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ZBB Energy Corporation (NYSEMKT:ZBB)

F4Q 2013 Results Earnings Call

September 30, 2013 4:30 PM ET

Executives

Eric Apfelbach - President and CEO

Will Hogoboom - Chief Financial Officer

Chuck Stankiewicz - Chief Operating Officer

Analysts

Jim Collins - Van Clemens

Operator

Please standby. Good afternoon, ladies and gentlemen. And welcome to the ZBB Energy Corporation Fourth Quarter and 2013 Year End Earnings Conference Call. 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 my pleasure to turn the call over to Mr. Eric Apfelbach. Please go ahead, sir.

Eric Apfelbach

Thank you, Operator. 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 I’ll 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’s conference call for our fourth quarter and fiscal year 2013, which ended June 30, 2013. ZBB Energy's press release containing fourth quarter and full year results was sent out on Friday, September 27th. 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 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 as 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 Operation sections of our most recently filed annual report on Form 10-K and our subsequently filed quarterly reports on 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’ll walk through the details of our financial results for the fourth quarter of 2013 as compared to the fourth quarter of fiscal 2012. Total revenue for the fourth quarter was $1,030,000, which is a 4.5% decrease from the same period a year ago.

Our product revenue in the fourth quarter of $933,000 represents a 9.1% increase for the same period a year ago. We reported $100,000 of engineering contract revenue in the fourth quarter, so work performed and milestones achieved on our R&D contract with the major U.S. technology company. We have an additional $200,000 of engineering services revenue to recognize in future periods when additional milestones are completed.

Total costs and expenses for the fourth quarter decreased approximately $1.4 million compared to last year. This was due to a decrease -- a $216,000 decrease in cost of product sold, a $745,000 reduction in advanced engineering and development expenses, a $275,000 reduction in general and administrative expense, and $170,000 less in depreciation and amortization.

For the fourth quarter, net loss was $0.03 per share versus $0.13 per share in the prior year's third quarter. This decrease in net loss per share was due to an improvement in gross margin and a decrease in operating expenses and interest expense.

Moving on to the annual results, total revenue for fiscal 2013 was $7.7 million, a $60.7 increase from the prior year, product sales of $7.3 million represents a 224% increase versus fiscal 2012.

We reported $418,000 of engineering contract revenue in fiscal 2013 versus $2.55 million in fiscal 2012. The decrease was due to revenues from a development agreement that were recognized in the prior fiscal year that did not reoccur in fiscal 2013.

Total costs and expenses for fiscal 2013 were $19.3 million, a $2.1 million increase versus the previous year, a $4.2 million increase in the cost of product sales was partially offset $900,000 reduction in engineering and development costs, an $875,000 decrease in advanced engineering and development expense and $283,000 reduction in depreciation and amortization expense.

We made -- for fiscal 2013 net loss was $0.15 per share versus a loss of $0.37 per share in the prior year. This decrease in net loss per share was due to $856,000 improvement in operating income and a $700,000 reduction in other expense.

We continue to make meaningful improvement in reducing our cost of product sold during fiscal 2013. In the fourth quarter of fiscal 2012 cost of product sold was 113.5% of sales. This improved to 92.1% of sales in the first quarter of fiscal 2013 and 81% in the most recent quarter.

For fiscal 2013 cost of product sold was 85.9% of sales compared to 91.8% last year. Controlling input costs and our ability to finance development and engineering programs to new and existing contract partners will be critical steps towards our near-term goals of cash flow breakeven, profitability and reaching our targeted gross margin of 35%.

The company’s cash balance at the end of the June 2013 quarter was $1.1 million and account receivables were $446,000. Our backlog as of today is $5 million, unchanged from our last conference call.

We anticipate to collect approximately $2.5 million in the first quarter from our current backlog and account receivable. The current rate of cash consumed by operating expenses is approximately $800,000 per month with another $200,000 per month for inventory purchases.

Last week we completed a $3 million bridge financing consisting of 3,000 shares of convertible preferred stock and warrants for common stock for a gross proceeds of $3 million. The net proceeds of the transaction will be used to meet our working capital need as we work towards finalizing strategic relationships with our large multinational partners which we expect to provide liquidity for our operations without further dilution to our shareholders.

You can also review our earnings release and our 10-K for further financial information. Thank you.

Now, I will turn the call back over to Eric.

Eric Apfelbach

Thank you, Will. I’m first going to review the status of our strategic partnerships. As we said in announcing our bridge financing transaction last week, we expect the proceeds from the transaction to provide the working capital needed for our business as we work towards the completion of the strategic partnerships with large multinational partners.

We have made significant progress with several potential partners. For obvious reasons, I can’t provide specific information as negotiations are ongoing. What I can tell you is that these deals have successfully completed include a wide range of benefit to ZBB including product licensing, research and development, manufacturing support, possible channel support and of course, working capital to help run the operation. As a result, we view these partnerships as key accelerating commercialization of our products, decreasing the time to reach positive cash flow and enhancing ZBB’s enterprise value.

For an update on some of the things on our sales pipeline, few highlights, first we received an order from a large utility company to use ZBB power electronics within the distribution level, dynamic voltage regulator. After validation testing, the potential purchase value of this device by this one utility is more than $30 million and the product can be applied on a worldwide scale with the market several times that of the initial customer.

Also in our pipeline is increasing activity with our hybrid drive controller supply agreement with Crosspoint Kinetics, which is a wholly-owned subsidiary of Cummins. Crosspoint has announced the introduction of their second generation [S300] hybrid system. This is the most cost effective retrofitable hybrid system in the class three to class six truck market.

Based on their third-party field validations, the system is shown an up to 30% fuel efficiency improvement. They expect full production of the product by the end of calendar year 2013. Now that this program is ramping up whole production, we can focus on additional versions and geographies which provide us an entry into a rapidly expanding market for retrofitable hybrid drive systems.

According to Frost & Sullivan, there are more than 260,000 class 3 to class 6 trucks on the road today. And they expect an annual run rate of over 68,000 to be produced by 2016. So this represents a sizable opportunity for ZBB.

Looking at orders in our near-term pipeline in general, the system in storage business has been weak due to the impact of the sequestration on the DOD and ending of products related to the Recovery Act. However, we continue to see an increase in proposed storage requirements on a long-term basis. Perhaps the greatest example is in California where the PUC recently issued a ruling proposing a total of 1.325 gigawatts of energy storage by 2020.

We do not expect any potential sales impact and our results were probably 18 to 24 months. To drive near-term growth, we continue to focus on opportunities outside of the U.S. Internationally, we are making great progress with the implementation of our products.

Within the next few months, we will have our systems installed in the South Pacific, Australia, Russia, also our Korean partner, Lotte Chemical, will install their first 250 kilowatt hour system next quarter in a mid-rise residential building. In addition, our joint venture partner in China, Meineng Energy, is shifting our V3 energy battery system for installation and operation that’s far in a number of microgrid applications outside of the State Grid market.

The ZBB EnerStore Battery has completed third-party safest required in China and Meineng Energy continues to work closely with the State Grid Corporation of China to ensure that the ZBB Enerstore meets or exceeds the criteria required to State Grid approval.

Now, that we have several quarters of experience with an install base, we are modifying our sales strategies a bit to commemorate the adoption of our technologies. We are asked on a regular basis about our previously installed systems base.

One area of opportunity we have identified is the need for additional software and control responsibility. We’ve made multiple modifications post insulation and our developing a plan to deploy systems on a more turnkey basis. In addition, being able to show, demonstrated operating experience will allow us to get involved earlier in the customer’s decision process.

To avoid having to make modifications later on, we are increasingly helping customers in the design and project support stages which gives us greater control over the ultimate design, greater customer loyalty and incremental and profitable engineering and support service revenue streams.

Another area of emphasis is to secure multi unit orders for our products versus the one and two unit orders, we are generally experiencing now. This will require leveraging with strategic partners and targeting high-level design makers in companies with true channel power.

Finally, many end users are taking a prove-it attitude in regards to renewable power sources. We believe there maybe an opportunity to place demo units in buildings to prove the functionality performance in cost saving attributes of our products. This depends on specific customer economics, third-party financing and help from our strategic partners.

At the same time, we are commercializing our technology, we’re also focused on continuous improvement of our product roadmap. At this point, we have a joint development program that is showing great potential. We believe the membrane project that we had talked about previously has the opportunity to offer greater efficiency and better operating performance while lowering capital and operating cost.

We’ve also launched the early stages of engineering a new version of our 500 kilowatt of our battery. This is important to hit the utility target price and performance targets. This program will be primarily funded by our various partners and benefit from the current experience in our installed base.

These units will be able to be numbered up just like our current products to enable very large installations. Our timeline for commercialization is currently plan to run in parallel with the timing of the California procurement process for the 1.325 gigawatt currently ordered by California PUC to be installed by 2020.

In regards to manufacturing, we are working very diligently to achieve an additional 10% to 20% cost savings in our volume products. Combined with other product improvements to drive efficiencies and lower cost inputs, we are on track to reach our targeted goal of 35% gross margin as we reach scale.

In summary, we’ve taken many steps over the last year to position our company to capitalize on the increasing demand for renewable energy sources and power storage systems. We made significant progress in commercializing our technology during fiscal 2013, including success in installing our technologies and multiple applications, such as microgrids, the industry’s first DC power data center, grid storage, commercial buildings and others.

We continue to secure strategic supply agreements and partnerships to introduce our products into new markets and increase sales opportunities with the near-term objective of becoming cash flow breakeven.

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

Question-and-Answer Session

Operator

(Operator Instructions) We will first go to Jim Collins from Van Clemens.

Jim Collins - Van Clemens

Hi, Eric. Jim Collins.

Eric Apfelbach

Hi Jim.

Jim Collins - Van Clemens

Can you give us little more color on this $30 million opportunity with the Utility. I guess, I didn’t quite understand the timing and -- and what’s that all about?

Eric Apfelbach

Sure. I will give you a brief and then Chuck Stankiewicz who is here also has dealt with this as well, but we booked that unit with a customer in Australia where they have long radio lines that need voltage stability.

Jim Collins - Van Clemens

Okay.

Eric Apfelbach

And we are seeing the same things in many markets like Canada, anywhere there is a -- I will call it a marginal grid and this unit is being designed right now, it will be prototyped. And we think it does have good application around the globe. So we are pretty excited about it. It looks like it can have a strong gross margin and we will have a product advantage on it as well. Chuck, I don’t think there is anything you want to add?

Chuck Stankiewicz

No. Essentially the product -- people refer to them as (inaudible) if you will in terms of the industry name. But really what it does, it provides dynamic voltage for our customer. And then as Eric said, there is a lot of applicability not only in this particular utility where they believe there is upwards of thousands of feeders that they can use as application then anywhere else, like Canada or even western United States where you have, let’s say, large loads on long transmission runs, it’s very applicable and prove very handy.

Jim Collins - Van Clemens

Was there a time-frame on it, I mean, as to when we -- this will be going to become revenue recovery?

Chuck Stankiewicz

Sure. We will be shipping the first prototypes here very shortly. They are in testing right now. We are testing prudent matter of factory. We will get it to the customer and I say start to the beginning of our next fiscal year when we would start to see, let’s say more meaningful orders with the product itself.

Jim Collins - Van Clemens

Okay. Thank you very much.

Operator

(Operator Instructions) We will now go to Richard Hicks.

Unidentified Analyst

Good afternoon. I am curious about the pricing of your recent financing, it seems to be very generous to those who participated to the point of being excessive and detrimental to your other shareholders because of the dilution, could you comment on that please?

Eric Apfelbach

Sure. Unlike many -- like many bridges, the company was definitely in need of cash and we had few options. And we pursued a unregistered security to keep the stock stable and to put it in long-term holders hand. We also could not use our aspire line due to the amount of money and the volume requirements now outlined. So, while, yeah, while on the outside it looks rich, we also wanted to show some support.

We did in this discussion of people who want to see inside support but not too much. So we had two directors acquire $250,000 a piece in support of the company and they get the bridge done. So it is a bridge financing and we felt we had to get it done in a very tight timeframe and cleanly, and so the -- so that sort of transaction we felt the terms were actually kind of market based, so…

Unidentified Analyst

Well they do seem excessive in view of your outlook and in view of not only the interest rates you are paying but convertible at half of what your last offering was that which was generally available for everybody and plus you have warrants attached. It seems to me that the pricing was not fair to your existing shareholders?

Eric Apfelbach

Okay. Thanks Rick.

Richard Hicks

Sure.

Operator

(Operator Instructions) We will now go to [Ravi Tubby].

Unidentified Analyst

Eric, thanks for taking my call. Just want to see if you can comment further on this strategic relationships, I think for the last two or three quarters on the conference calls you have been talking about developing these relationships. What companies are you working with and what advancements have you made -- and since the last -- in the last quarter or in the quarter before where you guys have been talking about this?

Eric Apfelbach

Yeah. I think, (inaudible) any more than we already have. The -- as you know, since last January we’ve been focused on getting strategic relationships that primarily could help with our channel average and help with our balance sheet because both will be critical going in these markets, so we’ve been working very hard on that obviously. We’re in a period where we’re negotiating and trying to finalize those types of agreements and we just can’t comment any further on the companies or the any specifics until those are completed.

Unidentified Analyst

Any developments where you guys are quoting along with any off-grid noble projects with these strategic relationships be with companies that would participate in that space or?

Eric Apfelbach

Yeah. There is definitely a channel leverage that we feel we can get in the off-grid power market, as well as the grid-connected market, those are two of our targets as you know.

Unidentified Analyst

Okay.

Eric Apfelbach

We feel that the area in the U.S. in many grid-connected areas this is going to be very interesting will be the commercial and industrial building space, partially because with our power electronics we really have an advantage cost equation and benefit to the customer.

So we’re looking at various applications within buildings where we can run CHP with micro-turbines. At the same time we’re managing the wind, solar, grid interface, DC in and DC out as you’ve seen in like our VISA datacenter application.

So what we’re really trying to get much better at and in my comments I mentioned about adding more software as a priority for the company, more control capability, that’s the last layer of capability we need to walk into a commercial and industrial building customer and say, okay, here’s a turnkey unit that manages all of your power flows and makes you money and it’s easy for you to do it.

None of these customers want to really fool with or are good at writing building power automation software. The more we can take of that the more of a turnkey offering will have and the easier it will be to penetrate.

I think the other thing I mentioned in this building space is that we tend to get really good reviews once people have seen our equipment and how it runs but since we’re the first one in there that’s ever done things like that. They tend to start figuring out as they go after the equipments in there.

So we definitely want to be able to walk in, start early with them and define the architecture of the system before the equipment hit their floor and that’s where we think the big opportunities are.

Unidentified Analyst

Do you still anticipate closing any of your relationships by the -- before you run out of cash again which looks like at the end of the year?

Eric Apfelbach

That would. Yeah. Normally you would structure a bridge, so you’d have enough money to get to the other side otherwise we call that a peer. So we obviously want our bridge to get us to the other side of the river.

Unidentified Analyst

All right. Thank you.

Eric Apfelbach

Yeah.

Operator

And we’ll take a follow-up question from Jim Collins from Van Clemens.

Jim Collins - Van Clemens

Yeah. Eric, what’s the latest our world battery competition and how are they doing?

Eric Apfelbach

Yeah. Good question. We see a couple of different things going around the globe. There is continued activity in vanadium redox mostly in Asia. So if you look in Asia right now you’d see there is one Chinese-based company that’s continuing to work on vanadium redox.

Jim Collins - Van Clemens

Okay. Yeah.

Eric Apfelbach

Sumitomo is also working on it. Those systems are very large and quite expensive compared to zinc bromide.

Jim Collins - Van Clemens

Okay.

Eric Apfelbach

So we don’t really see a way for them to get cheaper and smaller than we are so we think we’ve got a pretty good advantage there.

Jim Collins - Van Clemens

Sure.

Eric Apfelbach

Zinc bromide is represented in the U.S. by Primus Power in California and Premium Power in Boston. So those two companies are still working away well-funded, private and are expected to be competitors in the space, so…

Jim Collins - Van Clemens

If we got any big orders, if we’ve got any big orders because you say they are well-funded?

Eric Apfelbach

Primus Power launched their company actually with a big order before they had anything. They had a big order for agricultural opportunity in the middle of California.

Jim Collins - Van Clemens

Okay.

Eric Apfelbach

I think that was 40 megawatt hours, if I remember.

Jim Collins - Van Clemens

Yeah.

Eric Apfelbach

It’s a very large order. So they’re working on with their DOE finding to get -- now they did start out with zinc chloride and part away through their history decided to change to zinc bromide so that’s a big change.

Jim Collins - Van Clemens

Okay.

Eric Apfelbach

So I see where they go.

Jim Collins - Van Clemens

Okay. Well, thank you.

Eric Apfelbach

You bet.

Operator

And it appears there are no further questions. That does conclude our presentation for today. Thank you for your participation. Have a good day.

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