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ZBB Energy Corporation (NYSEMKT:ZBB)

Q2 2014 Earnings Conference Call

February 13, 2014 04:30 PM ET


Eric Apfelbach - President and CEO

Dilek Wagner - VP of Finance


Jim Kennedy - Marathon Capital Management

Mark Mcclain - Latinberg


Good afternoon, ladies and gentlemen and welcome to the ZBB Energy Corporation’s Second Quarter 2014 Conference Call. After prepared remarks, we will be opening the call to a question-and-answer period. (Operator Instructions) As a reminder, today’s conference is being recorded. It is now my pleasure to turn the conference over to Mr. Eric Apfelbach. Please go ahead.

Eric Apfelbach

Thank you. Good afternoon and welcome to our quarterly conference call. This is Eric Apfelbach, President and CEO of ZBB Energy Corp. And I am joined today by Dilek Wagner, our new VP of Finance and also Chuck Stankiewicz, our Chief Operating Officer. This is D’s first conference call so I’d like to take a moment to introduce her to all of you.

As we announced yesterday in our press release D was promoted to Vice President of Finance and will serve as the Principle Financial Officer of the Company. D has been with the Company since 2011 and most recently served as our Director of Financial Reporting. D will serve as our Principle Financial Officer and be responsible for our SEC and SOCS compliance, accounting and financial reporting, tax, treasury and investor relations. Congratulations D on your promotion.

For today’s call D will review the financials and then I will comment on recent changes within the organization and the status of our global strategy. At the close I’ll give an overview of our business development and sales activities. D?

Dilek Wagner

Thank you, Eric and good afternoon everyone. Thank you for joining us today for ZBB’s conference call for our fiscal 2014 second quarter which ended December 31, 2013. ZBB Energy’s press release of our second quarter results was sent out earlier this afternoon. The press release may also be found on our website at

And before we get underway, I’d like to ask everyone to take note of the Safe Harbor paragraph that appears at the end of the press release issued this afternoon which covers the Company’s financial results. This paragraph states that any forward-looking statements that we make; speak only as of the date made; are subject to inherent risks and uncertainties, including those described in our most recently filed Annual Report on Form 10-K and our subsequently filed quarterly reports on Form 10-Q; and should be unduly relied upon 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 statements.

Now I’ll walk through the details of our financial results for the second quarter of fiscal 2014 as compared to the second quarter of fiscal 2013. Total revenue for the second quarter was $961,000 versus 2.75 million in the same period a year ago. Revenue from product sales was $761,000 versus 2.75 million in the prior year quarter. We reported $200,000 in engineering and development contract revenue in the second quarter. This represents the final portion of engineering services revenue related to milestones achieved on our R&D contracts with a major U.S. technology company.

Total cost and expenses for the second quarter decreased approximately $2.5 million compared to last year. This was due to a $1.711 million decrease in cost of products sold and $281,000 decrease in advanced engineering and development costs and a $542,000 reduction in general and administrative expense. Gross margin for the second quarter of fiscal 2014 was 27.2% of sales, a 960 basis point improvement versus 17.6% in the second quarter of fiscal 2013.

For the second quarter of fiscal 2014 net loss attributable to common shareholders was $0.13 per share versus a loss of $0.20 per share in the prior year’s second quarter. This decrease in net loss per share was due to a reduction in advanced engineering and development cost and reduced selling general and administrative expenses.

Loss per share figures reflect the one for five reverse stock split that was effective October 31, 2013. The Company’s cash balance as of September 31st was $600,000 and accounts receivable was $283,051 and our backlog at the end of December including senior to do under the LOTE R&D agreement and an end of license agreement worth $8.8 million.

We anticipate to collect approximately $3.5 million in the third quarter from our current backlog and accounts receivable. The current rate of cash consumed by operating expenses in $1 million per month with another $175,000 per month for inventory purchases. Please also review our earnings release and our 10-Q for further financial information.

Now I will turn the call back over to Eric.

Eric Apfelbach

Thank you, D. Today I am going to provide an update on items during our second quarter as well as progress report on our sales pipeline and update on the energy storage mandates and items that occurred after the end of the quarter.

In December we entered into a new phase of our collaboration with LOTE Chemical. This agreement expands our relationship with LOTE who has been a very supportive partner since 2011. The agreement has two parts, first LOTE acquired an expanded non-exclusive license to sell our flow battery outside of the United States and China. This agreement provides an upfront license fee of $3 million to be paid in the third fiscal quarter and the royalty payments for sales outside of Korea until 2019. Lotte will pay the company an additional 1 million based on achievement of certain performance milestones.

Second, ZBB will design and build a next generation 500 kilowatt hour battery. Lotte will pay the company $3 million to cover the cost of materials research and development and overhead to design and build the first battery for testing in their facility. We expect this project to have about an 18 month duration in result in the most energy dense and low cost flow battery available in the market.

The objectives of both Lotte and ZBB in the collaboration is to combine our IT resources and global position to achieve the lower cost flow battery in the market. Not only does Lotte open new sales channels, their supply chain and R&D experience will also help us lower the cost and increase the performance of our batteries. Lotte's research ability is key to the membrane electrode materials and electrolyte development that we have going on.

This combines with the knowledge IT and manufacturing capability that ZBB has in Milwaukee and China to form a formidable team. Our program with Lotte is one of the three mega trend businesses that they are investing in. Because of this they are dedicating significant capital, human resources and square footage in Korea to ensure success on meeting the market requirements.

The market opportunity created by the partnership is very large for ZBB. The Korean government is pushing for hundreds of megawatts of energy storage and Lotte has the ability to install a large amount of storage on both their chemical plant sites and their retail space all over Asia. Their competition tends to be LG and Samsung lithium ion batteries, but there is no real flow battery competition in Korea.

Lotte also has key relationships in other regions of the world that ZBB does not have. The gulf region would be a great example of a possible market en-route that would be enabled by our joint effort with Lotte. We are also continuing to pursue additional strategic growth partnerships with a focus on large multinational organizations. With the recent mandate in the RFP increase and the push to renewables, many corporate candidate partners are beginning to seriously look at the landscape and notice that ZBB is a leader and one of the only pure play companies that has both storage and electronics expertise in grid storage. In addition the increased focus on smart buildings has opened up opportunity for our differentiated power router capability that we call the intersection.

With regard to our sales pipeline we continue to experience weakness in our domestic storage business due to the reduction in DOE spending related to green or clean energy installations and the DoD sequestration, in combination with the slow emergence of what we call the real grid storage market. In addition, ZBB products do not serve some of the segments well like the frequency regulation markets or the California self-generation market.

We are well positioned though and may have -- when we have many shots on goal to achieve faster revenue growth. From our current set of products and projects that are booked, we have some of the following things that are growing quickly. Follow on sales in Russia with BPC Engineering. They are currently commissioning their first inner system in their headquarters south of Moscow. New ongoing partnership with Capstone MicroTurbine and position in the remote and combined heat and power segments in Russia, give them an ability to ramp ZBB's products quickly.

Our Multi Input Power Systems, we call MIPS, is in prototype phase but is based on multiple other architectures that ZBB has shipped. It is targeting a simple, smaller, cheaper version of our intersection operating platform for use in developing countries buildings and microgrids. This system leverages the simplicity of our patented DC bus power routing into a networkable node in a smart grid or a smart building. It will have the ability to be networked and contains all of the information about power flows that a utility would want to know in a building. Of course the same system can be dropped on the ground in India or Africa and connected together quickly to bring AC and DC power to any remote location.

Our Statcom device also being prototypes for the Australian market as the first test bed. We are excited about this product as well because it appears that our ability to actively manage grid voltage at the power pull level could have many applications globally. This has the opportunity to be a high volume product that we expect to have solid gross margins.

Increased Hawaii penetration is a key objective for us, as many of you are aware we have had residential and military systems installed in Hawaii for some time. These systems have provided us with key knowledge about the market needs for both product software and hardware. Many product improvements have been implemented as a result and we are pushing hard to book additional systems. In addition the software improvements we have made, it is much easier for us to demonstrate the concept of a network of smart storage and supply response to the Hawaiian utilities. This market would also benefit from the ability to finance a project for the end customer and ZBB is working to find project finance options for their Hawaiian market.

Our supply agreement with Crosspoint Kinetics is beginning to accelerate as they push harder into both domestic and international markets. The growth in revenue for this product was delayed as Crosspoint Kinetics completed final quality and market testing and also worked off a bit of excess inventory of our controller. They appear to be in full go mode now though however.

I will provide a brief update regarding the mandates issued by the utility commissions for energy storage. We are seeing more utility regulators proposing energy storage mandates as a way to relieve grid -- relieve the grid during peak usage times and during renewables ramp periods. As previously discussed, the California PUC is scheduled to conduct first stage of their auction for 50 megawatts of the 1.325 gigawatts of storage they have mandated by 2020.

In addition Long Island Power Authority has proposed the installation of 150 megawatts of energy storage to help during peak usage and meet the future of load growth. The province of Ontario, Canada has also proposed adding 200 megawatts of storage starting with 50 megawatts by the end of 2014.

To help frame the magnitude of these mandates, I’ll use the LIPA proposal as an example. LIPA is looking for 150 megawatts of power supplied for 12 continuous hours. This requires a total of 1,800 megawatt hours of storage capacity. Put another way, LIPA would need the equivalent of 36,000 of our EnerStore batteries to meet the storage requirements. In California the PUC is mandating a total of 3.25 gigawatts of power for four hours in place by 2024. This would be the equivalent of 106,000 EnerStore batteries. Even if a small fraction of these orders represent a very significant opportunity for our company. Although the potential delivery of any product any California is at least 12 to 18 months away and the other proposals are in the preliminary stages.

Let me give you a brief update on the progress at Meineng, our JV in Wuhu, China. The China market for batteries still appears to be the largest and nearest term in the globe. China is very serious about improving the air quality in China through the use of renewables. In combination with the developing nature of their grid, it drives their need -- their forecast need for battery storage to be slightly over 40 billion by 2020, that’s $40 billion. At present, only lithium ion batteries are approved by the state grid. There are safety concerns about using large lithium ion batteries around densely populated areas however. At present [indiscernible] using vanadium redox chemistry and Meineng appear to be the leaders in the contest for the next generation grid battery.

Much progress has been made by Meineng on meeting the stringent requirements of the state grid and testing is ongoing. We will update you as specific milestones are reached and announced the by the state grid. Meanwhile Meineng is shipping product to non-state grid demo projects. In addition this quarter Meineng finished work on a prototype truck mounted version of our systems so that they could demonstrate physically dispatchable power. You can find a copy of Meineng’s press release regarding the truck on our website.

In terms of manufacturing capability Meineng now has achieved very low supply chain and manufacturing cost while meeting or exceeding all specs. They can manufacture or source everything but our plastic stack in their facility. ZBB now has tested Meineng systems at our U.S. site and the system passed all tests. This gives ZBB another excellent option on low cost global manufacturing.

In terms of operations following the end of the second quarter we made the final payment on a promissory note related to our acquisitions of Tier with the recent sale of their building and relocation of Tier’s employees into the company’s facility the integration of Tier is now complete. As part of this we signed a professional services agreement which Jeff Riker, the former President of Tier Electronics to continue to serve as our Chief Technology Officer. Jeff will be paid an hourly rate for his services and will remain on our Board of Directors. This give Jeff the ability to focus on what he loves in the product development and design cycle without the day-to-day stress of running our electronics group.

Thank you for calling today. That’s the end of my prepared remarks. We would be happy to take questions now, operator?

Question-and-Answer Session


Thank you. [Operator Instructions]. And our first question will come from Jim Kennedy of Marathon Capital Management.

Jim Kennedy - Marathon Capital Management

I just wanted to drill down a little bit on the Crosspoint Kinetics relationship. You had expressed in earlier calls there were some road bumps in terms of getting technology ready and now in the marketplace and sounds as though we are finally there and I also noticed that Crosspoint Kinetics hired a new Head of Sales or top sales executive recently looks like he’s got a strong background and just wondering if you could give us some flavor on I believe you have an initial sale into the Madison County or something like that, what status of that is? And then kind of discuss a little bit, have you interacted with the new sales executive? What the strategy is? What the pipeline may look like? Are there very specific targets in terms of [indiscernible] going after there, could you just talk a little bit more about that and now that it appears the technology is ready?

Eric Apfelbach

Sure, that is correct. They basically did another rigorous final test on the unit and have now released it for their production and they are ramping up personnel to sell it in their channel, so they are really just at that point of really pushing to see how may units they can book. We -- since it’s now out sales channel, we get secondhand information from them and we have not met their new sales executive, at least I haven’t. We deal with the Head of a Group primarily. They’re -- they know the market very well. They have great sales service and support capability throughout North America because of their current value added reseller network that they run.

And we’re excited about it because they’ve had good results out in the field. They -- it demonstrated 25% to 30% fuel savings with the unit and like I said it has passed very rigorous on road and fuel testing. So we -- mainly the role we play is that we are trying to enable them in whatever way we can to accelerate bookings but it’s mostly on their plate right now. They’re focusing on certain fleets obviously that used more start and stop applications, so a lot of school bus fleets and midsized shuttle bus fleets. And as I said, we’re basically trying to make them go faster if we can because the system is -- it’s got good gross margin, it’s robust and ready to go.

But we have had a few discussions ZBB independently just trying to see if that controller could be licensed or used in foreign markets. We do think it has got a great position and that effort is really going -- getting going now in earnest I would say now that Crosspoint Kinetics is really launching.

Jim Kennedy - Marathon Capital Management

When you say international, you mean via Crosspoint Kinetics or other organizations?

Eric Apfelbach

We preferred to do everything with -- because Cummins has really got their hand on the tailor here and so Cummins obviously is who you end up talking to when you start going international. Crosspoint Kinetics does not have as much experience with international sales and we do have the ability to take that controller and license it to other system providers. Right now, there is such a good partner that we’re really focused on making that successful. But there are opportunities probably in certain countries were neither company would want to probably put feet on the street and there may be a licensing opportunity.

Jim Kennedy - Marathon Capital Management

Is there anything relative to international, the regulations or vehicles that would necessarily call as you'd have to reengineer the product or is there a true retrofit globally as it currently exist?

Eric Apfelbach

That’s a good question. The primary thing that would have change on any vehicle is just the positioning of the variable torque motor that’s used there. The ultra-capacitors bank that we used in the controller would work as long as the vehicle is in the right weight range. And so most modern vehicles have a control system that can interface to that unit or be programmed to interface to it. It’s mainly the physical placement of the variable torque motor.

Jim Kennedy - Marathon Capital Management

Is there any clearance issue internationally or does it sit far enough on under truck where clearance is not an issue?

Eric Apfelbach

That I don’t know Jim, that’s probably -- you’re outside my level of knowledge on the engineering. There is a good CAD diagram on one of their new brochures. I don’t if they have their new brochures on their websites but there is a very good new CAD diagram they show the placement of the ultra-caps, the controller and the variable torque motor on the chassis.

Jim Kennedy - Marathon Capital Management

A final question for you Eric. Relative to kind of the sale cycle here in the U.S., how does that typically work? I suppose that they have some interest from a school system or a short half delivery service. Is that something where someone says okay we've got a fleet of any vehicles, let's put it on five or six months or is that something that Crosspoint will expect to say okay go ahead and put it on AD and then what is that process like -- I mean if somebody says go, is that a one month retrofit or does that take a long time to go?

Eric Apfelbach

The benefit of having the unit out in real buses for so long now and having such rigorous testing as people are much more comfortable going faster once they decide to use the device. So I'm sure some customers that are new to hybrids will say okay I'm going to crawl, walk, run and install a few. We've seen some other customers go right to a broader deployment though right out of the gate, because it's a more mature product at this point with a lot of credit behind it.

Jim Kennedy - Marathon Capital Management

Do you recognize revenue when you get the call that says okay, we sold 20 buses shipped product or exactly when do you recognize revenue?

Eric Apfelbach

We have a supply agreement with Crosspoint Kinetics, kind of a blanket order which they will just basically give us releases against. And so when we basically try to work with them to forecast demand there are some long lead items so forecasting demands are pretty important thing to do to keep the lead time short. And so we build to their orders and we recognize revenue when those systems leave our dock.

Jim Kennedy - Marathon Capital Management

That would be a nice [curve or] would happen let's say I came to you with a certain number of orders that maybe you didn’t have in stock. Is there a long lead time for you to get them or for you to produce them?

Eric Apfelbach

There is a [Technical Difficulty] would have to work hard on to pull in, if there was a step function change in forecast. Again they've got a phenomenal position in the market and because they have got some products that they sell to this type of fleet, they tend to -- their forecasting tends to be pretty darn good. But yes if there was a step function up I would -- everybody would say it's a good problem to have but there are a couple of long lead item parts in there that we would have to do some serious supply chain work on them.


Our next question will come from Rick Hicks.

Unidentified Analyst

Eric, would you speculate on future market opportunities for the MIPS architecture?

Eric Apfelbach

Sure, Rick. It's an exciting architecture for us, because of what I mentioned. We basically took all the benefits that we have in our intersection which is real time routing of AC and DC in and out. And we had a lot of requests starting with the off-grid market that said listen love the operation, love the flexibility, but we want to lower costs smaller, everything in a box type solution and if possible we'd like you to make it so that you could program in essence what the inputs and outputs are.

This worked especially well with our patented DC bus architecture, and we had done things like this similarly for the military, so when we engineered that for the off grid it rapidly become clear at that price point that it would be a very good product to put in buildings and this particular product can be networked together both communications wise and power wise.

So we have two kind of flavors of that unit ones that are kind of a 30 kilowatt type size. One is kind of a 60 kilowatt size and what we're excited about again is the fact that the smart building effort in the U.S. and other places is really picking up and the need for DC lighting circuits and DC card charging and DC UPS type systems, makes it a lot harder for anybody to start bolting these AC and DC systems together.

So when we look at what a building requires, this product seems to solve that very well. So we have never gone into the residential market before but this product both because of its price point and its volume manufacturing capability and its everything in a box type architecture, there's probably a good case to be made to put that in residential type applications. And so we're talking to people in those channels now about what the product would have to be, so that product I think in terms of increase in our excitement has gone beyond anything else and so we’re putting quite a bit of effort behind that right now to test those units and get them out into different applications.


[Operator Instructions]. And our next question will come from Eli Holzman.

Unidentified Analyst

Yes Eric can you expand a little more on -- you talked about China, what's going on there and that did they put your whole system on a truck that's for demonstration purposes that you are able to drive over somewhere and plug it into a grid or what can you just elaborate on that?

Eric Apfelbach

Yes the truck mounted system is interesting I have to admit I never thought I’d see a flow battery on a truck like that but in China they have so many places where they have grid constraints and they don’t want to be firing up diesel gen sets in the middle of an already too polluted area. So they challenged [indiscernible] to come up with a truck mounted version of our system and they engineered it, did a great job. They have driven the truck around with -- I think that unit has three of our flow battery on it and the invertors so you can basically drive that truck up like it was a big generator set and plug it into the load and discharge the batteries.

So it couldn’t in one of these vehicles that they put in and around most big cities so that they can rapidly recover from outages and have emergency based power that isn’t diesel based so we'll see the first truck just was produced and prototyped and now they are out trying to get a game plan for where is the market growth there.

Unidentified Analyst

So it’s three systems on there so it is 150 KW?

Eric Apfelbach


Unidentified Analyst

Three stacks and what is the status on approval by the state grid because right now you said only lithium ion's approved and I know you’ve passed a certain number tests but you are still waiting?

Eric Apfelbach

Right. We are still in testing with the state grid which is good, a fair amount of -- and there has been a fair amount of people that have failed and been sent home so we are happy to still be there. That being said we have in essence our third testing sequence going on. I like to tell people that it’s a difficult very stringent test they run but it's been extremely good for ZBB, painful but good because it's really paced our product development and many of the things that they wanted to change are benefiting us across the globe in the product.

So like I said, we have to do the testing. They just came back from Chinese New year and we are basically putting a lot of resources on getting those tests passed and we are optimistic. We made a huge amount of progress on the performance of the battery and their specific tests and after that we hope at some point here we can announce we've passed their test and have a report.

In their forecast when they say they are going to buy over $40 billion of batteries between now and 2020, obviously whatever work we put into that's worth it because we got the operation there, we have got a great team, we have got position great partners and the market is great so we absolutely have to pass that test. And so yes I am sorry you will have to stand by for an announcement really because we just don’t want to talk too much about the details of the sequence, the testing sequence.

Unidentified Analyst

And along those same lines you said that you expect to hear from other more local utilities as far as certain awards by certain dates and along with that I know you are in California on a demonstration basis how is that going?

Eric Apfelbach

Good yes, the -- it’s amazing right now there is a chart that I put together in the last six months. We went from zero mandates in RFQs up to multibillions of dollars just to North America. So it’s quite a shocking change and I right now -- every time I wake up I get an email that Italy is going to mandate storage, Germany is going to mandate storage, South Korea is doing it, Japan is doing it so we have seen this explosion of big demand. So we don’t worry about the size of the market right now. It's more timing for us and making sure the product can win any beauty contest that it has to go through.

So in North America there is primarily South Coast Edison and the CPUC effort at 1.3 gigawatts. Unfortunately some of that product doesn’t really need to ship until about 2018 to 2020. So it is out there always from a revenue perspective. obviously it would be transformational to start getting big pieces of that business. The system you -- I think you referred to we have a couple of systems in Southern California now one, is our NASDAQ system I megawatt hour that we shipped a while ago.

And that system is done its start up and sign off by the customer, the other system is we didn’t announce the location yet but it's in Southern California and a very visible micro grid and it’s awaiting actually a -- it is basically ready to go, it is waiting for some sign offs from I think their local inspectors. So we are excited about that as well because it’s well positioned, it’s very visible, it’s got some influential people working around it that are working on other large scale storage projects. So again success in these early installations that we’ve done is very key [indiscernible] within the company right now we’re spending a huge amount of our time and resources to ensure good word of mouth on the systems we’ve already got out there.

Unidentified Analyst

And then I guess the last question I have is, there is a lot of great potential. What’s our burn rate, how much cash do we have and do we expect -- what's the best potential short term to get in some revenue?

Eric Apfelbach

Well, in my comments I listed through some of the places we’ve already got systems is clearly our best potential so Hawaii, Russia, China, South Korea, and then there is -- in our funnel if you noticed I did not talk about our size of our funnel now because the numbers almost gotten strange because of all these multibillion dollar request. So right now it’s really a question of knocking some of those things down.

But we basically are focused on places we’ve already shift equipment and the partners we have. if something new, some low hanging fruit comes in that would be great. But we don’t really see that. There is a lot of island business right now that’s starting to percolate a little faster because of the immediate, the good paybacks that they have versus the $0.55 a kilowatt hour power they’ve got on a lot of the Caribbean Island, so many of those are kind of one or two systems though, they’re not the big grid systems. So we’re really focused on trying to increase these multi-unit, whether it’s electronics batters or both, we’re really doing that.

In terms of partners, I mentioned that we’re looking for more strategic partnerships. That’s both because it will help our cash flow so that we don’t have to sell equity to finance the company but also we’re looking at sales channel average and also manufacturing scale. We have the ability to ship 1.5 megawatt hours a month out of our Milwaukee facility and probably a fairly similar number out of China right. Both are rampable but we don’t really want to -- we've always envision that at a certain volume like most companies when things are stable and ramping, we’ll convert to a contract manufacturing type relationship.

And so those are the sorts of things that you’ll see us do as we ramp so that we don’t have to worry about building a new manufacturing facility or anything like that. All of our products are very transferrable with contract manufacturing, which is good. And so that’s where we’re focused.


Our next question will come from Mark Mcclain, Latinberg.

Mark Mcclain - Latinberg

How you’re doing? I’ve asked you just wanted to touch base a little bit further with respect to some of the commissioners allowing and then pushing the storage and allowing it to be rate based item with these utilities. If I remember correctly years ago there was a large utility in California that was testing, I believe it was like 1 megawatt battery. And then while you mentioned the stuff to be in compliance, doesn’t come until 2020. I believe on this call you mentioned something about LIPA and their push, I thought you said ’24. Have you tested any of your batteries with LIPA or is that just something that is just an opportunity that may come to fruition?

Eric Apfelbach

Yes, we have not tested anything with LIPA yet. Their request is fairly new and they’re early in their process. It’s also a very large request with very large minimums. So the suppliers that put storage if they actually contract that the way it’s currently being defined, very large minimum orders. So ZBB again would partner with a larger developer in that case and experience grid storage company and supply the equipment. So it’s exciting but it also excite -- we’re going to jump from to do something like LIPA, you're jumping from one z, two z up into the 1,000s of systems.

But that’s actually what’s important about our business strategy and the way we’re positioned. It’s not accidental that we have partners and we’re producing and we’re currently designing a 500 kilowatt hour block that’s going to very energy dense and low cost. That’s all coming together at the same time these market opportunities are. So you won’t see us shipping 36,000 of our 50 kilowatts units, this would be 500 kilowatt hour blocks designed just for that type of application.

So in terms of California they ask for a four hour discharge which is right in the center of our wheel house for our zinc bromide flow battery. LIPA was asking for a 12-hour discharged time to cover their demands and that’s a significant challenge, we can certainly do that it, just increases the size of the battery even more.

Mark Mcclain - Latinberg

So in California you’re really, you’re out there, you’re testing your products but you're really not expecting any significant purchases if you will until in 2018 or so?

Eric Apfelbach

Actually, I’m glad you’ve asked that question because these big like the SCE RFQs get a lot of attention and everybody looks at it and chases it. There is actually massive opportunity in California for both behind the meter storage which is actually our specialty, and also good connected systems with the Commons and they basically have different issues and different decision, trees different RFP processes. And so we’re actually believe that some of the best opportunities in California will not beat these big flashy mandates but other places in the state deploying storage to relieve their issues. There are even things within the state regarding irrigation, trying to get backup power and electricity that doesn’t fill the San Joaquin Valley with diesel pollution.

They want to get renewables. They need battery storage. They need microgrid type solutions for electric water pumping and irrigation. And as their water problems get worse, that problem has come to forefront. So again we’re seeing many-many opportunities any one of which would be a significant win for ZBB. So we were focusing on all of those and we’re increasing our effort in California quite a lot, in terms of trying to make sure we're aware of all these different things that are emerging and also have -- it’s both political [indiscernible] and the strategic sales model, you got to run in parallel in order to win some of these awards. So we’re clearly focused on California. I think California in near term will be the largest storage market in the U.S.

Mark Mcclain - Latinberg

And when do you think these results -- the bidding process, if you will, will occur and when will you know if you have the business or not?

Eric Apfelbach

It depends which one you’re referring to. I think you’re going see decisions being made on all these different things over the next -- continually now actually. There is -- in my remarks I mentioned the real market. This -- what we’re seeing right now is the emergent “the real market,” There is real needs, the products are becoming mature enough to service those. There is policy being formed that can easily enter your storage into some of these applications.

Perk is looking at allowing rate basing of storage which would be transformational to our business. It makes total sense, it’s another grid asset that’s needed, why should you not be able to put it in the rate base, right. So we expect these things to happen, it’s really hard to predict when especially in California. So I think you’ll see just a crescendo of activity here over the next few years as this “real market” is emerging.

Mark Mcclain - Latinberg

And in the interim, if you believe someone else asked about the burn rate if you will and my understanding is this JV that you have with Lotte Chemical, kind of reduces any capital needs at least for the next 12 to 18 months, is that accurate?

Eric Apfelbach

Yes, if you think of our business, it basically pays for a significant portion of our overhead, so all of our engineering earnings going into the battery, really all the materials all the designs for a next generation battery. So the company doesn’t have to pay for that which is phenomenal. And when you look at the size of that deal obviously it was all non-dilutive, right. So when we talk about, we don’t really quote what our net burn is after the Lotte agreement. But in reality, our net burn's lower than the number we quote for total expense in the company.

CapEx wise our facility is capable of probably producing about $40 million of revenue, right now, and our breakeven cash flow point is below that. So we don’t have a big CapEx budget of the new CapEx that might be spent maybe done in Lotte’s facility and not in ours. The conversion then to contract manufacturing would also honestly it could be a negative CapEx expense, right. If we transition manufacturing to a contract manufacturer we would probably transfer some of our assets to them in exchange for cash, that’s one way to do that.

So we have a lot of options there and we’re working on all of those, just for those reasons. We basically everything we do right now is to grow the revenue, make sure our gross margins are meeting targets, and that’s all to get cash for positive as soon as possible. For those paying attention on our headcount and we've gone from 80 to 60, we sold the Tier building moved everybody into our building. So we've taken quite a few actions to adjust our overhead and footprint to the current reality in the storage market. There is a limit to how small we can get though especially when we see -- if you listen to the products that we have it's all on -- ready to launch. We do have to stay in a posture where we can shift to Commons, shipped to Russia, ship to North Korea or South Korea rather. And so that's kind of our conundrum now, it's like boy we have got a lot of upside with all of the places we have deployed product and we also have to support it. Like I said it won't do us any good to have product out in the field if we can't support it and make those customers happy. And so that's all -- that’s where we are right now. I think just kind of reduced our footprint about as much as we can without sacrificing our future.


At this time we have no further questions in queue, so I'll turn the call back over to Eric.

Eric Apfelbach

Okay, thank you everybody for attending the call and we appreciate it. And we'll talk to you next quarter. Thank you.


Thank you. That will conclude our call for today. Thank you all for your participation. You may now disconnect.

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