acid and most other batteries, the ZESS uses electrodes that cannot and do not take part in the reactions but merely serve as substrates for the reactions. There is therefore no loss of performance, unlike most rechargeable batteries, from repeated cycling causing electrode material deterioration. During the charge cycle metallic zinc is plated from the electrolyte solution onto the negative electrode surfaces in the cell stacks. Bromide is then converted to Bromine at the positive electrode surface of the cell stack and is immediately stored as a safe chemically complexed organic phase in the electrolyte tank. When the ZESS discharges, the metallic zinc plated on the negative electrode dissolves in the electrolyte and is available to be plated again at the next charge cycle. In the fully discharged state the ZESS can be left indefinitely.
In addition to the ZESS energy storage products, ZBB has developed the power electronics topology to manage the energy and power within a single product. Where this product may be used purely for the integrated combination of multiples of the ZESS products to provide a single point of connection with a high level of modularity for maximum system availability; or it may be used for the integration of renewable sources directly in combination with the ZESS products in the form of a controlled and dispatch able power plant. The ZESS POWR product is uniquely designed to maintain the ZBB philosophy of modularity of standard product to achieve a configurable system. This modular approach allows interfacing any renewable energy with any number of ZESS units.
Product Design
The ZESS technology is composed of a module or a series of modules for increased power. The ZESS 50 delivers 50 kWh of electrical energy, which would be equivalent to roughly power a home for two days, and includes three cell stacks, each containing 60 cells. The module dimensions are 4’ x 4’ x 6.5’, weighing 3,200 pounds. The ZESS 500 is comprised of ten of the standard ZESS 50 modules and delivers 500kWh of electrically energy from a full state of charge at a continuous rate of 250kW. The ZESS 500 is utilized in systems that require higher levels of energy storage and output power capabilities, such as Utility scale applications, larger renewable energy applications, commercial and industrial applications where as the ZESS 50 is well suited for large residential applications, commercial application with and without renewable energy sources. Both the ZESS 50 and the ZESS 500 have rapid charging capabilities and fully charges from 0% State of Charge to 100% in approximately four hours.
Both energy storage products, ZESS 50 and ZESS 500, are designed products have the benefit “Turnkey” capabilities at a product level based on the ease of transporting, site locating and connecting the systems into the grid or other alternative energy generating sources. Along with ZBB’s most recent addition to the product portfolio, the ZESS POWR PECC, ZBB now provides the unique ability to automatically optimize the energy from the generating source, manages the power and energy in the system and provides the customer required output whether that is to the electric grid, or off grid.
Our systems provide a fully integrated energy storage solution for direct connect and integration of multiple units of ZESS and or multiple types and quantities of energy generating sources including all renewable and conventional sources; while providing the customer with a single point of connection and thus eliminating system integration complexity and issues arising from variable devices and coordinating/integrating such devices in an efficient and optimal way.
The products are predominantly manufactured with recyclable plastics, allowing for low production costs and economical mass production while being environmentally friendly both in the manufacturing process as well as throughout the products lifecycle.
Other Products in Development
We have also used our zinc bromide and manufacturing technologies to develop a non-flow battery product that, unlike the ZESS, does not require a circulating electrolyte system. This non-flow battery product is now known as the ZESS EV battery. The ZESS EV provides less power and is much simpler in its construction as it does not require the electrolyte storage and circulation systems of the ZESS products. Prototypes of the ZESS EV have passed over 3,000 cycles in lifecycle tests and still achieve total return energy efficiency of over 70%. However, sales of a viable commercial product require further refinements in the manufacture and design of this product. This battery is designed for use in small electric vehicles such as golf carts, materials handling equipment, wheel chairs, electric scooters and lawn mowers and in other applications such as telecommunication applications.
We are not actively marketing this product as we have elected to allocate our current resources towards the manufacture and sale of our ZESS flow batteries. During the coming year we will be reviewing strategic alternatives to advance the commercialization of the ZESS-EV battery, including the possibility of joint venture research, development, manufacturing and sales of any potential future products of this type. We will also investigate any licensing opportunities for this technology but will pay particular attention to the protection of our intellectual property so far developed.
Competition
Our energy storage systems are protected by U.S. and international patents and trade secrets law covering certain aspects of our manufacturing process and our zinc-bromine technology. We have been granted 16 patents to date and have additional patent applications pending.
Our systems compete with both traditional energy storage technologies, such as lead acid batteries, as well as emerging energy storage technologies, such as vanadium redox and sodium sulfur batteries and other advanced energy storage, however believe our factory built and tested modular system configurations are unique and target market applications are interested in optimizing the complete energy storage solution. For our target markets, we believe our energy storage solutions have significant advantages over competing companies’ products and solutions in terms of:
• Superior technical attributes in terms of the amount of energy that can be stored in a system of a given weight and size or “energy density” (sometimes measured in Watt Hours per Kilogram or Wh/kg), recharge cycle and overall cycle life
• Competitive cost, based on dollars per Kilowatt Hours (kWh), as well as life of the module components
• Modular construction allowing portable applications of varying size, as compared to the large scale, fixed site emerging alternatives.
Competing Technologies
The Electricity Storage Association (ESA) identifies eleven specific energy storage technologies. Our summary below is based on the more detailed information available about these technologies on the ESA’s website at www.electricitystorage.org. The information contained on the web site is not incorporated into and does not constitute a part of this report.
Lead-acid — Lead-acid is one of the oldest and most developed battery technologies. It is a low cost and popular choice for energy storage, but its suitability for energy management is very limited in applications that require deep discharge, long cycle life and longer term energy storage. Furthermore, the base components (lead and sulfuric acid) used in this type of battery are neither desirable to handle and recycle or to have installed in a facility without more extensive infrastructure and precautions.
Compared to modern lead-acid battery technology, we believe the zinc-bromine regenerative fuel cell provides superior technical performance at a significantly lower overall cost while utilizing materials that are more environmentally friendly and providing a safer surrounding.
We believe that our product has certain superior functionality characteristics over the leading lead acid technology of comparable 50kWh system, including:
| | | Zinc-Bromide | | Lead Acid |
| | | | | |
| Discharge | | Ability to discharge 100% of its power and maintain a level of energy regardless of the discharge rate. | | Discharges approximately 65% of its energy, however will be different depending upon the rate in which the energy is discharged |
| | | | | |
| Recharge | | 4 to 4 ½ hours for full recharge | | Up to 20 hours for full recharge |
| | | | | |
| Cycle Life | | 2,000 full charge/deep discharge cycles from 100% SOC and up to 15,000 with less than 100% SOC, maintains some functionality after cycle life, requires replacement of cell stack components only | | 750 full charge/regular discharge cycles, almost no functionality at end of cycle life; requires complete field replacement and proper disposal. |
| | | | | |
| Composition | | Plastic components (corrosion free, lower weight) | | Lead (heavy weight, corrosion of grids) |
| | | | | |
| Space Requirements | | Less | | Substantially more |
| Design Format | | Modular | | Not modular, requires large balance of plant and infrastructure development. |
| | | | | |
| Environmental | | Recyclable; zinc-bromine is a non-toxic, water based solution | | Contains lead; difficult to recycle and dispose of; toxicity issues, |
| | | | | |
| Maintenance | | Negligible, modular configuration allows easy replacement of parts | | 10%-15% (estimated) of capital cost per annum |
Zinc Bromine — this technology uses two different electrolytes that flow past carbon-plastic composite electrodes in two compartments separated by a micro porous polyolefin membrane. This is the technology that we utilize for our energy storage systems. The ZESS products and systems are modular in nature, designed for minimal on site civil works or installation. The products are designed complete for direct placement and the modular nature allows the total system design to achieve any size using standard ZESS 50 and/or ZESS 500 building blocks which may easily be relocated, removed from a system or addition of additional modules at any time.
Vanadium Redox — A flow battery that stores energy by use of vanadium dissolved in sulfuric acid solutions. Larger system foot print, toxicity, higher installation effort, custom designed construction project.
Sodium Sulphur (NaS) — A battery consisting of molten liquid sulfur at the positive electrode and molten metallic sodium at the negative electrode, separated by a solid beta alumina ceramic electrolyte. The battery for this device must always be maintained at high temperatures of approximately 300° C to allow the process to occur. This solution consists of significant installation effort and is typically of much larger or centralized type of energy storage as opposed to a distributed approach. .
Polysulfide Bromide (PSB) — A flow battery system based on a regenerative fuel cell technology that provides a reversible electrochemical reaction between two salt solution electrolytes (sodium bromide and sodium polysulphide).
Metal-Air — Potential high energy density and low cost battery, but electrical recharging is very difficult and is still in development.
Lithium Ion — also known as Li-ion, these batteries offer high energy density and high efficiency. Li-ion is widely used in small portable markets, but high manufacturing cost presently prohibits large scale industrial applications.
Flywheels — These primarily consist of a massive rotating cylinder operating in a low vacuum environment to improve efficiency. The main use for flywheels is for short-term uninterruptible power supply (UPS) and aerospace applications. Large scale applications would require a flywheel “farm” approach.
Pumped Hydro Storage — Pumped hydro storage is not a battery device, but rather, uses two reservoirs to create a limited amount of energy on demand. During off peak hours water is pumped from the lower reservoir to the upper; the water flow is reversed to generate electricity. This method is widely used but characterized by long construction times and high capital expenditure and requires a large geographic area and water supply.
CAES — A peaking gas turbine power plant using compressed air stored in large underground caverns inside salt rocks.
Super Capacitor Storage — These are devices with high power density and primarily designed for shorter duration higher power ratio of operation. Current focus is on small scale applications. Large scale applications are still under development.
Recent Developments
During the 2009 fiscal year:
Our current AEST project with CSIRO, an agency of the Australian Federal Government, has continued throughout the year, as planned. At the core of this project is the development of the next generation of our ZESS 50kWh module. As a development project the work program is therefore set as a series of milestones that measure and report upon the progress toward a successful outcome. It is very pleasing to report that this project has achieved and reported every milestone on time and on budget. The system modules have now been manufactured and assembled and this system will ship to site in late September for commissioning the following month. The project will run through to the end of June 2010.
In December 2008 ZBB announced that it received an order for a ZESS 500 energy storage system to be installed in conjunction with existing wind energy assets at the Centre for Renewable Energy, at Dundalk Institute of Technology in the Republic of Ireland. The system was shipped to Ireland on June 30, 2009 and is presently undergoing pre-commissioning installation on site where it will work in partnership with an 850kW wind turbine to provide a significant portion of the daily power requirements for the Institute’s campus.
In March 2009 ZBB announced that it received an order for a ZESS 50 energy storage system incorporating ZBB’s new and proprietary ZESS POWR power electronics system, from Likusasa Engineering and Contracting Pty Ltd of South Africa. Likusasa operates throughout the sub-Sahara and lower regions of continental Africa and has been working closely with ZBB to integrate the ZESS 50 into telecommunications base station infrastructure in Sub Saharan Africa. This system was shipped to South Africa in late June 2009 and Likusasa are now completing the installation at their customer’s site in Zambia. This is an entirely new market and application for our ZESS 50 product and one which we believe can become a worldwide market in the very near future.
Other recent project includes an order for two standard, modular, ZESS 50 energy storage systems), from Envinity Inc. a renewable energy design and installation company located in State College, Pennsylvania. The two fully integrated ZESS storage modules will be utilized in an off-grid, multi-source renewable energy power system for a 15,000 square foot private residence in central Pennsylvania. The Company also received an order for a ZESS 50 energy storage unit from Oregon State University. The ZESS power system will be used on campus at the Wallace Energy Systems and Renewables Facility. This fully integrated ZESS power system will be used in an on grid configuration with simulated wind and hydro electric sources.
Our earlier projects are all continuing. Most notable is our initiatives in California with the California Energy Commission and the two ZESS 500 systems owned by that group. We have continued to keep these systems maintained, upgraded in terms of control software and operational for continued evaluation. Currently the CEC are identifying new site locations for both systems and we anticipate this relocation to occur during the coming months. We are also continuing our initiatives to establish an integrated solar and storage village power system for off-grid applications in Africa and other strategic locations. This should be enhanced during the coming year by our relationship with Likusasa and their capabilities to handle installation, maintenance and monitoring throughout regional Africa. Our demonstration unit installed at Future House USA in Beijing continues to give us a promotional presence in China. Most recently the United States Secretary for Energy, Mr. Steven Chu, visited the Future House site as a part of his trade mission to that country.
We appointed several new Distributors and Manufacturers Representatives during the year, in the United States and for Australia and New Zealand. We anticipate making more of these appointments to expand our sales and marketing initiatives in the coming year. We were also pleased to announce in December 2008 that we had entered into a Memorandum of Understanding with Eaton Corporation that provides for an original equipment manufacturer (OEM) relationship between the companies. This has been a successful relationship for ZBB and has helped us further refine our products through the utilization of Eaton components as well as the matching of our storage systems with Eaton’s power electronics platform. The companies have also been working on joint marketing initiatives.
In October 2008 we announced the appointment of Mr. Bill Mundell as the Chairman of our Board and we appointed Mr. Marc Marotta as legal counsel to the Board. During the same month we also hosted at our Menomonee Falls facility an Energy Forum with Governors Richardson (New Mexico) and Doyle (Wisconsin) introducing energy reform plans to reduce America’s dependence on foreign oil and to invest in alternative sources of energy.
In March 2009 the Company was awarded a development grant of $229,000 from the Wisconsin Energy Independence Fund to help fund the development of our new power and energy control center (PECC), a proprietary energy management platform that is now subject to a new patent pending application. The trademarked ZESS POWR PECC system controls energy and power inputs from multiple power sources and then delivers energy out through an integrated inverter. ZBB is required to demonstrate two 50 kwh systems under this grant. Subsequent to the end of the financial year we have recently incorporated the first test system for off grid applications into a self contained purpose built mobile container that includes wind, solar and conventional generating units to provide an emergency back-up power system and command post for disaster relief agencies. This test system has most recently been on display in the State of Washington and will soon be displayed at ZBB before being used for display at other test sites. The second system is currently being developed and will be produced and deployed at a test site by December 2009.
As mentioned above, we extended our intellectual property (IP) portfolio during the year with a new patent application filed for the ZESS POWR PECC system. The Company is active in reviewing its IP portfolio together with other key engineering designs to ensure we protect our intellectual position and to maintain this valuable technology as a cornerstone of our enterprise valuation.
During 2008 and into 2009, the Company developed, prototyped and produced the first commercial units of its proprietary ZESS POWR Hybrid power electronics product for integrating ZESS energy storage technology directly with all sizes, types and numbers of renewable energy sources in a single product. This product performs the renewable energy functions that traditional inverters have done over the past while integrating with energy storage in an optimal way with a single “power plant” output for use on the electric utility grid or as an off grid power plant. With this, integrators, Independent Power Producers (IPP’s), commercial customers and electric utilities can leverage all the existing ZESS system benefits of peak demand shifting with the addition of providing a controlled and regulated renewable energy power plant. After these confirming technology efforts with our proven power electronics partners and product research in the market, the Company filed for patent in January of 2009. The combined flexibility and modularity of the ZESS energy storage combined with the flexibility and modularity of the ZESS POWR Power and Energy Control Center (PECC) has provide the Company and its customers with a “game changing solution” as stated by multiple system integrators and by its power electronic partners.
Marketing and Sales
We currently have established a dedicated sales and marketing staff, which although small at this time, will grow in response to the growth of the market. As such, several strategic relationships have been established with additional strategic relationships in the process of being established in the different market sectors in the form of key system integrator relationships, distributors, sales representative organizations and OEM arrangements. We are and have been focusing our sales efforts on the Energy storage integration with Renewable Energy for Electric utilities, large system integrators and IPP’s, large commercial and industrial customers. Additionally, we continue our focus in developing the Remote Area power systems as well as the peak shaving applications for Utilities and commercial customers. ZBB has introduced a fully integrated ZESS offering that provides customers with additional value to utilize a modular format for energy storage applications and/or when integrating different renewable energy resources. We do not believe that all distribution networks are appropriate for the sale of our products to utility or renewable energy companies and we therefore deal directly or through key distributors with our customers.
The technical characteristics of the ZESS flowing electrolyte zinc bromide regenerative fuel cell make it a strong candidate for a wide range of energy markets. Some markets are well established and clearly defined, and others are still developing. Our strategy in reaching these markets is based on exceeding performance and cost thresholds of competing technologies. We plan to continue pursuing appropriate distribution and sales arrangements with suitably qualified channel partners with established operations capable of selling, installing and maintaining our products. At present, ZBB has established relationship in geographical areas in the northwest, the southwest, the northeast and Hawaii as well as an extension of key channels through our relationship with Eaton Corporation.
As we have commercialized our systems for smaller remote area power systems we have established distributor relationships in key areas of developing areas that have proven to benefit from the ZBB Advanced Energy Storage system utilizing ZBB’s ZESS energy storage products as well as its patent pending ZESS POWR PECC integrated energy storage with other renewable and conventional generating sources. Commercial and home owner use we may be required to utilize services of distributors that sell to regional and national chain stores and home energy product re-sellers. We do not currently have any distribution relationships for our products in this market; however these are presently being developed.
We have completed the process to achieve ISO 9000 certification for our Wisconsin plant and operations and are now certified as ISO 9000-2008. We have also completed the process of UL certification for our ZESS controls and in process of achieving the UL certification in the power electronics portion of the ZESS products via our power electronic supplier. We intend to pursue this market and continue to assess the demand for our products in this market however there can be no assurance that we will be able to achieve this strategic objective. To address the lower power/energy applications such as residential and some remote power systems applications such as telecommunications (“TELCO”), we are in the process of evaluating an optimal product configuration that will address these markets in the future.
Our long-term strategic goal of the expansion of our customer base beyond public utilities and utility companies to enable us to ultimately produce and sell energy storage systems to the private sector, including business and residential customers who want to possess an alternative energy system for their businesses or homes; are now in place utilizing ZBB’s complete product and solution portfolio. Alternative energy applications has driven the marketplace to seek energy storage solutions and to lead the way by its continued growth as well as the continued awareness of the renewable energy limitations and to seek solutions to manage the power and energy being produced for either on or off grid applications.
The multi-faceted value of the ZESS product portfolio and system solutions for renewable energy, utility grid demand management, commercial and off grid remote power systems or back up power systems as well as Smart Grid applications has been demonstrated by the increase in customer contracts through the second half of fiscal year 2009.
Intellectual Property
A description of the current patented technologies, process number of patents and patent applications, along with the jurisdiction of patent application/grant is as follows:
| Description of Patents and Patent Applications | | Jurisdiction(s) | | Date of Grant or Application | | Expiration Date |
| Issued Patents and patent applications: | | | | | | |
| | | | | | | |
| Battery Circulation System with improved | | | | | | |
| four-way valve | | Australia | | June 20, 2003 | | |
| Carbon Coating for an Electrode | | United States | | May 6, 1997 | | October 12, 2015 |
| Compact Energy Storage System | | Australia | | November 26, 1998 | | May 21, 2016 |
| | | Japan | | May 21, 1996 | | (pending) |
| | | United States | | March 11, 1997 | | May 23, 2015 |
| Composite End Block for a Battery | | United States | | March 26, 1991 | | January 10, 2010 |
| End Block Constructions for Batteries | | United States | | May 3, 1994 | | January 15, 2013 |
| Friction Welded Battery Component | | United States | | July 31, 1990 | | September 20, 2008 |
| Method of Electrode Reconditioning | | Australia | | November 5, 1998 | | June 4, 2016 |
| | | Japan | | June 4, 1996 | | (pending) |
| | | United States | | July 22, 1997 | | June 7, 2015 |
| Method of Joining Bipolar Battery Frames | | United States | | July 30, 1991 | | September 10, 2010 |
| Spill and Leak Containment System for Zinc | | | | | | |
| Bromide battery | | Australia | | February 2, 2004 | | May 3, 2019 |
| | | United States | | July 17, 2001 | | May 4, 2019 |
| Terminal Electrode | | United States | | September 15, 1990 | | June 30, 2009 |
| | | | | | | |
| Zinc Bromine Battery with Non-Flowing | | | | | | |
| Electrolyte | | Australia | | . | | July 2, 2016 |
| | | Japan | | July 2, 2006 | | (pending) |
| | | Malaysia | | June 30, 2006 | | June 30, 2021 |
| Method and apparatus for controlling a hybrid power system | | United States | | March 18, 2009 | | (pending) |
While we have not patented our flow channel technology, management believes that the technology is sufficiently difficult to develop and would require years of research to replicate. Our cell technology for example, is based, in part, on the alignment and precise placement of multiple plates in series, prior to welding. Our welding utilizes highly technical friction welding methods that require specific pressure settings, temperature settings, friction welding frequencies and amplitudes as well as proper use of materials. While the friction welding process is not patented by us, certain of the components are patented and we require persons and subcontractors who participate in this process to execute non-disclosure agreements. This process alone has taken us over 12 years to develop. To the extent possible, we also limit the information available to persons who work on this process. Therefore, we have elected not to file a patent for our flow channel technology at this time as we believe that the public disclosure of the details relating to this technology that would have to be made in connection with applying for such patent would be detrimental to the proprietary nature of our know-how and would provide potential competitors with insight into our technology and manufacturing processes. We believe that our continued in-house research and development relating to the zinc bromide flow technology will provide an on-going source of competitive advantage.
So far, we have not seen any competitor be successful in implementing the technologies necessary for manufacturing zinc bromide systems. If a competitor is able to discover this process and manufacture this product on a commercial level, we may be materially and adversely affected. Therefore, management revisits its patent application process from time to time and may in the future file one or more patents relating to our flow channel technology as well as other technologies that we develop if it determines that the risks of disclosure are outweighed by the risks of non-protection of the patent in question.
ZBB has recently filed for patent (patent pending) “Method and apparatus for controlling a hybrid power system” for its unique modular, flexible and standardized power electronics topology known as the ZESS POWR Power and Energy Control Center (PECC) for providing a single product integration of any combination of ZESS products, any combination of renewable energy sources and any combination of conventional generating sources; while providing a single or multiple outputs for a customers use, whether that be a grid connect system, and off grid system or a DC distribution system at any voltage level or a combination of all of the above
Employees
We currently have an aggregate of 35 full time employees, of which 28 are located at our U.S. manufacturing and corporate headquarters in Wisconsin, and seven employed at our Research and Development facility in Australia. Currently ZBB has a total of 22 professional staff and 13 non professional staff. We expect staffing numbers to significantly increase as our business grows and new production equipment is deployed in accordance with our business expansion plans.
Sources and Availability of Raw Materials
We have developed products composed of low-cost components and materials. We believe that our components are assembled using well-understood manufacturing concepts that require relatively low capital cost and are readily scalable to achieve high quality. With the exception of the electrolyte and micro porous separator which are purchased, all other ZBB product components are either injection molded according to our proprietary designs or are standard off-the-shelf pieces. Currently, zinc and bromide, the elements used in our electrolyte, are widely available commodity minerals with numerous alternate suppliers.
We believe that the chemicals used in the electrolyte that we acquire are readily available and that the mixing of these substances in accordance with our specifications can be outsourced to various blending facilities. Currently, we outsource our electrolyte sorting and blending to a company in New Jersey, however, other blending facilities are also available in the United States. Similar, basic chemical raw materials are secured from Israel by the blending company on our behalf, however, the ingredients that comprise our electrolyte are not rare substances and we believe that other suppliers are available.
To improve manufacturing process efficiency, we outsource all basic manufacturing processes, such as injection and rotational molding for elementary component parts, and the mixing of our zinc bromide electrolyte solution, and devote our production capacity to the proprietary “value added” manufacturing of the cell stacks. We have patented designs and own all molds for all of the major parts of our cell stacks and tanks. All companies to which we outsource our manufacturing work are subject to confidentiality agreements.
We have developed unique, and in several cases, proprietary process technology and equipment for high volume automated manufacturing of our energy storage products, the principal product components of which are electrodes, separators, flow frames and end blocks. The core manufacturing undertaken by us is the construction of hermetically sealed, leak proof cell stacks, which consist of nearly 100% plastic materials. The equipment and general techniques used by our manufacturers are generally well-known manufacturing techniques employed in several fields, including the automotive industry, and we believe that alternative sources of manufacturing are available.
We have incurred losses and anticipate incurring continuing losses
As of the year ended June 30, 2009 we had an accumulated deficit of $37.3 million. We anticipate that we will continue to incur losses until we can produce and sell a sufficient number of our systems to be profitable. However, we cannot predict when we will operate profitably, if ever. Even if we do achieve profitability, we may be unable to sustain or increase our profitability in the future.
If we fail to adequately manage our resources, it could have a severe negative impact on our financial results or stock price.
We could be subject to fluctuations in technology spending by existing and potential customers. Accordingly, we will have to actively manage expenses in a rapidly changing economic environment. This could require reducing costs during economic downturns and selectively growing in periods of economic expansion. If we do not properly manage our resources in response to these conditions, our results of operations could be negatively impacted.
Unless we keep pace with changing technologies, we could lose existing customers and fail to win new customers.
Our future success will depend upon our ability to develop and introduce a variety of new products and services and enhancements to these new products and services in order to address the changing needs of the marketplace. We may not be able to accurately predict which technologies customers will support. If we do not introduce new products, services and enhancements in a timely manner, if we fail to choose correctly among technical alternatives or if we fail to offer innovative products and services at competitive prices, customers may forego purchases of our products and services and purchase those of our competitors.
The inability to maintain adequate levels of liquidity may have an adverse affect on the working capital of the Company.
The Company believes that its present working capital provided by operations along with recently completed equity offerings are adequate to meet its current needs as a going concern for at least the next twelve to eighteen months. However, should current global economic conditions continue to deteriorate, additional working capital financing may be required which may be difficult to obtain due to restrictive credit markets.
To remain competitive, we must continue to develop market and sell new and enhanced products at competitive prices, which will require significant research and development expenditures. If we do not develop new and enhanced products or if we are not able to invest adequately in our research and development activities, our business, financial condition and results of operations could be negatively impacted.
If our products do not perform as promised, we could experience increased costs, lower margins and harm to our reputation.
The failure of our products to perform as promised could result in increased costs, lower margins and harm to our reputation. This could result in contract terminations and have a material adverse effect on our business and financial results.
Shortages or delay of supplies of component parts may adversely affect our operating results until alternate sources can be developed.
Our operations are dependent on the ability of suppliers to deliver quality components, devices and subassemblies in time to meet critical manufacturing and distribution schedules. If we experience any constrained supply of any such component parts, such constraints, if persistent, may adversely affect operating results until alternate sourcing can be developed. There may be an increased risk of supplier constraints in periods where we are increasing production volume to meet customer demands. Volatility in the prices of these component parts, an inability to secure enough components at reasonable prices to build new products in a timely manner in the quantities and configurations demanded or, conversely, a temporary oversupply of these parts, could adversely affect our future operating results.
We could face competition from larger, more well-established companies.
Many of our competitors are much larger than we are, have significantly greater capital resources, have proven products and technologies, have already developed relationships with utility and renewable energy companies and, may have the manufacturing, marketing and sales capabilities to complete research, development and commercialization of commercially viable energy storage products more quickly and effectively than we can.
We have no experience manufacturing our products on a large-scale basis and may be unable to do so at our current facility.
To date, we have achieved only very limited production of our energy storage systems and have no experience manufacturing our products on a large-scale basis. In February 2006 we acquired a building we were previously leasing in Menomonee Falls, Wisconsin which provides up to 72,000 square feet for use as a manufacturing facility. This facility is currently producing at less than 10% of its expected capacity after our allocation of certain proceeds of our United States equity offering to fully staff and equip it. However, we do not know whether our current manufacturing facility, even if operating at full capacity, will be adequate to enable us to produce the energy storage systems in sufficient quantities to meet hoped for future orders. If there is demand for our products, our inability to manufacture a sufficient number of units on a timely basis would have a material adverse effect on our business prospects, financial condition and results of operations.
If our common stock is de-listed from the AMEX, the common stock will become less liquid.
Our shares have been listed on the NYSE Amex (formerly the American Stock Exchange) since June 18, 2007. We are required to comply with all reporting and listing requirements on a timely manner and maintain our corporate governance and independent director standards. If the NYSE Amex delists our common stock from trading if we fail to satisfy their ongoing listing requirements including, without limitation, corporate governance, financial condition, and financial reporting rules and minimum price and market capitalization rules, we will be adversely affected and our stock will become less liquid. There can be no assurance that our securities will remain eligible for trading on the NYSE Amex. If our common stock is delisted, our stockholders would not be able to sell the common stock on the NYSE Amex, and their ability to sell any of their common stock would be severely if not completely limited.
| Item 1B. | Unresolved Staff Comments |
Not Applicable to smaller reporting companies.
Wisconsin U.S.A. Property
In February 2006 ZBB Energy Corporation acquired the property on which its manufacturing facility is located at N93 W14475 Whittaker Way, Menomonee Falls, Wisconsin. The Company has occupied a portion of this space since 2002 pursuant to a sub-lease arrangement and acquired the property in February 2006 for $2.2 million pursuant to a land purchase option with the owner. The appraised fair market value of this property at the time of acquisition was $2.4 million. In connection with the purchase of this property, the Company initially incurred mortgage indebtedness from Investors Bank in Milwaukee in the amount of $1.8 million and on May 14, 2008 entered into loan agreements to convert the indebtedness into two long-term loans with Investors Bank and Wisconsin Business Development Corporation which are guaranteed in part by the US Small Business Administration.
The property is approximately 3.4 acres and has a facility with approximately 72,000 square feet of rentable manufacturing space, of which the Company occupied approximately 35,000 square feet at the time of its acquisition. This property is used to house our U.S. production, assembly and administration headquarters. The existing facility in Menomonee Falls is suitable to accommodate manufacturing capacity to up to 32MWh annually.
Bibra Lake, Western Australia (Leasehold)
In 2001 our Australian subsidiary, moved into new, leased, self-contained research and development facilities in Bibra Lake, Western Australia after previously occupying sub-leased laboratory and workshop facilities. This facility also provides the engineering support for Australian and South East Asia sales as well as a marketing base for the Company in this region. The current rental is $51,766 per annum (A$68,230), subject to annual CPI adjustments and which was based on a rental valuation obtained in November 2006 by an independent certified real estate appraisal company. In October of 2006, ZBB Technologies, Ltd exercised its option to renew the lease for five years, expiring on October 31, 2011.
None.
| Item4. | Submission of Matters to a Vote of Securities Holders |
None.
PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
The Common Stock of the Company has traded on the NYSE Amex (formerly the American Stock Exchange) under the name ZBB Energy Corporation (Symbol: ZBB) since June 20, 2007. The following table sets forth the high and low sales prices of the Company’s Common Stock for the periods indicated as reported on the NYSE Amex.
| 2009 Fiscal Year | | High | | | Low | |
| | | | | | | |
| 1st Quarter | | $ | 4.05 | | | $ | 2.22 | |
| | | | | | | | | |
| 2nd Quarter | | | 2.30 | | | | 0.86 | |
| | | | | | | | | |
| 3rd Quarter | | | 1.55 | | | | 0.80 | |
| | | | | | | | | |
| 4th Quarter | | | 1.58 | | | | 0.84 | |
| | | | | | | | | |
| 2008 Fiscal Year | | | | | | | | |
| | | | | | | | | |
| 1st Quarter | | $ | 5.94 | | | $ | 3.27 | |
| | | | | | | | | |
| 2nd Quarter | | | 4.25 | | | | 1.98 | |
| | | | | | | | | |
| 3rd Quarter | | | 3.15 | | | | 1.75 | |
| | | | | | | | | |
| 4th Quarter | | | 4.19 | | | | 2.80 | |
On June 30, 2009, the closing price of the common stock of the Company as reported was $1.20. As of August 31, 2009, the Company had 907 shareholders of record. These shareholders of record do not include non-registered stockholders whose shares are held in “nominee” or “street name”.
The Company has not declared quarterly dividends for the past two years.
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
As a result of consummation of our initial United States public offering 3,333,333 shares of our common stock, par value $0.01 was effected through a Registration Statement on Form SB-2 (Reg. No. 333-138243) which was declared effective by the SEC on June 20, 2007 resulting in receipt of $18,410,000 (net of underwriter’s costs) proceeds on June 20, 2007. The managing underwriter of our offer was Empire Financial Group, Inc.
From the proceeds of our June 2007 United States initial public offering, we incurred approximately $1.2 million in additional offering expenses and retired an aggregate of $4.5 million in indebtedness. Approximately $11 million of the net proceeds has been used for working capital and investments in manufacturing assets, including expanding our selling and marketing efforts and compliance costs, additional manufacturing capacity, and improvements to the product and manufacturing operations. The remaining net proceeds have all been applied to temporary investments in bank certificates of deposits and money market funds.
The following table sets forth information as of June 30, 2009 about the shares of the Company’s Common Stock outstanding and available for issuance under the Company’s existing compensation plans.
| Plan category | | Number of securities to be issued upon exercise of outstanding options, warrants, and rights | | | Weighted-average exercise price of outstanding options, warrants and rights | | | Number of securities remaining available for future issuance under equity compensation plan (excluding securities reflected in the previous columns) | |
| | | | | | | | | | | | | |
| Equity compensation plans approved by security holders | | | 1,424,354 | (1) (2) (3) | | $ | 3.24 | | | | 798,749 | (1) (2) |
| | | | | | | | | | | | | |
| Equity compensation plans not approved by security holders | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Total | | | 1,424,354 | | | $ | 3.24 | | | | 798,749 | |
Options issued and available to be issued under the existing Company equity plans are described below:
(1) In 2002 the Company established the 2002 Stock Option Plan (“SOP”) whereby a stock option committee was given the discretion to grant up to 882,353 options to purchase shares to key employees of the Company at exercise prices and dates to be determined by the directors. During the year ended June 30, 2008 400,000 options to purchase shares were granted to employees and directors exercisable at $3.59 (110% of the market closing price on June 6, 2008) based on vesting terms of June 2008 through January 2009, and exercisable at various dates through June 2014. No options were exercised and 16,793 options expired during the year ended June 30, 2009. At June 30, 2009 there remains 487,907 options outstanding with exercise prices of not less than $3.59 and exercise dates up to June 30, 2014. A further 91,200 options are available to be issued under the SOP.
(2) During 2005 the Company established an Employee Stock Option Scheme (the “2005 Plan”) that authorizes the board of directors or a committee thereof, to grant options to employees and directors of the Company or any affiliate of the Company. The maximum number of options that may be granted in aggregate at any time under this option scheme or under any other employee option or share plan is the number equivalent to 5% of the total number of issued shares of the Company including all shares underlying options under the Company’s stock option and incentive plans. Options issued expire five years after the vesting date. No options were exercised in fiscal 2008 or during the year ended June 30, 2009. At June 30, 2009, options to purchase 250,000 shares with an exercise price of $3.82 and an expiration date of June 2012 remain outstanding.
(3) During 2007 the Company established the 2007 Equity Incentive Plan (the “2007 Plan”) that authorizes the board of directors or a committee thereof, to grant options to purchase up to a maximum of 1,500,000 shares to employees and directors of the Company at exercise prices to be determined by the administrator but not less than 100% (110% for a 10% shareholder) of the market value on the date granted. During the year ended June 30, 2008 options to purchase 275,000 shares were granted to employees and directors exercisable at $3.59 based on vesting terms of June 2008 through January 2011 and exercisable at various dates through January 2016. During the year ended June 30, 2009 options to purchase 451,410 shares were granted to employees and directors exercisable at prices from $1.35 to $1.69 based on vesting terms of July 2009 through January 2012 and exercisable at various dates through December 2016. Included in the year ended June 30, 2009 grants were options to purchase 266,410 shares which vest upon certain contingent performance criteria, of which 93,248 vested and 39,963 forfeited during the period. 185,000 service based options were issued in fiscal 2009. Options to purchase an additional 707,549 shares are available to be issued under the 2007 plan.
In aggregate for all plans, at June 30, 2009, the Company has a total of 1,424,354 options outstanding and 798,749 options available for future grant under the SOP, 2005 and the 2007 Plans.
| Item 6. | Selected Financial Data |
Not applicable.
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Introduction
ZBB Energy Corporation, and its operating subsidiaries, (collectively, the “Company”), design, develop, manufacture and market 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 financial information presented herein includes: (i) Consolidated Balance Sheets as of June 30, 2009 and 2008 (ii) Consolidated Statements of Operations for the years ended June 30, 2009 and 2008 (iii) Consolidated Statement of Changes in Shareholders’ Equity for the years ended June 30, 2009 and 2008 (iv) Consolidated Statements of Cash Flows for the years ended June 30, 2009 and 2008.
Forward-Looking Statements
The statements contained in this Annual Report on Form 10-K that are not historical facts, including, without limitation, the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may be identified by, among other things, the use of forward-looking terminology such as “believes,” “expects,” “intends,” “plans,” “may,” “will,” “should,” “anticipates” or “continues” or the negative thereof of other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. These statements are based on the Company’s current expectations of future events and are subject to a number of risks and uncertainties that may cause the Company’s actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include, continued ability to maintain positive cash flow from results of operations, continued evaluation of goodwill for impairment and the Company’s development and production of competitive technologies in our market sector, among others. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. These risks and uncertainties are disclosed from time to time in the Company’s filings with the Securities and Exchange Commission, the Company’s press releases and in oral statements made by or with the approval of authorized personnel. The Company assumes no obligation to update any forward-looking statements as a result of new information or future events or developments.
Company Background
We design, develop, manufacture and distribute renewable energy storage systems under the recently trademarked names, ZESS POWR, 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 Amex (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 for delivery under various domestic contracts as well as international contracts to ship systems to destinations in Ireland, South Africa, and Australia within the next few months.
Wisconsin based initiatives include an agreement signed during the quarter with the Wisconsin Energy Independence Fund to secure $229,000 in support grant funding for the development of our own proprietary power conversion systems for both AC to DC and DC to DC renewable energy applications. We have contracted with a Wisconsin based partner to build and package the power electronics components for two ZESS 50 units that are required to be built under this grant.
Our production capacity has substantially increased through the delivery of new production equipment purchased during the year ended June 2009. This new equipment, along with manufacturing ramp-up and automation plans are underway that would enable a significant increase in production capability within several months. Since our IPO we have continued implementation of our business plan including the repayment of certain indebtedness, initiating manufacturing commercialization and capacity increases, ISO certification and UL listings, and commenced initial commercial marketing of our products into target markets.
We are currently working in the California energy market, in association with the California Energy Commission, 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.
The Company is actively involved in submitting proposals to the Federal Government in response to Funding Opportunity announcements issued as a result of the American Recovery and Reinvestment Act. These proposals cover opportunities for plant expansion, Smart Grid initiative, Renewable Energy Initiatives as well as research and development opportunities for applications where the Company’s technology could bring a transformational change to market applications that we currently do not address. We are in the process or have applied for approximately 36 Mwh of Smart Grid energy storage projects through various strategic partners and prospective customers under various Department of Energy programs, such as FOA 36.
On January 26, 2009 we filed an S-3 Registration Statement with the Securities and Exchange Commission. Amendments to the S-3 Registration Statement were filed on March 30, 2009 and May 1, 2009 and was declared effective by the SEC on May 13, 2009. We took this action as a proactive measure in anticipation of our possible future needs for additional working capital and further capital expenditures. On August 18, 2009 we announced the closing of our public offering, pursuant to this S-3 shelf registration. ZBB sold 1,791,667 units at $1.20 per unit, consisting of an aggregate of 1,791,667 shares of its common stock and warrants to purchase 358,333 shares of its common stock at an exercise price of $1.33 per share. The proceeds to ZBB after deducting placement agent fees and offering expenses were approximately $1.9 million.
In December 2008 ZBB received an order for a ZESS 500 energy storage system to be installed in conjunction with existing wind energy assets at the Centre for Renewable Energy, at Dundalk Institute of Technology in the Republic of Ireland. The system was shipped to Ireland on June 30, 2009 and is presently undergoing pre-commissioning installation on site where it will work in partnership with an 850kW wind turbine to provide a significant portion of the daily power requirements for the Institute’s campus.
Critical Accounting Policies
Estimates and assumptions
Management’s discussion and analysis of the financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amount 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 for each period. The following represents a summary of the Company’s critical accounting policies, defined as those policies that the Company believes are: (a) the most important to the portrayal of our financial condition and results of operations, and (b) that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. Estimates and assumptions are made by management to assess the overall likelihood that an accounting estimate or assumption may require adjustment. Management assumptions have been reasonably accurate in the past, and future estimates or assumptions are likely to be calculated on the same basis.
Foreign Currency
The Company uses the United States dollar as its functional and reporting currency, while the Australian dollar is the functional currency of one of its foreign subsidiaries. Assets and liabilities of the Company’s foreign subsidiary are translated into United States dollars at exchange rates that are in effect as at the balance sheet date while equity accounts are translated at historical exchange rates. Income and expense items are translated at average exchange rates which were applicable during the reporting period. Translation adjustments are accumulated in Accumulated Other Comprehensive (Loss) as a separate component of Shareholders’ Equity in the consolidated balance sheet.
Revenue Recognition
The Company currently contracts with its customers to develop, manufacture, install and service its energy storage systems under short and long-term contracts. These contracts have resulted in two distinct arrangements and revenue recognition policies. The first type of contract is for the production, delivery and installation of energy storage systems. The second type of contract is for product engineering and development activities.
Product sales orders that have relatively short duration (typically less than one year) normally use the completed-contract method of revenue recognition rather than the percentage-of-completion method. Revenues are recognized when the sales price is fixed, collectability is reasonably assured and the product’s title and risk of loss is transferred to the customer. Typically, these conditions are met when the product is shipped to the customer. The Company charges shipping and handling fees when products are shipped or delivered to a customer, and includes such amounts in net sales.
Revenue recognition on energy storage system long-term contracts utilizes the percentage-of-completion method which recognizes revenue proportionally as costs are incurred and compared to the estimated total costs for each contract. This has been the predominant method used in estimating revenues recognized in past reporting periods.
Engineering and development contracts are typically collaborative agreements to further develop renewable energy technologies and are often sponsored and partially funded in various amounts between government agencies and the Company. Often multi-year agreements which contain several elements and provide for varying consideration based on allowable costs, milestones and similar payment provisions and may provide for future licensing and royalties beyond the term of the arrangement. Revenue associated with these types of contracts are typically of longer duration and recognized under the percentage-of-completion method.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or market and consist of raw materials, work in progress and finished goods held for resale.
Costs incurred in bringing each product to its present location and conditions are accounted for as follows:
| · | Raw materials – purchased cost of direct material |
| · | Finished goods and work-in-progress – purchased cost of direct material plus direct labor plus a proportion of manufacturing overheads. |
The Company evaluates the recoverability of its slow moving or obsolete inventories at least quarterly. The Company estimates the recoverable cost of such inventory by product type while considering factors such as its age, historic and current demand trends, the physical condition of the inventory as well as assumptions regarding future demand. The Company’s ability to recover its cost for slow moving or obsolete inventory can be affected by such factors as general market conditions, future customer demand and relationships with suppliers. Historically, the Company’s inventories have demonstrated long shelf lives, are not highly susceptible to obsolescence and are eligible for return under various supplier return programs.
Property, Plant and Equipment
Land, building, office and manufacturing equipment, and test units are recorded at cost. Maintenance, repairs and betterments are charged to expense.
Finished goods normally held for sale to customers may sometimes be used in demonstration and testing by customers. During the periods that the units are transferred from inventory to plant and equipment they are depreciated over the period in use. Since the intent is for these units to be eventually sold they are returned to Inventory upon the completion of customer demonstration and testing at their written down value.
Depreciation is provided for all plant and equipment on a straight line basis over estimated useful lives of the assets.
Stock-Based Compensation
The Company follows the provisions of "Share-Based Payment" ("SFAS No. 123(R)"), which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.
Accordingly, the Company measures share-based compensation cost for all share-based awards at the fair value on the grant date and recognition of share-based compensation over the service period for awards that are expected to vest. The fair value of stock options is determined based on the number of shares granted and the price of our ordinary shares, and calculated based on the Black-Scholes valuation model. Black Scholes valuation attributes used in the model include expected volatility, term, and risk-free interest rate. Expected volatility is based on the historical volatility of the Company’s share price for the period prior to option grant equivalent to the expected life of the options. The expected term is based upon management’s estimate of when the option will be exercised. The risk-free interest rate for periods within the contractual life of the option is based upon the U.S. Treasury yield curve in effect at the time of grant.
The Company only recognizes expense to its consolidated statement of operations for those options or shares that are expected ultimately to vest, using two attribution methods to record expense, the straight-line method for grants with only service-based vesting or the graded-vesting method, which considers each performance period or tranche separately, for all other awards.
Advanced engineering and development
The Company expenses advanced engineering and development costs as incurred. These costs consist primarily of labor, overhead, and materials to build prototype units, materials for testing, develop manufacturing processes and include consulting fees and other costs.
To the extent these costs are separately identifiable, incurred and funded by advanced engineering and development type agreements with outside parties, they will be shown separately on the statement of operations as a “cost of engineering and development contract”.
Goodwill
Goodwill is recognized as the excess cost of an acquired entity over the net amount assigned to assets acquired and liabilities assumed. Goodwill is not amortized but reviewed for impairment annually as of June 30 or more frequently if events or changes in circumstances indicate that its carrying value may be impaired. These conditions could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit.
Testing for the impairment of goodwill involves a two step process. The first step of the impairment test requires the comparing of a reporting units fair value to its carrying value. If the carrying value is less than the fair value, no impairment exists and the second step is not performed. If the carrying value is higher than the fair value, there is an indication that impairment may exist and the second step must be performed to compute the amount of the impairment. In the second step, the impairment is computed by estimating the fair values of all recognized and unrecognized assets and liabilities of the reporting unit and comparing the implied fair value of reporting unit goodwill with the carrying amount of that unit’s goodwill.
Recent Accounting Pronouncements
See Note 2 in the accompanying notes to consolidated financial statements.
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. We have designed our products to meet these needs in that they can be combined for use in larger storage applications. Federal and State Government initiatives to lessen the United States greenhouse gas emissions and dependency on oil and 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 involvement in various market conferences (energy storage, wind, and solar, electric utility), direct marketing, marketing materials and web content, as well as continued efforts in media channels and highly visible applications such as the Future House USA installation in Beijing, China, the Likusasa power systems to remote areas in Africa, and the sale of the first large scale wind/storage 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 California Energy Commission 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. 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 $10 billion targeted towards grants and loan guarantees for the manufacturing of advanced batteries and components.
We are actively involved in submitting proposals to the Federal Government in response to Funding Opportunity announcements issued as a result of the American Recovery and Reinvestment Act of 2009. These proposals cover opportunities for plant expansion, Smart Grid initiative, Renewable Energy Initiatives as well as research and development opportunities for applications where the Company’s technology could bring a transformational change to market applications that we currently do not address. We are in the process or have applied for approximately 36 Mwh of Smart Grid energy storage projects through various strategic partners and prospective customers under various Department of Energy programs, such as FOA 36.
We have substantially increased production capacity through the delivery of new production equipment received during the year ended June 30, 2009. This new equipment, along with manufacturing ramp-up and automation plans are underway that will enable a significant increase in production capability within several months.
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 $2.6 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 at the Dundalk Institute of Technology in the Republic of Ireland, which was produced and shipped during the year ended June 30, 2009.
During fiscal 2009 we signed a contract with the Wisconsin Energy Independence Fund to secure $229,000 in support grant funding for the development of our own proprietary power conversion systems for both AC to DC and DC to DC renewable energy applications. We have contracted with a Wisconsin based partner to build and package the power electronics components for two units for evaluation with two ZESS 50 systems contracted to be built under this grant.
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 vanadium redox and sodium sulfur batteries. For our target markets, we believe our product has a significant advantage over competing products and technologies in terms of:
| | • | Superior technical attributes in terms of the amount of energy that can be stored in a system of a given weight and size or “energy density” (sometimes measured in Watt Hours per Kilogram or Wh/kg), recharge cycle and overall cycle life; |
| | • | Competitive cost, based on dollars per Kilowatt Hours (kWh), as well as life of the module components; |
| | • | Modular construction allowing portable applications of varying size, as compared to the large scale, fixed site emerging alternatives. |
We believe additional capital is necessary to continue our mid-to-long term growth plans. Actions taken by the board of directors and management in the current fiscal year include: 1.) increase in cost saving measures to ensure adequate cash resources to continue growing the company, assuming no new sources of capital funding; 2.) actively pursue various fund raising arrangements including engaging investment bankers to assist with equity based financing; 3.) focusing the Chief Executive Officer efforts on fund raising and federal stimulus package opportunities; and 4.) filing a “shelf” S-3 Registration Statement as a potential vehicle and to assist in fund raising efforts.
Results of Operations
Years ended June 30, 2009 and 2008:
Revenue and Other income:
Our revenues for the years ended June 30, 2009 and 2008 were $1,775,703 and $1,279,599, respectively, an increase of $496,104. This was the result of an increase in revenues of $383,843 from commercial product sales and revenues, and an $112,261 increase in engineering and development revenues as compared to the year ending June 30, 2008. Revenues include estimates based on the percentage-of-completion method of accounting for long-term contracts with two customers.
Other income for the year ended June 30, 2009 reflects a decrease in interest income of $360,585 compared to the year ended June 30, 2008, and a decrease of $74,780 in other income, primarily due to reductions in rental income. The decrease in interest income is a result of decreasing cash balances invested from the proceeds of 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 year ended June 30, 2009 and 2008 were $7,252,176 and $6,525,444, respectively. This increase of $726,732 in the year ended June 30, 2009 was primarily due to $339,959 increased cost of product sales, increased costs of $300,671 related to additional engineering and development activities as required under the AEST , and increases in selling, general, and administrative costs of $124,146. These increases in costs were partially offset by a decrease of $38,044 in depreciation expense.
Other expenses for the years ended June 30, 2009 and 2008 were $182,074 and $206,158, respectively. This decrease of $24,084 in other expenses for the period ended June 30, 2009 was primarily due to a $52,813 decrease in finance costs incurred during the comparable period of the prior fiscal year which included a early debt retirement charges from the proceeds of the public offering, offset by increases to interest expense of $28,729 in the period ended June 30, 2009 primarily from additional equipment financing.
Cost of product sales. Our cost of product sales for the years ended June 30, 2009 and 2008 were $640,710 and $300,751, respectively. The increase in expense in the year ended June 30, 2009 was primarily due to the production and shipment of the 500 Kwh system shipped to Dundalk Institute of Technology, Ireland during the year ended June 30, 2009.
Selling, General and Administrative. Our selling, general and administrative expense for the years ended June 30, 2009 and 2008 was $3,474,476 and $3,350,330, respectively. The expense during the current twelve month period reflected an increase of $124,146 compared to the year ended June 30, 2008 resulting from the establishment of the sales and marketing department, increases in non-cash charges related to share based compensation to key management and directors, and partially offset by salary reduction and other cost saving strategies implemented during the period.
Travel costs were $206,581 and $296,341 for the years ended June 30, 2009 and 2008, respectively, an $89,760 reduction. The costs were reduced by cost saving measures in the current period as well as a reduction in customer based travel related to installation and testing of energy storage systems sold in California incurred during the previous annual period. 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 $120,329, general insurance of $55,843, and directors and officers insurance of $40,500. During the comparable twelve month period ended June 30, 2008, insurance costs include insurance benefits for employees of $120,821, general insurance of $64,816 and $39,500 in directors and officers insurance costs were incurred.
Advanced engineering and development. Our engineering and development costs for the years ended June 30, 2009 and 2008 were $2,859,094 and $2,558,423, respectively. The increase during the year ended June 30, 2009 of $300,671 from the comparable 2008 period was primary due to the increase in advanced engineering and development costs and materials under the AEST project contract which commenced in July 2007. Expenses were partially offset by $126,997 received from the Australian government during the year ended June 30, 2009 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 allocated or included in cost of sales.
Net Loss. Our net loss for the years ended June 30, 2009 and 2008 was $5,546,572 and $4,904,663, respectively, resulting in a $641,909 increase in net loss as compared to the year ended June 30, 2008. In summary, this increase in loss was primarily the result of a $726,732 increase in operating costs, a reduction of $360,585 in interest income, reductions in other income and expense of $50,696 which were partially offset by a $496,104 increase in revenues.
Liquidity and Capital Resources
Since our inception, our research, development, and operations were primarily financed through debt and equity financings and government grants and projects. Total paid in capital as of June 30, 2009 was $45,655,262. We had a cumulative deficit of $37,273,367 as of June 30, 2009 compared to a cumulative deficit of $31,726,795 as of June 30, 2008. At June 30, 2009 we had a working capital surplus of $3,798,976 and as of June 30, 2008 a working capital surplus of $8,611,872. Our shareholders’ equity as of June 30, 2009 and June 30, 2008 was $6,780,319 and $12,016,118, respectively.
We believe that we will have sufficient capital necessary to meet our operating and capital commitments for at least the next twelve months. This is based on a conservative forecast that includes only current sales contracts which generate positive cash flows, 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, we believe additional capital is necessary to continue our mid-to-long term growth plans. Under current economic conditions and absent a substantial increase in new orders and additional debt or equity financing, the board of directors has requested that management implement increased cost containment measures. Actions taken by the board of directors and management during this fiscal year included: 1.) increase in cost saving measures to preserve cash resources; 2.) actively pursue fund raising arrangements, including engaging investment bankers to assist with equity based financing; 3.) focusing the Chief Executive Officer’s efforts on fund raising and federal stimulus spending plan opportunities; and 4.) filing a “shelf” S-3 Registration Statement to assist in fund raising efforts.
We are actively involved in submitting proposals to various State and Federal government agencies such as our response to Funding Opportunity announcements issued as a result of the American Recovery and Reinvestment Act. These proposals cover opportunities for plant expansion, Smart Grid initiative, renewable energy initiatives as well as research and development opportunities for applications where the Company’s technology could bring a transformational change to market applications that we currently do not address.
On January 26, 2009 we filed an S-3 Registration Statement with the Securities and Exchange Commission. Amendments to the S-3 Registration Statement were filed on March 30, 2009 and May 1, 2009 and were declared by the SEC effective on May 13, 2009. We took this action as a proactive measure in anticipation of our possible future needs for additional working capital and further capital expenditures. On August 18, 2009, we announced the closing of our public closing pursuant to this S-3 shelf registration. ZBB sold 1,791,667 units at $1.20 per unit, consisting of an aggregate of 1,791,667 shares of its common stock and warrants to purchase 358,333 shares of its common stock at an exercise price of $1.33 per share. The proceeds to ZBB after deducting placement agent fees and offering expenses were approximately $1.9 million.
Operating Activities
For the year ended June 30, 2009, net cash used in operations was $4,223,478. Cash used in operations resulted from a net loss of $5,546,572, reduced by $222,178 in net changes to working capital and also reduced by other net adjustments to reconcile net loss to cash of $1,100,916. Changes to working capital providing cash to operations resulted from decreases in inventories of $378,013 and other receivables of $61,083, and increases to accounts payable of $247,499, accrued compensation of $22,092, accrued expenses of $66,650, and deferred revenues of $98,627. Cash used in operations resulted from increases to accounts receivable of $609,987 and prepaid and other current assets of $41,799. Other adjustments increasing the net cash used in operations was $277,896 of depreciation, $372,855 of equipment costs reclassified to expenses, $200,000 of consulting fees applied to note receivable, and $338,864 of stock based compensation; and a decrease to cash resulting from an $88,699 reduction in the inventory allowance.
For the year ended June 30, 2008, net cash used in operations was $4,379,777 after adding back non-cash items of $888,230 consisting primarily of depreciation, stock based compensation, consulting fees applied to shareholder note receivable, and equipment used in operations. Sources of cash provided by operations resulted from a decrease in accounts receivable of $188,602; and increases in accrued expenses of $45,603 and deferred revenues of 308,395. Cash used in operations resulted from increases in inventory (net of $234,000 increase in inventory allowance) of $40,318, prepaid and other current assets of $235,485, and interest receivable of $44,227; and decreases in accounts payable of $228,664 and accrued loss on contracts of $357,250.
Investing Activities
For the year ended June 30, 2009, net cash used in investing activities was $1,889,658. Cash used in investing activities resulted from $889,658 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 year ended June 30, 2008, net cash used in investing activities was $721,468 due to increases in capital expenditures for manufacturing and testing equipment, building improvements, and computer software and hardware.
Financing Activities
For the year ended June 30, 2009, net cash from financing activities was $763,016 consisting of $1,070,000 in financing on manufacturing equipment less repayments of $306,984 principal.
For the year ended June 30, 2008, net cash used by financing activities was $4,270,457. Cash was used in the repayment of $1,882,634 in bank loans and notes payable of $4,047,823, and additional costs related to the June 2007 public offering of $100,000. Financing sources were provided from the refinancing of a bank loan in the amount of $1,760,000.
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
| Item 8. | Financial Statements and Supplementary Data |
INDEX TO FINANCIAL STATEMENTS
ZBB ENERGY CORPORATION
TABLE OF CONTENTS
| | | Page |
| Report of Independent Registered Public Accounting Firm | | 27 |
| Consolidated Balance Sheets as of June 30, 2009 and 2008 | | 28 |
| Consolidated Statements of Operations for the years ended June 30, 2009 and 2008 | | 29 |
| Consolidated Statements of Changes in Shareholders’ Equity for the Years ended June 30, 2009 and 2008 | | 30 |
| Consolidated Statements of Cash Flows for the years ended June 30, 2009 and 2008 | | 31 |
| Notes to Consolidated Financial Statements | | 32 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
ZBB Energy Corporation
Milwaukee, Wisconsin
We have audited the accompanying consolidated balance sheets of ZBB Energy Corporation and subsidiaries as of June 30, 2009 and 2008 and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ZBB Energy Corporation and subsidiaries at June 30, 2009 and 2008 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
| /s/PKF |
| Certified Public Accountants |
| A Professional Corporation |
New York, New York
September 16, 2009
ZBB ENERGY CORPORATION
Consolidated Balance Sheets
| | | June 30, 2009 | | | June 30, 2008 | |
| | | | | | | |
| Assets | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | | $ | 2,970,009 | | | $ | 8,451,320 | |
| Bank certificate of deposit | | | 1,000,000 | | | | - | |
| Accounts receivable | | | 614,154 | | | | 4,167 | |
| Interest receivable | | | 19,746 | | | | 80,829 | |
Inventories-net of $145,301 and $234,000 allowance | | | 1,023,571 | | | | 1,312,885 | |
| Prepaids and other current assets | | | 143,173 | | | | 316,274 | |
| Total current assets | | | 5,770,653 | | | | 10,165,475 | |
| Long-term assets: | | | | | | | | |
| Property, plant and equipment, net | | | 4,578,180 | | | | 4,240,640 | |
| Investment in joint venture | | | - | | | | 242,350 | |
| Goodwill | | | 803,079 | | | | 803,079 | |
| Total assets | | $ | 11,151,911 | | | $ | 15,451,544 | |
| Liabilities and Shareholders' Equity | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Bank loans | | | 416,558 | | | | 171,634 | |
| Accounts payable | | | 827,001 | | | | 607,520 | |
| Accrued expenses | | | 66,650 | | | | - | |
| Deferred revenues | | | 509,627 | | | | 644,700 | |
| Accrued compensation and benefits | | | 151,841 | | | | 129,749 | |
| Total current liabilites | | | 1,971,677 | | | | 1,553,603 | |
| Long-term liabilities: | | | | | | | | |
| Bank loans | | | 2,399,915 | | | | 1,881,823 | |
| Total liabilities | | $ | 4,371,592 | | | $ | 3,435,426 | |
| Shareholders' equity | | | | | | | | |
Common stock ($0.01 par value); 150,000,000 authorized | | | | | | | | |
| 10,618,297 and 10,512,283 shares issued and outstanding | | | 106,183 | | | | 105,123 | |
| Additional paid-in capital | | | 45,549,079 | | | | 45,619,608 | |
| Note receivable from shareholders | | | - | | | | (608,333 | ) |
| Accumulated other comprehensive (loss) | | | (1,601,576 | ) | | | (1,373,485 | ) |
| Accumulated (deficit) | | | (37,273,367 | ) | | | (31,726,795 | ) |
| Total shareholders' equity | | $ | 6,780,319 | | | $ | 12,016,118 | |
| Total liabilities and shareholders' equity | | $ | 11,151,911 | | | $ | 15,451,544 | |
See accompanying notes to consolidated financial statements
ZBB ENERGY CORPORATION
Consolidated Statements of Operations
| | | Year ended June 30, | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| Revenues | | | | | | |
| | | | | | | |
| Product sales and revenues | | $ | 686,906 | | | $ | 303,063 | |
| Engineering and development revenues | | | 1,088,797 | | | | 976,536 | |
| Total Revenues | | | 1,775,703 | | | | 1,279,599 | |
| Costs and Expenses | | | | | | | | |
| | | | | | | | | |
| Cost of product sales | | | 640,710 | | | | 300,751 | |
| Advanced engineering and development | | | 2,859,094 | | | | 2,558,423 | |
| Selling, general, and administrative | | | 3,474,476 | | | | 3,350,330 | |
| Depreciation | | | 277,896 | | | | 315,940 | |
| Total Costs and Expenses | | | 7,252,176 | | | | 6,525,444 | |
| | | | | | | | | |
| Loss from Operations | | | (5,476,473 | ) | | | (5,245,845 | ) |
| | | | | | | | | |
| Other Income (Expense) | | | | | | | | |
| Interest income | | | 145,088 | | | | 505,673 | |
| Interest expense | | | (182,074 | ) | | | (153,345 | ) |
| Finance costs | | | - | | | | (52,813 | ) |
| Other income (expense) | | | (33,113 | ) | | | 41,667 | |
| Total Other Income (Expense) | | | (70,099 | ) | | | 341,182 | |
| | | | | | | | | |
| Loss before provision for Income Taxes | | | (5,546,572 | ) | | | (4,904,663 | ) |
| Provision for Income Taxes | | | - | | | | - | |
| Net Loss | | $ | (5,546,572 | ) | | $ | (4,904,663 | ) |
| Net Loss per share- | | | | | | | | |
| Basic and diluted | | $ | (0.53 | ) | | $ | (0.47 | ) |
| Weighted average shares-basic and diluted: | | | | | | | | |
| Basic | | | 10,547,621 | | | | 10,463,579 | |
| Diluted | | | 10,547,621 | | | | 10,463,579 | |
See accompanying notes to consolidated financial statements.
ZBB Energy Corporation
Consolidated Statements of Changes in Shareholders' Equity
| | | | | | | | | | | | | | | Accumulated Other | | | | | | TOTAL | | | | |
| | | Number of | | | | | | | | | Note Receivable | | | Comprehensive | | | | | | Shareholders' | | | Comprehensive | |
| | | Shares | | | Common Stock | | | Add'l Paid-in Capital | | | from Shareholders | | | (Loss) | | | Accumulated Deficit | | | Equity | | | (Loss) | |
| Balance: June 30, 2007 | | | 10,087,090 | | | $ | 100,871 | | | $ | 44,994,333 | | | $ | (808,333 | ) | | $ | (1,546,537 | ) | | $ | (26,822,131 | ) | | $ | 15,918,203 | | | | |
| Issuance of common stock- note conversions | | | 159,256 | | | | 1,593 | | | | 473,644 | | | | | | | | | | | | | | | | 475,237 | | | | |
| Issuance of common stock - Montgomery warrants | | | 265,937 | | | | 2,659 | | | | (2,659 | ) | | | | | | | | | | | | | | | | | | | |
| Reduction of note receivable from stockholder | | | | | | | | | | | | | | | 200,000 | | | | | | | | | | | | 200,000 | | | | |
| Public offering costs | | | | | | | | | | | (100,000 | ) | | | | | | | | | | | | | | | (100,000 | ) | | | |
| Stock options expensed | | | | | | | | | | | 254,290 | | | | | | | | | | | | | | | | 254,290 | | | | |
| Net Loss | | | | | | | | | | | | | | | | | | | | | | | (4,904,663 | ) | | | (4,904,663 | ) | | $ | (4,904,663 | ) |
| Net Translation Adjustment | | | | | | | | | | | | | | | | | | | 173,051 | | | | | | | | 173,051 | | | | 173,051 | |
| Balance: June 30, 2008 | | | 10,512,283 | | | $ | 105,123 | | | $ | 45,619,608 | | | $ | (608,333 | ) | | $ | (1,373,485 | ) | | $ | (31,726,795 | ) | | $ | 12,016,118 | | | $ | (4,731,612 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock options expensed | | | | | | | | | | | 294,114 | | | | | | | | | | | | | | | | 294,114 | | | | | |
| Issuance of restricted stock in payment of compensation | | | 101,014 | | | | 1,010 | | | | 72,167 | | | | | | | | | | | | | | | | 73,177 | | | | | |
| Deferred stock compensation | | | | | | | | | | | (72,167 | ) | | | | | | | | | | | | | | | (72,167 | ) | | | | |
| Amortization of deferred stock compensation | | | | | | | | | | | 30,490 | | | | | | | | | | | | | | | | 30,490 | | | | | |
| Issuance of restricted stock-in payment of consulting fees | | | 5,000 | | | | 50 | | | | 13,200 | | | | | | | | | | | | | | | | 13,250 | | | | | |
| Reduction of note receivable | | | | | | | | | | | (408,333 | ) | | | 608,333 | | | | | | | | | | | | 200,000 | | | | | |
| Net Loss | | | | | | | | | | | | | | | | | | | | | | | (5,546,572 | ) | | | (5,546,572 | ) | | $ | (5,546,572 | ) |
| Net Translation Adjustment | | | | | | | | | | | | | | | | | | | (228,091 | ) | | | | | | | (228,091 | ) | | | (228,091 | ) |
| Balance: June 30, 2009 | | | 10,618,297 | | | $ | 106,183 | | | $ | 45,549,079 | | | $ | - | | | $ | (1,601,576 | ) | | $ | (37,273,367 | ) | | $ | 6,780,319 | | | $ | (5,774,663 | ) |
See accompanying notes to consolidated financial statements.
| | Year Ended June 30, | |
| Consolidated Statements of Cash Flows | | 2009 | | | 2008 | |
| Cash flows from operating activities: | | | | | | |
| Net loss | | $ | (5,546,572 | ) | | $ | (4,904,663 | ) |
| | | | | | | | | |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
| Depreciation | | | 277,896 | | | | 315,940 | |
| Change in inventory allowance | | | (88,699 | ) | | | 234,000 | |
| Equipment costs reclassified to expenses | | | 372,855 | | | | 118,000 | |
| Payments applied to note receivable for consulting fees | | | 200,000 | | | | 200,000 | |
| Stock based compensation | | | 338,864 | | | | 254,290 | |
| (Increase) decrease in operating assets: | | | | | | | | |
| Accounts receivable | | | (609,987 | ) | | | 188,602 | |
| Inventories | | | 378,013 | | | | (274,318 | ) |
| Prepaids and other current assets | | | (41,799 | ) | | | (235,485 | ) |
| Other receivables-interest | | | 61,083 | | | | (44,227 | ) |
| Increase (decrease) in operating liabilities: | | | | | | | | |
| Accounts payable | | | 247,499 | | | | (228,664 | ) |
| Accrued compensation and benefits | | | 22,092 | | | | 45,603 | |
| Accrued expenses | | | 66,650 | | | | (357,250 | ) |
| Deferred revenues | | | 98,627 | | | | 308,395 | |
| Net cash (used) in operating activities | | | (4,223,478 | ) | | | (4,379,777 | ) |
| Cash flows from investing activities | | | | | | | | |
| Capital expenditures | | | (889,658 | ) | | | (721,468 | ) |
| Bank certificate of deposit | | | (1,000,000 | ) | | | - | |
| Net cash (used) in investing activities | | | (1,889,658 | ) | | | (721,468 | ) |
| Cash flows from financing activities | | | | | | | | |
| Proceeds from bank loans | | | 1,070,000 | | | | 1,760,000 | |
| Repayments of bank loans | | | (306,984 | ) | | | (1,882,634 | ) |
| Proceeds (repayments) of notes payable | | | - | | | | (4,047,823 | ) |
| Additional public offering costs | | | - | | | | (100,000 | ) |
| Net cash provided (used) by financing activities | | | 763,016 | | | | (4,270,457 | ) |
| Effect of exchange rate changes on cash and cash equivalents | | | (131,192 | ) | | | - | |
| Net (decrease) in cash and cash equivalents | | | (5,481,311 | ) | | | (9,371,702 | ) |
| Cash and cash equivalents - beginning of year | | | 8,451,320 | | | | 17,823,022 | |
| | | | | | | | | |
| Cash and cash equivalents - end of period | | $ | 2,970,009 | | | $ | 8,451,320 | |
| Cash paid for interest | | $ | 121,468 | | | $ | 153,345 | |
| | | | | | | | | |
| Supplemental schedule of non-cash investing and financing activities: | | | | | | | | |
| Issuance of common stock pursuant to conversion of convertible notes | | | - | | | | 475,237 | |
| Investment in joint venture offset by unfulfilled deferred revenue | | | 160,000 | | | | - | |
| Equipment expensed to cost of contracts | | | 372,855 | | | | 118,000 | |
| Stock based compensation | | | 338,864 | | | | 254,290 | |
See accompanying notes to consolidated financial statements.
ZBB ENERGY CORPORATION
Notes to Consolidated Financial Statements
June 30, 2009
NOTE 1 — NATURE OF ORGANIZATION
ZBB Energy Corporation (“ZBB” or the “Company”) develops and manufactures distributed energy storage solutions based upon the Company’s proprietary zinc-bromine rechargeable electrical energy storage technology. The Company was incorporated under the laws of Wisconsin in 1998.
The Company develops, manufactures and markets energy storage systems with electric utility applications as its initial market. This scalable, mobile system is ideally suited for a number of market applications including:
— Load management for generation, transmission and distribution utilities, energy service companies and large industrial customers allowing peak shaving and deferral of capital expenditures that otherwise would be required to alleviate utility system constraints.
— Storage of renewable wind and solar energy production in both grid connected and grid independent environments.
—Power quality to alleviate downtime caused by voltage sags, voltage swells, frequency fluctuations, and combined with uninterruptible power supply (UPS) to eliminate power outages.
Since our inception, our research, advanced engineering and development, and operations were primarily financed through debt and equity financings, government grants and joint ventures.
The consolidated financial statements include the accounts of the Company and those of its wholly owned subsidiaries, ZBB Technologies, Inc. which operates a manufacturing facility in Menomonee Falls, Wisconsin, and ZBB Technologies, Ltd. which has its advanced engineering and development facility in Perth, Australia.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). All significant intercompany accounts and transactions have been eliminated upon consolidation.
Foreign Currency
The Company uses the United States dollar as its functional and reporting currency, while the Australian dollar is the functional currency of one of its foreign subsidiaries. Assets and liabilities of the Company’s foreign subsidiary are translated into United States dollars at exchange rates that are in effect as at the balance sheet date while equity accounts are translated at historical exchange rates. Income and expense items are translated at average exchange rates which were applicable during the reporting period. Translation adjustments are accumulated in Accumulated Other Comprehensive (Loss) as a separate component of Shareholders’ Equity in the consolidated balance sheet. No gain or loss on translation is included in the net loss.
Use of Estimates
The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the period covered by the report. Actual results could differ from those estimates. Estimates are used in accounting for, amongst other things, revenue and losses recognized under the percentage of completion method for sales, impairment and realizability of assets, depreciation, and valuations of equity instruments. Estimates and assumptions are reviewed periodically and the effects of any revisions are reflected in the consolidated financial statements in the period they are determined to be necessary.
Income Tax
Provisions for income taxes are based on taxes payable or refundable for the current year and deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled as prescribed in FASB Statement No. 109, “Accounting for Income Taxes”. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. There were no deferred tax assets recorded as of June 30, 2009.
Property, Plant and Equipment
Land, building, equipment, computers and furniture and fixtures are recorded at cost. Maintenance, repairs and betterments are charged to expense.
Finished goods normally held for sale to customers may sometimes be used in demonstration and testing by customers. During the periods that the units are transferred from Inventory to Plant and Equipment they are depreciated over the period in use. Since the intent is for these units to be eventually sold they are returned to Inventory upon the completion of customer demonstration and testing at their written down value.
Depreciation
Depreciation is provided for all plant and equipment on a straight line basis over estimated useful lives of the assets. The depreciation rate used for each class of depreciable asset is:
| | Depreciation Rate |
| Manufacturing Equipment and test units | 3 – 15 years |
| Office Equipment | 3 – 8 years |
| Building | 40 years |
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal Of Long-Lived Assets," the Company assesses potential impairments to its long-lived assets including property, plant and equipment when there is evidence that events or changes in circumstances indicate that the carrying value may not be recoverable.
If such an indication exists, the recoverable amount of the asset, being the higher of the asset’s fair value less costs to sell and value in use, is compared to the asset’s carrying value. Any excess of the asset’s carrying value over its recoverable amount is expensed to the statement of operations. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate.
Goodwill
Goodwill is recognized as the excess cost of an acquired entity over the net amount assigned to assets acquired and liabilities assumed. Goodwill is not amortized but reviewed for impairment annually as of June 30 or more frequently if events or changes in circumstances indicate that its carrying value may be impaired. These conditions could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit.
Testing for the impairment of goodwill involves a two step process. The first step of the impairment test requires the comparing of a reporting units fair value to its carrying value. If the carrying value is less than the fair value, no impairment exists and the second step is not performed. If the carrying value is higher than the fair value, there is an indication that impairment may exist and the second step must be performed to compute the amount of the impairment. In the second step, the impairment is computed by estimating the fair values of all recognized and unrecognized assets and liabilities of the reporting unit and comparing the implied fair value of reporting unit goodwill with the carrying amount of that unit’s goodwill. Based on this method, the Company determined fair value as evidenced by market capitalization, and concluded that there was no need for an impairment charge.
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 with a few high credit quality financial institutions predominately in the United States. At times such balances may exceed federally insurable limits. The Company has not experienced any losses in such accounts.
Investments
The Company occasionally invests in bank certificates of deposits with maturities of more than three months. As of June 30, 2009 the Company held a nine month certificate of deposit, interest accruing at 3.96%, and a maturity date of September 30, 2009.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or market and consist of raw materials, work in progress and finished goods held for resale.
Costs incurred in bringing each product to its present location and conditions are accounted for as follows:
| · | Raw materials – purchased cost of direct material |
| · | Finished goods and work-in-progress – purchased cost of direct material plus direct labor plus a proportion of manufacturing overheads. |
The Company evaluates the recoverability of its slow moving or obsolete inventories at least quarterly. The Company estimates the recoverable cost of such inventory by product type while considering factors such as its age, historic and current demand trends, the physical condition of the inventory as well as assumptions regarding future demand. The Company’s ability to recover its cost for slow moving or obsolete inventory can be affected by such factors as general market conditions, future customer demand and relationships with suppliers. Historically, the Company’s inventories have demonstrated long shelf lives, are not highly susceptible to obsolescence and are eligible for return under various supplier return programs.
Revenue Recognition
The Company currently contracts with its customers to develop, manufacture, install and service its energy storage systems under short and long-term contracts. These contracts have resulted in two distinct arrangements and revenue recognition policies. The first type of contract is for the production, delivery and installation of energy storage systems. The second type of contract is for product engineering and development activities.
Product sales orders that have relatively short duration (typically less than one year) normally use the completed-contract method of revenue recognition rather than the percentage-of-completion method. Revenues are recognized when the sales price is fixed, collectability is reasonably assured and the product’s title and risk of loss is transferred to the customer. Typically, these conditions are met when the product is shipped to the customer. The Company charges shipping and handling fees when products are shipped or delivered to a customer, and includes such amounts in net sales. The Company reports its sales net of actual sales returns.
Revenue recognition on energy storage system long-term contracts utilizes the percentage-of-completion method which recognizes revenue proportionally as costs are incurred and compared to the estimated total costs for each contract. This has been the predominant method used in estimating revenues recognized in past reporting periods.
Engineering and development contracts are typically collaborative agreements to further develop renewable energy technologies and are often sponsored and partially funded in various amounts between government agencies and the Company. Often multi-year agreements which contain several elements and provide for varying consideration based on allowable costs, milestones and similar payment provisions and may provide for future licensing and royalties beyond the term of the arrangement. Revenue associated with these types of contracts are typically of longer duration and recognized under the percentage-of-completion method.
In July 2007 the Company commenced engineering and product development activities pursuant to the collaborative Advanced Electricity Storage Technologies project (“AEST”) with the Commonwealth of Australia through July 2010 which terms include the receipt of funding of A$3.1 million (approximately US$2.3 million) toward development costs and include the production and delivery of a 500kWh energy storage system. During the years ended June 30, 2009 and 2008, $984,807 and $976,536, respectively, was recognized as revenue based on progress toward completion as specified in the contract.
Total revenues of $1,775,703 and $1,279,599 were recognized for the years ended June 30, 2009 and 2008, respectively, and were comprised of two significant customers in 2009 and one significant customer in 2008.
Loss per Share
The Company follows the provisions of SFAS No. 128 which requires the reporting of both basic and diluted earnings (loss) per share. Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings (net loss) per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. In accordance with FASB 128, any anti-dilutive effects on net income (loss) per share are excluded (as of the years ended June 30, 2009 and 2008 there were 1,790,167 and 1,395,523 underlying options and warrants that are excluded).
Stock-Based Compensation
The Company follows the provisions of "Share-Based Payment" ("SFAS No. 123(R)"), which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.
Accordingly, the Company measures share-based compensation cost for all share-based awards at the fair value on the grant date and recognition of share-based compensation over the service period for awards that are expected to vest. The fair value of stock options is determined based on the number of shares granted and the price of our ordinary shares, and calculated based on the Black-Scholes valuation model. Black Scholes valuation attributes used in the model include expected volatility, term, and risk-free interest rate. Expected volatility is based on the historical volatility of the Company’s share price for the period prior to option grant equivalent to the expected life of the options. The expected term is based upon management’s estimate of when the option will be exercised. The risk-free interest rate for periods within the contractual life of the option is based upon the U.S. Treasury yield curve in effect at the time of grant.
The Company only recognizes expense to its consolidated statement of operations for those options or shares that are expected ultimately to vest, using two attribution methods to record expense, the straight-line method for grants with only service-based vesting or the graded-vesting method, which considers each performance period or tranche separately. See Note 15 below.
Advanced engineering and development
The Company expenses advanced engineering and development costs as incurred. These costs consist primarily of labor, overhead, and materials to build prototype units, materials for testing, develop manufacturing processes and include consulting fees and other costs.
To the extent these costs are separately identifiable, incurred and funded by advanced engineering and development type agreements with outside parties, they will be shown separately on the statement of operations as a “cost of engineering and development contract”.
Comprehensive income (loss)
The Company reports its comprehensive income (loss) in accordance with SFAS No. 130, “Reporting Comprehensive Income”, which requires presentation of the components of comprehensive earnings. Comprehensive income (loss) consists of net income (loss) for the period plus or minus any net currency translation adjustments applicable for the periods ended June 30, 2009 and 2008 and is presented in the Consolidated Statements of Changes in Shareholders’ Equity.
Concentrations of Credit Risk and Fair Value:
Financial instruments that potentially subject the Company to concentrations of credit risk consists principally of cash and U.S. treasury investments, and bank certificates of deposit, and accounts receivable.
The Company maintains significant cash investments primarily with three or four financial institutions, which at times may exceed federally insured limits. The Company has not previously experienced any losses on such deposits. Additionally, the Company performs periodic evaluations of the relative credit rating of these institutions as part of its investment strategy.
Concentrations of credit risk with respect to accounts receivable are limited due to accelerated payment terms in current customer contracts and creditworthiness of the current customer base. However, at June 30, 2009, primarily all of the Company’s receivables pertain to one customer and revenues were concentrated among two customers during for the year then ended.
The carrying amounts of cash and cash equivalents, short-term investments, trade receivables, other current assets and accounts payable approximate fair value due to the short-term nature of these instruments. The carrying value of bank loans and mortgage payable approximate fair value based on their terms which reflect market conditions existing as of June 30, 2009.
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141R (revised 2007), “Business Combinations. SFAS No.141R among other things, establishes principles and requirements for how the acquirer in a business combination (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquired business, (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No.141R is effective for fiscal years beginning on or after December 15, 2008, with early adoption prohibited. The adoption of this statement is not expected to have a material effect on the Company's financial statements.
In December 2007, FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements”. This statement requires the ownership interests in subsidiaries held by parties other than the parent and the amount of consolidated net income attributable to the parent and to the non-controlling interest be clearly identified and presented on the face of the consolidated statements. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years beginning on or after December 15, 2008. The adoption of this statement is not expected to have a material effect on the Company's financial statements.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. SFAS 168 replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, and establishes the FASB Accounting Standards Codification (Codification) as the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements. SFAS 168 is effective for financial statements issued for interim periods and annual periods ending after September 15, 2009. We do not expect the adoption of SFAS 168 to have a material impact on our consolidated financial statements.
Effective July 1, 2008, the Company adopted FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS No. 159 gives entities the option to measure eligible financial assets and financial liabilities at fair value on an instrument by instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability. Subsequent changes in fair value must be recorded in earnings. SFAS 159 became effective with no impact to the Company’s financial position or results of operations, since it chose not to report any additional items at fair value.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165"). SFAS 165 is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for selecting that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009. The Company adopted this standard on June 30, 2009. See Note 16.
NOTE 3 - INVENTORIES
Inventory balances are comprised of the following amounts as of June 30:
| | | 2009 | | | 2008 | |
| | | | | | | |
| Raw materials | | $ | 766,871 | | | $ | 1,013,467 | |
| Work in progress | | | 402,001 | | | | 253,714 | |
| Finished goods | | | -0- | | | | 279,704 | |
| Inventory valuation allowance | | | (145,301 | ) | | | (234,000 | ) |
| TOTAL | | $ | 1,023,571 | | | $ | 1,312,885 | |
NOTE 4– PROPERTY, PLANT & EQUIPMENT
Property, plant, and equipment balances are comprised of the following amounts as of June 30:
| | | 2009 | | | 2008 | |
| | | | | | | |
| Office equipment | | $ | 115,809 | | | $ | 127,196 | |
| Manufacturing equipment | | | 4,091,587 | | | | 3,430,095 | |
| Test units | | | 534,591 | | | | 707,470 | |
| Building | | | 1,996,134 | | | | 1,996,134 | |
| Land | | | 217,000 | | | | 217,000 | |
| | | | 6,955,121 | | | | 6,477,895 | |
| Less accumulated depreciation | | | (2,376,941 | ) | | | ( 2,237,255 | ) |
| | | | | | | | | |
| Net Property, Plant & Equipment | | $ | 4,578,180 | | | $ | 4,240,640 | |
NOTE 5 – INVESTMENT IN JOINT VENTURE
In March 2005, the Company acquired a 49% interest in ZBB China Pty Ltd for a cost of $175,000 (estimated for current period foreign exchange rates). The joint venture company was licensed to distribute ZBB energy storage systems into the Chinese market.
On October 2, 2008 a mutual agreement was reached to terminate the co-operative joint venture agreement between ZBB and China Century Capital Limited. The effect of this termination is to cancel the exclusive manufacturing, marketing, and distribution rights granted by ZBB to the joint venture company, ZBB China Pty Ltd, and provided for ZBB to hold 100% ownership in this subsidiary.
During the year ended June 30, 2009 the Company dissolved the joint venture, realizing a loss on the investment of $15,369.
NOTE 6 – GOODWILL
The Company through a series of transactions in March 1996 acquired ZBB Technologies, Inc., a wholly-owned subsidiary. The goodwill amount of $1.134 million, the difference between the price paid for ZBB Technologies, Inc. and the net assets of the acquisition, amortized through fiscal 2002, resulted in the net goodwill amount of $803,079 as of June 30, 2009.
The Company accounts for goodwill in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” under which goodwill and other intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests. The implied fair value of goodwill is the amount determined by deducting the estimated fair value of all tangible and identifiable intangible net assets of the reporting unit to which goodwill has been allocated from the estimated fair value of the reporting unit. If the recorded value of goodwill exceeds its implied value, an impairment charge is recorded for the excess.
NOTE 7 – NOTE RECEIVABLE-Shareholder
In July 2006, the Company entered into a common stock purchase agreement with 41 Broadway Associates, LLC. Under the terms of the agreement the Company sold to 41 Broadway Associates, LLC a total of 294,118 shares for a total consideration of $1,000,000. Payments were to be paid in annual installments of $200,000 plus accrued interest at 4% over a five year period.
Both parties also entered into a five year consulting agreement, which would have provided approximately $200,000 of annual services including assistance with debt and equity financing, investor introductions, marketing, etc. During 2009 the Company determined the service agreement to be a minimal future value and effectively cancelled the agreement as of June 30, 2009.
In accordance with the terns of the note agreement, the cancellation of the service agreement, in effect relieved the remaining balance of the note receivable. Accordingly, the $408,333 remaining balance of the note receivable was written off and applied to additional paid in capital at June 30, 2009.
NOTE 8 – BANK LOANS AND NOTES PAYABLE
| The Company's debt consisted of the following as of June 30: | | 2009 | | | 2008 | |
| Bank loans-current | | $ | 416,558 | | | $ | 171,634 | |
| Bank loans-long term | | | 2,399,915 | | | | 1,881,823 | |
| Total | | $ | 2,816,473 | | | $ | 2,053,457 | |
On November 28, 2008 the Company entered into a loan agreement to finance new production equipment. The $1,070,000 bank note is secured by specific equipment, requiring monthly payments of $21,000 of principal and interest; rate equal to the prime rate; maturity date of December 1, 2013. Principal balance is $948,441 at June 30, 2009.
On May 14, 2008 the Company entered into two loan agreements to refinance the building and land in Menomonee Falls, Wisconsin:
—The first loan requires a fixed monthly payment of principal and interest at a rate of .25% below the prime rate, with any principal balance due at maturity on June 1, 2018, and secured by the building and land. Principal balance is $853,661 at June 30, 2009.
—The second loan is a secured promissary note guaranteed by the U.S. Small Business Administration, requiring monthly payments of principal and interest at a rate of 5.5% until May 1, 2028. Principal balance is $847,628 at June 30, 2009.
On January 22, 2007 the Company refinanced its equipment loan. The new loan term requires monthly payments of principal and an interest rate equal to the prime rate, maturity date of February 1, 2011. The loan is secured by a first lien on all business personal property. Principal balance is $166,743 at June 30, 2009.
Maximum aggregate annual principal payments for the 12 month periods subsequent to June 30, 2009 are as follows:
| 2010 | | $ | 416,558 | |
| 2011 | | | 360,070 | |
| 2012 | | | 324,338 | |
| 2013 | | | 338,016 | |
| 2014 | | | 124,228 | |
| 2015 and thereafter: | | | 1,253,263 | |
| | | $ | 2,816,473 | |
NOTE 9 - EMPLOYEE/DIRECTOR EQUITY INCENTIVE PLANS
In 2002 the Company established the 2002 Stock Option Plan (“SOP”) whereby a stock option committee was given the discretion to grant up to 882,353 options to purchase shares to key employees of the Company at exercise prices and dates to be determined by the directors. During the year ended June 30, 2008 400,000 options to purchase shares were granted to employees and directors exercisable at $3.59 (110% of the market closing price on June 6, 2008) based on vesting terms of June 2008 through January 2009, and exercisable at various dates through June 2014. No options were exercised and 16,793 options expired during the year ended June 30, 2009. At June 30, 2009 there remains 487,907 options outstanding with exercise prices of not less than $3.59 and exercise dates up to June 30, 2014. A further 91,200 options are available to be issued under the SOP.
During 2005 the Company established an Employee Stock Option Scheme (the “2005 Plan”) that authorizes the board of directors or a committee thereof, to grant options to employees and directors of the Company or any affiliate of the Company. The maximum number of options that may be granted in aggregate at any time under this option scheme or under any other employee option or share plan is the number equivalent to 5% of the total number of issued shares of the Company including all shares underlying options under the Company’s stock option and incentive plans.. Options issued expire five years after the vesting date. No options were exercised in fiscal 2008 or during the year ended June 30, 2009. At June 30, 2009, options to purchase 250,000 shares with an exercise price of $3.82 and an expiration date of June 2012 remain outstanding.
During 2007 the Company established the 2007 Equity Incentive Plan (the “2007 Plan”) that authorizes the board of directors or a committee thereof, to grant options to purchase up to a maximum of 1,500,000 shares to employees and directors of the Company at exercise prices to be determined by the administrator but not less than 100% (110% for a 10% shareholder) of the market value on the date granted. During the year ended June 30, 2008 options to purchase 275,000 shares were granted to employees and directors exercisable at $3.59 based on vesting terms of June 2008 through January 2011 and exercisable at various dates through January 2016. During the year ended June 30, 2009 options to purchase 451,410 shares were granted to employees and directors exercisable at prices from $1.35 to $1.69 based on vesting terms of July 2009 through January 2012 and exercisable at various dates through December 2016. Included in the year ended June 30, 2009 options were granted to purchase 266,410 shares which vest upon certain contingent performance criteria, of which 93,248 vested and 39,963 forfeited during the period. The remaining 185,000 options issued in fiscal 2009 are service based. Options to purchase an additional 707,549 shares are available to be issued under the 2007 plan.
In aggregate for all plans, at June 30, 2009, the Company has a total of 1,424,354 options outstanding and 798,749 options available for future grant under the SOP, 2005 and the 2007 Plans.
Information with respect to stock option activity under the employee and director plans is as follows:
| | | | | | Weighted-Average | |
| Stock Option Activity | | Number of Options | | | Exercise Price Per Share | |
| Balance at June 30, 2007 | | | 460,611 | | | $ | 4.81 | |
| Options granted | | | 675,000 | | | | 3.59 | |
| Options expired | | | (105,911 | ) | | | 5.61 | |
| Options exercised | | | - | | | | - | |
| Balance at June 30, 2008 | | | 1,029,700 | | | $ | 4.03 | |
| Options granted | | | 451,410 | | | | 1.49 | |
| Options expired | | | (16,793 | ) | | | 5.61 | |
| Options forfeited | | | (39,963 | ) | | | 1.35 | |
| Options exercised | | | - | | | | - | |
| Balance at June 30, 2009 | | | 1,424,354 | | | $ | 3.24 | |
The following table summarizes information relating to the stock options outstanding at June 30, 2009:
| | | Outstanding | | | Exercisable | |
| | | | | | Weighted- | | | | | | | | | | |
| | | | | | Average | | | Weighted- | | | | | | Weighted- | |
| | | Number of | | | Remaining | | | Average | | | | | | Average | |
| | | Options | | | Contractual Life | | | Exercise | | | Number of | | | Exercise | |
| Range of Exercise Prices | | Outstanding | | | (in years) | | | Price | | | Options | | | Price | |
| $1.35 to $1.69 | | | 411,447 | | | | 6.9 | | | $ | 1.50 | | | | 93,248 | | | $ | 1.35 | |
| $3.59 to $3.82 | | | 925,000 | | | | 4.1 | | | $ | 3.65 | | | | 871,666 | | | $ | 3.66 | |
| $3.83 and higher | | | 87,907 | | | | 0.7 | | | $ | 6.97 | | | | 87,907 | | | $ | 6.97 | |
| Balance at June 30, 2009 | | | 1,424,354 | | | | 4.7 | | | $ | 3.24 | | | | 1,052,821 | | | $ | 3.73 | |
In addition, under the “2007 Plan” and in conjunction with a salary reduction plan implemented during 2009, 101,014 restricted shares were granted as payment of compensation, of which vesting is 75% service based and 25% performance based. During the year ended June 30, 2009, $30,490 was recognized as expense, with a balance of up to $42,687 to be recognized as expense during the year ended June 30, 2010.
NOTE 10 - NON RELATED PARTY WARRANTS
At June 30, 2009 there are warrants to purchase 120,023 shares issued and outstanding to Empire Financial Group, Ltd. in connection with certain capital raising activities in 2006, exercisable at $3.23 per share and which expire on September 30, 2011.
At June 30, 2009 there are warrants to purchase 50,000 shares issued and outstanding to Empire Financial Group, Ltd. as part of the underwriting compensation in connection with our United States public offering which are exercisable at $7.20 per share and which expire on June 20, 2012.
At June 30, 2009 there are warrants to purchase 195,800 shares issued and outstanding to Strategic Growth International in connection with capital raising activities in 2006 and 2007, with expiration dates between March 2011 and June 2012 and exercise prices of between $3.75 and $7.20.
The table below summarizes non-related party warrant balances:
| Stock Warrants | | | | | Weighted-Average | |
| Non-related party activity | | Number of Warrants | | | Exercise Price Per Share | |
| | | | | | | |
| Balance at June 30, 2007 | | | 1,084,411 | | | $ | 5.41 | |
| Warrants expired | | | (600,941 | ) | | | 8.50 | |
| Warants exercised | | | (117,647 | ) | | | 3.40 | |
| Balance at June 30, 2008 | | | 365,823 | | | $ | 4.41 | |
| Warrants granted | | | - | | | | - | |
| Warrants expired | | | - | | | | - | |
| Warants exercised | | | - | | | | - | |
| Balance at June 30, 2009 | | | 365,823 | | | $ | 4.41 | |
NOTE 11 – COMMITMENTS
In July 2007 the Company commenced engineering and product development activities pursuant to a collaborative project entitled the Advanced Electricity Storage Technologies (“AEST”) project, with the Commonwealth of Australia, through July 2010. The terms of the project provide for the receipt of funding by the Company for future development costs which include the production and delivery of one 500kWh energy storage system.
The AEST project has total budgeted expenditure for operating and capital items of approximately $4.7 million (A$5.9 million) exclusive of any Australian taxes. The Company’s contribution of approximately $2.3 million (A$2.8 million) is the value of any cash and in-kind contributions provided to the project by the Company in undertaking the project activities. The Australian Government is providing the project funding of approximately $2.5 million (A$3.1 million) to be paid in accordance with the completion of contracted project milestones and subject to the Company’s compliance with project reporting requirements and demonstrating that the funds already provided to it have been fully spent or will be fully spent in the near future. There is a balance of approximately $0.6 million in contributions due by the Company to the project in cash and in-kind contributions as of June 30, 2009.
The Company had leased its Australian office facility from an entity affiliated with three of the Company’s officers. In January 2008 the facility was sold to a non-related Australian company, eliminating the related party relationship between the Company and its landlord. The current rental is $54,302 per annum (A$71,572) and is subject to an annual CPI adjustment.
Rent expense was $53,456 and $49,875 for the years ended June 30, 2009 and 2008.
The future payments required under the terms of the lease are as follows:
| For the years ended June 30, | | | |
| 2010 | | $ | 54,302 | |
| 2011 | | $ | 54,302 | |
| 2012 | | $ | 18,101 | |
| TOTAL: | | $ | 126,705 | |
NOTE 12 - EMPLOYMENT CONTRACTS
The Company has entered into employment contracts with executives and management personnel. The contracts provide for
salaries, bonuses and stock option grants, along with other employee benefits. The employment contracts generally have no set term and can be terminated by either party. There is a provision for payments of three months to eighteen months of annual salary as severance if we terminate a contract without cause, along with the acceleration of certain unvested stock option grants.
NOTE 13 - RETIREMENT PLANS
All Australian based employees are entitled to varying degrees of benefits on retirement, disability, or death. The Company contributes to an accumulation fund on behalf of the employees under an award which is legally enforceable. For U.S. employees, the Company has a 401(k) plan. All active participants are 100% vested immediately. Expenses under these plans were $76,303 and $64,714 for the years ended June 30, 2009 and 2008.
NOTE 14 — STOCK-BASED COMPENSATION
The Company issues stock options and other stock-based awards to executive management, key employees, and directors under its stock-based compensation plans (see Note 9).
For the years ended June 30, 2009 and 2008, the Company’s results of operations reflect compensation expense for equity based awards vested under its equity incentive plans. The amount recognized in the financial statements related to stock-based compensation was $338,864 and $254,290, based on the fair value of all awards vested during the years ended June 30, 2009 and 2008 respectively.
During the year ended June 30, 2009 options to purchase 451,410 shares were granted to employees and directors exercisable at prices from $1.35 to $1.69 based on vesting terms of July 2009 through January 2012, and exercisable at various dates through December 2016 and contingent on various continuous service and performance measurements, of which 39,963 options were forfeited. In addition 101,014 restricted shares were issued as payment of compensation and consulting services during the year ended June 30, 2009 (see Note 9 for additional details).
The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing method. The Company uses historical data to estimate the expected price volatility, the expected option life and the expected forfeiture rate. The Company has not made any dividend payments nor does it have plans to pay dividends in the foreseeable future.
The following assumptions were used to estimate the fair value of options granted during the years ended June 30, 2009 and 2008 using the Black-Scholes option-pricing model:
| | | 2009 | | | 2008 | |
| | | | | | | |
| Expected life of option (years) | | | 2.5 | | | | 3.0 | |
| Risk-free interest rate | | | 1.2 | % | | | 3.7 | % |
| Assumed volatility | | | 70 | % | | | 37 | % |
| Expected dividend rate | | | 0 | % | | | 0 | % |
| Expected forfeiture rate | | | 0 | % | | | 10 | % |
Time-vested and performance-based stock awards, including stock options and restricted stock, are accounted for at fair value at date of grant. Compensation expense is recognized over the requisite service and performance periods.
A summary of the status of unvested employee stock options as of June 30, 2008 and changes during the period then ended, is presented below:
| | | | | | Weighted-Average | |
| | | | | | Grant Date | |
| Unvested Stock Option Activity | | Number of Options | | | Fair Value Per Share | |
| Balance at June 30, 2007 | | | -0- | | | | -0- | |
| Granted | | | 675,000 | | | | 0.70 | |
| Vested | | | (391,000 | ) | | | 0.65 | |
| Balance at June 30, 2008 | | | 284,000 | | | $ | 0.77 | |
| | | | | | | | | |
| Granted | | | 451,410 | | | | 0.30 | |
| Vested | | | (323,914 | ) | | | 0.63 | |
| Forfeited | | | (39,963 | ) | | | 0.30 | |
| | | | | | | | | |
| Balance at June 30, 2009 | | | 371,533 | | | $ | 0.37 | |
As of June 30, 2009, there remains a total of $118,807 in unrecognized compensation cost related to unvested stock options which through 2012 vest pending certain service based ($81,159 unvested) and performance based ($37,648 unvested) criteria. In addition, future costs of $42,687 could be recognized during the year ended June 30, 2010 related to the restricted shares issued during the current fiscal year.
NOTE 15 — INCOME TAXES
The Company did not record a provision for federal, state or foreign income taxes for the years ended June 30, 2009 and 2008. The Company has not recorded a benefit for deferred tax assets as its realizability is uncertain.
The Company’s combined effective income tax rate differed from the U.S federal statutory income tax rate as set forth below:
| | | 2009 | | | 2008 | |
| Income tax benefit computed at the federal statutory rate | | | -34 | % | | | -34 | % |
| Foreign rate differential | | | 4 | % | | | 4 | % |
| | | | | | | | | |
| Change in valuation allowance | | | 30 | % | | | 30 | % |
| Total | | | 0 | % | | | 0 | % |
Significant components of the Company's net deferred tax assets as of June 30, 2009 and 2008 were as follows:
| | | 2009 | | | 2008 | |
| Net operating loss carryforwards | | $ | 9,812,303 | | | $ | 8,255,175 | |
| Foreign loss carryforwards | | | 1,114,442 | | | | 971,952 | |
| Deferred tax asset valuation allowance | | | (10,926,745 | ) | | | (9,227,127 | ) |
| Total deferred tax assets | | $ | - | | | $ | - | |
As of June 30, 2009, the Company had U.S net operating loss carry forwards of approximately $28,900,000 which begins to expire in 2014 for federal tax purposes. The Company also has gross foreign tax loss carry forwards of approximately $3,700,000 that are available to offset future liabilities for foreign income taxes. Substantially all of the foreign tax losses are carried forward indefinitely, subject to certain limitations.
A valuation allowance has been established for certain future income tax benefits related to income tax loss carry forwards and temporary tax adjustments based on an assessment that it is more likely than not that these benefits will not be realized. During the twelve months ended June 30, 2009 the valuation allowance increased by $1,699,618.
NOTE 16 — SUBSEQUENT EVENTS
Subsequent events have been evaluated through September 16, 2009, the date these financial statements were issued.
On August 18, 2009, the Company announced the closing of its public offering of common stock and warrants. ZBB sold 1,791,667 units at $1.20 per unit, consisting of an aggregate of 1,791,667 shares of its common stock and warrants to purchase 358,333 shares of its common stock at an exercise price of $1.33 per share. The proceeds to ZBB after deducting placement agent fees and offering expenses were approximately $1.9 million.
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
| Item 9A. | Controls and Procedures |
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, as of the end of the period covered by this report, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Act of 1934, as amended. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be included in our Securities and Exchange Commission (“SEC”) reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, relating to ZBB Energy Corporation, including our consolidated subsidiaries, and was made known to them by others within those entities, particularly during the period when this report was being prepared. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of the period covered by this report, our disclosure controls and procedures are effective at these reasonable assurance levels.
(b) Management’s Report on Internal Control over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s principal executive officer and principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurances with respect to financial statement preparation and presentation. Additionally, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. As of June 30, 2009, management assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria for effective internal control over financial reporting established in “Internal Control — Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Based on the assessment, management determined that the Company maintained effective internal control over financial reporting as of June 30, 2009, based on the COSO criteria. This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in the annual report.
(c) Changes in Internal Controls over Financial Reporting
In connection with the evaluation required by paragraph (d) of Rule 13a-15 under the Exchange Act, there was no change identified in our internal control over financial reporting that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| Item 9B. | Other Information |
None.
PART III
| Item 10. | Directors and Executive Officers of the Registrant |
The information required under this item is set forth in the Company’s Definitive Proxy Statement relating to the Company’s 2009 annual meeting of shareholders to be held on or about November 4, 2009 and is incorporated herein by reference. Such Proxy Statement will be filed with the SEC within 120 days of the Company’s year-end.
| Item 11. | Executive Compensation |
The information required under this item is set forth in the Company’s Definitive Proxy Statement relating to the Company’s 2009 annual meeting of shareholders to be held on or about November 4, 2009 and is incorporated herein by reference. Such Proxy Statement will be filed with the SEC within 120 days of the Company’s year-end.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required under this item is set forth in the Company’s Definitive Proxy Statement relating to the Company’s 2009 annual meeting of shareholders to be held on or about November 4, 2009 and is incorporated herein by reference. Such Proxy Statement will be filed with the SEC within 120 days of the Company’s year-end.
| Item 13. | Certain Relationships and Related Transactions |
The information required under this item is set forth in the Company’s Definitive Proxy Statement relating to the Company’s 2009 annual meeting of shareholders to be held on or about November 4, 2009 and is incorporated herein by reference. Such Proxy Statement will be filed with the SEC within 120 days of the Company’s year-end.
| Item 14. | Principal Accountant Fees and Services |
The information required under this item is set forth in the Company’s Definitive Proxy Statement relating to the Company’s 2009 annual meeting of shareholders to be held on or about November 4, 2009 and is incorporated herein by reference. Such Proxy Statement will be filed with the SEC within 120 days of the Company’s year-end.
PART IV
| Item 15. | Exhibits and Financial Statement Schedules |
Financial Statements
The following financial statements are included in Item 8 of this Annual Report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of June 30, 2009 and 2008
Consolidated Statements of Operations for the years ended June 30, 2009 and 2008
Consolidated Statements of Changes in Shareholders’ Equity for the Years ended June 30, 2009 and 2008
Consolidated Statements of Cash Flows for the years ended June 30, 2009 and 2008
Financial Statement Schedules
Financial statement schedules have been omitted because they either are not applicable or the required information is included in the consolidated financial statements or notes thereto.
Exhibits
The Exhibit Index immediately preceding the exhibits required to be filed with this report is incorporated herein by reference.
Exhibit No. | | Description |
| 3.1 | | Articles of Incorporation of ZBB Energy Corporation as amended dated February 16, 1998, as amended.(1) |
| 3.2 | | By-laws of ZBB Energy Corporation.(1) |
| 3.3 | | Amended By-laws of ZBB Energy Corporation, as adopted on October 28, 2004.(4) |
| 3.4 | | Audit Committee Charter of ZBB Energy Corporation.(5) |
| 3.5 | | Compensation Committee Charter of ZBB Energy Corporation.(5) |
| 3.6 | | Nominating Committee Charter of ZBB Energy Corporation.(6) |
| 4.1 | | Form of Stock Certificate.(4) |
| 10.1 | | Letter Agreement dated as of July 13, 2006 between ZBB Energy Corporation, 41 Broadway Associates, LLC (3) |
| 10.2 | | Contract dated as of June 29, 2007 between ZBB Technologies Ltd and the Commonwealth of Australia filed as an exhibit with Form 8-K filed July 11, 2007 (File No. 001-33540). |
| 10.3 | | Employment Agreement dated as of October 4, 2006 between ZBB Energy Corporation and Robert J. Parry (1), and as amended and filed with the Commission on June 26, 2009 as an exhibit to the Company’s Current Report on Form 8-K and incorporated by reference herein. |
| 10.4 | | Employment Agreement dated as of November 1, 2007 between ZBB Energy Corporation and Steven Seeker (7). |
| 10.5 | | Employment Agreement dated as of July 1, 2008 between ZBB Energy Corporation and Scott Scampini. (7). |
| 10.6 | | 2002 Stock Option Plan of ZBB Energy Corporation incorporated by reference to the Company’s S-8 Registration Statement as filed April 16, 2008 (File No. 333-150268). |
| 10.7 | | 2005 Employee Stock Option Scheme of ZBB Energy Corporation (1). |
| 10.8 | | 2007 Equity Incentive Plan of ZBB Energy Corporation incorporated by reference to the Company’s S-8 Registration Statement as filed April 16, 2008 (File No. 333-150268). |
| 23.1 | | Consent of Independent Registered Public Accounting Firm (PKF) filed herewith as Exhibit 23.1. |
| 31.1 | | Certification by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act, promulgated to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2 | | Certification by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act, promulgated pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1 | | Certification by Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code, promulgated pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2 | | Certification by Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code, promulgated pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| (1) | Filed as exhibit to original filing of Registration Statement of the Company on October 27, 2006 (File No. 333-138243). |
| (2) | Filed as exhibit to Amendment No. 1 to Registration Statement of the Company, as filed on February 13,2007 (File No.333-138243). |
| (3) | Filed as exhibit to Amendment No. 2 to Registration Statement of the Company, as filed on March 19,2007(File No. 333-138243). |
| (4) | Filed as exhibit to Amendment No. 3 to Registration Statement of the Company, as filed on April 13,2007(File No. 333-138243). |
| (5) | Filed as exhibit to Amendment No. 4 to Registration Statement of the Company, as filed on April 26, 2007(File No. 333-138243). |
| (6) | Filed as exhibit to Amendment No. 6 to Registration Statement of the Company, as filed on June 15, 2007(File No. 333-138243). |
| (7) | Filed as an exhibit to the Company’s Annual Report on Form 10-KSB for the year ended June 30, 2008 and incorporated by reference herein. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this Form 10-K Annual Report to be signed on its behalf by the undersigned on September 16, 2009, thereunto duly authorized.
| ZBB ENERGY CORPORATION |
| |
| /s/ Robert J. Parry |
| Robert J. Parry |
| Chief Executive Officer |
| (Principal Executive Officer) and Director |
In accordance with the requirements of the Securities Exchange Act of 1934, this Form 10-K Annual Report has been signed by the following persons in the capacities and on the dates indicated.
| | | Position | | Date |
| /s/ Robert J. Parry | | Chief Executive Officer | | September 16, 2009 |
| Robert J. Parry | | (Principal executive officer) and Director | | |
| | | | | |
| /s/ Scott W. Scampini | | Chief Financial Officer | | September 16, 2009 |
| Scott W. Scampini | | (Principal financial officer and Principal accounting officer) | | |
| | | | | |
| /s/ William Mundell | | Chairman and Director | | September 16, 2009 |
| William Mundell | | | | |
| | | | | |
| /s/ Richard A. Payne | | Director | | September 16, 2009 |
| Richard A. Payne | | | | |
| | | | | |
| /s/ Manfred Birnbaum | | Director | | September 16, 2009 |
| Manfred Birnbaum | | | | |
| | | | | |
| /s/ Richard A. Abdoo | | Director | | September 16, 2009 |
| Richard A. Abdoo | | | | |
| | | | | |
| /s/ Paul J. Koeppe | | Director | | September 16, 2009 |
| Paul J. Koeppe | | | | |
