UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2013
or
[ ] 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)
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Wisconsin
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39-1987014
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.)
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incorporation or organization)
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N93 W14475 Whittaker Way, Menomonee Falls, WI 53051
(Address of principal executive offices)
(262) 253-9800
(Registrant’s telephone number)
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.
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Yes
o
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).
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Yes
o
No
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
o
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Smaller reporting company
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(Do not check if a smaller reporting company)
Indicate by check whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
Yes
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No
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Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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Class
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Shares Outstanding as of February 14, 2014
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Common Stock, $.01 par value per share
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17,730,216
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ZBB Energy Corporation
Form 10-Q
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION (*)
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Page
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Item 1
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Condensed Consolidated Financial Statements
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1
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Condensed Consolidated Balance Sheets (unaudited), December 31, 2013 and June 30, 2013
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1
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Condensed Consolidated Statements of Operations (unaudited), Three and Six Months Ended December 31, 2013 and 2012
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2
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Condensed Consolidated Statements of Comprehensive Loss (unaudited), Three and Six Months Ended December 31, 2013 and 2012
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3
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Condensed Consolidated Statements of Changes in Equity (unaudited), Year ended June 30, 2013 and Six Months Ended December 31, 2013
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4
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Condensed Consolidated Statements of Cash Flows (unaudited), Six Months Ended December 31, 2013 and 2012
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5
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Notes to Condensed Consolidated Financial Statements (unaudited)
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6
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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24
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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28
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Item 4.
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Controls and Procedures
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28
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PART II. OTHER INFORMATION
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Item 1.
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Legal Proceedings
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29
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Item 1A.
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Risk Factors
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29
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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29
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Item 3.
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Defaults upon Senior Securities
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29
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Item 4.
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Mine Safety Disclosures
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29
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Item 5.
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Other Information
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29
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Item 6.
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Exhibits
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29
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Signatures
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30
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(*) All of the financial statements contained in this Quarterly Report are unaudited with the exception of the financial information at June 30, 2013, which has been derived from our audited financial statements at that date and should be read in conjunction therewith. Our audited financial statements as of June 30, 2013 and for the year then ended, and the notes thereto, can be found in our Annual Report on Form 10-K/A, which was filed with the Securities and Exchange Commission on September 30, 2013.
ZBB ENERGY CORPORATION
Notes to Condensed Consolidated Financial Statements (unaudited)
December 31, 2013
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
ZBB Energy Corporation (“ZBB,” “we,” “us,” “our” or the “Company”) develops and manufactures distributed energy storage solutions based upon the Company’s proprietary zinc bromide rechargeable electrical energy storage technology and proprietary power electronics systems. ZBB was incorporated in Wisconsin in 1998 and is headquartered in Wisconsin, USA with offices also located in Perth, Western Australia.
The Company provides advanced electrical power management platforms targeted at the growing global need for distributed renewable energy, energy efficiency, power quality, and grid modernization. The Company has developed a portfolio of intelligent power management platforms that directly integrate multiple renewable and conventional onsite generation sources with rechargeable zinc bromide flow batteries and other storage technology. The Company also offers advanced systems to directly connect wind and solar equipment to the grid and systems that can form various levels of micro-grids, hybrid vehicle control systems, and power quality regulation solutions. Together, these platforms provide a wide range of renewable energy system solutions in global markets for utility, governmental, commercial, industrial and residential customers.
The consolidated financial statements include the accounts of the Company and those of its wholly-owned subsidiaries: Tier Electronics LLC which operates manufacturing facilities in Menomonee Falls, Wisconsin; ZBB Energy Pty Ltd. (formerly known as ZBB Technologies, Ltd.) which has an advanced engineering and development facility in Perth, Australia; and its sixty percent owned subsidiary ZBB PowerSav Holdings Limited located in Hong Kong which was formed in connection with the Company’s investment in a China joint venture.
Interim Financial Data
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of adjustments of a normal and recurring nature) considered necessary for fair presentation of the results of operations have been included. Operating results for the six month period ended December 31, 2013 are not necessarily indicative of the results that might be expected for the year ending June 30, 2014.
The condensed consolidated balance sheet at June 30, 2013 has been derived from audited financial statements at that date, but does not include all of the information and disclosures required by US GAAP. For a more complete discussion of accounting policies and certain other information, refer to the Company’s annual report filed on Form 10-K/A for the fiscal year ended June 30, 2013.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and it’s wholly and majority-owned subsidiaries and have been prepared in accordance with US GAAP. All significant intercompany accounts and transactions have been eliminated upon consolidation.
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 in fully insured accounts at financial institutions predominately in the United States, Australia, and Hong Kong. The Company has not experienced any losses in such accounts.
Restricted Cash on Deposit
The Company had $69,356 and $60,000 in restricted cash on deposit as of December 31, 2013 and June 30, 2013, respectively, as collateral for certain credit arrangements.
Accounts Receivable
The Company records allowances for doubtful accounts based on customer-specific analysis and general matters such as current assessments of past due balances and economic conditions. The Company writes off accounts receivable against the allowance when they become uncollectible. Accounts receivable include no allowance for doubtful accounts as of December 31, 2013 and June 30, 2013 as management has concluded all outstanding balances are expected to be collected in full. The composition of accounts receivable is as follows as of December 31, 2013 and June 30, 2013:
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December 31, 2013
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June 30, 2013
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Current
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$ | 122,281 | $ | 236,296 | ||||
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30-60 days
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- | 50,000 | ||||||
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60-90 days
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875 | - | ||||||
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Over 90 days
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159,895 | 160,629 | ||||||
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Total
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$ | 283,051 | $ | 446,925 | ||||
Inventories
Inventories are stated at the lower of cost or market. Cost is computed using standard cost, which approximates actual cost, on a first-in, first-out basis. The Company provides inventory write-downs based on excess and obsolete inventories determined primarily by future demand forecasts. The write-down is measured as the difference between the cost of the inventory and market based upon assumptions about future demand and charged to the provision for inventory, which is a component of cost of sales. At the point of the loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.
Property, Plant and Equipment
Land, building, equipment, computers and furniture and fixtures are recorded at cost. Maintenance, repairs and betterments are charged to expense as incurred. Depreciation is provided for all plant and equipment on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives used for each class of depreciable asset are:
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Estimated Useful Lives
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Manufacturing equipment
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3 - 7 years
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Office equipment
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3 - 7 years
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Assets held for lease
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18 months
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Building and improvements
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7 - 40 years
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The Company completed a review of the estimated useful lives of specific assets during the quarter ended December 31, 2013 and determined that there were no changes in the estimated useful lives of assets.
Investment in Investee Company
Investee companies that are not consolidated, but over which the Company exercises significant influence, are accounted for under the equity method of accounting. Whether or not the Company exercises significant influence with respect to an investee depends on an evaluation of several factors including, among others, representation on the investee company’s board of directors and ownership level, which is generally a 20% to 50% interest in the voting securities of the investee company. Under the equity method of accounting, an investee company’s accounts are not reported in the Company’s consolidated balance sheets and statements of operations; however, the Company’s share of the earnings or losses of the investee company is reflected in the caption ‘‘Equity in loss of investee company” in the consolidated statements of operations. The Company’s carrying value in an equity method investee company is reported in the caption ‘‘Investment in investee company’’ in the Company’s consolidated balance sheets.
When the Company’s carrying value in an equity method investee company is reduced to zero, no further losses are recorded in the Company’s consolidated financial statements unless the Company guaranteed obligations of the investee company or has committed additional funding. When the investee company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized.
Intangible Assets
Intangible assets generally result from business acquisitions. The Company accounted for the acquisition of substantially all of the net assets of Tier Electronics LLC by assigning the purchase price to identifiable tangible and intangible assets and liabilities. Assets acquired and liabilities assumed were recorded at their estimated fair values. Intangible assets consist of a non-compete agreement, license agreement, and trade secrets.
Amortization is recorded for intangible assets with determinable lives. Intangible assets are amortized using the straight-line method over the three year estimated useful lives of the respective assets.
Goodwill
Goodwill is recognized as the excess cost of an acquired entity over the net amount assigned to assets acquired and liabilities assumed. Goodwill is not amortized but reviewed for impairment annually as of June 30 or more frequently if events or changes in circumstances indicate that its carrying value may be impaired. These conditions could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit.
The first step of the impairment test requires the comparing of a reporting unit’s fair value to its carrying value. If the carrying value is less than the fair value, no impairment exists and the second step is not performed. If the carrying value is higher than the fair value, there is an indication that impairment may exist and the second step must be performed to compute the amount of the impairment. In the second step, the impairment is computed by estimating the fair values of all recognized and unrecognized assets and liabilities of the reporting unit and comparing the implied fair value of reporting unit goodwill with the carrying amount of that unit’s goodwill. The Company determined fair value as evidenced by market capitalization, and concluded that there was no need for an impairment charge as of December 31, 2013 and June 30, 2013.
Impairment of Long-Lived Assets
In accordance with FASB ASC Topic 360, "Impairment or Disposal of Long-Lived Assets," the Company assesses potential impairments to its long-lived assets including property, plant and equipment and intangible assets when there is evidence that events or changes in circumstances indicate that the carrying value may not be recoverable.
If such an indication exists, the recoverable amount of the asset is compared to the asset’s carrying value. Any excess of the asset’s carrying value over its recoverable amount is expensed in the statement of operations. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate. Management has determined that there were no long-lived assets impaired as of December 31, 2013 and June 30, 2013 (see Notes 5 and 6).
Warranty Obligations
The Company typically warrants its products for twelve months after installation or eighteen months after date of shipment, whichever first occurs. Warranty costs are provided for estimated claims and charged to cost of product sales as revenue is recognized. Warranty obligations are also evaluated quarterly to determine a reasonable estimate for the replacement of potentially defective materials of all energy storage systems that have been shipped to customers.
While the Company actively engages in monitoring and improving its evolving battery and production technologies, there is only a limited product history and relatively short time frame available to test and evaluate the rate of product failure. Should actual product failure rates differ from the Company’s estimates, revisions are made to the estimated rate of product failures and resulting changes to the liability for warranty obligations. In addition, from time to time, specific warranty accruals may be made if unforeseen technical problems arise.
As of December 31, 2013 and June 30, 2013, included in the Company’s accrued expenses were $655,306 and $479,873 respectively, related to warranty obligations. Such amounts are included in accrued expenses in the accompanying consolidated balance sheets.
The following is a summary of accrued warranty activity:
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Six Months Ended
December 31, 2013
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Year Ended
June 30, 2013
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Beginning balance
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$ | 479,873 | $ | 418,557 | ||||
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Accruals for warranties during the period
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167,295 | 404,096 | ||||||
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Settlements during the period
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(136,508 | ) | (95,543 | ) | ||||
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Adjustments relating to preexisting warranties
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144,646 | (247,237 | ) | |||||
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Ending balance
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$ | 655,306 | $ | 479,873 | ||||
Revenue Recognition
Revenues are recognized when persuasive evidence of a contractual arrangement exits, delivery has occurred or services have been rendered, the seller’s price to buyer is fixed and determinable, and collectability is reasonably assured. The portion of revenue related to installation and final acceptance, is deferred until such installation and final customer acceptance are completed.
For sales arrangements containing multiple elements (products or services), revenue relating to undelivered elements is deferred at the estimated fair value until delivery of the deferred elements. To be considered a separate element, the product or service in question must represent a separate unit under SEC Staff Accounting Bulletin 104, and fulfill the following criteria: the delivered item(s) has value to the customer on a standalone basis; there is objective and reliable evidence of the fair value of the undelivered item(s); and if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control. If the arrangement does not meet all criteria above, the entire amount of the transaction is deferred until all elements are delivered. Revenue from time and materials based service arrangements is recognized as the service is performed.
The portion of revenue related to engineering and development is recognized ratably upon delivery of the goods or services pertaining to the underlying contractual arrangement or revenue is recognized as certain activities are performed by the Company over the estimated performance period.
The Company charges shipping and handling fees when products are shipped or delivered to a customer, and includes such amounts in net revenues. The Company reports its revenues net of estimated returns and allowances.
Revenues from government funded research and development contracts are recognized proportionally as costs are incurred and compared to the estimated total research and development costs for each contract. In many cases, the Company is reimbursed only a portion of the costs incurred or to be incurred on the contract. Government funded research and development contracts are generally multi-year, cost-reimbursement and/or cost-share type contracts. The Company is generally reimbursed for reasonable and allocable costs up to the reimbursement limits set by the contract.
Total revenues of $961,456 and $2,030,578 were recognized for the three and six months ended December 31, 2013, respectively. Revenues for the three months ended December 31, 2013 were comprised of three significant customers (95% of total revenues) and revenues for the six months ended December 31, 2013 were comprised of four significant customers (91% of total revenues). Total revenues of $2,748,007 and $4,571,328 were recognized for the three and six months ended December 31, 2012, respectively. Revenues for the three months ended December 31, 2012 were comprised of four significant customers (83% of total revenues) and revenues for the six months ended December 31, 2012 were comprised of five significant customers (77% of total revenues).
Engineering and Development Revenues
Milestone payments under collaborative arrangements are triggered by the results of the Company’s engineering and development efforts. Milestones related to the Company’s development-based activities may include initiation of various phases of engineering and development activities, successful completion of a phase of development, or delivery of specified equipment or products. Due to the uncertainty involved in meeting these development-based milestones, the development-based milestones are considered to be substantial (i.e. not just achieved through passage of time) at the inception of the collaboration agreement. In addition, the amounts of the payments assigned thereto are considered to be commensurate with the enhancement of the value of the delivered intellectual property as a result of our performance. The Company’s involvement is necessary to the achievement of development-based milestones. The Company accounts for development-based milestones as revenue upon achievement of the substantive milestone events. In addition, upon the achievement of development-based milestone events, the Company has no future performance obligations related to any milestone payments.
On December 13, 2011, the Company entered into a joint development and license agreement with a global technology company to jointly develop flow batteries. The objective of the joint development agreement is to develop low cost, high energy density grid scale flow battery stacks and systems that could lead to a significant cost reduction for grid level storage. The Company recognizes revenue under this agreement upon achievement of certain performance milestones. The Company recognized $200,000 of revenue under this agreement in the three and six months ended December 31, 2013 and December 31, 2012, respectively.
Included in engineering and development revenues were $200,000 for the three and six months ended December 31, 2013 and $218,183 for the three and six months ended December 31, 2012 related to collaborative agreements. Engineering and development costs related to the collaboration agreements totaled $43,636 for the three and six months ended December 31, 2013 and $0 and $45,065 for the three and six months ended December 31, 2012, respectively.
As of December 31, 2013 and June 30, 2013, the Company had no unbilled amounts from engineering and development contracts in process. The Company had received $47,200 and $45,300 in customer payments for engineering and development contracts, representing deposits in advance of performance of the contracted work, as of December 31, 2013 and June 30, 2013, respectively.
In April 2011, the Company entered into a Collaboration Agreement (the “Collaboration Agreement”) with Honam Petrochemical Corporation, now known as Lotte Chemical Corporation (“Lotte”), pursuant to which the Company and Lotte collaborated on the technical development of the Company’s third generation Zinc Bromide flow battery module (the “Version 3 Battery Module”) and Lotte received a fully paid-up, exclusive and royalty-free license to sell and manufacture the Version 3 Battery Module in Korea and a non-exclusive royalty-bearing license to sell the Version 3 Battery Module in Japan, Thailand, Taiwan, Malaysia, Vietnam and Singapore.
On December 16, 2013, the Company and Lotte entered into a Research and Development Agreement (the “R&D Agreement”) pursuant to which the Company has agreed to develop and provide to Lotte a Zinc Bromide chemical flow battery system, including a Zinc Bromide chemical flow battery module and related software (the “Product”), on the terms and conditions set forth in the R&D Agreement (the “Project”). The Project is scheduled to continue until December 16, 2015, unless extended by the mutual agreement of the Company and Lotte. Subject to the satisfaction of certain specified milestones, Lotte is required to make payments to the Company under the R&D Agreement totaling $3,000,000 over the term of the Project.
Additionally, on December 16, 2013, the Company and Lotte entered into an Amended License Agreement (the “Amended License”). Pursuant to the Amended License, the Company granted to Lotte, (1) an exclusive and royalty-free limited license in Korea to use the Company’s Zinc Bromide flow battery module, Zinc Bromide flow battery stack and the technical information and know how related to the intellectual property arising from the Project (collectively, the “Technology”) to manufacture or sell a Zinc Bromide flow battery (the “Lotte Product”) in Korea and (2) a non-exclusive (a) royalty-free limited license for Lotte and its affiliates to use the Technology internally in all locations other than China and Korea to manufacture the Lotte Product and (b) royalty-bearing limited license to sell the Lotte Product in all locations other than China, the United States and Korea. Lotte is required to pay the Company a total license fee of $3,000,000 under the Amended License plus up to an additional $1,000,000 if certain specific milestones are successfully achieved. In addition, Lotte is required to make ongoing royalty payments to the Company on Lotte’s sales of the Lotte Product outside of Korea until December 31, 2019. The license fees are subject to a16.5% non-refundable Korea withholding tax.
There were no payments received or revenue recognized under the Lotte agreements in the six months ended December 31, 2013.
Advanced Engineering and Development Expenses
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, development of 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 are shown separately on the consolidated statements of operations as a “cost of engineering and development.”
Stock-Based Compensation
The Company measures all “Share-Based Payments," including grants of stock options, restricted shares and restricted stock units to be recognized in its consolidated statement of operations based on their fair values on the grant date, which is consistent with FASB ASC Topic 718, “Stock Compensation,” guidelines.
Accordingly, the Company measures share-based compensation cost for all share-based awards at the fair value on the grant date and 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 the shares at grant, and calculated based on the Black-Scholes valuation model.
The Company compensates its outside directors primarily with restricted stock units (“RSUs”) rather than cash. The grant date fair value of the restricted stock unit awards is determined using the closing stock price of the Company’s common stock on the day prior to the date of the grant, with the compensation expense amortized over the vesting period of restricted stock unit awards, net of estimated forfeitures.
The Company only recognizes expense to its statements 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, for all other awards. See Note 9.
Income Taxes
The Company records deferred income taxes in accordance with FASB ASC Topic 740, “Accounting for Income Taxes.” This ASC Topic requires recognition of deferred income tax assets and liabilities for temporary differences between the tax basis of assets and liabilities and the amounts at which they are carried in the financial statements, based upon the enacted tax rates in effect for the year in which the differences are expected to reverse. The Company establishes a valuation allowance when necessary to reduce deferred income tax assets to the amount expected to be realized. There were no net deferred income tax assets recorded as of December 31, 2013 and June 30, 2013.
The Company applies a more-likely-than-not recognition threshold for all tax uncertainties as required under FASB ASC Topic 740, which only allows the recognition of those tax benefits that have a greater than fifty percent likelihood of being sustained upon examination by the taxing authorities.
The Company’s U.S. Federal income tax returns for the years ended June 30, 2010 through June 30, 2013 and the Company’s Wisconsin and Australian income tax returns for the years ended June 30, 2010 through June 30, 2013 are subject to examination by taxing authorities.
Foreign Currency
The Company uses the United States dollar as its functional and reporting currency, while the Australian dollar and Hong Kong dollar are the functional currencies of its foreign subsidiaries. Assets and liabilities of the Company’s foreign subsidiaries are translated into United States dollars at exchange rates that are in effect 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 equity in the consolidated balance sheets.
Loss per Share
The Company follows the FASB ASC Topic 260, “Earnings per Share,” provisions which require 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 the FASB ASC Topic 260, any anti-dilutive effects on net income (loss) per share are excluded. For the six months ended December 31, 2013 and 2012 there were 6,850,061 and 3,187,476 shares of common stock underlying options, restricted stock units and warrants that are excluded, respectively.
Concentrations of Credit Risk and Fair Value
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable.
The Company maintains significant cash deposits primarily with three financial institutions. All deposits are fully insured as of December 31, 2013. The Company has not previously experienced any losses on such deposits. Additionally, the Company performs periodic evaluations of the relative credit ratings of these institutions as part of its banking 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.
The carrying amounts of cash and cash equivalents, accounts receivable, other current assets, accounts payable and accrued expenses approximate fair value due to the short-term nature of these instruments. The carrying value of bank loans and notes payable approximate fair value based on their terms which reflect market conditions existing as of December 31, 2013 and June 30, 2013.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. It is reasonably possible that the estimates we have made may change in the near future. Significant estimates underlying the accompanying consolidated financial statements include those related to:
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·
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the timing of revenue recognition;
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·
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the allowance for doubtful accounts;
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·
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provisions for excess and obsolete inventory;
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·
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the lives and recoverability of property, plant and equipment and other long-lived assets, including goodwill and other intangible assets;
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·
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contract costs and reserves;
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·
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warranty obligations;
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·
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income tax valuation allowances;
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·
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stock-based compensation; and
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·
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valuation of warrants.
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Reclassifications
Certain amounts previously reported have been reclassified to conform to the current presentation.
Segment Information
The Company has determined that it operates as one reportable segment.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or results of operations upon adoption.
In July 2013, the FASB issued ASU 2013-11 – Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which requires an unrecognized tax benefit to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, similar tax loss, or a tax credit carryforward. To the extent the tax benefit is not available at the reporting date under the governing tax law or if the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented as a liability and not combined with deferred tax assets. ASU 2013-11 is effective for annual periods, and interim periods within those years, beginning after December 15, 2013. The amendments are to be applied to all unrecognized tax benefits that exist as of the effective date and may be applied retrospectively to each prior reporting period presented. The Company expects no material impact to its financial statements as a result of adopting this pronouncement.
In April 2013, the FASB issued ASU 2013-07 – Presentation of Financial Statements (Topic 205) – Liquidation Basis of Accounting. The amendments require an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. Liquidation is imminent when the likelihood is remote that the entity will return from liquidation and either (a) a plan for liquidation is approved by the person or persons with the authority to make such a plan effective and the likelihood is remote that the execution of the plan will be blocked by other parties or (b) a plan for liquidation is being imposed by other forces (for example, involuntary bankruptcy). If a plan for liquidation was specified in the entity’s governing documents from the entity’s inception (for example, limited-life entities), the entity should apply the liquidation basis of accounting only if the approved plan for liquidation differs from the plan for liquidation that was specified at the entity’s inception. The amendments require financial statements prepared using the liquidation basis of accounting to present relevant information about an entity’s expected resources in liquidation by measuring and presenting assets at the amount of the expected cash proceeds from liquidation. The entity should include in its presentation of assets any items it had not previously recognized under US GAAP but that it expects to either sell in liquidation or use in settling liabilities (for example, trademarks). The amendments are effective for entities that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013, and interim reporting periods therein. Entities should apply the requirements prospectively from the day that liquidation becomes imminent. Early adoption is permitted. The adoption is not expected to have an impact on the Company’s consolidated financial statements in its present condition.
In March 2013, the FASB issued ASU 2013-05 – Foreign Currency Matters (Topic 830) – Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Group of Assets within a Foreign Entity or of an Investment in a Foreign Entity. These amendments provide guidance on releasing cumulative translation adjustments when a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or a group of assets that is a non-profit activity or a business within a foreign entity. In addition, these amendments provide guidance on the release of cumulative translation adjustments in partial sales of equity method investments and in step acquisitions. The amendments are effective for fiscal years and interim reporting periods within those years, beginning after December 15, 2013. The amendments should be applied prospectively to derecognition events occurring after the effective date. Prior periods should not be adjusted. Early adoption is permitted. If an entity elects to early adopt the amendments, it should apply them as of the beginning of the entity’s fiscal year of adoption. The Company is required to adopt this standard beginning July 1, 2014. The Company does not anticipate these changes to have an impact on its consolidated financial statements.
In February 2013, the FASB issued ASU 2013-04 – Liabilities (Topic 405) – Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date. These amendments provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. Examples of obligations within this guidance are debt arrangements, other contractual obligations, and settled litigation and judicial rulings. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. These amendments shall be applied retrospectively to all prior periods presented for those obligations within the scope of this Subtopic that exist at the beginning of an entity’s fiscal year of adoption. Early adoption is permitted. The adoption of these amendments is not expected to have a material effect on the Company’s consolidated financial statements.
In February 2013, the FASB issued ASU No. 2013-02 – Comprehensive Income (Topic 220) — Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under US GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under US GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under US GAAP that provide additional detail about those amounts. This guidance is effective prospectively for reporting periods beginning after December 15, 2012. The Company adopted this guidance in the third quarter of fiscal year 2013. This new guidance did not impact the Company’s presentation, financial position, and results of operations.
In September 2011, the FASB issued an update to ASC Topic 350, Intangibles – Goodwill and Other. This ASU amended the guidance in ASC Topic 350-20 on testing for goodwill impairment. The revised guidance allows entities testing for goodwill impairment to have the option of performing a qualitative assessment before calculating the fair value of the reporting unit. The ASU did not change how goodwill is calculated or assigned to reporting units, nor did it revise the requirement to test annually for impairment. The ASU was limited to goodwill and did not amend the annual requirement for testing other indefinite-lived intangible assets for impairment. We adopted this ASU as of our 2012 goodwill impairment testing. The adoption of this ASU did not impact our consolidated financial statements.
In July 2012, the FASB issued ASC update No. 2012-02 - Intangibles – Goodwill and Other (Topic 350), Testing Indefinite-Lived Intangible Assets for Impairment (“ASC 2012-02”). Under the amendments in this update, a company has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. If after assessing the qualitative factors, a company determines it does not meet the more-likely-than-not threshold, a company is required to perform the quantitative impairment test by calculating the fair value of an indefinite-lived intangible asset and comparing the fair value with the carrying amount of the asset. The amendments in this update were effective for annual and interim impairment test performed for fiscal years beginning after September 15, 2012 (early adoption permitted). The Company adopted this guidance in the second quarter of fiscal year 2013. The adoption of this update had no impact on its financial statements.
NOTE 2 – CHINA JOINT VENTURE
On August 30, 2011, the Company entered into agreements providing for establishment of a joint venture to develop, produce, sell, distribute and service advanced storage batteries and power electronics in China (the “Joint Venture”). Joint Venture partners include ZBB PowerSav Holdings Limited (“Holdco”), AnHui Xinlong Electrical Co. and Wuhu Huarui Power Transmission and Transformation Engineering Co. The Joint Venture was established upon receipt of certain governmental approvals from China which were received in November 2011.
The Joint Venture operates through a jointly-owned Chinese company located in Wuhu City, Anhui Province named Anhui Meineng Store Energy Co., Ltd. (“AHMN”). AHMN intends to initially assemble and ultimately manufacture the Company’s products for sale in the power management industry on an exclusive basis in mainland China and on a non-exclusive basis in Hong Kong and Taiwan.
In connection with the Joint Venture, on August 30, 2011 the Company and certain of its subsidiaries entered into the following agreements:
|
·
|
Joint Venture Agreement of Anhui Meineng Store Energy Co., Ltd. (the “China JV Agreement”) by and between ZBB PowerSav Holdings Limited, a Hong Kong limited liability company (“Holdco”), and Anhui Xinrui Investment Co., Ltd, a Chinese limited liability company; and
|
|
·
|
Limited Liability Company Agreement of ZBB PowerSav Holdings Limited by and between ZBB Cayman Corporation and PowerSav New Energy Holdings Limited (the “Holdco Agreement”).
|
In connection with the Joint Venture, upon establishment of AHMN, the Company and certain of its subsidiaries entered into the following agreements:
|
·
|
Management Services Agreement by and between AHMN and Holdco (the “Management Services Agreement”);
|
|
·
|
License Agreement by and between Holdco and AHMN (the “License Agreement”); and
|
|
·
|
Research and Development Agreement by and between the Company and AHMN (the “Research and Development Agreement”).
|
Pursuant to the China JV Agreement, AHMN was capitalized with approximately $13.6 million of equity capital. The Company’s only capital contributions to the Joint Venture were the contribution of technology to AHMN via the License Agreement and $200,000 in cash. The Company’s indirect interest in AHMN equals approximately 33%.
The Company’s investment in AHMN was made through Holdco. Pursuant to the Holdco Agreement, the Company contributed to Holdco technology via a license agreement with an agreed upon value of approximately $4.1 million and $200,000 in cash in exchange for a 60% equity interest and PowerSav agreed to contribute to Holdco $3.3 million in cash in exchange for a 40% equity interest. The initial capital contributions (consisting of the Company’s technology contribution and one half of required cash contributions) were made in December 2011. The subsequent capital contributions (consisting of one half of the required cash contribution) were made on May 16, 2012. For financial reporting purposes, Holdco’s assets and liabilities are consolidated with those of the Company and PowerSav’s 40% interest in Holdco is included in the Company’s consolidated financial statements as a noncontrolling interest. For the three and six months ended December 31, 2013, AHMN had a net loss of $603,130 and $1,147,617, respectively. For the three and six months ended December 31, 2012, AHMN had a net loss of $878,198 and $1,510,583, respectively.
The Company’s basis in the technology contributed to Holdco is $0 due to US GAAP requirements related to research and development expenditures. The difference of approximately $4.1 million in the Company’s basis in this technology and the valuation of the technology by AHMN is accounted for by the Company through the elimination of the amortization expense recognized by AHMN related to the technology.
The Company has the right to appoint a majority of the members of the Board of Directors of Hong Kong Holdco and Hong Kong Holdco has the right to appoint a majority of the members of the Board of Directors of AHMN.
Pursuant to the Management Services Agreement Holdco will provide certain management services to AHMN in exchange for a management services fee equal to five percent of AHMN’s net sales for the first five years and three percent of AHMN’s net sales for the subsequent three years.
Pursuant to the License Agreement, Holdco granted to AHMN (1) an exclusive royalty-free license to manufacture and distribute the Company’s ZBB EnerStore, zinc bromide flow battery, version three (V3) (50KW) and ZBB EnerSection, power and energy control center (up to 250KW) (the “Products”) in mainland China in the power supply management industry and (2) a non-exclusive royalty-free license to manufacture and distribute the Products in Hong Kong and Taiwan in the power supply management industry.
Pursuant to the Research and Development Agreement, AHMN may request the Company to provide research and development services upon commercially reasonable terms and conditions. AHMN would pay the Company’s fully-loaded costs and expenses incurred in providing such services.
The Company had product sales of $495,984 and $540,462 to AHMN during the three and six months ended December 31, 2013, respectively. The Company had product sales of $191,868 and $895,306 to AHMN during the three and six months ended December 31, 2012, respectively.
The operating results for AHMN for the three and six months ended December 31, 2013 and 2012 are summarized as follows:
|
|
Three months ended December 31,
|
Six months ended December 31,
|
||||||||||||||
|
2013
|
2012
|
2013
|
2012
|
|||||||||||||
|
Revenues
|
$ | 54,338 | $ | 54,294 | $ | 96,183 | $ | 54,294 | ||||||||
|
Gross Profit (loss)
|
(23,759 | ) | 1,041 | (52,746 | ) | 1,041 | ||||||||||
|
Income (loss) from operations
|
(631,463 | ) | (860,224 | ) | (1,215,059 | ) | (1,510,668 | ) | ||||||||
|
Net Income (loss)
|
(603,130 | ) | (878,198 | ) | (1,147,617 | ) | (1,510,583 | ) | ||||||||
NOTE 3 - GOING CONCERN
The accompanying consolidated financial statements have been prepared on the basis of a going concern which contemplates that the Company will be able to realize assets and discharge its liabilities in the normal course of business. Accordingly, they do not give effect to any adjustments that would be necessary should the Company be required to liquidate its assets. The Company incurred a net loss of $4,755,760 attributable to ZBB Energy Corporation for the six months ended December 31, 2013 and as of December 31, 2013 has an accumulated deficit of $85,688,584 and total ZBB Energy Corporation equity of $2,072,181. The ability of the Company to settle its total liabilities of $6,743,748 and to continue as a going concern is dependent upon obtaining additional financing, closing additional sales orders and achieving profitability. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
We believe that cash and cash equivalents on hand at December 31, 2013, expected collections on the Lotte R&D Agreement and Amended License Agreement, and other potential sources of cash, will be sufficient to fund our current operations through the end of fiscal year 2014. However, unexpected delays in payments could cause short-term gaps in cash for funding operations. Accordingly, the Company is actively seeking funding alternatives including conventional lines of credit, sale of property and other short-term funding sources to provide appropriate cash availability in case of unforeseen cash receipt delays.
In addition to the short-term cash funding alternatives, we are working on strategic partnership transactions that may be available to the Company. We are currently in active discussions with several parties regarding potential strategic partnership and/or license and development transactions. If the Company is unable to obtain additional required funding, the Company’s financial condition and results of operations may be materially adversely affected and the Company may not be able to continue operations.
NOTE 4 – INVENTORIES
Inventories are comprised of the following as of December 31, 2013 and June 30, 2013:
|
December 31, 2013
|
June 30, 2013
|
|||||||
|
Raw materials
|
$ | 907,642 | $ | 1,181,557 | ||||
|
Work in progress
|
1,217,855 | 1,278,219 | ||||||
|
Total
|
$ | 2,125,497 | $ | 2,459,776 | ||||
NOTE 5– PROPERTY, PLANT & EQUIPMENT
Property, plant, and equipment are comprised of the following as of December 31, 2013 and June 30, 2013:
|
December 31, 2013
|
June 30, 2013
|
|||||||
|
Land
|
$ | 217,000 | $ | 217,000 | ||||
|
Building and improvements
|
3,520,872 | 3,520,872 | ||||||
|
Manufacturing equipment
|
3,695,914 | 3,819,533 | ||||||
|
Office equipment
|
403,066 | 403,541 | ||||||
|
Assets held for lease
|
- | 355,986 | ||||||
|
Construction in process
|
- | 24,300 | ||||||
|
Total, at cost
|
7,836,852 | 8,341,232 | ||||||
|
Less, accumulated depreciation
|
(3,151,447 | ) | (3,161,525 | ) | ||||
|
Property, Plant & Equipment, Net
|
$ | 4,685,405 | $ | 5,179,707 | ||||
NOTE 6– INTANGIBLE ASSETS
Intangible assets are comprised of the following as of December 31, 2013 and June 30, 2013:
|
December 31, 2013
|
June 30,2013
|
|||||||
|
Non-compete agreement
|
$ | 310,888 | $ | 310,888 | ||||
|
License agreement
|
288,087 | 288,087 | ||||||
|
Trade secrets
|
1,599,122 | 1,599,122 | ||||||
|
Total, at cost
|
2,198,097 | 2,198,097 | ||||||
|
Less, accumulated amortization
|
(2,156,069 | ) | (1,787,024 | ) | ||||
|
Intangible Assets, Net
|
$ | 42,028 | $ | 411,073 | ||||
Estimated amortization expense for the fiscal period ending June 30, 2014 is $411,073.
NOTE 7 – GOODWILL
The Company acquired ZBB Technologies, Inc., a former wholly-owned subsidiary, through a series of transactions in March 1996. ZBB Technologies Inc. was subsequently merged with and into ZBB Energy Corporation on January 1, 2012. 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 December 31, 2013 and June 30, 2013.
NOTE 8 – BANK LOANS AND NOTES PAYABLE
Bank loans and notes payable consisted of the following at December 31, 2013 and June 30, 2013:
|
December 31, 2013
|
June 30, 2013
|
|||||||
|
Bank loan payable of principal and interest at a rate equal to prime plus 1.50%, as
defined, subject to a floor of 4.75% with any principal due at maturity on January 1,
2014; collateralized by accounts receivable and inventory related to a specific
customer contract.
|
$ | 213,750 | $ | 213,750 | ||||
|
Note payable to the seller of Tier Electronics LLC payable of $495,000 on January
21, 2014. Interest accrues at a rate of 8% and is payable monthly. The promissory
note is collateralized by the Company’s membership interest in its wholly-owned
subsidiary Tier Electronics LLC. See note (a) below.
|
495,000 | 495,000 | ||||||
|
Note payable to Wisconsin Department of Commerce payable in monthly
installments of $23,685, including interest at 2%, with the final payment due
May 1, 2018; collateralized by equipment purchased with the loan proceeds and
substantially all assets of the Company not otherwise collateralized. The Company
is required to maintain and increase a specified number of employees, and the
interest rate is increased in certain cases for failure to meet this requirement. See
note (b) below.
|
1,136,195 | 1,136,195 | ||||||
|
Bank loan payable in fixed monthly payments of $6,800 of principal and interest
at a rate of .25% below prime, as defined, subject to a floor of 5% with any principal
due at maturity on June 1, 2018; collateralized by the building and land.
|
649,495 | 673,339 | ||||||
|
Note payable in fixed monthly installments of $6,716 of principal and interest at
a rate of 5.5% with any principal due at maturity on May 1, 2028; collateralized
by the building and land.
|
718,197 | 734,228 | ||||||
|
Bank loan payable in monthly installments of $21,000 of principal and interest at a
rate equal to prime, as defined, subject to a floor of 4.25%; paid in full during fiscal
2014.
|
- | 29,076 | ||||||
| $ | 3,212,637 | $ | 3,281,588 | |||||
|
(a)
|
If the federal capital gains tax rate exceeds 15% and or the State of Wisconsin capital gains tax rate exceeds 5.425% at any time prior to the payment in full of the unpaid principal balance and accrued interest on the promissory note, then the principal amount of the promissory note shall be retroactively increased by an amount equal to the product of (a) the aggregate amount of federal and state capital gain realized by the Seller or Seller’s sole member, as applicable, in connection with the acquisition, multiplied by (b) the difference between (i) the combined federal and State of Wisconsin capital gains tax rate as of the date of calculation, minus (ii) the combined federal and State of Wisconsin capital gains tax rate of 20.425% as of January 21, 2011. Any adjustment to the principal amount of the promissory note shall be effected by increasing the amount of the last payment due under the promissory note without affecting the next regularly scheduled payment(s) under the promissory note. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed, effectively raising the top rate for capital gains to 20%. The Company recorded an additional $45,000 of principal due under this note as other expense for the year ended June 30, 2013.
|
|
(b)
|
As of April 2013, the Wisconsin Department of Commerce granted the Company a 12 month deferral of the required installment payments of $22,800. On March 1, 2014, fifty equal monthly installments of $23,685 will commence through April 1, 2018 with the final installment due on May 1, 2018.
|
Maximum aggregate annual principal payments for fiscal periods subsequent to December 31, 2013 are as follows:
|
2014 (six months)
|
$ | 816,454 | ||
|
2015
|
351,146 | |||
|
2016
|
361,065 | |||
|
2017
|
371,407 | |||
|
2018
|
358,389 | |||
|
2019 and thereafter
|
954,176 | |||
| $ | 3,212,637 |
NOTE 9 – EMPLOYEE/DIRECTOR EQUITY INCENTIVE PLANS
During the six months ended December 31, 2013 and 2012, the Company’s results of operations include compensation expense for stock options and restricted stock units (“RSUs”) granted under its various equity incentive plans. The amount recognized in the financial statements related to stock-based compensation was $105,796 and $413,610, based on the amortized grant date fair value of options and RSUs during the six months ended December 31, 2013 and 2012, respectively.
At the annual meeting of shareholders held on November 7, 2012 the Company’s shareholders approved an amendment of the 2010 Omnibus Long-Term Incentive Plan (“Omnibus Plan”) which increased the number of shares of the Company’s common stock available for issuance pursuant to awards under the Omnibus Plan by 900,000 shares and the creation of the 2012 Non-employee Director Equity Compensation Plan (“2012 Director Equity Plan”), under which the Company may issue up to 700,000 RSU awards and other equity awards to our non-employee directors pursuant to the Company’s director compensation policy.
In aggregate for all plans, at December 31, 2013 the Company had a total of 1,019,183 options outstanding, 1,169,598 RSUs outstanding and 655,194 shares available for future grant under the Omnibus Plan.
Information with respect to stock option activity under the employee and director plans is as follows:
|
Number
of
Options
|
Weighted
Average
Exercise Price
|
Average
Remaining
Contractual Life
(in years)
|
||||||||||
|
Balance at July 1, 2012
|
847,813 | $ | 6.25 | |||||||||
|
Options granted
|
142,710 | 1.90 | ||||||||||
|
Options forfeited
|
(205,239 | ) | 5.05 | |||||||||
|
Balance at June 30, 2013
|
785,284 | 5.75 | 5.34 | |||||||||
|
Options granted
|
245,200 | 0.79 | ||||||||||
|
Options forfeited
|
(11,301 | ) | 2.61 | |||||||||
|
Balance at December 31, 2013
|
1,019,183 | $ | 4.61 | 5.53 | ||||||||
During the six months ended December 31, 2013 options to purchase 245,200 shares were granted to employees exercisable at $0.78 to $1.90 per share based on service based vesting terms from July 2013 through December 2016 and exercisable at various dates through December 2021. During the six months ended December 31, 2012 options to purchase 661,050 shares were granted to employees exercisable at prices from $1.75 to $1.90 per share based on various service and performance based vesting terms from July 2012 through December 2015 and exercisable at various dates through December 2020.
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 six months ended December 31, 2013 and 2012 using the Black-Scholes option-pricing model:
|
Six months ended December 31,
|
||||||||
|
2013
|
2012
|
|||||||
|
Expected life of option (years)
|
4 | 4 | ||||||
|
Risk-free interest rate
|
0.95 - 1.20 | % | 0.46 - 0.60 | % | ||||
|
Assumed volatility
|
94 - 155 | % | 100 - 104 | % | ||||
|
Expected dividend rate
|
0 | % | 0 | % | ||||
|
Expected forfeiture rate
|
5.16 - 5.62 | % | 4.19 - 6.66 | % | ||||
Time-vested and performance-based stock awards, including stock options and RSUs 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 December 31, 2013 and June 30, 2013 and changes during the years ended is presented below:
|
Number
of
Options
|
Weighted
Average
Grant Date
Fair Value
Per Share
|
Average
Remaining
Contractual Life
(in years)
|
|||||||
|
Balance at July 1, 2012
|
449,499 | $ | 4.70 | ||||||
|
Granted
|
142,699 | 1.90 | |||||||
|
Vested
|
(158,384 | ) | 4.75 | ||||||
|
Forfeited
|
(171,147 | ) | 4.20 | ||||||
|
Balance at June 30, 2013
|
262,668 | 3.44 | |||||||
|
Granted
|
245,200 | 0.79 | |||||||
|
Vested
|
(66,307 | ) | 2.73 | ||||||
|
Forfeited
|
(3,032 | ) | 2.06 | ||||||
|
Balance at December 31, 2013
|
438,529 | $ | 2.08 |
4.40
|
|||||
Total fair value of options granted in the six months ended December 31, 2013 and 2012 was $167,501 and $155,201, respectively. At December 31, 2013, there was $202,377 in unrecognized compensation cost related to unvested stock options, which is expected to be recognized over the next three years.
The Company compensates its directors with RSUs and cash. On December 20, 2013, 455,696 RSUs were granted to the Company’s directors in partial payment of directors fees through November 2014 under the 2012 Director Equity Plan. As of December 31, 2013, 113,925 of the RSUs had vested and there were $90,000 in directors’ fees expense settled with RSU’s for period ended December 31, 2013.
On May 1, 2013, the Company’s President and CEO and Chief Operating Officer were awarded 200,000 RSUs each which would have vested on the satisfaction of certain performance targets as of December 31, 2013. The RSU’s were forfeited on December 31, 2013 resulting in a credit to selling, general and administrative expense of $406,000 during the three and six months ended December 31, 2013. On January 14, 2014, the Company’s President and CEO and Chief Operating Officer were awarded 500,000 RSUs each of which 100,000 vested immediately upon grant, and the remaining 400,000 will vest on the satisfaction of certain performance targets as of June 30, 2014. 200,000 of the 400,000 RSUs are classified as liability awards because they provide for cash settlement (although the Company has the ability to convert these RSUs to share settlement at its option). The RSU award liability is measured at its fair value at the end of each reporting period and, therefore, will fluctuate based on the performance of the Company’s common stock. The estimated expense for the six months ending June 30, 2014 is $920,000 for the January 14, 2014 RSU’s.
As of December 31, 2013 there were 395,104 unvested RSUs outstanding which will vest through January 15, 2016 and $413,331 in unrecognized compensation cost related to unvested RSUs which are expected to be recognized through January 15, 2016. Shares of common stock related to vested RSUs are to be issued six months after the holder’s separation from service with the Company.
The table below summarizes the status of restricted stock unit balances:
|
Number of
Restricted
Stock Units
|
Weighted
Average
Valuation
Price Per Unit
|
|||||||
|
Balance at July 1, 2012
|
489,687 | $ | 3.60 | |||||
|
RSUs granted
|
970,000 | 1.30 | ||||||
|
RSUs forfeited
|
(320,000 | ) | 1.30 | |||||
|
Shares issued
|
(8,000 | ) | 1.70 | |||||
|
Balance at June 30, 2013
|
1,131,687 | 2.30 | ||||||
|
RSUs granted
|
460,696 | 0.79 | ||||||
|
RSUs forfeited
|
(400,000 | ) | 1.45 | |||||
|
Shares issued
|
(22,785 | ) | 0.79 | |||||
|
Balance at December 31, 2013
|
1,169,598 | $ | 2.01 | |||||
NOTE 10 - WARRANTS
At December 31, 2013, the following warrants to purchase the Company’s common stock were outstanding and exercisable:
|
|
·
|
81,579 warrants exercisable at $0.95 per share and which expire in September 2016 issued as placement agent’s compensation in connection with the sale of $3 million of preferred stock on September 27, 2013 as described in Note 11.
|
|
|
·
|
3,157,895 warrants exercisable at $0.95 per share and which expire in September 2016 issued in connection with Securities Purchase Agreements entered into with certain investors providing for the sale of a total of $3 million of preferred stock on September 27, 2013 described in Note 11.
|
|
|
·
|
15,000 warrants exercisable at $2.10 per share which expire in July 2015 issued as partial payment for services.
|
|
|
·
|
579,061 warrants exercisable at $2.375 per share and which expire in June 2017 issued in connection with the Underwriting Agreement entered into with MDB Capital Group, LLC as part of underwriting compensation which provided for the sale of $12 million of common stock on June 19, 2012 as described in Note 11 .
|
|
|
·
|
511,604 warrants exercisable at $2.65 per share and which expire in May 2017 issued in connection with Securities Purchase Agreements entered into with certain investors providing for the sale of a total of $2,465,000 of Zero Coupon Convertible Subordinated Notes on May 1, 2012 as described in Note 8.
|
|
|
·
|
12,100 warrants exercisable at $5.00 per share which expire March 2015 through July 2015 issued as partial payment for services.
|
|
|
·
|
8,000 warrants in January 2011 exercisable at $2.80 per share and which expire in January 2014 issued to an equipment supplier. The fair value of the warrants was $11,834 and was included in the cost of the equipment.
|
|
|
·
|
224,375 warrants exercisable at $5.20 per share and which expire in September 2015 issued to certain purchasers of Company shares in March 2010.
|
|
|
·
|
71,667 warrants exercisable at $6.65 per share and which expire in August 2015 issued to certain purchasers of Company shares in August 2009.
|
The table below summarizes warrant balances:
|
Number of
Warrants
|
Weighted
Average
Exercise Price
Per Share
|
|||||||
|
Balance at July 1, 2012
|
1,400,506 | 3.15 | ||||||
|
Warrants granted
|
21,300 | 2.95 | ||||||
|
Warrants expired
|
- | - | ||||||
|
Warrants exercised
|
- | - | ||||||
|
Balance at June 30, 2013
|
1,421,806 | $ | 3.15 | |||||
|
Warrants granted
|
3,239,474 | 0.95 | ||||||
|
Warrants expired
|
- | - | ||||||
|
Warrants exercised
|
- | - | ||||||
|
Balance at December 31, 2013
|
4,661,280 | $ | 1.62 | |||||
NOTE 11 – EQUITY
On October 31, 2013, the Company effected a reverse stock split of its common stock by a ratio of 1-for-5 (the “Reverse Split”). As a result of the Reverse Split every five outstanding shares of Common Stock became one share of common stock. No fractional shares were issued in connection with the Reverse Split. A shareholder who would otherwise have been entitled to receive a fractional share of common Stock received a cash payment equal to the closing sales price of the Company’s Common Stock on October 31, 2013 as reported on the NYSE MKT times the amount of the fractional share. The Reverse Split did not change the number of shares of common or preferred stock that the Company is authorized to issue, or the par value of the Company’s common or preferred stock. The Reverse Split resulted in a proportionate adjustment to the per share exercise price and the number of shares of common stock issuable upon the exercise of outstanding warrants and stock options, as well as the number of shares of common stock eligible for issuance under the Omnibus Plan and the 2012 Director Equity Plan. All of the information in these financial statements has been presented to reflect the impact of the 1-for-5 Reverse Split on a retroactive basis.
On September 26, 2013 the Company entered into a Securities Purchase Agreement with certain investors providing for the sale of 3,000 shares of Series B Convertible Preferred Stock (the “Preferred Stock”). Certain Directors of the Company Purchased 500 shares.
Shares of Preferred Stock were sold for $1,000 per share (the “Stated Value”) and accrue dividends on the Stated Value at an annual rate of 10%. At December 31, 2013 the Preferred Stock was convertible into a total of 3,160,525 shares of common stock of the Company (“Common Stock”) at a conversion price equal to $0.95. Upon any liquidation, dissolution or winding up of the Corporation, holders of Preferred Stock are entitled to receive out of the assets of the Company an amount equal to two times the Stated Value, plus any accrued and unpaid dividends thereon. The net proceeds to the Company, after deducting $90,127 of offering costs, were $2,909,873. At December 31, 2013 the liquidation preference of the Preferred Stock was $6,077,499.
In connection with the purchase of the Preferred Stock, investors received warrants to purchase a total of 3,157,895 shares of Common Stock at an exercise price of $0.95. The warrants are exercisable at any time prior to September 27, 2016. In addition, the Company issued a total of 81,579 warrants to a placement agent in connection with the transaction. These warrants expire on September 27, 2016.
On March 13, 2013, the Company entered into a common stock purchase agreement (the “Aspire Purchase Agreement”) with Aspire Capital Fund, LLC, an Illinois limited liability company, under which Aspire Capital committed over a two year period to purchase up to $10 million of ZBB Energy common stock based on prevailing market prices over a period preceding each sale, subject to certain terms and conditions.
On March 19, 2013 the Company issued 345,098 shares to Aspire Capital in consideration for Aspire Capital’s entry into the Aspire Purchase Agreement and Aspire Capital purchased 588,235 shares for $1,000,000 pursuant to the agreement at $1.70 per share.
On March 25, 2013 and March 26, 2013, Aspire Capital purchased a total of 992,720 shares pursuant to the Aspire Purchase Agreement at a price per share of $1.50 for a total purchase price of $1,500,000.
Aspire Capital purchased 100,000 shares at a per share price of $1.5175 for a total purchase price of $151,750 on April 4, 2013; 90,000 shares at a per share price of $1.6655 for a total purchase price of $149,895 on April 12, 2013; and 70,000 shares at a per share price of $1.4595 for a total purchase price of $102,165 on May 3, 2013.
Through December 31, 2013 the Company had issued a total of $2,903,190 of shares of common stock under this facility and $7,096,190 remained available. In accordance with applicable NYSE MKT rules, shareholder approval would have been required for the Company to sell in excess of 3,104,341 shares pursuant to the Aspire Purchase Agreement. Through December 31, 2013 the Company had issued a total of 2,186,053 shares pursuant to the Aspire Purchase and had the ability to sell up to 918,288 additional shares under the Aspire Purchase Agreement. The Company has not made any additional sales to Aspire under the Agreement since June 30, 2013. In light of limitations on the Company’s ability to continue to effectively use the Aspire Purchase Agreement, including NYSE MKT limitations and SEC registration requirements, the Company has no current plans to sell any additional shares under the agreement.
NOTE 12 – COMMITMENTS
Leasing Activities
The Company leases its Australian research and development facility from a non-related Australian company under the terms of a lease that expires October 31, 2016. The rental rate was $75,596 per annum (A$72,431) and was subject to an annual CPI adjustment. Rent expense was $23,239 and $46,185 for the three and six months ended December 31, 2013, respectively and $26,315 and 51,724 for the three and six months ended December 31, 2012, respectively. The Company renewed the lease on its Australian research and development facility through October 2016 at a rental rate of $95,855 per annum (A$95,000) subject to an annual CPI adjustment. The Company also leases a building from an officer of its subsidiary, Tier Electronics LLC, who is also a shareholder and director, under a lease agreement that was due to expire on December 31, 2014. Subsequently a lease termination agreement was entered into on October 20, 2013, which terminated the lease effective December 31, 2013 for a fee of $21,000. The rent expense for the three and six months ended December 31, 2013 was $42,000 and $63,000, respectively and $21,000 and $42,000 for the three and six months ended December 31, 2012. The Company was required to pay real estate taxes and other occupancy costs related to the facility.
The future payments required under the terms of the leases for fiscal periods subsequent to December 31, 2013 are as follows:
|
2014 (six months)
|
$ | 44,776 | ||
|
2015
|
89,552 | |||
|
2016
|
29,851 | |||
| $ | 164,179 |
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 up to twelve 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 $35,819 and $68,145 for the three and six months ended December 31, 2013, respectively. Expenses under these plans were $34,697 and $65,150 for the three and six months ended December 31, 2012, respectively.
NOTE 14— INCOME TAXES
The provision (benefit) for income taxes consists of the following:
|
Six months ended December 31,
|
||||||||
|
2013
|
2012
|
|||||||
|
Current
|
$ | (48,250 | ) | $ | (74,151 | ) | ||
|
Deferred
|
- | - | ||||||
|
Provision (benefit) for income taxes
|
$ | (48,250 | ) | $ | (74,151 | ) | ||
The Company accounts for income taxes using an asset and liability approach which generally requires the recognition of deferred income tax assets and liabilities based on the expected future income tax consequences of events that have previously been recognized in the Company’s financial statements or tax returns. In addition, a valuation allowance is recognized if it is more likely than not that some or all of the deferred income tax assets will not be realized in the foreseeable future. Deferred income tax assets are reviewed for recoverability based on historical taxable income, the expected reversals of existing temporary differences, tax planning strategies and projections of future taxable income. As a result of this analysis, the Company has provided for a valuation allowance against its net deferred income tax assets as of December 31, 2013 and June 30, 2013.
The Company’s combined effective income tax rate differed from the U.S. federal statutory income rate as follows:
|
Six months ended December 31,
|
||||||||
|
2013
|
2012
|
|||||||
|
Income tax benefit computed at the U.S. federal statutory rate
|
-34 | % | -34 | % | ||||
|
Australia research and development credit
|
-1 | % | -1 | % | ||||
|
Change in valuation allowance
|
34 | % | 34 | % | ||||
|
Total
|
-1 | % | -1 | % | ||||
Significant components of the Company’s net deferred income tax assets as of December 31, 2013 and June 30, 2013 were as follows:
|
December 31, 2013
|
June 30, 2013
|
|||||||
|
Federal net operating loss carryforwards
|
$ | 21,201,832 | $ | 19,777,894 | ||||
|
Federal - other
|
2,431,391 | 2,273,021 | ||||||
|
Wisconsin net operating loss carryforwards
|
2,697,958 | 2,482,692 | ||||||
|
Australia net operating loss carryforwards
|
1,430,293 | 1,398,139 | ||||||
|
Deferred income tax asset valuation allowance
|
(27,761,474 | ) | (25,931,746 | ) | ||||
|
Total deferred income tax assets
|
$ | - | $ | - | ||||
The Company has U.S. federal net operating loss carryforwards of approximately $62 million as of December 31, 2013, that expire at various dates between June 30, 2016 and 2033. The Company also has $2.4 million in other federal deferred tax assets comprised of charitable contributions carryforwards and intangible amortization. The Company has U.S. federal research and development tax credit carryforwards of approximately $87,000 as of December 31, 2013 that expire at various dates through June 30, 2033. As of December 31, 2013, the Company has approximately $52 million of Wisconsin net operating loss carryforwards that expire at various dates between June 30, 2014 and 2028. As of December 31, 2013, the Company also has approximately $5 million of Australian net operating loss carryforwards available to reduce future taxable income of its Australian subsidiaries with an indefinite carryforward period.
A reconciliation of the beginning and ending balance of unrecognized income tax benefits is as follows:
|
December 31, 2013
|
June 30, 2013
|
|||||||
|
Beginning balance
|
$ | 193,097 | $ | 208,593 | ||||
|
Effect of foreign currency translation
|
(6,891 | ) | (15,496 | ) | ||||
|
Ending balance
|
$ | 186,206 | $ | 193,097 | ||||
The unrecognized income tax benefits relate to the credit the Company claimed during fiscal 2011 related to a refundable Australian research and development tax credit for qualified expenditures incurred during fiscal year 2010. If recognized, it would favorably affect the effective income tax rate. The amount is included in accrued expenses in the accompanying consolidated balance sheets.
The Company’s issuance of additional shares of common stock has constituted an ownership change under Section 382 of the Internal Revenue Code which places an annual dollar limit on the use of net operating loss (“NOL”) carryforwards and other tax attributes that may be utilized in the future. The calculation of the annual limitation of usage is based on a percentage of the equity value immediately after any ownership change. The annual amount of tax attributes that may be utilized after the change in ownership is limited. Previous issuances of additional shares of common stock also resulted in ownership changes and the annual amount of tax attributes from previous years is limited as well. The extent of any limitations on the usage of net operating losses has not been determined.
ZBB ENERGY CORPORATION
|
Item 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Overview
ZBB Energy Corporation (“We,” “Us,” “Our,” “ZBB” or the “Company”) develops and manufactures modular, scalable and environmentally friendly power systems (ZBB EnerSystem) based upon the Company’s proprietary zinc bromide rechargeable electrical energy storage technology.
We provide advanced electrical power management platforms targeted at the growing global need for distributed renewable energy, energy efficiency, power quality, and grid modernization. We have developed a portfolio of intelligent power management platforms that directly integrate multiple renewable and conventional onsite generation sources with rechargeable zinc bromide flow batteries and other storage technology. We also offer advanced systems to directly connect wind and solar equipment to the grid and systems that can form various levels of micro-grids. We have also developed hybrid vehicle control systems and power quality products. These platforms provide a wide range of renewable energy solutions in global markets for utility, governmental, commercial, industrial and residential customers.
On August 30, 2011, we entered into agreements providing for establishment of a joint venture to develop, produce, sell, distribute and service advanced storage batteries and power electronics in China (the “Joint Venture”). Joint Venture partners include ZBB PowerSav Holdings Limited, AnHui Xinlong Electrical Co. and Wuhu Huarui Power Transmission & Transformation Engineering Co.
The Joint Venture was established in November 2011 and operates through a jointly owned company located in Wuhu City, Anhui Province named Anhui Meineng Store Energy Co., Ltd. (the “JV Company”). The JV Company will initially assemble and ultimately manufacture the Company’s products for sale in the power management industry on an exclusive basis in mainland China and on a non-exclusive basis in Hong Kong and Taiwan.
The JV Company has been capitalized with approximately $13.6 million of equity capital, which includes approximately $9.5 million of cash and a contribution of technology from us to the JV Company via a license agreement (the “License Agreement”) valued at approximately $4.1 million by the JV Company. Our indirect interest in the JV Company equals approximately 33%.
Our investment in the JV Company was made through ZBB PowerSav Holdings Limited, a Hong Kong limited liability company, a holding company formed with PowerSav New Energy Holdings Limited (“Hong Kong Holdco”). We own 60% of Hong Kong Holdco’s equity interests. We have the right to appoint a majority of the members of the Board of Directors of Hong Kong Holdco and Hong Kong Holdco has the right to appoint a majority of the members of the Board of Directors of the JV Company.
Pursuant to a management services agreement Hong Kong Holdco will provide certain management services to the JV Company in exchange for a management services fee equal to five percent of the JV Company’s net sales for the first five years and three percent of the JV Company’s net sales for the subsequent three years.
Pursuant to the License Agreement, the Company has granted to the JV Company (1) an exclusive royalty-free license to manufacture and distribute our Version 3 battery Module and ZBB EnerSection POWR PECC (up to 250KW) (the “Products”) in mainland China in the power supply management industry and (2) a non-exclusive royalty-free license to manufacture and distribute the Products in Hong Kong and Taiwan in the power supply management industry.
Pursuant to a research and development agreement, the JV Company may request us to provide research and development services upon commercially reasonable terms and conditions. The JV Company would pay our fully-loaded costs and expenses incurred in providing such services.
Risks and Uncertainties
The following discussion of the consolidated financial position and results of operations of the Company should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Form 10-Q and the Company’s annual report filed on Form 10-K/A for the fiscal year ended June 30, 2013. In addition to historical information, this discussion contains forward-looking statements such as statements of the Company’s expectations, plans, objectives and beliefs. These statements use such words as “may,” “will,” “expect,” “anticipate,” “believe,” “plan,” and other similar terminology. In addition to the risks and uncertainties faced generally by participants in the renewable energy industry, we face the following risks and uncertainties:
|
·
|
Our stock price could be volatile and our trading volume may fluctuate substantially.
|
|
·
|
We have incurred losses and anticipate incurring continuing losses.
|
|
·
|
We need additional financing.
|
|
·
|
Our industry is highly competitive and we may be unable to successfully compete.
|
|
·
|
Our ability to achieve significant revenue growth will be dependent on the successful commercialization of our new products, including our third generation ZBB EnerStore, zinc bromide flow battery and ZBB EnerSection power and energy control center.
|
|
·
|
To achieve profitability, we will need to lower our costs and increase our margins, which we may not be able to do.
|
|
·
|
If our products do not perform as promised, we could experience increased costs, lower margins and harm to our reputation.
|
|
·
|
To succeed, we will need to rapidly grow and we may not be successful in managing this rapid growth.
|
|
·
|
Our relationships with our strategic partners may not be successful and we may not be successful in establishing additional partnerships, which could adversely affect our ability to commercialize our products and services.
|
|
·
|
Shortages or delay of supplies of component parts may adversely affect our operating results until alternate sources can be developed.
|
|
·
|
We have no experience manufacturing our products on a large-scale basis and may be unable to do so at our manufacturing facilities.
|
|
·
|
Our China joint venture could be adversely affected by the laws and regulations of the Chinese government, our lack of decision-making authority and disputes between us and the Joint Venture.
|
|
·
|
Business practices in Asia may entail greater risk and dependence upon the personal relationships of senior management than is common in North America, and therefore some of our agreements with other parties in China and South Korea could be difficult or impossible to enforce.
|
|
·
|
Our success depends on our ability to retain our managerial personnel and to attract additional personnel.
|
|
·
|
We market and sell, and plan to market and sell, our products in numerous international markets. If we are unable to manage our international operations effectively, our business, financial condition and results of operations could be adversely affected.
|
|
·
|
Our financial results may vary significantly from period-to-period due to long and unpredictable sales cycles for some of our products and the cyclical nature of certain end-markets into which we sell our products, which may in turn lead to volatility in our stock price.
|
|
·
|
Businesses and consumers might not adopt alternative energy solutions as a means for obtaining their electricity and power needs, and therefore our revenues may not increase, and we may be unable to achieve and then sustain profitability.
|
|
·
|
The success of our business depends on our ability to develop and protect our intellectual property rights, which could be expensive.
|
|
·
|
We may be subject to claims that we infringe the intellectual property rights of others, and unfavorable outcomes could harm our business.
|
|
·
|
If our shareholders’ equity continues to remain below the minimum requirement, our common stock may be delisted from the NYSE MKT, which would cause our common stock to become less liquid.
|
|
·
|
We have never paid cash dividends and do not intend to do so.
|
For further information concerning these risks and uncertainties see the Risk Factors sections of our Annual Report on Form 10-K/A for the year ended June 30, 2013 and in any subsequently filed Quarterly Reports on Form 10-Q.
New Accounting Pronouncements
Refer to Note 1 of the Notes to Consolidated Financial Statements for a discussion of recently issued accounting pronouncements.
Critical Accounting Policies and Estimates
The preparation of our financial statements conforms to accounting principles generally accepted in the United States of America, which requires management, in applying our accounting policies, to make estimates and judgments that have an important impact on our reported amounts of assets, liabilities, revenue, expenses and related disclosures at the date of our financial statements. On an on-going basis, management evaluates its estimates including those related to bad debts, inventory valuations, warranty obligations, asset impairments and income taxes. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from management’s estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America and related disclosures require management to make estimates and assumptions.
Results of Operations
Three months ended December 31, 2013 compared with the three months ended December 31, 2012
Revenue:
Our revenues for the three months ended December 31, 2013 and 2012 were $961,456 and $2,748,007, respectively. The decrease of $1,786,551 was the result of a $1,986,551 decrease in commercial product sales and a $200,000 increase in engineering and development revenues as compared to the three months ended December 31, 2012.
Costs and Expenses:
Total costs and expenses for the three months ended December 31, 2013 and 2012 were $3,104,169 and $5,594,078, respectively. This decrease of $2,489,909 in the three months ended December 31, 2013 was primarily due to the following factors:
|
·
|
$1,710,748 decrease in costs of product sales principally due to decreased product sales;
|
|
·
|
$280,908 decrease in advanced engineering and development expenses due to a decrease in prototype costs;
|
|
·
|
$542,418 decrease in selling, general and administrative expenses was principally due to a decrease of $377,889 in stock based compensation due predominately to the reversal of compensation expense attributed to performance based awards whose objectives were not achieved.
|
Other Expense:
Total Other Expense for the three months ended December 31, 2013 decreased by $326,318 to $175,367 from $501,685 for the three months ended December 31, 2012 primarily as a result of a $326,042 decrease in equity in loss of investee company.
Income Taxes (Benefit):
Benefit for income taxes during the three months ended December 31, 2013 decreased by $45,630 to $28,521 from $74,151 for the three months ended December 31, 2012. Benefit for income taxes represents an estimate of a refundable research and development tax credit we expect to receive from the government of Australia for the fiscal year ending June 30, 2014 related to the qualified expenditures we incurred during the year then ending June 30, 2014.
Net Loss:
Our net loss for the three months ended December 31, 2013 decreased by $924,488 to $2,158,969 from the $3,083,457 net loss for the three months ended December 31, 2012. This decrease in loss was primarily the result of decreases in expenses as described above.
Six months ended December 31, 2013 compared with the six months ended December 31, 2012
Revenue:
Our revenues for the six months ended December 31, 2013 and 2012 were $2,030,578 and $4,571,328, respectively. The decrease of $2,540,750 was the result of a $2,522,567 decrease in commercial product sales and $18,183 decrease in engineering and development revenues as compared to the six months ended December 31, 2012.
Costs and Expenses:
Total costs and expenses for the six months ended December 31, 2013 and 2012 were $6,739,477 and $10,313,458, respectively. This decrease of $3,573,981 in the three six ended December 31, 2013 was primarily due to the following factors:
|
·
|
a $2,605,740 decrease in costs of product sales principally due to decreased product sales;
|
|
·
|
a $738,479 decrease in selling, general and administrative expenses was principally due to a decrease of $355,800 in wage and related expenses and $281,034 in stock based compensation due predominately to the reversal of compensation expense attributed to performance based awards whose objectives were not achieved.
|
Other Expense:
Total Other Expense for the six months ended December 31, 2013 decreased by $281,748 to $343,592 from $625,340 for the six months ended December 31, 2012 primarily as a result of a $284,631 decrease in equity in loss of investee company.
Income Taxes (Benefit):
Benefit for income taxes during the six months ended December 31, 2013 decreased by $25,901 to $48,250 from $74,151 for the six months ended December 31, 2012. Benefit for income taxes represents an estimate of a refundable research and development tax credit we expect to receive from the government of Australia for the fiscal year ending June 30, 2014 related to the qualified expenditures we incurred during the year then ending June 30, 2014.
Net Loss:
Our net loss for the six months ended December 31, 2013 decreased by $1,210,487 to $4,755,760 from the $5,966,247 net loss for the six months ended December 31, 2012. This decrease in loss was primarily the result of decreases in expenses as described above.
Liquidity and Capital Resources
Since our inception, our research, advanced engineering and development, and operations have been primarily financed through debt and equity financings, and engineering, government and other research and development contracts. Total paid in capital as of December 31, 2013 was $89,358,502. We had a cumulative deficit of $85,688,584 as of December 31, 2013 compared to a cumulative deficit of $80,932,824 as of June 30, 2013. At December 31, 2013 we had a working deficit of $1,236,472 compared to June 30, 2013 working capital of deficit of $175,857. Our shareholders’ equity as of December 31, 2013 and June 30, 2013 was $2,072,181 and $3,822,202, respectively.
In April 2011, we entered into a Collaboration Agreement (the “Collaboration Agreement”) with Honam Petrochemical Corporation, now known as Lotte Chemical Corporation (“Lotte”), pursuant to which the Company and Lotte collaborated on the technical development of our third generation Zinc Bromide flow battery module (the “Version 3 Battery Module”) and Lotte received a fully paid-up, exclusive and royalty-free license to sell and manufacture the Version 3 Battery Module in Korea and a non-exclusive royalty-bearing license to sell the Version 3 Battery Module in Japan, Thailand, Taiwan, Malaysia, Vietnam and Singapore.
On December 16, 2013, we entered into a Research and Development Agreement with Lotte (the “R&D Agreement”) pursuant to which we agreed to develop and provide to Lotte a Zinc Bromide chemical flow battery system, including a Zinc Bromide chemical flow battery module and related software (the “Product”), on the terms and conditions set forth in the R&D Agreement (the “Project”). The Project is scheduled to continue until December 16, 2015, unless extended by the mutual agreement of the Company and Lotte. Subject to the satisfaction of certain specified milestones, Lotte is required to make payments to us under the R&D Agreement totaling $3,000,000 over the term of the Project.
Additionally, on December 16, 2013we entered into an Amended License Agreement with Lotte (the “Amended License”). Pursuant to the Amended License, we granted to Lotte, (1) an exclusive and royalty-free limited license in Korea to use the Company’s Zinc Bromide flow battery module, Zinc Bromide flow battery stack and the technical information and know how related to the intellectual property arising from the Project (collectively, the “Technology”) to manufacture or sell a Zinc Bromide flow battery (the “Lotte Product”) in Korea and (2) a non-exclusive (a) royalty-free limited license for Lotte and its affiliates to use the Technology internally in all locations other than China and Korea to manufacture the Lotte Product and (b) royalty-bearing limited license to sell the Lotte Product in all locations other than China, the United States and Korea. Lotte is required to pay us a total license fee of $3,000,000 under the Amended License plus up to an additional $1,000,000 if certain specific milestones are successfully achieved. In addition, Lotte is required to make ongoing royalty payments to the Company on Lotte’s sales of the Lotte Product outside of Korea until December 31, 2019. The license fees are subject to a 16.5% non-refundable Korea withholding tax.
On September 26, 2013, the Company entered into a Securities Purchase Agreement with certain investors providing for the sale of 3,000 shares of Series B Convertible Preferred Stock (the “Preferred Stock”). Shares of Preferred Stock were sold for $1,000 per share (the “Stated Value”) and accrue dividends on the Stated Value at an annual rate of 10%. At December 31, 2013 the Preferred Stock was convertible into a total of 3,160,526 shares of common stock of the Company (“Common Stock”) at a conversion price equal to $0.95. Upon any liquidation, dissolution or winding up of the Corporation, holders of Preferred Stock are entitled to receive out of the assets of the Company an amount equal to two times the Stated Value, plus any accrued and unpaid dividends thereon. The net proceeds to the Company, after deducting $90,127 of offering costs, were $2,909,873. At December 31, 2013 the liquidation preference of the Preferred Stock was $6,077,499.
At December 31, 2013, our principal sources of liquidity were our cash and cash equivalents which totaled $669,858, accounts receivable of $283,051, and expected collections on the Lotte R&D Agreement and Amended License Agreement.
We believe that cash and cash equivalents on hand at December 31, 2013, and expected collections on the Lotte R&D Agreement and Amended License Agreement, and other potential sources of cash, will be sufficient to fund our current operations through the end of fiscal year 2014. However, unexpected delays in payments could cause short-term gaps in cash for funding operations. Accordingly, the Company is actively seeking funding alternatives including conventional lines of credit, sale of property and other short-term funding sources to provide appropriate cash availability in case of unforeseen cash receipt delays.
In addition to the short-term funding alternatives, we are working on strategic partnership transactions that may be available to the Company. We are currently in active discussions with several parties regarding potential strategic partnership and/or license and development transactions. If the Company is unable to obtain additional required funding, we may not be able to:
|
|
·
|
remain in operation;
|
|
|
·
|
execute our growth plan;
|
|
|
·
|
take advantage of future opportunities; or
|
|
|
·
|
respond to customers and competition.
|
Operating Activities
Our operating activities used net cash of $3,232,985 for the six months ended December 31, 2013. Cash used in operations resulted from a net loss of $5,004,242 reduced by $1,159,877 in non-cash adjustments and decreased by $611,379 in net changes to working capital. Non-cash adjustments included $106,024 of stock-based compensation expense, and $790,806 of depreciation and amortization expense. Net decreases in working capital were primarily due to decreases in accounts receivable of $163,874, inventories of $446,780, and increases in accounts payable of $161,296 and accrued expenses of $199,411, offset by decreases in customer deposits of $478,503.
Investing Activities
Our investing activities used net cash of $49,312 for the six months ended December 31, 2013, used for the purchase of property and equipment and deposits of restricted cash.
Financing Activities
Our financing activities provided net cash of $2,789,998 for the six months ended December 31, 2013. Net cash provided by financing activities was comprised principally of $3,000,000 in proceeds from the issuance of preferred stock, less issuance costs of $96,967. We made repayments of $113,035 of principal on bank loans and notes payable.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of December 31, 2013.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable for smaller reporting companies.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that material information relating to the Company is accumulated and communicated to management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosures.
Changes in Internal Controls
During the period covered by this quarterly report on Form 10-Q, the Company has not made any changes to its internal control over financial reporting (as referred to in Paragraph 4(b) of the Certifications of the Company’s principal executive officer and principal financial officer included as exhibits 31.1 and 31.2 filed with this report) that have materially affected, or are reasonably likely to affect the Company’s internal control over financial reporting.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 1A. RISK FACTORS
We operate in a rapidly changing environment that involves a number of risks that could materially affect our business, financial condition or future results, some of which are beyond our control. In addition to the other information set forth in this report, the risks and uncertainties that we believe are most important for you to consider are discussed in Part I, “Item 1A. Risk Factors” in our most recent Annual Report on Form 10-K and in any subsequent Quarterly Reports on Form 10-Q. Other than the factor set forth below, there have been no material changes to the risk factors described in those reports.
If our stockholders’ equity continues to remain below the minimum requirement, our common stock may be delisted from the NYSE MKT, which could cause our common stock to become less liquid.
Our shares have been listed on the NYSE MKT (formerly NYSE Amex) (the “Exchange”) since June 18, 2007. The Exchange imposes, among other requirements, listing maintenance standards. On October 14, 2013, we received notice from the Exchange staff indicating that we were noncompliant with certain listing requirements concerning minimum stockholders’ equity and financial condition requirements. On December 31, 2013, the Exchange staff notified the Company that it had accepted the Company's compliance plan and granted the Company an extension until April 15, 2015, to regain compliance with the minimum stockholders' equity continued listing standards. The Company will be able to continue its listing during the plan period and will be subject to periodic review by the Exchange Staff. Failure to make progress consistent with the plan or to regain compliance with the continued listing standards by the end of the applicable extension periods could result in the Company's shares being delisted from the Exchange.
If the NYSE MKT delists our common stock from trading for this reason or for failing to meet any other ongoing listing requirements, among other things, it could lead to a number of negative implications, including reduced liquidity in our common stock and greater difficulty in obtaining financing. There can be no assurance that our common stock will remain eligible for trading on the NYSE MKT.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
The exhibits required to be filed as a part of this report are listed in the Exhibit Index.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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ZBB ENERGY CORPORATION
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February 14, 2014
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By:
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/s/Eric C. Apfelbach
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Name:
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Eric C. Apfelbach
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Title:
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Chief Executive Officer
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(Principal Executive Officer)
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February 14, 2014
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By:
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/s/ Dilek Wagner
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Name:
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Dilek Wagner
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Title:
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Vice President of Finance
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(Principal financial officer and
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Principal accounting officer)
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EXHIBIT INDEX
Item 6 Exhibits:
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Exhibit
No.
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Description
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Incorporated by Reference to
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Research and Development Agreement between ZBB Energy Corporation and Lotte Chemical Corporation dated December 16, 2013*
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Amended License Agreement between ZBB Energy Corporation and Lotte Chemical Corporation dated December 16, 2013*
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Amendment to Collaboration Agreement between ZBB Energy Corporation and Lotte Chemical Corporation dated December 16, 2013
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Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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Certification of Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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101
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Interactive Data Files
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30