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ZBB Energy Corporation (NYSEMKT:ZBB)

F2Q13 Earnings Call

February 14, 2013 11:00 am ET

Executives

Eric Apfelbach – President and Chief Executive Officer

Will Hogoboom – Chief Financial Officer

Charles Stankiewicz – Chief Operating Officer

Analysts

Ankur Desai – MDB Capital Group LLC

Jay Wigdae – Lakefront Partners

Operator

Good morning ladies and gentlemen and welcome to the ZBB Energy Corporation Quarterly Earnings Conference. After prepared remarks, we will be opening the call to a Q&A period. (Operator Instructions) As a reminder, this call is being recorded.

It is now pleasure to turn the call over to Mr. Eric Apfelbach. Mr. Apfelbach, please go ahead.

Eric Apfelbach

Thank you. Good morning everybody and welcome to our quarterly conference call. This is Eric Apfelbach; I’m the President and CEO of ZBB Energy Corporation. And I’m joined here by Will Hogoboom, our CFO; and Chuck Stankiewicz, our COO. First, Will review the financials and then Chuck and I will brief you on the operating activities and comment on our global strategy and then we'll close with an overview of our business development activities. Will?

Will Hogoboom

Okay, thank you Eric and good morning everyone. Thank you for joining us today for ZBB’s conference call for our second fiscal quarter of 2013, which ended December 31, 2012. ZBB energy’s press release containing second quarter results was sent out by market wire yesterday, February 13, after the market closed. The press release may also be found on our website at zbbenergy.com. I would like to call your attention to the following Safe Harbor statement.

Certain statements made in this conference call contain forward-looking statements within the meaning of section 27a of the Securities Act of 1933 as amended and section 21e of the Securities and Exchange Act of 1934 as amended that are intended to be covered by the "safe harbor" created by those sections. Forward-looking statements which are based on certain assumptions and describe our future plans, strategies and expectations can generally be identified by the use of forward looking terms such believe, expect, may, will, should, could, seek, intend, plan, estimate, anticipate, or other comparable terms.

Forward-looking statements in this conference call may address the following subjects among others. Statement regarding the sufficiency of our capital resources, expected operating losses, expected revenues, and expected expenses and our expectations concerning our business strategy.

Forward-looking statements involve inherent risks and uncertainties, which could cause actual results to differ materially from those in the forward-looking statements as a result of various factors, including those risks and uncertainties described in the risk factors and in management's discussion and analysis of financial condition and results of the operation sections of our most recently filed annual report on Form 10-K and our subsequently filed quarterly reports on Form 10-Q.

We urge you to consider those risks and uncertainties in evaluating our forward-looking statements. We caution participants in this conference call not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. Except as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein or elsewhere to reflect any change in our expectations with regard there to or any change in events, conditions or circumstances on which any such statement is based. Thank you.

Now I will walk through the details of our financial results for the second quarter of 2013 as compared to the second quarter of fiscal 2012. Total revenue for the second quarter was $2.7 million, which was up over 500% from the same period a year ago. Our product revenue in the second quarter increased over 10 times from the same period a year ago. It is significant to note that with the tenfold increase in product revenue, we also increased our backlog. We had a backlog of $5.3 million as of November 5, 2012. We booked new orders of $3.5 million and we shipped our recognized revenue of $2.7 million for a current backlog as of today of $6.1 million, which is an increase of $800,000 from several months ago. These sales orders include ZBB EnerSystem and also follow-on orders for our hybrid vehicle motor controllers.

Although we continue to work on our engineering contracts, we did not report any engineering services revenue in the second quarter, because we used the milestone method of accounting for our existing engineering contracts and the current milestones were in progress, but not completed as of December 31, 2012. We have $400,000 of engineering services revenue remaining to recognize in future periods when the milestones are completed. As we have said previously, engineering services will continue to be important to our business model, but the growth in product revenue will outpace engineering revenue in future periods.

Total cost and expense for the three months that ended December 31, 2012 increased by approximately $2.4 million, which is primarily due to the following factors.

Cost of product sales in the second quarter increased $2,027,000 which was related to $2.5 million increase in commercial product sales. As we expected, (inaudible) product cost decreased in the second quarter, resulting in gross profit of almost $500,000 and a gross margin of 18%. Our gross margin increased in the second quarter from 7% in the first quarter.

We expect product margins to continue to improve in current levels as our cost cutting measures are implemented, as sales volume continues to increase and our production continues to ramp up in volume. This will enable production efficiencies and materials cost reduction from higher volume vertices. Chuck will also provide comments on our activities to reduce product costs.

Advanced engineering and development expenses increased approximately $190,000 due to the shift from engineering contracts to commercial production of ZBB EnerSystem and hybrid vehicle motor controllers and other company products.

Selling, general and administrative expenses increased $185,000, primarily due to an increase in personnel required for our company growth.

Total other expense increase $388,000 primarily due to the $457,000 equity in loss of investee company. This is the consolidated portion of our China joint venture net loss for the quarter. Eric will describe the significant process that has been made by our China joint venture to our production and commercialization of our ZBB EnerSystem in China.

It is important to note that under the equity method of accounting, which we use for our investment on the China joint venture, we will not report any further net losses until the joint venture reports profits because at this point we have recognized losses equal to our cash investments in the joint venture.

Income tax benefit in the second quarter declined by $38,000 solely due to a decrease in costs and expenses that qualified for the R&D tax credit from the Australian government. We are fortunate to operate a research facility in Australia one of the only countries in the world to provide a cash refundable research tax credit.

For the second quarter net loss was $0.04 per share versus $0.08 per share in the prior year second quarter, and this was mainly due to the increase in common shares outstanding.

The company's cash balance at the end of the December 2012 quarter was $2.4 million and accounts receivable were $1.2 million. As mentioned our current backlog is $6.1 million including product backlog of $5.7 million, and engineering contract backlog of $400,000. Of the total $6.1 million of backlog we have already received $1.6 million in advanced payments from customers to finance the inventory and production cost for those contracts.

Excluding these payments, the shipment of the product backlog will result in $3.1 million of cash flow to the company in addition to collections of accounts receivable of $1.2 million over the next two quarters. Our average monthly cash burn including inventory purchases is expected to be $1.4 million per month in the balance of fiscal year 2013.

Thank you for your interest in our financial results and for your support of our company. Now back to Eric.

Eric Apfelbach

Thank you, Will. ZBB continued to make significant progress establishing our growth objectives by posting record revenues, while stripping system to some of the most significant applications in historic industry. Our products are now operating in the field and improving their advanced just as the larger market opportunities are converging with their capabilities.

During the quarter we posted several significant achievements and some of these were key to enabling our revenue growth plan. First, we’ve signed a long-term OEM supply agreement with Crosspoint Kinetics a wholly-owned subsidiary of Cummins Crosspoint for hybrid electronics.

The company received from Crosspoint Kinetics $900,000 of new orders booked in the second quarter. In addition, to the original order of $500,000 booked in the first quarter. These controllers are part of the Crosspoint Kinetics systems that can convert existing or new class 4, 5 and 6 small to medium-sized busses, the hybrid vehicles providing significant fuel and cost savings, as well as lowering the carbon footprint on the vehicle. These systems utilizing our controller can immediately convert any vehicle to a hybrid using super capacitors to store the energy instead of batteries and thereby making the vehicle conversion lighter and lower cost than current hybrid technology with batteries.

We are very pleased with this agreement between Cummins Crosspoint and ZBB and expect to see increase orders from this agreement as the technology is rolled out through Cummins worldwide distribution network. Second, we’ve signed an agreement to supply 2 megawatt hour of the ZBB EnerStore System including 40 ZBB EnerStore modules for the luxury eco-resort The Brando. This project is in French Polynesia, and it’s designed to be the first lead-platinum certified destination resort in the world, as a new construction and in a campus category. This instillation will also include the use of our DC bus architecture in order to simplify the design and operation of this microgrid.

Third, we received the development order to be followed by a prototype order for electronics to be applied to an innovative generator technology being developed for hydro generation.

Fourth, we shipped an eight unit ZBB EnerStore and ZBB EnerSection power and energy control center system to the microgrid installation at the Joint Base Pearl Harbor Hickam. Military base in Honolulu, Hawaii.

Fifth, we shipped an order from the U.S. Navy Fleet and Industrial Supply Center, San Diego for a 1,000 megawatt and 500 kilowatt rated energy storage system for use in a microgrid application at the San Nicolas Island Naval Facility, located in the Catalina Island group, just west of LA.

Sixth, we achieved significant ZBB EnerStore product cost reduction that keeps on plan to meet our gross margin targets for orders shipped in the third and fourth quarters. In addition since the end of the quarter, we received an order for a Grid Independent EnerSystem with the ZBB EnerStore flow batteries to provide an integrated Microgrid Energy Management System to the University of Technology Sydney to serve as a permanent power source, demonstration unit and learning platform in the newly constructed Broadway Building.

We also shipped a ZBB EnerSystem to Lotte Chemical in South Korea, consisting of a ZBB EnerStore and the EnerSection power and control center. In addition, we also entered into a strategic relationship with BPC Engineering in Moscow, Russia, which introduces ZBB’s line of products into the Russian and Commonwealth of Independent States markets.

EPC has ordered its first EnerSystem which will provide a prototype model in Russia for customers to see exactly what the system can do on a location. EPC is great partner for us in Russia and the right market channel and expertise to service the ZBB products.

And finally, we delivered against an initial contract to provide ZBB's second generation hybrid electric vehicle controller technology to the Crosspoint Kinetics partnership; this product is a role model for the balance of our product segments, because it has regular, but ramping shipment profile and also has higher than target gross margins.

At this point, I’m going to hand it over to Chuck to do a quick overview of our operations and then I will cover a few more detailed points of our sales and business activity. Chuck?

Charles Stankiewicz

Thank you, Eric. Good morning everyone. Over the last few quarterly conference calls, we have discussed the evolution of our company towards the commercially oriented high volume manufacturer. The study increase of product sales from $1.6 million in Q1 to $2.7 million in Q2 has allowed ZBB to implement the continually improving productions steps necessary to achieve lower product manufacturing costs.

Last quarter, we confirmed that we’d achieved our stated goal of reducing the material cost of our V3 battery by 30%; the method of achieving these reductions included the refinement of the product design that has resulted in a reduced spot count and changing the battery component to standard commercially off shelf parts whenever possible. These set of actions allowed us to achieve the cost reductions previously stated and to also reduce the component lead times and a reliance of single sourced production parts. The ability of second source whenever possible will provide us flexibility and security and knowing our V3 production line will be less slightly to be disruptive due to the status of individual sub-suppliers.

The reduction of material cost has been a major step in our cost out efforts, but at the same time our design team has been working with production to improve the overall manufacture ability of the product. Although many of these steps are settle that allows us the ability of reduced manufacturing lab cost for battery module and allow more modules to be manufactured with less incremental employees. In addition, the simplification of processes ensures consistency in manufacturing, resulting in reductions in factory test, time and an easier commission system in the field.

Well our discussions recording manufacturing improvements is centered around V3 module builds during our quarterly calls. We should not lose side of the fact that the same steps have been taking place in the design and production of our power conversion products. Our grid-tie invertors, DC converters and our customer specific designs including Crosspoint Kinetics hybrid controllers will experience improvements to their costs through improvements to design, souring and manufacturing processes.

Most meaningful metric that can be applied to any manufacturing processes, the impact it has at bottom line. We certainly have a long way to go, but our positive trending, a product gross margins from negative 14% in the fiscal year 2012 final quarter to 7% in fiscal year 2013 Q1 to 18% in the Q2 quarter shows a clear path to 30% plus gross margins. We expect to eventually achieve. The BPC Engineering order represented the 150 kilowatt hour, V3 module sold by the company.

Over 40% of these units have yet to be shift, affording us additional opportunities to improve the gross margin of our current product backlog. Thank you and now back to Eric.

Eric Apfelbach

Thank you, Chuck. Regarding sales and business development, we continue to be very encouraged with the increasing quality and quantity of opportunities in our sales pipeline. As we have mentioned in the past, however we expect bookings to still be lumpy due to the nature of our customer base and the fact we are entering new market segments with new products. The time frame in which we have reasonably clear bookings visibility is about four quarters. Currently our final identified opportunities in our served market is a bit over $38 million. This $38 million includes only well-qualified opportunities that we feel we have a very good chance of winning, we determined customer budget, authority need and timing to decide whether an opportunity is truly qualified and belongs in the funnel.

Again, our power electronics and storage modules are like a black set that can address all these markets. So we have tremendous flexibility and a broad served available market. The products size range in our funnel continues to grow as well, we are currently quoting projects greater than 2 megawatt hour of storage. Now that we have designed, built and installed our first 500 kilowatts hours unit in IIT and we have shift a 1 megawatt hour to net the NAV, and now we are building a 2 megawatt hour unit for (inaudible), it becomes much easier to configure and quote installations that require multiple blocks of 500 kilowatts hours.

Our international business development took another important step forward with our announcement of the relationship with BPC engineering in Russia. This is a great example of where all of our guidelines are met for the quality of our partner, the needs in the market and I believe that it represents a near-term growth opportunity. BPC Power Systems is an integrated engineering company engaged and designing, supplying, installing and supporting distributor power and heat generation systems. BPC’s demonstrative success in creating a market for distributed generation in Russia, reaching a 30 million annual run rate with Capstone Turbine turbines in a seven-year period.

They developed a team of executives and relationships that have already identified many specific customers were as storage solution makes economic sense today. In addition, net team has demonstrate of the ability to carryout the entire working cycle of selling, engineering, constructing, and supporting distributed power and energy systems for new customers. We are very excited to have BPC as a partner and to get their first system installed.

Regarding our China JV, our China JV in Meineng Energy continues to move forward with increasing activity. Last quarter we mentioned that Meineng was targeting January 2013 for shipments from the JV, and this goal was call was met. Meineng continues to work on critical mix steps necessary to procure, large grid-connected orders in China.

In the meantime, Meineng will be placing orders for components with ZBB. The annual storage market in China is already estimated at gigawatt hour in size. So, achieving grid-connected orders is a top priority for ZBB and Meineng, and will be game-changer of Meineng and ZBB to achieve this milestone.

Let me give you a brief update on some of our strategic relationships. We have continued to mature our conversations with key strategic partners. Now that we have real system out demonstrating what they can do, it becomes much clear to collaborators what are value proposition is, and where the synergy is between the companies. It’s very clear we have strong leverage with the integrated storage companies that have existing markets channels and support infrastructure.

It’s our intent to add one of these types of companies to our collaborators at least over the next two quarters. Our existing collaborations continue to move along as plan. Lotte Chemical is continuing to be very helpful on battery component development that can significantly benefit the price performance ratio of our battery stack. We are in discussions on continued next steps and in improving performance and manufacture ability of the cell stacks. They have the scale to complete these developments, as well as a ramp into full production.

It’s also expected that they will be a second source of battery stacks by 2014, as we ramp production in both regions. This was the objective of the program and the fact that we are on track is important to ZBB, because it will reduce the capital expense required for us to ramp while ensuring safe and low-cost supply chains.

Work intensity has picked up with our U.S. technology company partner as we review all of the techno economics of the product ideas that the collaboration has created. The project is going well and we believe we will proceed to the next phase of development. This product can cover a different operation regime than ZZB’s EnerStore, so that two would have a strong position when regulators complete their work on energy storage utility applications and determine the appropriate rate base treatment.

This collaboration has also generated multiple benefits as we have worked together to evaluate other storage projects using ZBB products and also other partners that can be brought together to help accelerate ZBB’s market entry. In summary, we’ve continued to achieve record quarterly product revenue with one of the most compelling product sets in the industry. Our challenge is to covert these opportunities in our funnel at the rate that enables us to meet our growth targets. Many of the strategic collaboration discussions we are engaged in could include an equity investment component. We have continued to manage our cash aggressively during our ramp phase and we’ll make any needed adjustments as we progress towards our business plan goals.

The metrics of success are very clear. One, demonstrate that our early product installations prove our value proposition. Two, convert these initial product installation into additional bookings and revenue. Three, continue to drive costs out of our products and increase margins. Four, add key partnerships that leverage our ability to develop products and go to market. We believe we have the team, the products and the market opportunity to achieve these adjectives in 2013.

Thank you everybody for calling in today. We’ll be happy to take your questions now. Thank you operator.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll take our first question from William Blanchard, Private Investor.

Unidentified Analyst

Good morning. On the previous call, I believe I just hear in your comments, you commented on the joint program or project activity with a non-disclosed company. Could you expand on that a little bit please, including any near-term decision points?

Eric Apfelbach

Sure, yeah we quantify that as an R&D project. It was the collaboration between technology that company had and our ability to develop commercial flow battery product from that. It proceeded well through I would say the first gates of classic R&D project. There is a lot of benefits that have been uncovered from that. And so now we’re entering into more disciplined product development gate review, thus I mentioned the techno-economics.

It’s like most R&D projects where the commitment of cost and manpower go up quite a bit at this point to actually proceed to its privatization. But I think that the benefit and the way the market is progressing are very compelling, and that product, if you recall, is targeted at much larger storage opportunities in our current product, and also has a different operating capability than the zinc bromide flow battery.

So the two products would be very synergistic both in capability and market served available market. So again those discussions are going on now, but it’s a significantly more detailed on projecting the product cost, product capability, and budgets where commercialization effort.

Unidentified Analyst

Could you give us any idea when the earliest we might see such product?

Eric Apfelbach

No, we don’t have a timeline for a product entry yet, that’s actually part of the discussion right now in terms of how much resource, how fast.

What I will tell you is the market for grid storage is actually accelerating, in fact yesterday we saw an announcement from CPUC, basically putting in that they want a minimum of 50 megawatt hours of storage up to possibly 600 megawatt hours of grid storage in LA basin alone. And this is exactly the sort of market opportunity where people were kind of saying, well, is it going to happen or is it not going to happen.

So the market assessment portion of that product I would say is preceding ahead of the schedule for – and that covers our product as well by the way, but I think that’s a sort of the thing many of these big companies in terms of spending more money on a new product development really want to see. Is the market going to be there when the product is? And again that looks pretty compelling at this point.

Unidentified Analyst

Okay. I read on a DoD energy blog dated February 11 about some problems at the Hickam Pearl Harbor project, the Court was – the air force and contribution of a flow battery flopped, was that a battery and what can you tell us about what happened?

Eric Apfelbach

Yeah, I think that the blogger maybe used some confusing language that our battery is in spiders program as you know, so that is our battery and I have shift and passed the initial sign off of that battery, so it's been released actually through its first gate of evaluation in path, so.

Charles Stankiewicz

And we’ve completed all commissioning aspects of our battery and our contractual commitments.

Eric Apfelbach

So I think maybe an unfortunate use of some of the projects, I'm not sure the blog I was referring to. So if we find any clarification on that, we will certainly put it out if we see anything.

Unidentified Analyst

Okay. Thank you for your time and good luck.

Eric Apfelbach

You bet. Thank you.

Operator

We'll take our next question from Ankur Desai with MDB Capital.

Ankur Desai – MDB Capital Group LLC

Hi, guys. Hello.

Eric Apfelbach

Hello, Ankur.

Ankur Desai – MDB Capital Group LLC

Thanks for taking my questions. First I wanted to know on the cash position front, I mean you spoken a little bit about potentially trying to attract equity financing from partnerships already, I just wanted to know if there are other non-dilutive methods of praising any capital that you perused?

Eric Apfelbach

Yeah, just like we always have done really all options are on our table that strengthen our balance sheet, obviously non-dilutive routs are preferred, things like what we did with own amp is a good example of a non-dilutive thing that really helps our cash flow and our balance sheet. So we are pursuing those heavily, most of those are going to be combined with some sort of a strategic partnership of some sort, so yeah, we look at everything.

Ankur Desai – MDB Capital Group LLC

Great. I also wanted to get, I know you’ve mentioned your qualified – your well qualified funnel is about $38 million, do you have the sense of what the kind of historical conversion rate of that funnel has been?

Eric Apfelbach

Well, we don't really – I usually refer to the health of the funnel and that's because every quarter we are getting much better at qualifying these types of business, maybe these types of opportunities in our funnel and that goes to our personnel, just experience and knowing where the [pathos] can be in some of these long complicated sales processes we’re in.

So, we are a much better now in identifying timing and probability of the project actually happening, so many projects simply go away and so, that’s a critical qualification step. And then knowing how we win, we’ve actually off the projects that had been booked in the industry, we’ve gotten a very good share of those, especially in the DoD. So, we’re pretty comfortable with our ability to win as long as the project happens in our served available market space.

I think as both the industry gets a little bit more stable and, we get a few quarters more out into our, to shipping our product on a regular basis in ramping, we’ll be able to start talking about kind of our batting average if you will in our funnel, it’s just a little too early on that right now.

Ankur Desai – MDB Capital Group LLC

Okay. And, I also wanted to get a little further comment from you on, I know you just mentioned that the CPUC decision from yesterday. It seems to me that it could be potentially a major announcement. But, I wanted to, if you get a little additional color in sort of the size of the market opportunity and how you sort of differentiate yourself from your competitors and trying to attack that part of the market?

Eric Apfelbach

Sure. I think it’s a landmark decision, honestly this is the first time storage at this ratio on this size. It’s been basically put into the CPUC policy and it’s going to move on a fairly fast track. I think we will probably post the press release, CPUC putout yesterday on our website, so people can see it. But it basically specifies for the LA basin, that a minimum of 50 megawatts, and a maximum of 600 megawatts of capacity need to be procured from energy storage resources. Again this is just the LA basin this is something that, I think everybody in the storage industry has been waiting for to get, so the utilities can integrate storage as part of this solution.

We’ll get more details, but this will drive the business significantly. We obviously already have had multiple dealings in California and are well positioned with the CPUC to compete on all of this storage. So this is somewhat what I was referring to the convergence of the real market. This is the first time, we have seen a real market versus POV type demonstration programs and scattered projects. This is the reward for all of us who have positioned ourselves in this market. So I think it’s a landmark decision, I think this in combination with the things that you see FERC doing are going to lead to a very broad utilization of storage in the utility network in the U.S.

Ankur Desai – MDB Capital Group LLC

Thank you very much

Eric Apfelbach

You bet.

Operator

We’ll take our next question from (inaudible). Private Investor.

Unidentified Analyst

Yeah, thanks for taking my call. Just a follow-up to that cash position question. In the previous calls, you mentioned about being cash flow positive by the end of this fiscal year, it looks like that won’t happen. Based on your backlog and your current cash position and the cash burn, what’s your confidence level in that or can you add some details on that of how – where you will be by the end of fiscal year.

Charles Stankiewicz

We haven’t talked about where we will be at the end of the fiscal year. We did mention in our release that we believe we will raise capital before the end of the fiscal year through one of our routes that we are talking about. All options are on the table for us as we have said. We have multiple conversations going with strategic, both dilutive and non-dilutive type things. So as I have said, all options are on the table. And we are very fortunate, we have a lot of options, which is obviously where you want to be at our stage.

So that’s all we have really said at this point and obviously what’s important for our cash flow convergence in our business model is that improvement in our gross margin is on track to hit that margins we need and really what were – the reason we don’t give forecast is because the revenue side is where we really are pushing to grow and that will be the key metric of when we hit our cash flow positive crossover point.

Unidentified Analyst

Okay. Just another question on this Cummins deal, is there any scope for your battery technology to go in there or just only your controllers?

Charles Stankiewicz

No, that’s a ultra capacitor storage right now and if a version of that were, you could use a same version of that with a battery because it’s on a mobile platform, you would choose something like lithium ion battery, probably due to the energy density. So right now, that’s not a flow battery candidate.

Unidentified Analyst

Okay. Thanks for the call.

Charles Stankiewicz

You bet.

Operator

We’ll hear next from Andrew Young, private investor.

Unidentified Analyst

Thanks for taking my question. With the China joint venture, are you done with that part or putting any more cash into that? And then on the other side, I see that you’re moving into more product sale which is done very well and obviously as you reduce our cost of sales and the profit margins going up, you cash flow should go up.

Do you have any other partnerships with that, that reduce how much the cost of goods sold there, because if you keep going down that avenue, which clearly that’s where the growth is, what’s your expectation by the end of the year to get that gross margin from 18%, to say 30% better? That’s all I have, thank you.

Charles Stankiewicz

Sure, I guess there are two questions there. One is in China, right. So China, we’re obviously focused and grid connected in essence, sign off there for the largest part of the market. That’s were currently its estimated China will contract about a gigawatt hour of storage over the next year. So it’s a huge market. Currently in China, lithium ion batteries and lead acid batteries are the two only approved storage technologies other than pumped hydro and things like that. So there is – really our objective there is to become the first new technology, advance battery to get qualified on the grid the reason are they could obviously because of they huge market now we got a great position are (inaudible) position extremely well so we are we are exited about in completely focused on beginning into shift a grid connected to (inaudible) applications the terms are the gross margins right we out line kind of stepping stones at you know I think our last call we have identified to we want to be 35% gross margin by the end of the year, so there is many, many different aspects of how you get that gross margin but we have a global supply chain its running very well we have an engineering team has done some great things to engineer out cost and we on plan to reach that gross margin which obvious this critical for the business model are the company

Unidentified Analyst

Was there any thing further (inaudible)

Charles Stankiewicz

Oh, no, no thank you very and you guys have a wonderful day.

Unidentified Analyst

You back thank you .

Operator

Your next question comes from (inaudible)

Unidentified Analyst

Yeah I take our my call I had a question about the press release (inaudible) came out about maiden yesterday were there we poor on can you some ration that with our actually the sale, I was confuse like and that

Charles Stankiewicz

Yeah, that was the commission of our system in wire fist system at the residential kind our complex with out first system was install so that system has I get in some first of kind in the world system so its got connection to the solar it’s got connection every generating if power from the elevator system they removed there are this are genset and use our battery for back the grid goes. out. And so that system is very key for us and that – that’s why we announced the successful commissioning.

Unidentified Analyst

Okay. My next question is on, when do you expect the Tahiti inflation to be completed and also did you see that Sir Richard Branson is looking for alternative, looking for a similar set up or he is high on retreat?

Eric Apfelbach

We have seen that Richard Branson it’s a slightly smaller application. But for Tahiti will be shipping the units and they will be arriving sometime, let’s say, late spring or early summer, to Tahiti. And based on their schedule, because there is a lot of integration and things that need to take place as they get the entire resource up. You’ll hear us making statements in terms of like final commissioning sometime in the end of our calendar year.

Unidentified Analyst

Okay. There is one final question, thanks for that answer. You mentioned caps on turbine which has a lot of our distributors that are specializing in future applications. Are you looking to build a relationship with a company like CapStone or controls that obviously has lots of branches and lot of expertise in that area?

Eric Apfelbach

Yeah, we see a lot of value and people that are putting in the systems. So all the candidates you mentioned are great partners. The reason we are exited about PPC is, because all in one channel partners there, we have experts who can, look at a situation, design it with or without a CapStone, they do the economic analysis, they work with the customer. DC-Bus system is an ideal way to tie together any distributed generation source, whether it’s a turbine, fuel cell or a gen-set. So we would anticipate that there will be caps down, turbans hanging off our DC box in the not too distant future in Russia.

Charles Stankiewicz

Yeah, if you take a look at the Russian grid, it blends itself to solutions of actually having micro grids or applications. We have a combination of PowerGen source and then energy storage source. So it’s a perfect application for us and the great thing with BPC is that they are very used to dealing with English companies, American companies. So a lot of the transfer of knowledge and the working with them is going to be very seamless for us, which is real exciting also.

Unidentified Analyst

Okay, thank you very much.

Operator

We will take our next question William Blanchard, Private Investor.

Unidentified Analyst

Hi, I read that the State of Connecticut has a very active microgrid project solicitation (inaudible) going on. By seeing ZBB linked at least one of the submission and I was wondering if you had any information on when decisions will be made on the project and whether you are actually involved in more than one and who are partnering with for some of those?

Charles Stankiewicz

Yeah we wouldn’t comment on that the timing of that. Some of those opportunities are in our funnel. So when I mentioned the $38 million, you would see us supplying into a larger integrator and responding to those requests.

Unidentified Analyst

Okay, but there is more than one.

Eric Apfelbach

Chuck, do you know?

Charles Stankiewicz

Well, it’s interesting for us because sometimes, we actually will respond. We’ll have multiple people who are bidding on the overall contract and multiple of them will come to us for the same thing, so we have to sort out whether obviously, we don’t put that in our funnel twice, because only one of our people bidding will win. So the answer to the question is, we have multiple people inquiring about projects in that area, range fully we can't say on top of my hand right now or either that I can't verify saying that they are on separate projects, or some of the same? And one thing we can say, I mean it's just general in the market in general, there is a lot of interest in areas Connecticut or even if we go into Long Island in different projects that we're looking at, just the whole idea of security for like emergency shelters and that sort of thing, lot of the times people talk about the same estimate, people don't immediately buy energy storage devices, but what they do is they start to look in and realize that you can't really rely on a grid to keep people worm and sheltered and happy when you have a natural disaster occurs. So we're having a lot of those discussions taking place and hopefully they will bear some fruit.

Eric Apfelbach

Yes to expand on that, the East Coast in general, as most people saw there was $50 billion I think in recovery money for the East Coast after Sandy and many of those companies are trying to figure out how do you get the grid to be more resilient and recover faster and provide more protection in these sorts of events. So we're hopeful that that will spur grid modernization at a faster rate in that region and I think it will, and many of our value propositions like when we tell people that hey, you know what, you can’t use your cellular energy on your roof when the grid goes out because it separates you from the grid, many people listen to that but until it happens to then they are not willing to open up their wall and write the check for a system, so now people are actually out saying, in my hospital, in my data center, in my critical area. We’ve already got on east coast system in a data center. We’ve got the ability to back up UPS’s and hospital also. These are becoming very, very real conversations now versus the kind of kick that tires mentality that existed a year ago. So we like to see that trend.

Unidentified Analyst

All right thank you.

Eric Apfelbach

Yeah.

Operator

We’ll take our next question from Jay Wigdale with Lakefront Partners.

Jay Wigdae – Lakefront Partners

Thank you. And to the management team I continue to commend you with your achievements given the balance sheet that you have to deal with. So thank you. I do have just a couple questions of clarification. Are you anticipating sequential revenue growth here for the next quarter?

Eric Apfelbach

Yeah we didn’t talk about the next quarter’s revenue growth, but we consistently said that is obviously our target. Our book-to-bill ratio continues to be bigger than we one. Our funnel continues to grow and our manufacturing capacity is greater than $40 million annual. And all of our segments are growing. So with that I think you could anticipate we are pretty bullish.

Jay Wigdae – Lakefront Partners

You just mentioned $40 million in current capacity that would be up from the mid-30s, I believe.

Eric Apfelbach

Yeah it’s right in that neighborhood. And it depends on product mix, things like common cross point actually is helpful because it gives us higher revenue and margin capability in places where we don’t have a capacity constraint. Right now we have specific features of equipment that will constrain our battery production to bottom 1.5 megawatt hours per month and that’s fine for our current forecast. Honam, as I mentioned, will remove that capacity constrain and will continue to be able to grow our capacity as well. So capacity is not an issue, and all I can say is that really right now it’s a race to see how fast we can book new orders.

Jay Wigdae – Lakefront Partners

And then, just to clarify on your gross margin comment. Did you say that you expect to be at 35% gross margin by the end of the June quarter?

Eric Apfelbach

Yes. And my only (carry on) and that is there is a dependency on how fully loaded our factory is at that point. So, but from a product perspective, if you look at the cost of materials and the labor and the supply chain things that we’re doing they’re all on target to meet that kind of a product capability. And again it does somewhat depend on mix a little bit. The good news is some of our new products ideally will have higher margins in that and our mix will continue to improve as well.

Jay Wigdae – Lakefront Partners

Okay. And then, just as it relates to your strategic financing alternatives, might there be a scenario where you would have an interim step before strategic and, or should we anticipate a strategic is the next announcement we’ll hear as it relates to funding?

Eric Apfelbach

Yes. We haven’t said, Jay. You’ll have to wait for the next announcement, I think, entirely to answer that. Like I said, it’s nice to have a lot of options that we do and we’re going to work all of them for the benefit of the shareholders to try to minimize dilution and maximize our value. And so sometimes having a lot of options is good, sometimes it creates it takes a little bit more time to maximize your short amount of return. So we are focused on that right now, so stay tuned.

Jay Wigdae – Lakefront Partners

Okay. And then just the last question has to do with the China JV. The funding requirements for ramp over there I would imagine are going to be fairly sizable. Is that going to require additional investment from ZBB, and if not is there potential dilution in your ownership over there, as you get outside funding there as well.

Eric Apfelbach

Yeah, the current plan there is that we’ve any capital that the JV needs would be raised from either new investors or existing investors and we’re going to cross that bridge when we get to it. They are well capitalized and have both equity and debt in place that gives them a very good position to do what they need to do, and the – because the market is so big over there and a true grid storage solution is very compelling that JV has a lot of attention in interested parties. So I think they’re just like most, it’s kind of like a start-up. They’re trying to make sure they can maximize their revenue growth and runway with the capital they’ve got. And then if they raise more money, they will do at a much higher valuation.

Jay Wigdae – Lakefront Partners

Great.

Eric Apfelbach

Thanks.

Operator

At this time there are no further questions.

Eric Apfelbach

Okay, thank you everybody for attending the call. We look forward to updating you next quarter.

Operator

This does conclude today’s conference. We thank you for your participation. You may now disconnect.

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