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ZBB Energy Corporation (NYSEMKT:ZBB)

Q3 2014 Earnings Conference Call

May 13, 2014 04:30 PM ET

Executives

Eric Apfelbach - President and CEO

Dilek Wagner - VP of Finance

Analysts

Jim Kennedy - Marathon Capital Management

Operator

Good afternoon, ladies and gentlemen and welcome to the ZBB Energy Third Quarter Fiscal 2014 Earnings Conference Call. After prepared remarks, we will be opening the call to a Q&A period. (Operator Instructions) 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. Mr. Apfelbach please go ahead.

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 am joined today by Dilek Wagner, our new VP of Finance. For today’s call D will review the financials and then I will comment on the status of our global strategy and walk through an overview of our business development 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 third quarter which ended on March 31. ZBB Energy’s press release containing third quarter results was sent out earlier this afternoon. The press release may also be found on our website at zbbenergy.com.

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 covering 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 third quarter of fiscal 2014 as compared to the third quarter of fiscal 2013. Total revenue for the third quarter was $4.57 million versus $2.12 million in the same period a year ago. Revenue from product sales was $822,000 versus $2.02 million in a prior year quarter. Engineering and development contract revenue in the third quarter was $750,000 and was related to the Lotte research and development agreement. License revenue for the third quarter was $3 million, this represent a one-time upfront payment from Lotte Chemical for the non-exclusive license to sale our batteries. Gross margin for the third quarter of fiscal 2014 was 33.5% sales versus 12.8% in the third quarter of fiscal 2013.

Total cost and expenses for the third quarter decreased $319,000 compared to last year to approximately $4.6 million. This was primarily due to a $198,000 decrease in engineering and development costs and a $137,000 decrease in depreciation and amortization expense. The $1.2 million decrease in cost of product sales was offset by a similar increase in general and administrative expense. For the third quarter of fiscal 2014, net loss attributable to common shareholders’ was $67,945 or roughly breakeven on a per share basis versus a loss of $2.8 million or $0.18 per share in the prior year third quarter. Loss per share figures reflect the one for five reverse stock split effective October 31, 2013.

On March 19, we completed a secondary offering of common stock. We issued 6.325,000 shares of common stock at a price of $2.25 per share for net proceeds of $13.1 million. The company’s cash balance as of March 31st was $13.4 million. Accounts receivable were $580,000 and our backlog was $5.2 million. The current rate of cash consumed by operating expenses in approximately $1.1 million per month. 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. We have a number of new shareholders on the call today following our recent equity offering, so I will include some general overview information in my comments today. I will also review the multiple shots on goal that we have available as well as highlights from our third quarter and subsequent items following the end of the quarter. As D mentioned, we received the $3 million license fee from Lotte Chemical in exchange for non-exclusive right to sale our flow batteries outside of the United States and China. For those of you who are new to the ZBB story. Lotte is an $18 billion corporation and has been a committed partner with us since 2010.

In addition to the license fee and funding for the 500 kilowatt hour flow battery project, they have made significant investments in their own production facilities. In addition to the license, we also completed the first progress milestone contained in our research and development agreement to design and build the new 500 kilowatt hour flow batter product. This is a very key product effort for ZBB, because this new design incorporates all of the performance improvements and cost reductions that ZBB has identified over the last few years, and packages them in a grid scale energy dense product to serve the multi-megawatt opportunities that are arising. It’s our belief that we will need this product in order to head our $500 per kilowatt hour sale price and 35% gross margin targets.

Lotte is also ramping their stack production facility in Korea and plans to produce initial runs from the factory in the fourth quarter of this year. This is also very important as it secures a second source and additional capacity without ZBB spending the 10s of millions of dollars in CapEx needed for a state-of-the-art facility. ZBB and Lotte are collaborating to ensure that exchange of knowledge and expertise leads to improved processes and performance and better market prices.

Many positive results have been realized through our collaboration with Lotte and we expect that to continue. In addition, we are in discussions with Lotte to structure a supply agreement that would include ZBB’s chassis frame, internal components and power electronics. Lotte will source the electrolyte and manufacture the stacks to be placed inside the chassis for their end-customers.

Our project at the University of Technology in Sydney, Australia, has been installed and has being commissioned now. This 100 kilowatt hour system has a PV array, a wind turbine, a thermal generator and a fuel cell connected in a grid independent mode. It will serve as an excellent demonstration facility for other customers in the Australia market. In addition, we have tested and shift our new StatCom product to Ergon Energy in Australia, which serves around 700,000 customers in Queensland. This unit has passed complete functional and power lab testing, both at ZBB and Ergon.

The equipment will be placed in the field in the coming weeks. Field qualification for this product will be measured in quarters in order to get the utility enough reliability data in the harsh full mounted installation. Based on the successful lab testing, however, we are now beginning the effort to sell this product in other target markets that are typified by high concentrations of PV and/or dynamic loads or long power line runs.

Our 2 megawatt hour project at the Brando Resort and Tahiti is also in the commissioning process. As they continued to optimize the operation of their power system, they decided to purchase one of our 125 kilowatt inverters which we expect to ship by the end of June. Initially, that system did not include any electronics from ZBB.

In China, we continue to focus on our internal testing of our flow battery with Meineng Energy. While the testing to meet the requirement of the State Grid is taking longer than expected, we are still ahead of our advanced storage competitors in the process. China represents one of the largest global opportunities for energy storage. While we work to secure State Grid acceptance, Meineng will continue to book and ship product to sites that do not require State Grid sign-off. These opportunities are primarily off-grid, micro-grid or customer demo facilities. Meineng’s positive engineering, manufacturing, supply chain, and testing contribution, to the global growth objectives of ZBB, continue to get stronger.

Our multi-product or multi-input product hour systems, or MIPS, product is continuing to move through product testing, and are expecting to ship in the next few months to the end customer. Our MIPS product is designed to be a simple, smaller and cheaper version of our intersection operating platform for use in developing countries in micro-grids. We currently are prototyping both, a 30 kilowatt and 60 kilowatt, system. We are targeting off-grid and military markets first, powered by the commercial and industrial building space, second.

Our Cummins Crosspoint project continues to focus on ramping their business, and we are nearing the point where they will have used up the inventory there to accumulated during their recent test and launch phase. We will announce when we receive additional release is against our existing supply agreement with Cummins.

We are also nearing testing of our new product that we booked with TLZ for the run-of-river power generation market. TLZ will connect this paddle wheel type device to our 125 kilowatt converter in our Menomonee Falls, location if all goes well this end product will shift to a customer in India next quarter.

In Russia, BPC engineering is integrating our EnerSystem which consist to both of ZBB EnerStore, EnerStore flow battery and the ZBB EnerSection power and energy control center with the Capstone microturbine. This system is more efficient than operating diesel generators while the recent escalation of tensions in Russia has caused some concern for the ramp of the business. We have not heard of any direct impact the sanctions have had on BPC or our business interest in Russia.

Our domestic sales have been negatively impacted in recent quarters due to the sequestration and end of tax credit and subsidies for green energy projects. Last month, the U.S. DOE announced plans to offer up to 4 billion in loan guarantees for renewable energy projects, including advanced electric grid technology and storage and energy efficiency improvements.

The DOE has targeted very large projects and developers with this, and the expense level needed to participate certainly separates the man from the boys. Our ZBB’s not yet identified a project that would be applicable for this program we are continuing to look for our match.

In regards to the energy storage mandates that had been previously announced, there are been no significant updates from the California PUC or Long Island Power Authority. We believe the South Coast Edison will announce the short list for the first 50 megawatt RFQ in June. ZBB was notified days ago that we’re really only Battery Company to get shortlisted as a prime contractor for the 40 megawatt imperial irrigation district so hesitation.

Only nine firms out of 150 applicants were shortlisted so we are very happy with this outcome. Our long discharge capability is a great fit for this need. Many hurdles will have to cross in order to win this business but we believe that imperial irrigation wants to test multiple technologies.

Our strategy of being system supplier with knowledge and products across both batteries and power electronics give us an advantage in these sales situations. Another emerging market opportunities has been filled by the recent cornered enhanced lower reduction rebate program. This includes direct rebates for storage demand response controls, combine ethane power and others.

There is a 400 megawatt hour program tap for energy storage that is worth approximately $250 million in rebates. This is all customer side of the meter installation, in other words it’s a perfect fit for ZBB’s product set. As we prepared for the additional sales opportunities ahead of us, we’re looking to add staff for mainly in our sales and technical areas. Recently, we announced the hiring of Ted Peck as Sales Manager for Hawaii.

Ted’s background in the private and public sector including serving as the energy administrator for the state of Hawaii and with Johnson Controls should prove very beneficial as we extend our relationships with the state utilities and then users including the potential installation of backup systems to the 6,000 elevators in the state.

Hawaii is the canary in the coal mine for distributed generation and distributed smart storage. Our product is uniquely qualified to give both the utility and building on what they need to manage high penetrations of renewals. Let me close with an overview of our system level product strategy.

We have seen a noticeable increase in articles trumpeting the need for distributed generation and distributed smart storage which has been our strategy for the last four years. Conventional power electronics limit you to stick built approaches requiring multiple grid interconnects and independent dispirit software communications schemes. This approach results in limited functionality and creates layered risks. Also you can’t readily or cost effectively add or reconfigure sources of generation. ZBB equipment allows you to take control of your power using integrated full proof energy management platforms. Our approach provides systems that are flexible and scalable to prioritize and optimize all generation sources.

We ensure that you simple and proactively use the most cost effective reliable power available regardless of the variability of renewable, grid outages, rate structures and other factors. Think of ZBB intersection as a micro grid in a box, it’s a resourceful and intelligent router sensing, pivoting and collecting multiple sources of power, leveraging renewable, the grid and energy storage to ensure the load gets the most reliable and cost effective power it needs -- when it needs it. In addition, you can limit or completely eliminate the need for diesel gen sets and the costly infrastructure and emissions compliance requirements.

In addition, data is becoming more powerful and the ability to monitor collect and understand the costs associated with power drive and power delivered is a value. ZBB is working with partners and with internal software development to position our customers to benefit from that value. With the targeted software functionalities ZBB technology will continually assess and prioritize three critical factors of building power and the associated costs. One the utility demand response signal via open ADR. Two, the local building management system of analog signals and three, onsite generation dispatch to leverage time of day peak shifting.

In addition to demand response that relies on just turning things off, a utility or owner operator can take advantage of our supply response concept and operate a fleet of storage assets to maximize value; this is the future of the smart grid as we see it. It’s an exciting time in the grid storage business as we’re seeing a rapid escalation of mandates and RFP activity; it’s as if everyone went from talking about it to doing it. The global energy system is a big ship to turn however but all of the drivers that we see seem to be pushing in the right direction.

Thank you for calling in today. We’d be happy to take questions now. Operator.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We’ll take our first question from Jim Kennedy from Marathon Capital Management.

Jim Kennedy - Marathon Capital Management

Quick question, you mentioned that you are about to I guess we’ll it burn off the inventory at Cummins. Can you say how much was deposit or inventory with them?

Eric Apfelbach

Yeah, it was in the range of 50 units or something like that but they had accumulated that was outside of their normal demand. So they have now gone through most of that.

Jim Kennedy - Marathon Capital Management

Alright. And can we assume that they went through most of that once they really started remarketing this a month or two ago?

Eric Apfelbach

Yeah, they exactly -- they started remarketing they did an extensive retest. I think as I mentioned in our last call. So right, they’re just basically have take up that slack and hopefully going to just continue to growth their business from here, that’s what our expectation is.

Jim Kennedy - Marathon Capital Management

Okay. And would that take the form do you think of them restocking of could they order these two a month or five a month or whatever, what’s the lead time here?

Eric Apfelbach

Well, we have an open PO and supply contract with them. So I would expect them to now get more into a normalized release schedule against that order. There is a -- some of the lead times in the product are fairly long, so it does require them to plan ahead. But again it should become much more of a normal supply chain type ordering process now as they ramp and they get more confident in their forecast.

Jim Kennedy - Marathon Capital Management

Okay. And do you know the types of businesses that these 50 went into?

Eric Apfelbach

Most of these are fleets mid small -- I would call them smaller fleets of mid-sized buses. So, one of their primary early participants in their program were these mid-sized school buses. But all indications I’ve had is they’re smaller and mid-size fleet customers.

Jim Kennedy - Marathon Capital Management

Okay. And also surprised that they haven’t not come back to you for, let’s call it a reorder, as you say, getting in the normal ordering pattern. If you feel like they’re almost through their 50, and that require some kind of lead time to get these, wouldn’t they be coming back by now or is that lead times 30 day, 60 days, 90 days, I mean what do they need?

Eric Apfelbach

Well, yeah, there are various components in there. There is a pretty big diversity of lead time of the components that go into our system. So, we were able to manage some of that but not all of it. So, I think we’re nearing that point we’re right they will have to do a release. We just -- as I said in the comments, we’ll announce that probably when we book it.

Jim Kennedy - Marathon Capital Management

Okay.

Eric Apfelbach

So we’re right at about that point.

Operator

(Operator Instructions) And with no further questions in the queue, I would like to turn the call back over to Mr. Apfelbach, for additional or closing remarks.

Eric Apfelbach

Okay. Thank you everybody for calling again. We look forward to speaking you next quarter with our general update.

Operator

This does conclude today’s conference. We thank you for your participation.

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