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| ZBB > SEC Filings for ZBB > Form 10-K on 18-Sep-2009 | All Recent SEC Filings |
18-Sep-2009
Annual Report
Introduction
ZBB Energy Corporation, and its operating subsidiaries, (collectively, the "Company"), design, develop, manufacture and market renewable energy storage systems under the recently trademarked names, ZESS 50 and ZESS 500. Our ZESS systems are built using a proprietary process based upon our zinc-bromide rechargeable electrical energy storage technology. The modular nature of our zinc-bromide regenerative fuel cells allows it to be sized and packaged into fully customized, large format energy storage systems. Our systems combine these modules with computer hardware and software that interface with a customer's power source to recharge during off peak times and discharge power as needed.
The financial information presented herein includes: (i) Consolidated Balance Sheets as of June 30, 2009 and 2008 (ii) Consolidated Statements of Operations for the years ended June 30, 2009 and 2008 (iii) Consolidated Statement of Changes in Shareholders' Equity for the years ended June 30, 2009 and 2008 (iv) Consolidated Statements of Cash Flows for the years ended June 30, 2009 and 2008.
Forward-Looking Statements
The statements contained in this Annual Report on Form 10-K that are not historical facts, including, without limitation, the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations," are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may be identified by, among other things, the use of forward-looking terminology such as "believes," "expects," "intends," "plans," "may," "will," "should," "anticipates" or "continues" or the negative thereof of other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. These statements are based on the Company's current expectations of future events and are subject to a number of risks and uncertainties that may cause the Company's actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include, continued ability to maintain positive cash flow from results of operations, continued evaluation of goodwill for impairment and the Company's development and production of competitive technologies in our market sector, among others. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. These risks and uncertainties are disclosed from time to time in the Company's filings with the Securities and Exchange Commission, the Company's press releases and in oral statements made by or with the approval of authorized personnel. The Company assumes no obligation to update any forward-looking statements as a result of new information or future events or developments.
Company Background
We design, develop, manufacture and distribute renewable energy storage systems under the recently trademarked names, ZESS POWR, ZESS 50 and ZESS 500. Our ZESS systems are built using a proprietary process based upon our zinc-bromide rechargeable electrical energy storage technology. The modular nature of our zinc-bromide regenerative fuel cells allows it to be sized and packaged into fully customized, large format energy storage systems. Our systems combine these modules with computer hardware and software that interface with a customer's power source to recharge during off peak times and discharge power as needed.
The Company completed a public offering on the Australian Stock Exchange (the "ASX") in March of 2005. Our securities traded on the ASX from March 2005 to August 9, 2007 when they were delisted in connection with our United States public offering.
On June 18, 2007, in connection with our initial United States public offering of 3,333,333 shares of our common stock at an initial offering price of $6.00 per share, our shares began trading on the NYSE Amex (formerly the American Stock Exchange) under the symbol "ZBB".
Since our inception, until fiscal 2005, when we completed the Australian public offering and began our first major production contract, we were primarily a research and development company with little or no revenues. We have historically funded our operations primarily through debt and equity financings, government grants and joint ventures.
In 2008 we completed production under a multi-year contract with the California Energy Commission ("CEC") to produce the first two ZESS 500 kWh commercial energy storage systems for utility use. We also developed, produced, and shipped the first ZESS 50, a smaller capacity modular version of the ZESS 500 energy storage system.
In the current quarter we are in production on multiple ZESS 50 and ZESS 500 kWh renewable energy systems for delivery under various domestic contracts as well as international contracts to ship systems to destinations in Ireland, South Africa, and Australia within the next few months.
Wisconsin based initiatives include an agreement signed during the quarter with the Wisconsin Energy Independence Fund to secure $229,000 in support grant funding for the development of our own proprietary power conversion systems for both AC to DC and DC to DC renewable energy applications. We have contracted with a Wisconsin based partner to build and package the power electronics components for two ZESS 50 units that are required to be built under this grant.
Our production capacity has substantially increased through the delivery of new production equipment purchased during the year ended June 2009. This new equipment, along with manufacturing ramp-up and automation plans are underway that would enable a significant increase in production capability within several months. Since our IPO we have continued implementation of our business plan including the repayment of certain indebtedness, initiating manufacturing commercialization and capacity increases, ISO certification and UL listings, and commenced initial commercial marketing of our products into target markets.
We are currently working in the California energy market, in association with the California Energy Commission, Pacific Gas & Electric and the US Department of Energy amongst others, to install products into the local transmission and distribution network. In addition we are currently addressing numerous opportunities in the renewable energy markets within the United States along with a diverse international marketplace with the intention of introducing products and services into these markets.
The Company is actively involved in submitting proposals to the Federal Government in response to Funding Opportunity announcements issued as a result of the American Recovery and Reinvestment Act. These proposals cover opportunities for plant expansion, Smart Grid initiative, Renewable Energy Initiatives as well as research and development opportunities for applications where the Company's technology could bring a transformational change to market applications that we currently do not address. We are in the process or have applied for approximately 36 Mwh of Smart Grid energy storage projects through various strategic partners and prospective customers under various Department of Energy programs, such as FOA 36.
On January 26, 2009 we filed an S-3 Registration Statement with the Securities and Exchange Commission. Amendments to the S-3 Registration Statement were filed on March 30, 2009 and May 1, 2009 and was declared effective by the SEC on May 13, 2009. We took this action as a proactive measure in anticipation of our possible future needs for additional working capital and further capital expenditures. On August 18, 2009 we announced the closing of our public offering, pursuant to this S-3 shelf registration. ZBB sold 1,791,667 units at $1.20 per unit, consisting of an aggregate of 1,791,667 shares of its common stock and warrants to purchase 358,333 shares of its common stock at an exercise price of $1.33 per share. The proceeds to ZBB after deducting placement agent fees and offering expenses were approximately $1.9 million.
In December 2008 ZBB received an order for a ZESS 500 energy storage system to be installed in conjunction with existing wind energy assets at the Centre for Renewable Energy, at Dundalk Institute of Technology in the Republic of Ireland. The system was shipped to Ireland on June 30, 2009 and is presently undergoing pre-commissioning installation on site where it will work in partnership with an 850kW wind turbine to provide a significant portion of the daily power requirements for the Institute's campus.
Critical Accounting Policies
Estimates and assumptions
Management's discussion and analysis of the financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses for each period. The following represents a summary of the Company's critical accounting policies, defined as those policies that the Company believes are: (a) the most important to the portrayal of our financial condition and results of operations, and (b) that require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. Estimates and assumptions are made by management to assess the overall likelihood that an accounting estimate or assumption may require adjustment. Management assumptions have been reasonably accurate in the past, and future estimates or assumptions are likely to be calculated on the same basis.
Foreign Currency
The Company uses the United States dollar as its functional and reporting currency, while the Australian dollar is the functional currency of one of its foreign subsidiaries. Assets and liabilities of the Company's foreign subsidiary are translated into United States dollars at exchange rates that are in effect as at the balance sheet date while equity accounts are translated at historical exchange rates. Income and expense items are translated at average exchange rates which were applicable during the reporting period. Translation adjustments are accumulated in Accumulated Other Comprehensive (Loss) as a separate component of Shareholders' Equity in the consolidated balance sheet.
Revenue Recognition
The Company currently contracts with its customers to develop, manufacture, install and service its energy storage systems under short and long-term contracts. These contracts have resulted in two distinct arrangements and revenue recognition policies. The first type of contract is for the production, delivery and installation of energy storage systems. The second type of contract is for product engineering and development activities.
Product sales orders that have relatively short duration (typically less than one year) normally use the completed-contract method of revenue recognition rather than the percentage-of-completion method. Revenues are recognized when the sales price is fixed, collectability is reasonably assured and the product's title and risk of loss is transferred to the customer. Typically, these conditions are met when the product is shipped to the customer. The Company charges shipping and handling fees when products are shipped or delivered to a customer, and includes such amounts in net sales.
Revenue recognition on energy storage system long-term contracts utilizes the percentage-of-completion method which recognizes revenue proportionally as costs are incurred and compared to the estimated total costs for each contract. This has been the predominant method used in estimating revenues recognized in past reporting periods.
Engineering and development contracts are typically collaborative agreements to further develop renewable energy technologies and are often sponsored and partially funded in various amounts between government agencies and the Company. Often multi-year agreements which contain several elements and provide for varying consideration based on allowable costs, milestones and similar payment provisions and may provide for future licensing and royalties beyond the term of the arrangement. Revenue associated with these types of contracts are typically of longer duration and recognized under the percentage-of-completion method.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or market and consist of raw materials, work in progress and finished goods held for resale.
Costs incurred in bringing each product to its present location and conditions are accounted for as follows:
· Raw materials - purchased cost of direct material
· Finished goods and work-in-progress - purchased cost of direct material plus direct labor plus a proportion of manufacturing overheads.
The Company evaluates the recoverability of its slow moving or obsolete inventories at least quarterly. The Company estimates the recoverable cost of such inventory by product type while considering factors such as its age, historic and current demand trends, the physical condition of the inventory as well as assumptions regarding future demand. The Company's ability to recover its cost for slow moving or obsolete inventory can be affected by such factors as general market conditions, future customer demand and relationships with suppliers. Historically, the Company's inventories have demonstrated long shelf lives, are not highly susceptible to obsolescence and are eligible for return under various supplier return programs.
Property, Plant and Equipment
Land, building, office and manufacturing equipment, and test units are recorded at cost. Maintenance, repairs and betterments are charged to expense.
Finished goods normally held for sale to customers may sometimes be used in demonstration and testing by customers. During the periods that the units are transferred from inventory to plant and equipment they are depreciated over the period in use. Since the intent is for these units to be eventually sold they are returned to Inventory upon the completion of customer demonstration and testing at their written down value.
Depreciation is provided for all plant and equipment on a straight line basis over estimated useful lives of the assets.
Stock-Based Compensation
The Company follows the provisions of "Share-Based Payment" ("SFAS No. 123(R)"), which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.
Accordingly, the Company measures share-based compensation cost for all share-based awards at the fair value on the grant date and recognition of share-based compensation over the service period for awards that are expected to vest. The fair value of stock options is determined based on the number of shares granted and the price of our ordinary shares, and calculated based on the Black-Scholes valuation model. Black Scholes valuation attributes used in the model include expected volatility, term, and risk-free interest rate. Expected volatility is based on the historical volatility of the Company's share price for the period prior to option grant equivalent to the expected life of the options. The expected term is based upon management's estimate of when the option will be exercised. The risk-free interest rate for periods within the contractual life of the option is based upon the U.S. Treasury yield curve in effect at the time of grant.
The Company only recognizes expense to its consolidated statement of operations for those options or shares that are expected ultimately to vest, using two attribution methods to record expense, the straight-line method for grants with only service-based vesting or the graded-vesting method, which considers each performance period or tranche separately, for all other awards.
Advanced engineering and development
The Company expenses advanced engineering and development costs as incurred. These costs consist primarily of labor, overhead, and materials to build prototype units, materials for testing, develop manufacturing processes and include consulting fees and other costs.
To the extent these costs are separately identifiable, incurred and funded by advanced engineering and development type agreements with outside parties, they will be shown separately on the statement of operations as a "cost of engineering and development contract".
Goodwill
Goodwill is recognized as the excess cost of an acquired entity over the net amount assigned to assets acquired and liabilities assumed. Goodwill is not amortized but reviewed for impairment annually as of June 30 or more frequently if events or changes in circumstances indicate that its carrying value may be impaired. These conditions could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit.
Testing for the impairment of goodwill involves a two step process. The first step of the impairment test requires the comparing of a reporting units fair value to its carrying value. If the carrying value is less than the fair value, no impairment exists and the second step is not performed. If the carrying value is higher than the fair value, there is an indication that impairment may exist and the second step must be performed to compute the amount of the impairment. In the second step, the impairment is computed by estimating the fair values of all recognized and unrecognized assets and liabilities of the reporting unit and comparing the implied fair value of reporting unit goodwill with the carrying amount of that unit's goodwill.
Recent Accounting Pronouncements
See Note 2 in the accompanying notes to consolidated financial statements.
Known Trends, Market Opportunities and Challenges
We believe that there are specific existing and rapidly emerging market opportunities for the Company's energy storage products.
We believe that in North America the electric utilities markets' increasing energy demands on an increasingly fragile transmission and distribution network is forcing both utilities and commercial and industrial customers to adopt distributed storage and delivery systems to increase the reliability and the capacity of the electrical grid. We have designed our products to meet these needs in that they can be combined for use in larger storage applications. Federal and State Government initiatives to lessen the United States greenhouse gas emissions and dependency on oil and increasing concerns surrounding CO2 emissions are also driving this market sector. We believe that solar and wind energy has grown over the past five years and will continue to grow for so long as fossil fuel prices are increasing. Because both solar and wind are intermittent primary energy sources, both grid connected and off-grid installations require energy storage devices to optimize their capabilities.
We continue to advance the sales and marketing process in the areas of sales network structure, direct key accounts, strategic relationships, marketing and industry/policy involvement.
We continue to build a direct market pipeline of opportunities which include several electric utilities; companies involved in renewable energy; large renewable energy integrators involved in on-grid and off-grid applications, government facilities and other commercial and industrial opportunities such as "big box" store chains.
We have advanced the ZBB presence and awareness in the market through involvement in various market conferences (energy storage, wind, and solar, electric utility), direct marketing, marketing materials and web content, as well as continued efforts in media channels and highly visible applications such as the Future House USA installation in Beijing, China, the Likusasa power systems to remote areas in Africa, and the sale of the first large scale wind/storage facility on a college campus at the Dundalk Institute of Technology in the Republic of Ireland. ZBB is in the process of furthering these marketing and networking efforts with additional marketing activities that will continue to raise the profile of ZBB and the ZESS brands.
We continue to work in the California energy and utility markets through the California Energy Commission and pursue opportunities with Pacific Gas & Electric and the U.S. Department of Energy amongst others, to install products into the local transmission and distribution network. In November 2008 the State of California amended certain renewable energy rebate programs to include energy storage systems, such as those manufactured and sold by us, when our systems are incorporated as part of either new or existing renewable energy installation.
We are currently addressing opportunities and engaged in fulfilling orders targeted to renewable energy markets in the United States, Europe, Australia, and Africa with the intention of introducing products and services into these markets. The United States and governments throughout the world are implementing renewable energy mandates, tax credits, investments, and other incentives related to renewable energy and energy efficiency including the energy storage sector. The American Recovery and Reinvestment Act of 2009 includes provisions for over $14 billion in amounts to be available for "Energy Efficiency and Renewable Energy" until September 30, 2010, with $10 billion targeted towards grants and loan guarantees for the manufacturing of advanced batteries and components.
We are actively involved in submitting proposals to the Federal Government in response to Funding Opportunity announcements issued as a result of the American Recovery and Reinvestment Act of 2009. These proposals cover opportunities for plant expansion, Smart Grid initiative, Renewable Energy Initiatives as well as research and development opportunities for applications where the Company's technology could bring a transformational change to market applications that we currently do not address. We are in the process or have applied for approximately 36 Mwh of Smart Grid energy storage projects through various strategic partners and prospective customers under various Department of Energy programs, such as FOA 36.
We have substantially increased production capacity through the delivery of new production equipment received during the year ended June 30, 2009. This new equipment, along with manufacturing ramp-up and automation plans are underway that will enable a significant increase in production capability within several months.
Our current contracts include a collaborative project (Advanced Electricity Storage Technologies project) with the Commonwealth of Australia which commenced July 2007 and running through July 2010, which includes the payment to the Company of $2.6 million for future development costs and which includes the production and delivery of one 500kWh energy storage system for installation into a renewable energy site in Australia. In December 2008 we received an order for a Zess 500 system to be installed in conjunction with existing wind energy assets at the Dundalk Institute of Technology in the Republic of Ireland, which was produced and shipped during the year ended June 30, 2009.
During fiscal 2009 we signed a contract with the Wisconsin Energy Independence Fund to secure $229,000 in support grant funding for the development of our own proprietary power conversion systems for both AC to DC and DC to DC renewable energy applications. We have contracted with a Wisconsin based partner to build and package the power electronics components for two units for evaluation with two ZESS 50 systems contracted to be built under this grant.
In addition to the other risk factors stated above, and other information relating to our business as referenced in our "Company Background" section, we believe that some of the biggest challenges we face will be gaining market acceptance for our newer products and reaching the utility and renewable energy companies that we target. In order to be successful we must also develop a reputation of reliability and quality service.
Our systems compete with both traditional energy storage technologies, such as lead acid batteries, as well as emerging energy storage technologies, such as vanadium redox and sodium sulfur batteries. For our target markets, we believe our product has a significant advantage over competing products and technologies in terms of:
• Superior technical attributes in terms of the amount of energy that can be stored in a system of a given weight and size or "energy density" (sometimes measured in Watt Hours per Kilogram or Wh/kg), recharge cycle and overall cycle life;
• Competitive cost, based on dollars per Kilowatt Hours (kWh), as well as life of the module components;
• Modular construction allowing portable applications of varying size, as compared to the large scale, fixed site emerging alternatives.
We believe additional capital is necessary to continue our mid-to-long term growth plans. Actions taken by the board of directors and management in the current fiscal year include: 1.) increase in cost saving measures to ensure adequate cash resources to continue growing the company, assuming no new sources of capital funding; 2.) actively pursue various fund raising arrangements including engaging investment bankers to assist with equity based financing; 3.) focusing the Chief Executive Officer efforts on fund raising and federal stimulus package opportunities; and 4.) filing a "shelf" S-3 Registration Statement as a potential vehicle and to assist in fund raising efforts.
Results of Operations
Years ended June 30, 2009 and 2008:
Revenue and Other income:
Our revenues for the years ended June 30, 2009 and 2008 were $1,775,703 and $1,279,599, respectively, an increase of $496,104. This was the result of an increase in revenues of $383,843 from commercial product sales and revenues, and an $112,261 increase in engineering and development revenues as compared to the year ending June 30, 2008. Revenues include estimates based on the percentage-of-completion method of accounting for long-term contracts with two customers.
Other income for the year ended June 30, 2009 reflects a decrease in interest income of $360,585 compared to the year ended June 30, 2008, and a decrease of $74,780 in other income, primarily due to reductions in rental income. The decrease in interest income is a result of decreasing cash balances invested from the proceeds of the Company's U.S. public offering in June 2007. Interest income is expected to continue to decrease in future periods as proceeds from the public offering are utilized for capital expenditures and operational purposes and from lower interest rates on the funds invested.
Total costs and expenses for the year ended June 30, 2009 and 2008 were $7,252,176 and $6,525,444, respectively. This increase of $726,732 in the year ended June 30, 2009 was primarily due to $339,959 increased cost of product . . .
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