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ZBB Energy Corporation (NYSEMKT:ZBB)

F4Q2012 Earnings Call

September 07, 2012, 11:00 am ET

Executives

Eric Apfelbach - President & CEO

Will Hogoboom - CFO

Chuck Stankiewicz - COO

Analysts

Barry Kitt – Pinnacle Funds

Operator

Good morning ladies and gentlemen and welcome to the ZBB Corporation annual earnings conference call. As a prepared remarks, we will be opening the call to a question-and-answer period. (Operator Instructions) As a reminder this call is being recorded.

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

Eric Apfelbach

Thank you. Good morning everyone and welcome to our quarterly conference call. This is Eric Apfelbach, President and CEO of ZBB Energy Corporation. I will be joined today by Will Hogoboom, our CFO, and Chuck Stankiewicz, our COO. First, Will review the financials and then I'll give you a brief update on our status of our global strategy, our operating activities, and close with an overview of our businesses development activities. Chuck is attending today and will answer questions during the Q&A period on all of the operating and engineering activities. Will?

Will Hogoboom

Okay, thank you Eric and good morning everyone. Thank you for joining us today for ZBB’s conference call for the fourth quarter of our fiscal year ended June 30, 2012 including this discussion of our financial results.

ZBB energy’s press release containing fourth quarter results was sent out by market wire yesterday September 6 after the market closed. The press release and that should be found 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 section. Forward-looking statements which are based on certain assumptions and describe our future plans, strategies and expectations can generally be identified by the use of forward looking terms such believe, expect, may, will, should, could, seek, intend, plan, estimate , anticipate, or other comparable terms.

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

Forward-looking statements involve inherent risks and uncertainties which could cause the 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 the 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 as such our quarterly reports on Form 10-Q.

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

Now I will walk through the details of our financial results for the fourth quarter and the year. Revenue for the fourth quarter was $1.1 million which was down 21% from the same period a year ago. It is important to note that with the commercialization of our new ZBB EnerSystems products the company’s model is transitioning and product sales will continue to grow as a percentage of overall revenue.

As such, during the fourth quarter we saw a 29% increase in product sales from the same period a year ago while engineering services declined 68%. Engineering services will continue to be an important part of our business going forward, but the lumpy nature of this business may make comparisons more difficult as was the case during the fourth quarter.

Revenue for the year was $4.8 million representing a 167% increase from fiscal 2011. Also for the year, product revenue increased 145% and engineering services increased 189%. Total costs and expenses for the three months ended June 30, 2012 increased approximately $2.1 million which was primarily due to the following factors.

Cost of product sales in the fourth quarter increased $704,000. This increase was partially due to our yearend recalculation of the manufacturing overhead rate and inventory costing which was also applied to cost of product sales for the first three quarters. As such the reported cost of product sales in the fourth quarter includes approximately $149,000 of yearend adjustments that do not relate to fourth quarter product shipments.

The actual cost of product sales for fourth quarter shipments was approximately $822,000. These costs are higher than the planned ongoing costs due to start up production costs, higher initial material costs for low volume purchases and the initial low production volume. Advanced engineering and development expenses increased $1.5 million due to the company's engineering and development activities for our ZBB EnerStore and ZBB EnerSection systems which included preproduction development and pilot plant operations, prototype production and ETL testing in the June 2012 quarter.

SG&A expenses increased $347,000 due to planned increases in sales, marketing and administrative personnel which resulted in an increase in salaries and related expense of $241,000 and the increase in stock-based compensation expense of $386,000. These increases were partially offset by decreases in several other expense category. Total cost and expenses for the twelve months ended June 30 2012 and 2011 were $7.3 million and $10.6 million respectively. This increase of $6.7 million was primarily due to the following.

Cost of product sales increased $1.5 million due to the increase in commercial product sales. Cost of engineering and development expenses increased $514,000 due to activities related to our engineering and development agreements including the Honam and US Strategic Partner contracts.

Advanced engineering and development expenses increased $2.7 million due to our engineering and development activities for our ZBB EnerStore and ZBB EnerSection systems, again which included our pre-production development, pilot plant operations, prototypes and ETL testing.

The $1.1 million increase in SG&A expenses was due to previously mentioned [planned] increase in personnel, which results in increase in salaries and related expense for the year of $666,000.

We also had an increase this year of a $152,600 due to the inclusion of Tier Electronics SG&A expenses for 12 months and fiscal year 2012 compared with five months and fiscal year 2011, and we had an increase in stock based compensation of $570,000 for the year. Again, these expenses increases were offset by some decreases in other expenses.

Depreciation and amortization expense increased by $1 million this year, due primarily to $435,000 of additional amortization of intangible assets related to the Tier acquisition that occurred in January 2011 and $319,000 related to changes in estimated lives for certain assets.

The balance of the increase was due to property, plants and equipment additions which remain related to ZBB EnerStore and ZBB EnerSection production equipment and capitalized facility expenditures.

Other expenses increased by $1.5 million for the year. This increase was due to approximately $842,000 of discount on the $2.6 million convertible debt financing, which related to the accounting rules that required us to record a discount on this convertible debt based on the valuation of the warrants that issued with the debt and the conversion feature of the debt.

We also recorded $228,000 of convertible debt issuance costs as interest expense. The discount and the debt issuance costs will fully amortize to expense in the fourth quarter of fiscal year 2012 because the convertible debt was paid in full in June 2012.

The remaining portion of the increases in interest expense was due to new debt including the Tier acquisition debt and there was (inaudible) Department of Commerce $1.3 million, 2% financing.

For the fourth quarter, net loss was $0.13 per share versus $0.08 per share in the prior’s year fourth quarter. And company’s net loss for the 12 month ended June 30, 2012 was $0.37 per share compared to a net loss of $0.38 per share for the 12 months ended June 30, 2011.

On June 19, 2012; we closed our other written secondary offering yielding net proceed of $10.8 million and on July 5, 2012 we closed the overallotment option for $1.6 million yielding total net proceeds of $12.4 million.

We regained our previously issued convertible debt in June 2012 with the proceeds from the offering. The company’s cash balance at the end of the June 2012 quarter was $7.8 million. The company’s current cash balance as of the date of this earnings release is $5.6 million.

Our current backlog is $6.2 million including product backlog of $5.7 million and engineering contract backlog of $500,000. Of this $6.2 million of backlog, we have received $1.3 million in advance payments from customers.

Thus shipment of the product backlog will result in $4.3 million of cash flow to the company. The engineering contract backlog will result in cash flow of $75,000 per quarter for the next five quarters.

We have procured the majority of the inventory required to fulfill our backlog and therefore we expect the majority of the product and engineering contract backlog to result in net cash flow to the company of approximately $4 million.

Our current cash burn not including inventory purchases is running approximately $900,000 per month in fiscal year 2013 and we expect the net cash burn to decrease during the year as we generate cash flow from the backlog.

We implemented MRP system during the last fiscal year which enables us to closely coincide plant materials purchases with production requirements to further manage our cash and working capital.

Overall, we believe that we have excellent systems and skilled personnel in place to manage and forecast cash. In summary, we have achieved record yearly revenue and we have strengthened our balance sheet with our stock offering in June to provide sufficient liquidity to reach EBITDA positive on our production activities this year.

Thank you. Now back to Eric.

Eric Apfelbach

Thank you, Will. So this was a busy quarter at ZBB. 2012 produced record revenue and we expect revenue to accelerate from here. As backlog and shipments continue to grow, we expect our bottom line to improve at a greater pace as incremental revenue is leveraged over our fixed cost.

In short, we expect all of the components of our business plan to converge this fiscal year and drive us to a cash positive company versus a cash burning company.

Over the last two years, our team has designed and developed a new generation of EnerSystem to provide the right solution for the problems that grid is facing today worldwide.

We have also built the infrastructure and partnerships to bring the product to market in some of the largest and highest growth markets including North America, China and Korea.

Since our last call, we made several achievements. Some of these were key to enabling our revenue growth plan. First, we shipped for ZBB systems to clients around the world and we shipped components for 10 of the ZBB EnerStore to our China joint venture partner for a assembly during the fourth fiscal quarter.

Second, we signed a contract to provide a power management system to SPIDERS which stands for Smart Power Infrastructure Demonstration for Energy Reliability. This is in the Department of Defense and that product will be installed at Pearl Harbor in Hawaii.

Third, as Will said, we completed a secondary offering a little over $12 million in net proceeds. This has provided a much stronger balance sheet and should be sufficient to meet our goals being cash flow positive by the end of this current fiscal year.

Fourth, we promoted Chuck Stankiewicz to COO. Chuck has been with us been now for about almost a year and he has been tasked for lowering our production cost and ensuring our ability to deliver products worldwide.

If we successfully install and commission the 500 kilowatt hour energy management system including ZBB EnerStore storage and ZBB EnerSection inverters on the Illinois Institute of Technology Campus that's part of their perfect power micro grid.

Six, we received repeat orders from our China joint venture for over $600,000. And finally we received the ETL listing to UL 1741 standards for our 125 kilowatt inverters. Regarding our recent installation at the IIT campus. I was at the IIT campus for a few days after our installation, which by the way was completed over a weekend in essence. The installation includes an EnerSystem comprised of 500 kilowatt hour modules. This is [10-B3] modules. They're capable of both grid tie and off grid operations via 250 kilowatt EnerSection consisting of two 125 kilowatt inverters.

The IIT installation was important for ZBB because it's the first perfect power grid of its kind in the U.S. The IIT Perfect Power Microgrid is a showcase for multiple renewable energy resources such as solar and wind, fast electric vehicle charging stations and the use of energy storage in an optimized real world microgrid applications.

The DOE, a sponsor for the Microgrid system hosted a workshop at the University in early August where our EnerSystem was showcased as an integral part of the future sustainable grid. For ZBB, it demonstrated our vision of manufacturing and easy to assemble battery module that can be easily configured and applicable from 50 kilowatt hours up through multiple megawatt hours.

I demonstrated in [watts] many attendees through our technology to numerous -- showed the technology to numerous investors suppliers and government representatives. And they were all very impressed with the installation and the potential savings from utilizing our EnerSection inverters and EnerStore storage components.

Numerous competitors have realized the need for a control system like the one we have developed. Our competitors in the industry, are now coming over to this strategy we have pioneered and distributed smart storage versus centralized storage. Our competitors have one big problem however they don't have an EnerSection platform so they can't actually operate effectively in this mode.

I also had multiple conversions, with suppliers partners and competitors at which they had penetration into the high growth markets like China that ZBB has established. When Lux Research said we have a $113 billion grid storage market in 2017 and over $40 billion is in China and Japan alone, our current capability to sell in those market will pay off handsomely.

Regarding operations, two quarter ago we said that we are in inflection point and I'm happy to report that we are now in the growth side of that inflection point. During our last conference call we suggested that a measurement of our success and transition to a commercially oriented high volume manufacture would be our ability to shift systems to different customers in multiple applications. Since July 1st we have shipped 25 EnerStore V3 modules together what EnerSection power and energy control components that will used in multiple projects that are located throughout the United States and Hawaii.

The size and scope of the projects that will go live over the next several months included grid and off grid applications, large are one megawatt hour and small 50 kilowatt hour amounts of storage and require either 25 kilowatt or 125 kilowatt ETL UL 1741 inverters. Earlier this week we announced the ETL listing of our 125 kilowatt inverter to UL 1741 standards. As you all may recall we expected this certification before the end of the fiscal year, but a few days were experienced at the ETL facility that required the overall schedule to run longer than expected.

The actual testing was completed in July as noted by the ETL listing in the 125 kilowatt inverters for the IIT microgrid project in Chicago that was commissioned in July, but the final paperwork was required to complete the certification was not received until recently.

In the same press release we mentioned the decision that we have made to delay the introduction of our 60 kilowatt inverter. The primary reason for this decision is based on the fact that our current backlog and the pipeline of order opportunities indicates that our grid time needs can be readily served by the use of the 25 kilowatt and the 125 kilowatt inverters either in single or multiple inverter configurations. If in the future a defined need for 60 kilowatt is determined we will reintroduce the product at that time.

As we mentioned in our last call the product development efforts have begun to take the natural shift from ensuring initial product success to a new phase focused on system refinement and product cost reduction our initial installations have demonstrated that the EnerStore and EnerSection products that can be commercially deployed, but it has also has provided us with a road map towards continues improvement and optimization.

Our engineering team is taking this information and working diligently on simplifying this is code for cost reduction, both the components that comprises system and the system itself, since a high percentage of our system cost is materials considerable cost reductions can be gained replacing customized components with readily available ones. Although our controls, concepts, and software will always remain unique to ZBB, the simplification of the system design and components will lead to substantial cost savings and lead time reduction, both critical to the success of the company.

As stated in our May call product cost reduction is essential to success of ZBB we have previously stated that our goal is to achieve a 30% reduction in materials cost our V3 battery module from its initial bill by the end of this calendar year. We can confirm that these goals are on track, and that we are beginning to experience the benefits of both value engineering and globalization of our supply chain in reducing the overall product cost.

Regarding sales although we clearly saw our bookings progression through our funnel slow down a bit over the summer, we continue to be encouraged with the increasing quality and quantity of opportunities in our sales pipeline. As we have mentioned in the past, we expect that bookings to be lumpy due to the nature of our customer base and the fact that we’re entering a new market with a new product. We expect product sales to increase as we move in to the fall and our customers design orders for the many projects we have in the funnel

In addition, we recently added Tony Siebert to the team as VP of Sales and product marketing. Tony brings over 20 years of experience in sales and engineering with ABB and American Superconductor and he is focused on the utility and industrial segment worldwide.

Our sales funnel now contains multiple projects where 500 kilowatt hour size unit will be used by itself or in groups. We’ve seen multiple applications where our value drivers are strong for the end customers and they have a broad multi-unit need.

The modular design is helping us react to the various opportunities quickly with an optimum solution. In terms of our electronics business, most of our effort goes in to the core ZBB product set. We're also seeing increased success with our Hybrid Bus Controller program. This effort is multiple growing end customers that save money through the use of the system. We expect this product line to be at or above our target margins and our partner is planning on growing this product line through their sizeable sales force.

We're working with our Korean partner on the next phase of our strategic plan. This includes a marketing campaign and rollout of our products in the Korean market. Our sales team has been tasked to fill the order book as we expect further orders to be placed during the fall and to build our backlog in both the US and the far east.

Regarding China our China JV Meineng Energy continues to move forward with increasing activity. Mr. Brad Hansen of PowerSav which is another partner in our China JV is the acting CEO of Meineng and has continued to lead the launch plan which concluded with the official opening on July 25.

They are presently building the first 10 EnerStores and expect to have all installed and commissioned by year end. In addition the joint venture has just ordered over 600,000 in components to build additional units due to the anticipated demand. The target locations for the first EnerSystems had been finalized and the market continues to look very strong. We see opportunities ranging from lead acid battery replacement to wind energy to micro grids.

We also continue to talk to other partners that offer complimentary products or have development synergies with ZBB. We are now booking projects with other storage types like lithium iron batteries and we will establish preferred suppliers, if there are market channel synergies as well that we can leverage our revenue growth through these partnerships.

In terms of geography, much of our partnership focus is in the high growth markets such Japan, India, Brazil. We expect to expand our partnership circle over the next few quarters. As you probably are aware, Japan just shut down the majority of its nuclear power plants and renewables with storage are expected to replace much of that nuclear power supply.

Japan just instituted a $0.53 per kilowatt hour feed in tariff renewalable energy. With the help of our strategic partner in Korea, Honam and its parent company the Lotte Group, we expect to be a significant player in this replacement process.

So how does all this come together in a growth plan and create shareholder value. We are fortunate to have a team in place that can simultaneously execute our revenue growth plan and a cost reduction plan on a global basis.

This will be done in parallel with a continuous improvement of our products and a product production ramp both here and in China. Because of the capabilities we have in our team we are confident the resulting growth plan for the company can be met. At present, we are dealing with the typical early production type issues and costs. With successful implementation of our supply chain development and cost reduction plan, we estimate we can become EBITDAX positive by around the end of the fiscal fourth quarter.

We are estimating our blended product gross margins to reach the mid 30s in fiscal 2015 as we capture more volume and value from engineering benefit. With Lux predicting that the grid storage market will grow over 200% during this period and our current design win rate, our EBITDAX plan is very achievable.

In summary, we have achieved record yearly revenue and we continue to increase our backlog while shipping existing customer orders. We've also further strengthened our balance sheet. We set very tough stretch goals for everybody at ZBB, but in particular for our product development, business development and operations. We are ramping up production and we expect further orders to be added to the backlog as we move through fiscal 2013. The hard work is not over, but we have passed the major milestones, we have an outstanding team at ZBB and want to congratulate them for their achievements this quarter.

The metrics for success in the coming year are very clear. One we've got to demonstrate that our early product installations prove our value proposition. Two, you got to convert initial product installations into accelerated bookings and revenue. Three, continue to drive our cost of our products and increase margins. And four, add key partnerships that leverage our ability to develop products and go to market. We believe we have the team and products and the market opportunity to achieve these objectives in fiscal 2013. Thank you for calling today. Now we will open up floor for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from [Stefan Rooney] a private investor.

Unidentified Analyst

Approximately a week ago you did the presentation at what was it – was it MDB or was that the Bright Lights?

Eric Apfelbach

That was the -- a week ago was in Chicago at the IDEAS.

Unidentified Analyst

You mentioned HECO, the Hawaiian Electric Company.

Eric Apfelbach

Right.

Unidentified Analyst

You mentioned that they were taking over, not necessary taking over but wanted to use one year [installation] to the grid asset. Now I was just wondering if you could add some comments, it sounds quite interesting. I just wanted to know if you can add some commentary to that.

Eric Apfelbach

Yeah, it's really a broader. I think it's an indication of where the new smart grid thinking is going and that is how do you integrate a smart grid with the renewable assets and storage that are acquired. We view Hawaii as kind of the (inaudible) and coal mine where these things will come together and how will you actually have an effective smart grid.

So that’s why you can see utilities like TICO asking questions about how they can allow customers in circuits right now where they had said no more renewal, no more solar, if you roll over 15% penetration. That’s not a popular answer for a place where solar energy is now cheaper than the grid energy and that they have large peaks. So [TICO] is interested in trying to find a way to control their grid and still enable renewable penetration on the Island.

They're evaluating a lot of different methodologies in Hawaii. It's also an excellent test bed we’re being asked to be involved in most of those I would say. Both military and commercial, so what's interesting to us there is that they’re thinking ahead to how our system can be a key component on a smart grid that enables the renewable energy penetration on the grid and that’s our vision long-term.

I think we will see it first in Hawaii then you will see it in California and anywhere that there is large renewable penetration on grids. They are having trouble staying stable with those inner maintenances.

Unidentified Analyst

Is there a length of time that they are looking at or given any indication as to or this can be like a two year study or how long ago did they start, is there any way, do you have foresee ability on that issue.

Eric Apfelbach

We do not have any timeframes. I think you know Hawaii again there is conversations going on with the DOD and Pearl Harbor with various smart grid test facilities on the island and then the grid operator are all I think in this discovery say and what might it be the most effective and cost effective way to run renewable on the grid in Hawaii.

So it’s really a discovery phase right now on how that will meet together. The combination of the demo projects in Hawaii though again both DOD and commercial. I think I’ll answer those questions, we fortunate to be involved in most of those.

Unidentified Analyst

Okay. Moving on to the SPIDERS I noticed I think in your released yesterday that you added the Colorado installation to the announcement. So does that mean that you are now scheduled to go into the second phase as well and I didn't, I had never seen that before?

Eric Apfelbach

It does not. I mean SPIDERS, SPIDERS is located around multiple areas. Our installation will be in Pearl Harbor and the other phases have not been determined yet.

Unidentified Analyst

Okay. Previously, you discussed some potential possibilities of partnerships in India and also I was wondering if there any progress made any types of relationships and if you guy to make the announcement, maybe the next six months or so?

Eric Apfelbach

Sure. Let me take the opportunity with that question to elaborate a bit on our international strategy. So as everybody I think knows the opportunity and the size of the market and the need in places like India is off the chart. I mean they have a big problem, they have a big population, they need solutions to get those people electricity in a stable way. The question always been financing and how do you enter a country like India. We if there is any place that we would focus on a high value partner is in a place like India. So we have really a strategy to look for key projects that we can go into that country with a strong partner who will localize the product in that country. We are pacing out our activities because we want to be successful with what we have already initiated in other high growth markets.

We don’t wake up in the morning and worry about the size of our served available market right now. We have got a great opportunity just in China and the Asian countries. We don’t want to miss the market window however, and we certainly want to and essence to what I call fishing for what is the right strategic partnership in those countries.

So we are not in a hurry to do that but we want to make sure we understand and try to get something done in India that’s a good example. Each high growth country that’s been identified, we are doing business development activity to see if we can align our strategic interest and needs with those of that country and you can imagine Japan, India, Brazil these are all very different metrics for what a successful partnership could be in those countries.

So we are in essence doing the business development activity there both with people that are of that country and also with multi-nationals who have active and long-term positions in those countries.

And our objective there clearly is to get a partnership that has a very good sales channel synergy with us and also because we don’t have infinite amounts of cash I think as everybody knows we want those to be balance sheet synergistic as well.

Unidentified Analyst

I guess that leads me to my last question and cash burn and need for further financing and I believe in the recent may be the S1 or right after you completed there was a restriction on registrations for 12 months and I just wanted to know if you guys are going to see a need to finance before then and how that plays into your view of funding the company going forward?

Eric Apfelbach

Right, yeah we still believe as we said in the comment that we can hit cash flow breakeven on the capital we got to some degree. We are going to see we ideally the faster we grow the more we would want to strengthen our balance sheet but we do not believe we have to raise capital again in that period just due to our conversions on cash flow positive. Ideally, if we are raising capital after that it’s to accelerate growth in some of these key markets.

Unidentified Analyst

All right, that’s I noticed you have $4 million in inventory already?

Eric Apfelbach

Correct.

Unidentified Analyst

Okay, then your net cash flow in addition to $5.6 million as of today. So it's a lot stronger than any of your peers. Anyway, congratulations on the progress you guys have made and I'll jump back in the queue.

Eric Apfelbach

Alright, thank you.

Operator

Our next question will come from Barry Kitt with Pinnacle Funds.

Barry Kitt – Pinnacle Funds

Hi, guys.

Eric Apfelbach

Hello, Barry.

Barry Kitt – Pinnacle Funds

Just a thought on your press release versus your conference call. As you guys know, very few of your investors are actually on conference calls like this and I would like to recommend that you put more information in your press releases so that the investors who're just reading the press release not on your conference call have the benefit of hearing the vision that you shared today. So for example, some things you said in this call or you expect sales to increase in the fall.

You expect to be cash flow positive by or in the Q4 and you have inventory and raw materials to deliver and perform in the backlog. Those are all very important pieces as the previous questioner mentioned, people might have concern about your cash balance. But you just said that you have the inventory and raw materials to perform in the backlog. So as that backlog is delivered, that's going to increase your cash, obviously then you'll have your cash (Inaudible) that will substantially help but these things are not in your press release.

So if someone is just reading your press release, it might be a little bit more subdued than it was on this conference call and hear these things. So I would like to recommend going forward that you have more of a financial forecast section at the end of your press release, will you share more of this information to help people understand that are not on this call.

Eric Apfelbach

Okay, that's excellent feedback, Barry.

Unidentified Analyst

Thank you.

Eric Apfelbach

Okay.

Operator

Next, we'll go to [William Blanchard], private investor.

Unidentified Analyst

Good morning. In a previous call this year you mentioned some joint flow battery your research activity was an undisclosed company. What color can you offer on the progress of that work and also could you give an idea of the company resources you're currently devoted to it and where they are near term milestones that will indicate whether that will continue or perhaps increase in activity.

Eric Apfelbach

Sure. Yeah, that work is continuing. It's going very well it is a true R&D program. So we are – I think this is where ZBB's knowledge base in flow batteries really shines. We're able to do what the program ask, which is accelerate of [learning] process on their specific technology. We've gone through the first milestone review and as I said the end customer very happy and we expect that to go forward.

The key gate on that you know it's a product development type gate. The question will become do you go to next product development versus what's now a technology development. And that would require increase in investments. So we have not reached that gate yet we have not done a gate review on that with the customer, but as I said so far it's looking very interesting and that's about all I can really say on that one.

Unidentified Analyst

Can you give us any idea? How close we are to that next gate?

Eric Apfelbach

It's about four to six months out.

Unidentified Analyst

Are ZBB systems accounted for grid frequency regulation services under FERC order 755, are the systems not quite fast enough in response time to be used there?

Eric Apfelbach

Short answer is yes, but I'm going to actually have Chuck weigh in on that.

Chuck Stankiewicz

Yeah they most certainly are. And actually in terms of the one megawatts and those timeframes our units are quick with that one of the comment too, is that FERC has just issued about a month or two ago, they called a notice of proposed regulation, you know for which was talking about ancillary services, not just for frequency regulation but for energy storage as a whole.

So when you start to look at the way the FERC and utilities are starting to look at energy storage, the first thing in (inaudible) and places such as that, they're looking at it not only for frequency regulation but really taking value with that energy storage means and how it can help let's say change the grid and make it more efficient altogether.

So when you start to look at these ancillary services adding together, its pass things such as our zinc bromide battery, it allows us to be more competitive and actually have more applications across the entire United States.

Eric Apfelbach

I'll add one other point to that when I was at the DOE Micro Grid Forum and at IIT giving the tour I was amazed that the number of questions from thought leaders around the world about, can you deliver on a VAR command from this system and our answer is yes. We've designed a four quadrant, full by-directional inverter on the [end of our] systems so that it could supply all these disciplined value drivers that become much more important on these micro grids and other installations as more renewables have been put into the grid and they were, I would say we had a very positive reaction just from the fact that our system can go up to a full VAR command from a grid operator.

Chuck Stankiewicz

Yeah, and one thing about that too, and just an important point with is it can actually produce reactive power or VARs separate from the energy storage itself, so the inverters are actually designed where the – you do not need to be providing say kilowatt to the grid you can just provide kilo – kVARs to the grid separately. So it actually gives the grid operator a lot of flexibility in the micro grid itself.

And just for the engineers of the Group, the VARs are important because all loads aren't just (Inaudible) and electric heaters, there are things like motors and pumps and other things that actually require what we refer to as reactive power to operate and keep the voltage maintained.

Unidentified Analyst

Okay, that sounds like an exciting market. You previously mentioned talking about using Hawaii as a laboratory and theyn you mentioned California, but as I understand that the PGM on the east coast is the further state adding including New York I guess what I'm wondering is if there's something your sales team is focusing on and looking at the market because they issued the order but different RTLs across the country are doing it over different times and California is not first, from what I understand?

Eric Apfelbach

Yeah. Well, right each – it is a regionally divided up sales strategy, every region is different because of the payback streams you can get and the utility rate structures and the peaking and the infrastructure of their grid and its ability to be modified. So it's demand for storage, so you're right, every one of these systems we have to approach differently and I think this is where actually Tony joining our team is going to be a huge help. He has been working in those utility based systems much more than the other people in our sales team honestly. So we’re actually looking forward to having a more detailed discussion with the utilities and as these (inaudible) and other things happened, we really liked the convergence we’re seeing there, but I don’t know.

Chuck Stankiewicz

No, and also, you know, on that thing, one of the things we do here is product development, you know and we have our current products right now but we're also evolving and where it will be overtime, be looking at bigger batteries, bigger power electronics and that actually fits in to different areas.

So at the moment right now if you look at PJM for example, I mean we wouldn’t typically be something we will be looking at exciting in that 10 megawatt hours at a substation or something of that nature that is specifically just for the ancillary service in terms of frequency regulation, but as these rules come in to effect and they become more prevalent, we really believe we'll have the products and the range of products if you will to apply not only at utility substations, but let's say of behind the [need] or actually in distribution type applications as well.

So it's really us matching up a whole suite of products with what's happening and evolving in the market. So it's pretty exciting I think over the long-term and it's (inaudible).

Unidentified Analyst

I totally agree. Okay (inaudible), can you also help us understand anything about the Honam contract going forward with respect to the ZBB related sales. I heard you say something about, you're going to ramp up your marketing there. Now, just help me to understand you know, what they’re doing versus what we're doing in Korea or what we failed to do and also what financial results will come out of that and whether you will see them broken out any time soon like in the next year.

Eric Apfelbach

Right good question. We are currently as we mentioned in our prior release we are currently negotiating the second phase of that agreement. We successfully completed all of the items in the first phase. Honam is a plastics and battery components company, so they are not in the battery business per se. Their first objective is really to help us be the lowest cost producer of plastics stacks you know number one.

Number two it give us an excellent technology partner in South Korea. They have exclusive rights in South Korea to manufacture and sell the V3 battery product and we now are talking about what they want to do in terms of their market strategy and batteries and they are not -- it is not finalized yet how far up the food chain they want to go and how fast.

What they provide though is they are a division of the Lotte Group which is obviously a massive, in essence retail and millions of square feet of real estate in Asia and there are multiple opportunities to help transition things like renewable integration, storage in some of those buildings, car charging all of the things that are going to be driven in South East Asia.

We are trying to get to a point where we can announce the next phase of that within a few months and so we'll elaborate on the detail at that time on where that's headed.

Operator

And our next question will come from Joe (inaudible), a private investor.

Unidentified Analyst

But quickly what kind of revenue would you need to make $0.10 a share and the answer that I am interested in the tax loss carry forward and the value of that? Thank you.

Eric Apfelbach

Yeah, Joe we have not given guidance at all to $0.10 a share. All we are doing now is trying to give people visibilities of when our EBITDA had crossed over point there, obviously that’s take into account our revenue growth and gross margins et cetera all wrapped into that model.

Unidentified Analyst

I am not trying to get when, I just wonder if you need 50 million in sales or 100 million in sales, just an idea when you will and I am trying to understand your income statement. When you look out a couple of years, what kind of sales would you need to – pick any numbers you want, it’s not a forecast, it’s just understanding your income statement question?

Eric Apfelbach

Yeah, again I am not going to give you the specifics, they always said as we expect to converge on about a 35% gross margin number out in 2015. We have told investors that our fully absorbed capacity on our current facility here is between $30 million and $45 million in this building.

And the contribution from China being a JV is a little bit different than as well. So I don’t have an answer for you, Joe on specifically that but if you use those numbers that we have publicly talked about, I think you could kind of triangulate on when that will happen.

Unidentified Analyst

How about the tax loss carry forward, I don’t what it is or how big it is and when it expires?

Will Hogoboom

I think it's important to know Joe that there has been many ownership changes as ZBB with regard to our stock offerings there and other changes. So there is really likely a limitation on the use of that tax loss carry forward and we don’t have that number right now. We are in the process of calculating our tax [recording] what we are quite sure it is limited and we have mentioned that in our disclosures.

Operator

We'll hear next from [John Viver], a private investor.

Unidentified Analyst

I just have a question of the California market. There is recently an article about the California Energy Commission potentially requiring storage for some new projects out there. So then what's your response to that IP and also have you been investigating the potential out there soon to be implemented capping trade for you?

Eric Apfelbach

Sure, yes we are keeping up on all of those things in California, we had some projects in our backlog that are located in California.

Chuck Stankiewicz

We have sales people in California.

Eric Apfelbach

Right we have a sales person located in Southern California, so we are very focused on that, but it is California that being said, they talk about a lot of things, it is like they are hydrogen highway. And I think we all live through that, they did for ten years and don’t have a hydrogen highway. So we are going to watch and stay close and make penetrations where again where our core ROI makes sense to those customers. And there are some very good places for that in the state, any of those other policy changes in the state would be great to add as a tailwind but we are seeing increased activity from the state legislature and many of the utility customers to try to get storage as an integral part.

We believe that with the solar energy push there and the electric car charging push and the increase in request for BC distribution or charge system is great, that we will see increasing sales in California and it's definitely a good target market.

Unidentified Analyst

It’s a little bit larger than; can I ask one more question?

Eric Apfelbach

Sure.

Unidentified Analyst

In your business model in the United States, do you have any distributors that you can hand or could you just place an order and just hand them off the product or do you have to be involved in every deal and then if that’s the case, how do you really decide, how many deals you can actually get yourself into, how do you make a profit on a particular sale on the first time of your sale?

Eric Apfelbach

Right, well we design everything to be kind of [lego sack] which we really like because the customers end up coming to us and saying hey this is a size of my solar. This is my grid situation. This is my building situation and we can quickly use our lego sack of components to structure something that works well for them without re-engineering all kinds of things. So many of our discussions now are really around the application price engineering request on optimizing the system architecture and then we can, so to answer your question, our involvement, we wanted to go down significantly and it is going that direction as we just standardized our products. There are continuous improvement efforts here to make it really plug and play, so that our effort and involvement will drop even more.

Some of our distributors and channel partners have significant capability on their end to take what we give them and really get it install and all we have to do is the commissioning and startup. So it ranges, we do have some sales channels that don’t really have that understand your capability as much. So I don't know if that answers your question.

Unidentified Analyst

No, can you give a kind of perspective I just know some other companies sell always through distributors and I think that [hurts] the bottom line somewhat. I knew distributors make the money in the company really breaks even. 1I always going to because that's going to be a problem with some alternative energy companies in it was my observation. I thought the question mostly about whole (inaudible) but I am also kind of puzzled with that work. What the model is running, making money of that. Could you I guess you kind said you will elaborate on that in a couple of months.

Eric Apfelbach

Correct.

Operator

And we'll go next to (inaudible).

Unidentified Analyst

India market, can you give some color on the how is your product positioned versus the lithium ion batteries in respect to telecom towers. I remember a few months ago on one of your calls you said that in India the telecom was the big market for you. I wonder how your position on so pricing in technology you have for that market.

Eric Apfelbach

Sure. In telecom is an area where we've been I would say we don't have product out there yet. We're talking to partners about that market; it’s obviously a different world from building integration and grid utility type work.

And that’s why we are interested in partnerships in that sector. Your question on lithium ion, lithium ion is tend to be good for faster shallower cycles and we tend to be good for two to six hour or even eight hour discharge times.

In India, we have had conversations where they have 12 hours of grid time and 12 hours where the grid is down fairly routinely. So you are displacing diesel fuel over a 12 hour period and a [flow] battery as a very good fit with that from a cost of ownership perspective. The other part of it is our electronics and our patents in that area can easily integrate the renewables with the grid whether it’s on or off and then serves both AC and DC outputs seamlessly.

We see some telecom units in India going to complete DC architectures, some mid-size units are still AC and DC required. So our electronics is an enabler there as well in terms of making it simple to use any type of battery.

As we mentioned, we have now done projects with (inaudible) batteries with lithium ion batteries, with [flow] batteries. So if a customer has a situation where they have only short discharge time and a reasonable temperature range and they have lower power requirements. We may recommend using a lithium ion battery on our unit, but if it’s six hours to 12 hours of discharge time every day, we probably would say the economics are going to strongly favor flow battery, the cost per kilo watt hour right in our units acquire should be at or below quality. I will say quality lithium ion batteries and the cost of ownership should be quite a bit lower over time.

Unidentified Analyst

Is your product, do you have a product to-date to sell for that market or you are some time away from developing one?

Eric Apfelbach

We do not have that to-date. The product required for that market is usually again for the smaller telecom towers is probably going to be a 5 kilowatt output and may be a 10; well it depends on the size but 10 kilowatt to 50 kilowatt hour type battery.

So the areas we see good match are again the places that want 12 hours of discharge time. Those were very close to right now. Our smallest inverter is 25 kilowatt which may be overkill for some of those markets and our view is to get into the small DC markets that need only 5 kilowatts. We would have to do a product revision on some other products we have already developed here but and work with a partner on that.

There you are getting into a very cost competitive situation on the 5 kilowatt because in essence since you are down almost with the (inaudible) type electronics or the Ericsson type electronics that are going to quite low cost.

Chuck Stankiewicz

It’s also important to point out that’s not the only market that we believe is viable for us in India. I mean as we’ve investigated more and more, we think our 50 Kilowatt hour plus solutions. We'll take a good part of a niche to (Inaudible) large niche, and we could be successful there as well.

Unidentified Analyst

Right, so I mean, you could go after the areas without no grid. The villages for your products.

Eric Apfelbach

Exactly. And it's whole conversation of micro grid. Across the globe, we're seeing this concept of a micro grid start to be synonymous with smart grid. In fact there was an article recently that said is a micro grid really what the smart grid was supposed to be? And the answer is our EnerSection, we started to call it a micro grid in a box, because it does all of the things that people are wishing they had on our microgrid. Only we put it all in a box and patented it.

So when we go out to our village, let's just say and they say, hey I want on grid, I want off grid, I want solar integration, I want wind integration, I want storage, I want AC and DC out of this box. That's all there. So we don't have to engineer anything for that. And that's where we really get excited because it is something, obviously if we're shipping it off grid to the military right now or shipping it the datacenters, we're shipping it on trailers. We've got multiple permutations of this system that are doing all of these things, and so for us, in India it becomes a finance question more than anything and the finance issues in India I think are becoming resolved especially when you see these massive grid outages.

Unidentified Analyst

All right, so we would like to add a EPC companies to be your targets for partnerships or would you say.

Eric Apfelbach

That's one of them. Certainly. The other ones are some of the larger renewable energy companies that are doing system installations.

Unidentified Analyst

Well, thank you very much.

Eric Apfelbach

You bet.

Operator

Next question will come from Jay (Inaudible) with (Inaudible) Partners.

Unidentified Analyst

Hi, just a quick question. Your electric vehicle program and I see where Kohl's – right down the street from you is getting much more aggressive in the space, is this a targeted customer, have you had any dialogue with them and is that still a product area that you're after?

Eric Apfelbach

In specifically the Kohl's we had a few conversations with Kohl's, like many big box retailers they want an ROI that's very difficult. I think usually one year one and half years. So they tend to be putting in car chargers as demos. We do have a something in our backlog which integrates storage, with a car charging area and solar energy happens to be in California.

The interesting thing that we see happening with car chargers is number one, we can go directly DC which those car chargers are and keep DC right from the solar all way due to the car charger and not convert it AC or back again twice. So the efficiencies is higher.

The other thing we going on is that the some customer have big peak demand charges and if you get 3 people plug in 50 kilowatt car chargers out at the curb, and you have peak demand charges that you get hit with, your energy bill is going to go up tremendously. So just the fact in each storage they are managed very effectively real time, so that you can avoid those peak demand chargers. So we like the business model we are somewhat skeptical about the overall growth of the electric car charger market, but we are, like I said, we do have some projects that will demonstrate the benefits of what we're doing.

It may be that some of those I believe that some of those will see faster growth in Asia where policy will be more direct and uniform from the government and tell people what they're going to do versus ask them. So we'll see how that develops, what we do we do want to basically approve of that value model and car chargers.

I just think -- my impression, [Jay] is on the big box retailers especially in areas like the Midwest here we've sold our energy's marginal and their ROI expectations are very high it may be difficult to get that depends (Inaudible).

Unidentified Analyst

Great, thanks for the answer.

Operator

And we have one final question in our queue. Last question will come from [William Blanchard], private investor.

Unidentified Analyst

So, have you seen any effects of the looming defense department's (inaudible) yet?

Chuck Stankiewicz

No, not really I think other than just probably some slowness in some of those activities. The areas we are playing in there that we are going to a really targeted at saving the DOD cash right up front. So we're displacing like in our (inaudible) program we're displacing diesel fuel that has a landed costs at over $50 a gallon because of (Inaudible) on island and so they even know their budgets may get cut, their net positive would be the renewable energy activities that they are engaging on and that is across all of their activities they just put out a $7 billion [RFQ] or power purchase agreement to try to get more of the energy mix shift into renewable and we certainly see that drive growing strongly, I think once the elections are over and some of that confusions down though we will see an increase they've got a pretty big budget.

Unidentified Analyst

And finally can you give us some color on the Tier's activities and whether they are changing now?

Eric Apfelbach

Yeah, I mentioned in my comments that when we acquired Tier, we had three to five product developments in process with Tier already. Our aggressive launch of those products consumed most or all of their engineering capabilities since the acquisition there's a few core products they had the one I outlined in my comment is the hybrid bus controller. We, and they do have other products but they tend to be smaller niche products for DOD or another industrial customers.

We obviously would like to have any of our engineering efforts go towards multi unit growth market type products and not one-off NRE-type products. So we added a market driven growth strategy over the top of their competencies. The reason I mentioned the hybrid bus controller because that's one, it's different from our core market to put our hybrid bus controller out there is some great partners on that program and we believe that it's a retrofittable variable torque drive on a drive shaft of a bus that has to start and stop very often. So the fuel savings is quite good and it's engineered in a way where it's getting good adoption because of its price point.

And at the market, a lot of people are trying to succeed at and many of them have not done well because they were too expensive. This unit the partner out engineer and I think it could scale well over multiple markets but we expect that one to probably be one of the bigger revenue opportunities that was that Tier-1 we acquired the company.

Unidentified Analyst

Yes, I remember you mentioned that I had asked about your, maybe a year ago or nine months ago and you mentioned that then, is it something that’s kind of done now and now it's just a question of making some money on the results or where do we stand?

Eric Apfelbach

You mean, Tier in general or that product?

Unidentified Analyst

No, the hybrid bus controller.

Eric Apfelbach

Oh, that product is shipping on bus is there on the road. What I would say is, like any product, it will go through revisions to reduce cost and increase capability and things like that so but that one is a released product that’s shipping and being installed on buses.

Unidentified Analyst

And part of the personnel related. Are they pretty constant or have you seen them increase as well. I know you increased your personnel in lots of areas?

Eric Apfelbach

Yeah, I mean Tier has increased in size a little bit, not huge, mostly in the areas of software, mechanical engineering to support the aggressive product plans we had. So the headcount is only up maybe four I think roughly from one we did the acquisitions.

Unidentified Analyst

And what about (inaudible) versus that the Tier and ZBB teams work pretty much seamlessly together now. So there is a lot of overlap on both sides. So what you increase people here they help Tier and Tier helps us. So it’s not really ups and downs it’s all [weak].

Eric Apfelbach

It’s good they are two blocks away from us and you are right everybody works together on these projects. So we don't think of them as separate teams. They really are together.

Operator

We do have another question from (inaudible).

Unidentified Analyst

Yes, Eric what is the size of our new funnels, is it still around $35 million?

Eric Apfelbach

Yeah and it depends again how you measure the funnel but yeah it’s at least is bigger that was before and as I mentioned when I talk about the quality of the funnel that's what I look at because when since the quality to me means that we have multi-unit bookings capability in those target segments that we're in. Whereas before I think we had more [1V, 2V’s] project I think now we will take both but to scale the company quickly its one of our key objective is to make sure that we convert this early penetrations into the strategic customer so that we don't have to go do hand-to-hand combat (inaudible) funds on every order we want.

So we very happy with the funnel. It is international as well. We see again activity in these core markets we mentioned. And we see an increasing the other's just strong needs around the globe and things like the Japanese issue happen and then they put out a $0.53 tariff things change pretty fast and economics of that situation are tremendous or you get massive blackouts in India all of a sudden we see so the directionality of the macro drivers for our products is looking excellent.

And I think the other thing that again I touched on it but this whole convergent of the thought process of us -- around why wouldn't we like it at the micro grid could do x, our mission and our marketing right now is show people that the EnerSection already does all of that. You don't have to wish for that to be true it's kind of there.

So that's what we'd see going on and the funnel on the opportunities there is as (Inaudible) from another macro there's a lot of slowness in Europe and some other things, but we don't see the impacts of that in China and Asia as much as and India where the energy situation is more severe.

Unidentified Analyst

Then from the fourth fiscal quarter what revenues are we -- do we need in order to is it breakeven or go in the black or just how does that work?

Eric Apfelbach

We're just projecting our rights towards the end of the quarter we will cross over to EBITDA's positive.

Unidentified Analyst

EBITDA positive.

Eric Apfelbach

Yeah.

Unidentified Analyst

Okay.

Eric Apfelbach

If there is an (inaudible) at the end of the EBITDA so just in terms of the stock-based comp we'll any non cash things.

Unidentified Analyst

Okay. Thank you very much.

Operator

And with that we have no further questions I'd like to turn the call back over to representatives for any final and closing remarks.

Eric Apfelbach

Okay I like to thank everybody for attending the call I look forward to updating in the next quarter which again we expect to be an exciting call so thank you again for your time and questions

Operator

And with that once again ladies and gentlemen that does conclude today's call thank you for your participation and have a great day.

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