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ZBB Energy Corporation (NYSEMKT:ZBB)

F3Q2013 Earnings Conference Call

May 13, 2013 04:30 PM ET

Executives

Eric Apfelbach - President and CEO

Will Hogoboom - CFO

Charles Stankiewicz - COO

Analysts

Ira Holtzman - Lower Electric

James Kennedy - Marathon Capital

James Wigdale - Lakefront Partners

Operator

Good afternoon ladies and gentlemen and welcome to the ZBB Energy Corporation Quarterly Earnings Conference. After today's prepared remarks, we will open the call to a Q&A period. (Operator Instructions).

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

Eric Apfelbach

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

Will Hogoboom

Thank you, Eric, and good afternoon everyone. Thank you for joining us today for ZBB Conference Call for our Third Fiscal Quarter of 2013, which ended March 31, 2013. ZBB Energy's press release containing third quarter results was sent out by market wire today, May 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 statements. Certain statements made in this conference call contain forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933 as amended, and section 21-E 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; statements regarding the sufficiency of our capital resources, expected operating losses, expected revenues, 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 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 thereto or any change in events, conditions or circumstances on which any such statement is based.

Now I will walk through the details of our financial results for the third quarter of 2013 as compared to the third quarter of fiscal 2012. Total revenue for the third quarter was $2.1 million, which increased 28% from the same period a year ago. Our product revenue in the third quarter of $2,019,000 more than doubled from the $930,000 for the same period a year ago. Our backlog is $5 million, compared to $6.1 million on February 14, 2013, the last time that we stated our sales backlog. These sales orders include ZBB EnerSystem and follow-on orders for our hybrid vehicle motor controllers.

When we report sales order backlog, we only report actual sales order received from customers that we have accepted, and that we have not shipped. We do not include sales orders in final negotiations, proposals, and other quotations that are in process with customers and potential customers, all of which we define as our sales funnel.

We reported $100,000 of engineering contract revenue in the third quarter, for work performed and milestones achieved, and our R&D contract with a major U.S. technology company. We have $300,000 of engineering services revenue, to recognize in future periods, when additional milestones are completed.

Total cost on expenses for the three months ended March 31, 2013 decreased approximately $300,000 compared to the same quarter last year. This decrease was due to a decrease in advanced engineering and development materials costs of $1.1 million, and an increase in materials for cost of goods sold of approximately $700,000 due to the increase in product sales.

Advanced engineering and development and materials decreased, because we substantially completed the EnerStore and EnerSection product development since last year.

For the third quarter, net loss was $0.04 per share versus $0.09 per share in the prior year's quarter. This decrease in net loss per share was due to an increase in revenues, gross margin, and a number of common shares outstanding, and a decrease in operating expenses. The company's cash balance at the end of March 2013 quarter was $2.6 million and accounts receivable were $1.1 million.

Our current backlog is $5 million, including product backlog of $4.7 million and engineering contract backlog of $300,000. Of the total $5 million of backlog, we have received $1.1 million in advance payments from customers, to finance the inventory and production costs for those contracts.

Excluding these payments, the shipment of the product backlog will result in $3.9 million of cash flow to the company. In addition to collections of accounts receivable of $1.1 million over the next two quarters. We expect our average monthly cash burn, including inventory purchases to continue to be $1.4 million per month in the balance of fiscal year 2013.

During the third quarter, we closed our agreement with Aspire Capital for a two-year $10 million equity financing agreement. As of today, we raised $2.9 million under this agreement, and we have an additional, approximately 4.6 million shares that can be sold to Aspire without further approvals. The company will hold a special shareholder meeting on June 28, 2013 to seek shareholder approval to allow us to fully utilize the $10 million available under the Aspire agreement.

We have $6.3 million of shareholder's equity at March 31, 2013, which was above the NYSE-MKT exchange requirements of $6 million. Our agreement with Aspire Capital was important to us in the third quarter, which maintained our required level of equity under the Exchange rules.

Since the quarter ended, we also closed a $1.1 million working capital line of credit, bank financing, guaranteed by the export-import bank of the United States. You can also review our earnings release and our 10-Q for further financial information.

Thank you for your interest in our financial results and for your support of our company. Now I will turn the call back over to Eric.

Eric C. Apfelbach

Thank you, Will. On this quarter, I wanted to begin my comments by providing a high level summary of our strategy, and how our various initiatives contribute to our growth objectives. Later in the call, I will go over some additional detail on the status and expected contributions of our various collaborations.

To look in the rearview mirror, ZBB has gone from a company with no viable products [two] years ago, to a leader in the grid and microgrid, storage and electronics space. We have established ourselves as the clear leader in flow batteries, as no other company is shipping a viable product. Our core product strategies of using collaborations, aggressive continuous improvement, and global scale cost leverage are still providing substantial price performance ratio improvements, and we do not believe that anyone will be able to beat us, as we reach true production volume first on a global basis.

This is a result of the conversions of our long-term strategy that we initiated three years ago. From a market strategy perspective, predicting the specific geographies and market segments, where steady growth will occur first, is much more difficult to forecast. The strongest return on investment segments for storage, where are displacing diesel fuel with renewables.

This is why a good portion of our business has been from the Department of Defense and Island areas. For grid connected systems in the U.S., it is our belief that the storage industry will begin to accelerate quickly, when the utilities are able to include cost of storage in the rate base.

We know they need and want storage to deal with the price winds associated with intermittent renewable production. The California Public Utility Commission recently mandated 50 megawatts equivalent of storage capacity in the LA Basin for exactly this reason.

We will also be watching FERC's activities in this area and hope they will reach a conclusion within a year, to enable rate basing of storage assets. Obviously, this would be a game changer for the U.S. market. ZBB is well positioned for these developments with our current projects, leadership position, and ability to shift utility scale quantities of storage.

Our product capabilities are making strong progress as well. Our two major product improvement initiatives are focused on increasing the round trip efficiency and continuously reducing costs. For a flow battery, the major areas to focus on for efficiency, are reducing the auxiliary loads, like the pumps etcetera, and the separator within the stack itself.

Since the end of last quarter, we have become increasingly convinced that a key technology we are working on, will not only give us a substantial increase in efficiency, but also a meaningful cost reduction at the same time.

We will work to prove, that that technology is ready for manufacture and meet lifetime expectations over the next few quarters. This product improvement can be easily integrated into our current stack design, and could give us a significant, defendable lead in price performance. It also increases the served available market size for ZBB, as some segments demand higher efficiencies.

During the quarter, we posted several achievements of merit. First, we completed production and customer factory acceptance activities for a 40-unit ZBB EnerStore system, resulting in a significant portion of the revenues for the third quarter. I only wish each shareholder could have seen this project coming through the factory, that demonstrated all of the engineering and manufacturing efforts, had met their objectives, and that we can scale quickly.

Second, ZBB and Itron, in conjunction with additional project partners, determined the final site for a project in California. This is an important proving ground for the upcoming CPUC storage business.

Third, we entered into a $10 million common stock purchase agreement with Aspire Capital fund, whereby Aspire has committed over the next two years, to purchase common stock, based on prevailing market prices, as Will had outlined.

Fourth, we launched the first renewable energy generator set, and energy storage project sizing application, which is based on the ZBB EnerSystem platform, powered by HOMER Energy's optimization analytical engine, the new web-based application is accessible via our website, zbbenergy.com, and is designed to provide optimized economic power system configurations for remote grid, microgrids and intermittent grid supply locations.

Fifth, we received a contract valued at greater than $500,000 from Meineng Energy, our joint venture company in China.

Sixth, we commissioned a ZBB EnerSystem at a mid-rise residential apartment building near downtown Honolulu for NIDON Clean Energy. NIDON is a renewable energy design and integration company based in Honolulu. The system consists of ZBB's EnerStore Zinc Bromide flow battery modules and a ZBB EnerSection directly connected to a PV array. We believe there is solid follow-on business, after this system is [proven].

Seventh, we delivered against an initial contract to provide ZBB's second generation hybrid electric vehicle controller technology to Crosspoint Kinetics, with whom we entered into a Strategic Supply Agreement in November 2012.

Eighth, we entered into a strategic relationship with BPC Engineering in Moscow, Russia. This relationship introduces ZBB's line of products into the Russian and Commonwealth of Independent States markets.

Ninth, we booked and shipped another ZBB EnerSystem to Lotte Chemical in South Korea, consisting of a ZBB EnerStore and an EnerSection power and control center.

Finally, we received an order for a Grid Independent ZBB EnerSystem 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.

In addition, since the end of the quarter, we secured bank financing of $1.14 million, guaranteed by the Export-Import Bank of United States, to finance export of our products.

We also received Australia research tax credit of $192,000. In addition, we booked another follow-on order from Lotte Chemical for 250 kilowatt hour EnerSystem, in part kits, that will enable them to build an additional three EnerStore units in their facility.

At this point, I am going to hand you over to Chuck to do a quick overview of our operations, then I will come back and cover a few additional points on sales and business activity. Chuck?

Charles Stankiewicz

Thank you, Eric. Good afternoon everyone. During our conference call last quarter, we noted the 100th order received for our 50 kilowatt hour V3 EnerStore, which was a significant achievement for ZBB, and critical for our efforts to evolve to a commercially oriented product sales driven company. Since that call three months ago, we have focused on improving our product, based upon lessons learned from both field operations and factory testing.

We have used that information to refine the manufacturing and testing of our product, resulting in higher reliability and improved profitability. We believe that continual product improvement is not only possible, but also necessary, in order to keep our gross margin needle trending in the positive direction.

Increasing order volume will undoubtedly help drive manufacturing costs downward. However, these expected costs savings, due to volume, can evaporate quickly, if your product and production processes are not volume ready. We believe that ZBB is now in position to convert sales growth, to increase the bottom line results.

During previous calls, Eric and I have fielded questions regarding the facility production capability. We have answered this question in the past, by stating that our capacity based upon current staffing levels and current production capability of critical machinery and processes, is approximately 1.5 megawatt hours per month. We have never in a position to fully prove out this statement, so we receive the order for Pacific Beachcomber and have to execute this order in a relatively short period of time.

As we have previously stated, the Beachcomber project will provide 2,000 kilowatts of energy storage for a luxury, eco-friendly resort in French Polynesia. This project required us to supply 40 V3 EnerStore battery modules. Before shipping the system to Beachcomber, the contract required ZBB to demonstrate the capability of the EnerStore, by going to a stringent series of factory acceptance tests, with customer representatives observing the actual testing, that was performed at our factory.

The customer representatives did not arrive at our facility until mid-March, leaving little room for error, in order to have Beachcomber system leave our facility before the end of March.

In order to be ready for customer representatives, it essentially required us to complete the assembly and standard factory tests for the 40-unit order, prior to their arrival. We wanted to ensure that the Beachcomber order was constructed incorporating the latest design improvements based on our lessons learned over the past year.

This provided an added challenge, since some of these changes would not be available for production until late January. In short, we had to manufacture 40 V3 batteries in approximately six weeks. I am happy to report that the customer witnessed and accepted the factory testing of the systems and the Beachcomber system did leave our facility in March.

This may have been more hectic than we would have liked, but it did show that ZBB products can satisfy the factory testing requirements set forth by an owner of a luxury resort, that will depend on the EnerStore working as designed, 365 days per year. We also clearly proved that 1.5 megawatt hours per month of V3 batteries can be produced.

With regards to our quarter ending in June, we will have shipped the 100 V3 systems, that were announced as sold during the last quarterly call. These systems will provide ZBB systems to countries that are excellent target markets for energy storage, including Russia and Australia. We will also be delivering and installing our first V3 system in California, which is expected to have the greatest potential for energy storage within the United States.

In fulfillment of our contracts we leased under our Strategic Supply Agreement with Crosspoint Kinetics, we are rapidly manufacturing and shipping our second generation hybrid vehicle controller product for use in their energy saving hybrid system for class 4, 5 and 6 vehicles.

Thank you, and now I will turn it back over to Eric.

Eric Apfelbach

Thank you, Chuck. Let me say a few words about our sales and business development activities. We continue to be encouraged with the quality and quantity of opportunities in our sales pipeline, especially over the long term. We will continue to expect our bookings to be lumpy, due to the nature of our customer base, and the fact that we are entering new market segments with new products. Currently, our sales funnel and our served market is a bit over $40 million. This $40 million includes only well qualified opportunities that we feel, we have a very good chance of winning.

Again our power electronics and storage modules are like a Lego block set. They can address all of these markets, so that we have tremendous flexibility and a broad-served available market.

Our international business development continued to move forward with our recent shipment to BPC Engineering in Russia. We continue to believe that the Russian market represents a strong near term growth opportunity. BPC has helped with integration of Capstone turbines, and combined [heating] power applications, that's synergistic with other opportunities we are seeing around the globe as well.

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

In China, our JV, Meineng Energy, continues to move forward with increasing activity. Meineng continues to work on critical next steps necessary to procure large grid connected orders in China. Qualification for these opportunities is some of the most rigorous in the world. So a specific timeline has been difficult to predict. As in our other markets, we are learning a tremendous amount about what these customers require, and that pushes our product improvement efforts at a high rate. The annual storage market in China is already estimated at a gigawatt hour in size. So achieving grid connected orders is a top priority for ZBB and Meineng, and would be a game changer for Meineng and ZBB to achieve this milestone.

A word about our strategic collaborations and efforts in that area; developing strategic collaborations continues to be a critical part of our strategy. As a small company with limited resources, leveraging relationships with key strategic partners, will be essential for us to successfully implement our business plan. We have continued to mature our conversations with key strategic partners. Now that we have real systems that are demonstrating what they can do, we believe it becomes much clear to collaborators what our value proposition is, and where the synergies between the companies lie.

We believe, we have a strong leverage with the integrated storage companies that have existing market channels and support infrastructure. Our existing collaborations continue to progress. We are in discussions with Lotte on next steps, aimed at improving performance and manufacturability of the cell stacks. It is 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 a safe and low cost supply chain. In the meantime, Lotte is also increasing their investment level in the program, as they prepare for manufacturing and increase their system orders, as we just announced.

Work intensity has picked up with our U.S. technology partner as well, as we review all the techno-economics of the product ideas that that collaboration has created. This product can cover a different operation regime than ZBB's EnerStore, so the 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 also continues to generate multiple benefits, as we will work together to evaluate other storage projects, using ZBB products, and other key partners that can be brought together to help accelerate ZBB's market entry.

In summary, we continue to achieve record quarterly product revenue, with one of the most compelling product sets in the industry. We will continue to build on our lead by focusing on segments where steady growth can be generated. Given our limited capital resources, we have continued to manage our cash aggressively during our ramp phase, and we will make any needed adjustments, as we progress towards our business plan goals.

As Will mentioned, the company will hold a special shareholder meeting at the end of June to seek shareholder approval to remove the NYSE-MKT limitations on the use of the Aspire $10 million funding instrument, as we view this facility as critically important to provide necessary liquidity, while we seek strategic financing.

The metrics for success for us are clear. One, demonstrate that our product installations prove our value proposition. Two, convert these initial product installations into repeatable bookings and revenue. Three, continue to improve the price performance ratio, and increase margins; and four, add key partnerships that leverage our ability to develop products and go to market.

Our team has proven that it can conquer big challenges, and that is why we are now market leaders. We are excited about the conversions we believe can happen in the near future, between (inaudible) market opportunity, and our improving market position.

Thank you for calling in today. We would be happy to take any questions now. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. We will go first to Stefan Maroney, a private investor.

Unidentified Analyst

Good afternoon Eric, how are you doing today?

Eric Apfelbach

Very good.

Unidentified Analyst

Congratulations on the recent project announcement. I was taking a look at that, and I was curious that -- I believe that the project was initially announced in September of 2011 and I was just --

Eric Apfelbach

I think that's correct. It was one of the projects where the customer wouldn't allow us to use their name. So we were excited about the project, but we had to stay in stealth mode for a while on it.

Unidentified Analyst

Okay. And it sounds like it's going to be a great project. I had a couple of questions. Do you generally expect -- are they going to -- will projects like that going forward take that long to implement, or is there a timeline that's actually going to shorten, number one. And then are you going to be able to do it retrofit datacenters, or is it only a new datacenters?

Eric Apfelbach

Yeah. Good questions. We would expect things to get shorter in terms of cycle time. That is the first time that's ever been done on the face of the earth. So -- and you are also seeing, at the same time, the datacenter industry, standardize on (inaudible) DC and finally, introducing products from the servers across the board, that can support a DC backbone like that. So everything's coming together right now. So we would expect that cycle time to drop, and our intent there is to make that kind of a standard offering, to integrate renewable with that standard DC architecture.

Unidentified Analyst

And with that, will you be able to retrofit that for datacenters that are up and running now, or is it something likely to -- only on a go forward brand new datacenter basis?

Eric Apfelbach

I think the most compelling applications will be for new datacenters. It is retrofittable, but the customer, you can imagine, they go from an AC backbone with your servers to a DC backbone, it's a fairly major retrofit. You are pulling out everything, except the building wall. So with the size of the energy savings as well, I think you are going to see a lot of people, when they go to do an upgrade, they will go ahead and swap their servers to DC and much of the other equipment in the facility, just because that's one of their largest expenses, with the amount of energy they are consuming.

Unidentified Analyst

Okay. And that's actually -- I noticed that you guys actually became one of the participating partner right now and the [EMerge] alliance too.

Eric Apfelbach

Correct.

Unidentified Analyst

Over the last, which for those listening, have pretty interesting stuff on the [3AD] BPC process. My next question was on the Cummins contract, and where do you foresee that being the value to ZBB over the next -- I mean, it's hard, is that a big part of your business? I mean, what I am trying to get at is that, you guys have said before that there is -- at about $28 million, you guys are breakeven or I would break that down to about $7 million a quarter. Is there any foreseeability with -- I know you said things are going to be lumpy, but is there any foreseeability with how you would potentially be able to get there yet?

Eric Apfelbach

Well, we like Cummins, because it's less lumpy. Although it is a new product going into somewhat of a new segment. You've got a retrofittable hybrid drive. So we're dependent on Cummins there. It's a new business for them. Crosspoint Kinetics was formed solely to penetrate that market faster, and so, what we like about that business is that it's a higher volume month-to-month type product to ship. It has got good gross margins and it's a core contributor. We don't have as much visibility, as to how fast they can grow that business. We do know it has got some international capability as well. So it's got a very good potential, it's just predicting the ramp rate on, that is difficult.

Unidentified Analyst

Is there any estimate as to how many units you have guys have out running the field currently?

Eric Apfelbach

I am going to ask Chuck, that question.

Charles Stankiewicz

Well actually, with the new orders that we have gotten from the supply agreement, they have orders placed of 150 and I think right now, we have shipped close to a 100 of the first 150 units.

Unidentified Analyst

Okay. And that's since approximately last November would you say, when you guys announced?

Charles Stankiewicz

That's correct.

Unidentified Analyst

Okay.

Charles Stankiewicz

If you know, I mean, we talked this -- there were some original prototypes and things that were originally shipped. But these are the, let's say, more the real deal units for actual customers.

Unidentified Analyst

For actual customers? Okay.

Charles Stankiewicz

Yeah. I mean, in other words, I should rephrase. I mean actually, the old ones were for customers too, but this is more the production commercial ready products going out the door right now.

Unidentified Analyst

As opposed to prototype (inaudible).

Charles Stankiewicz

Correct.

Unidentified Analyst

Okay. Next question. You guys mentioned how long -- is there a general estimate of how long a project -- until a project is considered proven? And I asked that question is, because, you guys are basically a new type of company and is it a year or six months or what are your customers, how do they feel about that?

Eric Apfelbach

It's a good question, one that we ask ourselves fairly often. We -- yeah it's a new product, so many people haven't used a flow battery before, because we are the first one to shift them commercially. Many people have not used the interconnection electronic the way we do it, so they like that. Generally, one of the things we are seeing is, once they see all of that, they think of all the other neat things they can do with controls, and automation of different things that they start adding on. So the projects take on a fair amount of extended life, which is good from a perspective that we -- again, we are out in front I think on how to ship a customer, turnkey solution that really matters to them.

We at the same time though, many of these projects can go six, nine months, for them to get enough data and runtime, that they feel comfortable, that things are stable, that it's doing what it wants to, and the economics are doing what they want. And so there is a lot -- I would say, in all of our applications right now, we have had iterations of learning both, on our core products and what can happen, and work with the customers to get some additional features built into the, either hardware or software.

So that will all of course shrink over time, as our philosophy here is that everything is modular, plug and play, turnkey, and we have that opportunity because the way our hardware is designed that, our software that's on these modules, can be modified and architected very quickly. It's exciting because there is, in all these early installations, there is a lot of upside the way storage is used, when you interact with renewable and the grid, and you do it in a smart fashion.

So again, as the product gets, 'bankable' and it's just (inaudible) out of the factory, and with known operating envelopes, it does not take us long, when we ship something, it goes on to their site, if their site is ready, we can load electrolyte in a battery, connect it and start it up very quickly. So it's usually running in a day or two.

Unidentified Analyst

My next question had to do with the technology partner, and actually goes back to that MDB report that was released that discussed your IP strategy, and number of patents that you guys have filed for over the last, I guess 12 months maybe. I was wondering if you could provide any color as to -- I mean, are those in conjunction with the technology partner, or are these your own things, there was another -- I don't really -- you guys never really discuss that, as far as utility patents and what that means?

Eric Apfelbach

The ones that MDB are referencing are all our own independent patent claims and expand across our battery and our electronics. So the partner we work with, had some of their own independent IP; and that's primarily around electrolyte systems and electrochemistry. We have all the knowledge on, kind of the real flow battery work, and all the system knowledge. So that's kind of our -- the thing we bring is rapidly taking ideas on benchtop electrolytes and turning them into a real flow battery.

Unidentified Analyst

I guess what we will see of these, as they start to mature and become public, we will see the majority of the IP in that direction or --?

Eric Apfelbach

Which direction do you mean, do you mean towards --?

Unidentified Analyst

Could you tell about utility taxes, which is really generic, as far as -- I mean, I have searched for some of your patents, but I don't think they have gone public yet, because there is kind of that criteria before they actually get published.

Eric Apfelbach

Yeah. Exactly. Well, you will see patents expand all categories.

Unidentified Analyst

Okay.

Eric Apfelbach

Yeah.

Unidentified Analyst

All right, and moving to mining, energy, is it the same type of UL? Is that the same type of certification that you guys are seeking, something similar to that?

Eric Apfelbach

No I would quantify it as different. I would quantify it more state-grid specific operating type testing. China has its own [animal], that grid is run by a huge $180 billion entity and they have very specific rigorous tests across the whole operating regime of storage. So, it's unlike anywhere else. Our UL testing here is a great baseline, because when they see that's all done, they don't have to go wonder about, if the product and electronics tested to a rigorous standard already. That's much more operability.

Charles Stankiewicz

If you think about it, there's two basic large entities in China, that control the entire grid; the Southern Grid and the State Grid. So it's a lot different than it is in the U.S., and they have a lot more, let's say vertical, decision-making processes, in terms of what they buy and don't buy and how they buy it.

Unidentified Analyst

And what's your kind of -- how clear it is a vendor within that, than, kind of opens the doors?

Eric Apfelbach

Yeah.

Charles Stankiewicz

That's exactly right.

Unidentified Analyst

Okay. Definitely encouraged to see the BPC contract. They have been a good partner for Capstone. Are they familiar with (inaudible) or is that -- (inaudible) they are actually doing now with the first (inaudible) shipment?

Eric Apfelbach

Yeah, they are just taking delivery of the first system, and they visited here, and they know our product fairly well, but they are moving quickly to get complete knowledge of the system, and then try to see how many they can sell over there, not only their current install base, but all the current applications that they have identified in their core business.

Unidentified Analyst

Okay. I have seen them Capstone, and the press buys their ability to sell into that market. So hopefully that will work that well. And I guess the last question is Itron, and that report. I have seen a baseline report, but I think it was prepared at some point in the last year too, that's based on -- that solar initiative that you are part of. Is that the same project? It has got DBB, Prudent Energy and (inaudible)?

Eric Apfelbach

Yeah. That's right. The other suppliers have backed out, due to challenges with that application. But we are the lonestanding storage supplier.

Unidentified Analyst

Really? Interesting. Has Target then backed out then, or is that completely -- SunPower, is that something you guys can comment on or no? At this point?

Eric Apfelbach

Yeah, we haven't commented on that yet. But when that becomes public, we will let you know.

Charles Stankiewicz

Maybe by next quarter, you may hear more about that.

Unidentified Analyst

All right. Well, thanks for taking the call guys, and I will jump back in the queue.

Eric Apfelbach

You bet. Thanks.

Operator

We will go next to [Jim Collins with Banclemens].

Unidentified Analyst

Yes Eric. My question is, are we running into any competition or competing with Durathon, GE, etcetera, entry into this energy area? The Durathon battery?

Eric Apfelbach

You know, a little bit. I wouldn't say I don't know. We haven't had any direct like orders lost to Durathon or anything like that. That battery has a very slow charge and discharge rate, and it's a high temperature battery. So their application space is shifted a little bit from where our Wheelhouse is. So we tend not to see them. They are also dovetailing that battery into other places in there, the GE conglomerate, where they've got a sales channel already. So supplementing generators, we have seen them announce some telecom applications, and I think there was recently an announcement on selling that battery with their wind solutions.

So currently, we haven't seen them go into applications where a flow battery like you've got six hours of discharge time and you are expected to have a higher rate of charge and discharge relative to the capacity of the battery. But they are a formidable competitor obviously, just because of the size and the investment level that they have had in that program.

Unidentified Analyst

Then also, may we get, maybe a price range on the EnerStore and the EnerSection? I am just curious as to per unit, I mean, what would be a ballpark range for the price --?

Eric Apfelbach

It ranges -- its so hard, Jim, based on the application, because we sell it as a system with the -- and a lot of times, we don't even quote, for instance, our battery separately. A lot of people use dollars per kilowatt hour metrics on the battery. But our battery generally, if you looked at across our space, and if you did the numbers in our P&L, you'd kind of come out at $1,000 a kilowatt hour. But the variation in the electronics contribution is the wildcard there, and it's all over the map.

Unidentified Analyst

Then my last question would be, about the rate base. I know that public utility in Minnesota, they got a sodium-sulfur facility, which is very large. With that being their rate base, has anybody got the storage in rate bases for the utilities in the country?

Eric Apfelbach

We are not aware of anybody that can rate base storage yet. Most of the projects that you have seen are demonstration projects, utilities, they want to get used to something, and facility install for battery, I am not sure when they took delivery of that. But that was in production, and they had to stop production due to some fires, and then they have recently, I believe, started shipping again. That's from a Japan NGK, the supplier.

Unidentified Analyst

Very good. Thank you very much.

Eric Apfelbach

You bet. Thank you.

Operator

We will hear now from [Neil Sagans with Sagans Consulting].

Unidentified Analyst

Hey Eric.

Eric Apfelbach

Hi Neil.

Unidentified Analyst

Hey listen, most of my questions were answered, but while I have got you here, what exactly is the limitation you are trying to have removed, so that you can use the Aspire facility? Does it have something to do with the size of your shelf?

Eric Apfelbach

It's actually the 20% rule that is the limiter on the Aspire agreement.

Unidentified Analyst

Okay. So you are going to ask shareholders to approve removing the restriction that the company can't issue -- the company can only -- you are going to ask for approval to issue more than 20% of the outstanding equity?

Eric Apfelbach

Right, within that instrument. So it doesn't -- that whole thing integrates basically, obviously. So yeah, to go to the full $10 million will require more than 20%.

Unidentified Analyst

Unless you get your stock price up to $1, right?

Eric Apfelbach

Well, the way --

Unidentified Analyst

I am teasing with you Eric. Okay, well listen, thank you. Like I said, most of my questions were answered. Thank you.

Eric Apfelbach

All right. Thanks Neil.

Operator

We will move to Ira Holtzman with Lower Electric.

Ira Holtzman - Lower Electric

Hi Eric.

Eric Apfelbach

Hello Ira.

Ira Holtzman - Lower Electric

The questions that I have are, what's the oldest install we have and what kind of data do we have back on that, and is that still holding up part of the sales process?

Eric Apfelbach

Yeah, actually some of our first shipments of the V3 actually went to China. So after that, actually the way the unit was -- I think the next shipment, the one that we just announced.

Charles Stankiewicz

Yeah, we announced the commissioning, but it has been back to Visa site for six months -- or for six to nine months.

Eric Apfelbach

And they have used that on and off. They are probably one of the leader customers -- boy, it's interesting, this thing really is -- works well on a datacenter, but now I want to do other things with it. Some of our early systems to -- we were making software improvements on the fly, so we've kept them up on that. But you can kind of see, now that they have used it longer, and they understand how it can work into a datacenter, they are pretty bullish about it, and that's -- many of our customers are kind of in that camp. They want to use it for a while, get enough data and information before they jointly do a press release like that, if they are happy.

So the other part of your question now, who has got the most runtime data. I think that we are getting quite a bit of data out of China, but it's kind of inside, it's at our JV, are probably the most significant data from the early systems, and then, Hawaii, many of our other systems are in, various forms of commissioning that we have shipped. You can imagine things like going to an island, we have to ship electrolyte by boat, etcetera. So there's a fairly long time, from when these things can leave our dock, until the time they are actually running.

As far as showing artifact of our -- the contribution from our international shipment as well.

Ira Holtzman - Lower Electric

Okay. So you've mentioned Hawaii just now, but I didn't hear you talk about it in kind of recapping the situation? I thought that we were very excited about that market, what's going on with that install? No one's like --

Eric Apfelbach

That one has been started getting commissioned, when did we turned that one Chuck?

Charles Stankiewicz

It was last fall.

Eric Apfelbach

Yeah, last fall. So again, totally new application, new -- pretty much everything about it was new for that Island and that market. So they are running that. That's obviously a commercial product that's in a place where they depend on it, for backup power, if the grid goes down. We have done a lot of different things to that system, and currently are working on actually integrating, getting more automated integration for the utility as well. So it's kind of -- it's a new application. It's somewhat of a testbed and we hope that is a leading -- kind of a lead horse for that whole line market. But it's -- one of the things we see in Hawaii, there is a lot of -- there is a lot of challenges there as well, and there has been some other negative battery experiences on the other side of the island, and so people are definitely very cautious, and yet -- because that's going in a commercial building. We definitely, there is no mincing words, you have to prove your value equation at that site, before they will go buy 10 more.

So that's the phase we are in, its making sure the product proves itself.

Charles Stankiewicz

And we are always collecting data, but the one thing as a point, is that our customer's data is our customer's data. So as you go through, and we could have been reporting on things from these and other things, except, that it's really the customer has a choice of telling us when we can start to talk about that particular project, or you can share data on a particular project.

Eric Apfelbach

One thing, Chuck just mentioned something, we have a new version of our control system that actually started shipping now, that will allow us to remotely collect more data, in a much-much better way than we could on our early systems, and that's going to help us as well, and we had a fairly rudimentary system, and that the customer had to help us with, to collect data, and now we will be able to remotely monitor.

Charles Stankiewicz

That's correct.

Ira Holtzman - Lower Electric

So, are there still a lot of potential sales that are sitting on the sideline and waiting for your product, in their opinion to be more proven?

Eric Apfelbach

Yes. Definitely. We are still pretty excited about Hawaii, but it's definitely. This is where, again, when I talk about new markets and new products, the good news is, we have a very unique offering, the bad news is, we have a very unique offering. So we do have to get, so that it's just a standard thing like buying a gen set, is how we'd like to get it, but it does take some time.

Ira Holtzman - Lower Electric

Okay. And so along those lines, at one point, you would hope to be cash flow neutral or positive, depending on how you are looking at it by the end of the fiscal fourth quarter. Is that no longer the case?

Eric Apfelbach

Correct. I mean, if you look at where we are right now, from where -- the bogey that we put out there, was to be kind of in that $26 million to $28 million run rate. You can see our revenues this quarter, we are going to have a good year, but we got to scale quickly too and get things through our funnel. So what we are excited about is, we have proven we can ship very high yield product, and that we can pass rigorous tests and that we have the factory capacity, to easily do it.

We have to pull those bookings through faster to get to that $28 million, $26 million revenue run rate. So that's what all of our focus is on now. What's interesting about that, again, I didn't go into detail on our funnel, but we are very well positioned in these different segments, call it Russia, call it China, call it Hawaii, call it CPUC, call it DoD. We are positioned, we got products there, it's been tested. All of these markets in these segments, served available markets, much larger than what we need to get to cash flow breakeven. But we need to convert that, obviously, into bookings in the near term. So that's our challenge.

Ira Holtzman - Lower Electric

Well that would be obviously -- the sales side, and what -- China goes back to my other question is, what specifically is the challenge to get them over the hump, so to speak, and is it something that you have control over, or is it something that we just need more time?

Eric Apfelbach

Well I think it's both. Obviously, we have a lot of control over how we deploy our permanent resources, and how we pick partners; because obviously, we are being very selective on where we spend our time, and we want near term growth and we don't want barriers to entry in the places we go. If you notice, while we are very excited about India, we haven't announced anything there, because there are barriers to entry in India that we feel are not -- the planets are not in alignment there yet, whereas other places they are. So we are being very focused on where we think we can get growth over the next quarters, and two year type timeframe.

The things we don't control are obviously the adoption cycle of some of these markets can be longer than we'd like. There is a lot of governmental bodies, utilities.

Charles Stankiewicz

Exactly, and that's what you talked about in the comments, the regulatory environment is evolving also, which is going to make things a lot easier for people to adopt storage.

Eric Apfelbach

Right. So everything's directionally correct. We really like the way things are headed, but that's when I say lumpy, that's exactly what I mean. We see there and look at all these things we don't control, and we focus on those things we can, but over the long term, this is such a large market, and there are so many striving needs in these segments that we are already shipping equipment to. I use the term, that we have a lot of shots on goal, to get to our cash flow breakeven type number.

Ira Holtzman - Lower Electric

Alluding to that, or going to that point, you said your burn rate, was it $1.4 million a month?

Eric Apfelbach

Yeah right in that neighborhood.

Charles Stankiewicz

Including inventory purchases, orders.

Ira Holtzman - Lower Electric

So does that mean, given that you've drawn what, $1 million against the $10 million, that it's -- whatever that comes out to be, six months worth of cushion, or is there increased sales during that period of time, that you expect that to drop substantially?

Charles Stankiewicz

Yeah, we are going to just give you a quick overview on that.

Eric Apfelbach

Ira, our cash burn in terms of expenses is about $1 million a month, and as we mentioned, our cash balance at March 31 was $2.6 million. We have got $1 million of receivables. There is about $3 million coming in from our order backlog. So you can sort of see where that puts us, and that's one reason we asked for flexibility from our stockholders to fully approve that Aspire agreement, to give us more flexibility in terms of cash resources.

Ira Holtzman - Lower Electric

Okay. So overall, it sounds like things are positive, but we are still kind of in that middle section, that it's still a waiting game, and how much is the stock going to get diluted, and what's the market going to value this? Because it's obviously still extremely low, based on what we actually have?

Eric Apfelbach

Right. Its good summary.

Ira Holtzman - Lower Electric

Okay. Thank you.

Eric Apfelbach

You're welcome.

Operator

We will hear next from Jim Kennedy with Marathon Capital.

James Kennedy - Marathon Capital

Hi guys.

Eric Apfelbach

Hello Jim.

James Kennedy - Marathon Capital

How are you doing?

Eric Apfelbach

Doing good.

James Kennedy - Marathon Capital

I'd like to drill down a little bit, so that I can kind of get my head around this financing. Rewind about 11 months ago, we raised approximately $12 million, I think net (inaudible) of a little over 10, under the auspices that hey, you know what, we have got a pretty good shot at cash flow breakeven by next June, which obviously we are not going to be there, and I understand, based on your explanations, that the markets aren't developing quite as quickly, as you hoped they would.

So, what gives me the confidence, sitting here now, that we aren't in the same situation nine months ago, and what concerns me is this, you've put a financing in place that is very shareholder unfriendly, and what I mean by that is, it's wonderful to have an equity line of credit, when you want to tap it once in a while, because you are short $500,000 or $1 million. What I think I heard is, that you are into the line for $2.9 million already, and with the additional shares you paid upfront to get the line in place, and you are asking the approval to tap the other $7 million, if needed, which unless there is something you are not saying on this call, it sure looks to me like you are going to be tapping that other $7 million. Which means in total, we will have issued $10 million shares, and short of some great news, and stocks not going up in the face of that kind of issue.

So we are looking at about 30 million shares coming on into the market in the hands of people who are not investors, they are financiers. So that means that, instead of doing the financing and putting shares in the hands of people that might want to hold them long term, and make a long term investment, we are just giving them, somebody is going to flip them, because they are in the business of finance; and I understand that, if that's a short term need. But here we are, talking about unleashing the entire $10 million.

So Eric, I just wanted to get your perspective on your view of the shareholder aspect of that, and also what confidence do we have, that you are sitting here with another nine months going by, and with that $10 million, we have to come back for more?

Eric Apfelbach

Right. Thanks Jim. No I understand the concerns. We chose from a number of different options to do financing in this period of time for the company. And it's our intent, and objective to consummate something on the strategic side, as soon as possible, and the Aspire type of instrument, we'd like to use it as little as possible, I think just like you would. So we are working hard on really trying to get something done on the strategic side, that would alter that scenario that you just outlined.

At the same time, we don't want to have ever, our backs up against the wall, either in any of those discussions. So we want to make sure we have the time to get those sorts of thing done in a shareholder positive way as well. So it's a strategy that we have chosen, and obviously our intent is to be the best for the shareholders over the long term and its really our effort to get that done.

James Kennedy - Marathon Capital

Well, and again, I applaud and understand the strategy. But we are into this thing for $3 million already, so we've issued X number of shares, we've seen the effect of that and the share price, and you're going to place yourself interest a corner, because if the stock doesn't go higher, you are going to be putting more shares in people's hands at $0.30, and then at $0.27, and with no incentive to hold the stock. That's my point Eric. So I will leave it to you guys to manage that. But again, it's extremely unfriendly shareholder financing in place.

I wanted to just switch gears real quickly back to Cummins, and just say that, can you share, now that we are on, I guess what you referred to as Gen-II, can you share the -- obviously things don't go 100% where you would like them from day one, can you share with us, what has not gone well, what needed to be corrected, and where we stand in terms of your view of the product at this point, realizing that the sales effort is up to them.

Charles Stankiewicz

Right. Well and Jim, this is Chuck Stankiewicz. The product itself were a controller that's actually controlling the Cummins, Crosspoint Kinetics products, which incorporates ultra capacitors which are used to, let's say, take energy or put energy put to a variable torque motor. So from our standpoint, over the course, and as we call these prototypes and all. We are actually at a controller right now that the customer has fully accepted, and we had gone literally the equivalent of years worth of operating, which is in the number of somewhere around 12,000, 18,000 miles in the field, and the units have run very-very well.

So from our standpoint, our controller seems pretty robust. When they went through the original qualification, they had to go through the Department of Transportation, made sure it ran properly and then go through a lot of different tests.

So our units are running well. They are actually going through proving for a lot of these mechanical components at the same time. So we went through some of our pain, actually almost before that we introduced the Gen-II controller. But at the moment, its running pretty well. We've had some software parameter changes, but for the most part, Eric, you can comment as well, the customer is pretty pleased with what we are doing, and that being Cummins.

The other issues for integration and how they are being accepted and what they are doing in terms of their whole production, that's really more Cummins comments. But from our standpoint, we are doing pretty well.

Eric Apfelbach

Right. We are just really in production mode on that now, and for us, there is no real engineering activity at all going on from our perspective. It's just build them when they need them. I think they -- like I said, they are launching a new business, focused on nothing but these products. So they are going through additional startup pains too, I would say. But they do have to prove, for some of their new customers, the larger customers, that the whole systems runs through their company's stack. So --

Charles Stankiewicz

Yeah, and a lot of our initial issues too. Really, it was very-very little about the electronics, but if you can envision, that this -- the controller sits on the bottom of the bus in the winter, and that kind of thing. So it's more or less salt and liquids and external containment in the vessel itself, as opposed to the rest of the electronics in the unit.

James Kennedy - Marathon Capital

Okay. Thank you.

Eric Apfelbach

Thanks Jim.

Operator

We will hear now from [Riley Tudy], a private investor.

Unidentified Analyst

Hey Eric. Thanks for taking my call. Just a follow-up to this sales funnel. I am trying to understand, this number hasn't changed for the last two or three conference calls that you guys mentioned. You guys keep mentioning the same number. I am wondering is this -- are you not able to identify new projects, or are you adding and removing projects at the same rate, or just very long sales cycles. Things aren't changing and maybe is it possible for you to break this $40 million to -- geographically between North America, Japan or China, whoever they are. So maybe that will help us understand if something is going on in those countries that are dragging this along?

Eric Apfelbach

Yeah, I think in the future, we could start to -- because of our international footprint, start to break it up by geography as well. The challenge we have got right now is, some of these things like China is a good example, until we get qualification, we have that as a zero, basically, a very low amount in our funnel. So it's going to go from nothing to large, and we don't know -- we are very conservative on what we put in our funnel right now. So, we have that same issue like, right now, you will see we don't have anything forecast for Russia, for instance. We sold one unit, we are going to ship it. We are going to get to know that market better, and we believe it will be quite a good market. But until we see a specific location with specific budget, specific architecture, it doesn't go into our funnel.

So there is a little bit of churn in the funnel. When I talk about the quality of the funnel, we kind of look at the things that may be were budgeted, that went away. We have a fair amount of projects that look like they are going to happen. Our number one competitor is things not happening at all generally. So, I think it's just kind of coincidence, its sitting where it is, because we are working on so many large things, that if we put any percentage in, it would distort the visibility I think, that we communicate to the investors.

But I think we have a huge, if you looked behind that $40 million number, there is a massive amount of opportunity in the possibility side, it's hard to quantify, so we leave it out right now.

Unidentified Analyst

You think we could understand it better between -- are these brand new opportunities or follow-up to any prototypes that you have shipped?

Eric Apfelbach

They are both. One thing we are seeing, that we are excited about, is that we are gaining a lot of visibility, because we are the only company shipping commercial type flow batteries. And so we see an increasing recognition that we are kind of a go-to company for a lot of these things. And even some of the strategic partners, I think are headed that way too. So it's like, when I say, its directionally correct, we really like that. But at the end of the day, only a booking counts for us right now, right? So to get to cash flow positive, which is our number one goal, we got to book it, ship it. So we, in a lot of these segments, again we see some possible big upside when these, both regulatory and utility adoption rates cross with our product readiness in the U.S.

Other countries where we probably -- you are going to see us do more and more in other countries, and it's just -- again its harder for us to predict, because we don't have -- we are generally working through partners there. We are not -- we don't have direct sales forces in these other locations. So we are -- again, if somebody doesn't have all the answers to the qualification questions we have. While it may be look really interesting, we probably leave it out of the funnel, until we know more.

Unidentified Analyst

I mean, that's what I am trying to understand the quality of your funnel, given the cash on hand you have, and your burn rate. What is realistic in the near future to -- (inaudible) you guys in terms of this coming to fruition?

Eric Apfelbach

Yeah. We have not put out a guidance on bookings or revenue yet, just for the reason that the moving parts in the funnel are big enough that we did -- there is no way we could predict and have a lot of merit right now. Like I said, we like what we see there, but at the end of the day, we are going to be measured solely whether we book something or not, and that right now, we are going to operate on a quarter-to-quarter basis just reporting our backlog. I think we can give you more visibility though, going forward into the geographical breakdown on some of the things we are seeing.

Unidentified Analyst

Would you say the CPUC thing is a major portion of your $40 million right now, or just outside of it?

Charles Stankiewicz

Actually it's not. I mean, that's one of the challenges we have, is that CPUC, they are talking about the idea potentially putting out an RFP for like 50 megawatts worth of storage. So if we put that in the funnel, that 50 megawatts you could say, okay, $1000 a kilowatt, we could increase the funnel by $50 million, but until we really understand where they are going, we haven't included that.

Eric Apfelbach

Yeah, and we are probably the best or one of the best positioned storage companies for that business. But it is a good example of where they are mandating storage. We've got product going right into that location, with that person who mandated it, and if we are successful, we should be able to get an outsized piece of that business. But there is a lot of ways, projects and timing on stuff like that can vary. So we are just not putting it in at all right now.

Charles Stankiewicz

Until we understand the politics and the real drive and how quickly they are going to make decisions in that.

Unidentified Analyst

I just keep pressing on the same thing, but any -- what's your confidence level -- what will come this year, out of that $40 million? 10%? 20%?

Eric Apfelbach

I -- no. Chuck runs sales, so I am looking at him. But you mean, this fiscal year?

Unidentified Analyst

Yeah. I guess you got one more quarter, so.

Eric Apfelbach

Right, exactly. I mean, we are probably through that. It's really hard to tell, that's all I can tell you. If there is one thing that we have learned at VDD, it's that pushing stuff out the bottom of the funnel has a lot of standard deviation around it, and that's why, we just haven't been giving guidance on the rate of bookings or the revenue rate.

Charles Stankiewicz

I'm (inaudible) Eric as he went through the different opportunities in his talk of the things we are looking at, and everything from Russia to Australia, the visa announcement. I mean all these, we fully expect they are going to bear fruit. It's just a question of timing; and it's again, the market right now is pretty fluid, and also there is a lot of dynamics that are outside of our control, that dictate that fluidity. So we are doing our best to manage it, and we are poised to go after any of those markets. We have got vehicles that we can actually -- we feel very confident now at same token, as we don't have the buildup of inventory, but very confident that we are asked to perform fairly rapidly, we can put out product to the tune of 4.5 megawatts per month, and if we can do that, we feel confident we are at the foot of a breakeven.

Unidentified Analyst

Okay. Just a last question. As far as India, Eric, are you normally looking at utility type of projects or any specific diesel displacement projects, like the telecom towers or others like them?

Eric Apfelbach

Yeah. We are looking at both. It's interesting, we are looking at utility connected telecom, utility connected datacenters. As you know, the utilities over there run intermittently, so they are a great backup source for our systems. Solar is gaining a lot of attention over there. So people who need power continuously, you can imagine, a system like ours there, really helps.

So the challenge we have in India, is there is a reason they don't have a lot of stable power, is because they don't spend CapEx in a lot of these areas. Now we are seeing that start to change. There are some key projects there, that we think will have credible partners, and CapEx that can support it, so that it's done in the right way. Then we will see, going forward, how fast things scale in India.

Unidentified Analyst

Any of that, India, in the funnel at all the moment or no?

Eric Apfelbach

It is not.

Unidentified Analyst

Okay. Okay. Thanks for taking my call.

Eric Apfelbach

You bet. Thank you.

Operator

We will go next to Jay Wigdale with Lakefront Partners.

James Wigdale - Lakefront Partners

Thanks. Just a couple of questions. You talked about the China grid approval. It clearly sounds like that's going slower than you expected. Is there -- have you gotten any feedback, and can you maybe define when you went in and started the process, and what their feedback has been to this point?

Eric Apfelbach

Yeah, I can give you a few, just general comments. I mean, it's taking longer than we initially expected, I would say. We get a tremendous amount of feedback. We do have equipment that they have obviously been heavily involved with. So, the feedback has been good. As I mentioned in my comments, it's probably the most rigorous testing that our product could be thrown into, on the face of the earth. So it's great from that perspective.

So, we don't -- but it is a little like peeling an onion for anybody who has worked in China with the state grid or any of the other large governmental bodies. You have to go peel the onion, there is no shortcuts, there is no easy ways to get to the endgame. So that's the mode we are in, it's just basically answering questions, and knocking down what they want to do with, as fast as these discussions and iterations happen.

So I think we are making very strong progress. What you have to realize in China is that, right now, lead acid batteries and lithium ion are the only two 'accepted' battery varieties by the State Grid. So there is somewhat of a raise to be the -- who is going to be the new generation battery in China that gets accepted. And obviously, the people who achieve that are going to have a very nice business. And some people have tried and failed. Their products have been kicked out and sent home and I don't know if they will ever get another chance.

So if that happened to us, obviously, we would tell you that.

Charles Stankiewicz

It hasn't happened yet.

Eric Apfelbach

So we are peeling the onion as fast as we can, and -- about the opportunity.

Charles Stankiewicz

And someone who has worked for the State Grid for a number of years prior to ZBB, even the whole way they set up testing and all is pretty much an iterative process. So it's almost by definition, a fairly slow process, and it doesn't necessarily mean you can complete a series of tests, but then after what they see, that series of tests, they may ask you to do other tests. They may ask you to do other tests.

So we are working through it, and I think the results are okay at the moment. They are just not completed.

James Wigdale - Lakefront Partners

But again, clearly taking longer than you had expected? I mean, that part of the strategy of your partnership with the group from [AMAC] was that they were seasoned in driving that approval process. Is that a correct assumption?

Charles Stankiewicz

You mean with Meineng, yeah?

Eric Apfelbach

With Power-Save.

Charles Stankiewicz

Power-Save and Meineng.

Eric Apfelbach

Exactly. So they are -- and that has been helpful. They have a very good, I'd say working relationship at those levels, and that's very helpful, this whole process.

James Wigdale - Lakefront Partners

And this vote that's coming up at the end of June, when you originally entered into this, Aspire, was that originally targeted to have that approval at the end of June, or is this a new development?

Eric Apfelbach

Well as you saw, when we did the Aspire deal, we only included 15 million shares under that agreement, which was not up to the full amount of that facility. We are really just trying to give ourselves extra breathing space here, so that we don't end up in a place where, obviously it takes a while to get shareholder approval. You can't start that the day before you need to do that. So we elected to do that. It was not necessarily the original intent to do it. But it's something we just want to make sure, we have all the degrees of freedom we need to get our other projects going.

James Wigdale - Lakefront Partners

Which would imply that the strategic investment or partnership that you are pursuing, is just -- isn't happening. So is there any feedback that you can address on your strategic efforts specifically?

Eric Apfelbach

Not really, Jay. I mean, we are working across a lot of different companies and entities that we work with; and all I can tell you is that it is a top objective of us to get one of those over the goal line, and we have got a team and board that has done a lot of these things before and it's probably a lot like peeling the onion of the other thing I mentioned. We have to get it done. But yeah in this environment, those sorts of agreements and the different -- you know, with ZBB being across various geographies etcetera, it takes a little while to get it done.

James Wigdale - Lakefront Partners

Then, this might be for Will, but the investment and investee company, is that China?

Will Hogoboom

Yes it is, Jay.

James Wigdale - Lakefront Partners

Okay. Thank you, and the reason for the decline in the value, I assume, it's just accumulating losses?

Will Hogoboom

Yes. Our initial cash investment was $200,000. We also contributed IP, which was not included in the investment valuation in our accounting. But the way the equity method of accounting works, when the investee has losses, we book our share of those losses, up to the amount of our cash investments. So you basically -- we have written off our cash investments.

James Wigdale - Lakefront Partners

Great. Thank you.

Eric Apfelbach

Thanks Jay.

Operator

Moving on to [Stephen Ware with SJ Incorporated].

Unidentified Analyst

Good afternoon guys.

Eric Apfelbach

Good afternoon.

Unidentified Analyst

Hello, you can hear me alright?

Eric Apfelbach

Yes.

Unidentified Analyst

Too loud or too low.

Charles Stankiewicz

No, you're great.

Unidentified Analyst

Okay. All right. How about a little more color on the significance of today's news, regarding the, what it was, why don't you fill us in?

Eric Apfelbach

Well yeah, it's very interesting. Again, for those of you that don't know datacenters, they have found that they can save huge amounts of energy by --

Unidentified Analyst

Okay, but before you go into it, why don't you cut through the chase of the significance of this. We are happy to see this come down the pike and get commissioned evidently. So you guys seem a little bipolar on your color here, regarding the future of the company, kind of wishy-washy, and if you can cut to the chase and give us a long term perspective, that'd be great?

Eric Apfelbach

Well yeah. so the announcement this morning was about using our system as a DC hub within a datacenter, all right. That seemed --

Unidentified Analyst

But still, what's the overall market? Cut to the overall market?

Eric Apfelbach

We don't know the overall market for that. Again, this is the first time, DC products have been really -- servers have been connected directly to a UPS backbone and DC lighting circuits have all been integrated with renewables in a datacenter?

Unidentified Analyst

Well, when you guys have done in a testpad, it was gone into detail. Why aren't you guys highlighting that during this call?

Eric Apfelbach

Yeah, I think we outlined it in the press release. Starline DC is an expert in this space and EMerge is pursuing this. So it is a new application. So I don't think anybody has a market size or rate of penetration of the new DC standards.

Unidentified Analyst

Okay. So listen, you say EMerge is pursuing this, what does that mean exactly? I mean, EMerge is not a go-ahead, explain what you mean by emerges pursuing this?

Eric Apfelbach

EMerge is a very large group of companies that are focused on getting all the products that you need in a datacenter to run on a new standard 380 DC. So you just can't have the server in that fit. You want --?

Unidentified Analyst

In today's press release, you are saying that's the new global standard, correct?

Eric Apfelbach

Correct.

Unidentified Analyst

So what's that global market?

Eric Apfelbach

I don't know the global market for new telecom installations.

Unidentified Analyst

What's the Lux Research you guys always refer to? I mean, you know?

Eric Apfelbach

What we have -- you know there is a lot of different third party Lux Research. If you look at our investor presentation, we have got a top level Lux global storage market.

Unidentified Analyst

All right. No problem. No problem. So what's the deal with the Marathon displeasure? That's kind of surprising, given their silence, they are buying, and what's the intent here, what's going on with suddenly, you guys communicate on a conference call, normally I would think you would speak to them on a daily basis? If not, on a monthly.

Eric Apfelbach

Yeah, I am not going to speak for another investor. We announced things today, and that's the --

Unidentified Analyst

That's a well publicized investor in your company, a long term holder of it. Suddenly he is expressing displeasure. The crux of fairly significant announcement today?

Eric Apfelbach

Right. Nobody likes delusion or any other thing like that.

Unidentified Analyst

Okay. That is all. That whole thing was very odd. But needless to say, you were touting electronics as ZBB's greater prospect as opposed to the storage, how do you view that now? Those earlier statements, you're viewing the storage as a higher contender now? Seems like that's the projects that you are booking?

Eric Apfelbach

Well you have to look from the revenue contribution. Within the company, the storage is going to occupy a higher revenue amount as we go forward. What's key about the electronics is, it enables these applications. You can't go into the Visa datacenter and do DC distribution without the electronics. So the two -- that's why the two, one is an able and one is a larger revenue and gross margin contributor.

Unidentified Analyst

Why don't you just oppose? I mean, all of these significant developments with the negativity on the paycheck to paycheck, I mean, let's be real here. And then, the biggest question we all have is the reverse split, and how that plays into, and potential bad news you may release. So where are we looking on a forward of inflexion?

Eric Apfelbach

I am sorry, what?

Unidentified Analyst

With the share price and all the other investors, and forward-looking statements, how are you looking going forward? Are you guys going to buy some stock?

Eric Apfelbach

Yeah. I mean, again I will comment on specific questions. We have specific things when insiders can buy and sell and we have to live by those rules.

Unidentified Analyst

Right. I think there has been a lot of windows of opportunity, and you guys are releasing significant news. But yet you try to be pollyannaish and bipolar regarding your opinion of the prospects for the company? I find it really contradictory. I mean, are you guys playing into the short side or are you guys truly long? And what are you going for here? I mean, you are waiting for legislation, but it seems like things are winding a little bit here for you guys, yet you are downplaying it during this call.

Eric Apfelbach

Well, as you know, we have not given forward guidance for a reason. There are a lot of moving parts. We are a early stage company, and we have to deal with that.

Unidentified Analyst

All right. I mean, okay. Right well. Okay, so what's your significance as far as -- what's the significance regarding Itron and Universal Electric? I mean, how are those guys relative to your Korean venture or even the Russia thing? I mean, you guys could just play it out as serial deluderers all the way, and so you maintain a $1 a share price, while Capstone with a $100 million market cap. I mean, where's the shareholder value that will come into play here, and it seems like you guys have some skin in the game. But we'd like to see more.

Eric Apfelbach

I mean --

Unidentified Analyst

I mean, ultimately, where is this going? I mean, you guys obviously quarter-to-quarter seem to want to be uncertain. But with these recent developments, I mean -- lets get your perspective to everybody on the call, given that nobody was even ready to queue in at the beginning, like a few quarters ago, which I find it very ironic. So what do you guys have to say? Gut feeling going forward, viability, apparently this Aspire agreement is specious, so let's hear it?

Eric Apfelbach

Well listen, again I am more than happy to respond to specific questions. We are not going to --

Unidentified Analyst

No, no. What's your gut feeling?

Eric Apfelbach

We are not going to give gut feels.

Unidentified Analyst

We don't want to hide verbally. I mean, negatively or positively, we want to hear what you think going forward? I mean, are you guys going to intend to, for your next window, take more greater stake in the company? I mean, the directors fees are absolutely incredible and everybody agrees that you guys are completely soaking this company?

Eric Apfelbach

All right, if you can --

Unidentified Analyst

No, no. It's very apparent what you guys are -- all right, well best of luck, and looks like the technology has come a long way under your tenure, and we appreciate it, and feel free to give me a call.

Eric Apfelbach

You bet. Thank you.

Operator

We will take a follow-up from [Jim Collins].

Unidentified Analyst

Yes all right. The one thing that comes to mind, are we in the UPS business now, Active Power uses flywheels to solve the problem, and now we are using our technology, which I would imagine is much more expensive than using flywheels. Just what is your take on, just somebody that we will be working with or -- with their competitors or what?

Eric Apfelbach

Our system can be hooked up in line with two UPSes or it can be operated in kind of a -- I will call it a UPS mode. Depends on the customer's architecture. We are not like a true UPS, generally like a standalone UPS, that's not our application. We will work with UPSes for critical power applications like datacenters or hospitals or things like that.

Unidentified Analyst

Okay. That's fine. Thank you.

Eric Apfelbach

Okay. Thanks.

Operator

And gentlemen, I will turn the conference back to you for closing remarks.

Eric Apfelbach

Okay. Well I appreciate everybody calling in today and for the very thought-provoking questions, and we look forward to talking to you next quarter. Thank you.

Operator

That concludes today's conference. Thank you all for joining.

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