Approximately eleven months ago, I stumbled upon a John Petersen article entitled "Two Stocks for Grid Storage: ZBB Energy and Axion Power," wherein he described the energy storage sector as "an investment mega-trend that will endure for decades." At the time, ZBB Energy and Axion Power were trading at $1.43 and $0.87 respectively, and I had no idea how this article would shape my research interests over the next twelve months.
My interest piqued, I began looking into ZBB, Axion and Mr. Petersen's copious article archive. Shortly before Mr. Petersen's article, ZBB had successfully completed a three-year test of its flow battery under the tutelage of Australia's Commonwealth Scientific and Industrial Research Organisation (CSIRO). Interestingly however, after listening to my first ZBB conference call, I was less than impressed. As I remember, the call focused primarily on the integration of Tier Electronics, providing backup power for cellular phone towers in third world countries and the company's weak finances. As a consequence, based on Mr. Petersen's recommendation, I added ZBB to my watch list to see how the company would develop, but took no further action.
On April 13, 2011, ZBB announced a joint development partnership with Honam Petrochemical, a division of the Lotte Group to deliver lowest cost flow batteries. Honam, a $12 billion petrochemical company, had identified energy storage as a priority business and selected ZBB as its partner moving forward. This announcement encouraged me to renew my due diligence efforts in ZBB. By mid-summer, ZBB closed a $2 million financing round at approximately a 12% discount to market with certain directors making an investment at market price and other insiders beginning to buy in earnest again.
Over the last twelve months, insiders and Marathon Capital, a 10% beneficial holder, have bought close to 2 million shares or approximately 5% of the total shares outstanding at prices between $0.56 and $0.92. ZBB's method of financing has struck me as prudent because management has seemingly only raised what is immediately required to run the company rather than take on a large down round. However, despite this just-in-time financing, ZBB has had no problems raising capital at close to market price and insiders have bought both on the open market and as a part of private transactions. From all angles, it appears management's goals are in line with its investors, they are guarding ZBB's capital structure closely, and if the price materially increases, ZBB will be in a position to capitalize in order to guarantee ZBB's future.
As each month passes, ZBB has made additional impressive announcements and installations. At the end of August, ZBB, which had been attempting to crack the Chinese market, announced a joint venture company to enter the Chinese market after a year of vetting 75 potential partners. Because of the shenanigans that has been coming out of China over the last year, the market yawned at this announcement. Nevertheless, this joint venture company that will initially assemble and ultimately manufacture ZBB products for sale in the power management industry is moving forward, has been awarded its first contracts, and is building a new state-of-the-art manufacturing center in WuHu City, Anhui Province that will begin operations in early 2012.
On September 7, 2011, ZBB made two major announcements. The first was the issuance of a patent for the ZBB EnerSection™, a "plug and play" hybrid power conversion system that can support the integration of nearly any combination of onsite generating sources. At the time, I did not really know what this meant. Yes, I read the announcement, but the engineering significance of it was lost on me.
The same day, ZBB announced a collaboration with Universal Electric Corporation to provide uninterrupted power to DC voltage lighting loads, rack power to servers and other miscellaneous loads at a major data center in a 380vDC trial program. Again, I thought this was another positive announcement, but I did not comprehend its significance at the time.
Shortly thereafter, ZBB presented at the Renshaw & Rodman investor conference and it was identified that ZBB would not receive their UL certification for grid interconnection for another couple months. Immediately thereafter, there was a strong sell off, but insiders again began buying shares in earnest.
At that time, I took a closer look at the collaboration with Universal Electric, 380vDC, the EnerSection and the unnamed financial center. In digging into this topic, I found the Emerge Alliance and the efforts that its members such as Intel and other large technology players were taking in implementing the new 380vDC standard in data centers and buildings around the world. It was at that time that I understood why the CEO Eric Apfelbach described ZBB as the Cisco of the power industry. The EnerSection is similar to a router or a computer tower with multiple USB ports. The EnerSection, an energy storage agnostic platform, has the ability to integrate any power generating source whether on AC or DC, along with various types of storage into an overall system.
Previously, if a building had wind, photovoltaic, grid, gen set, and storage inputs, the architecture would require a separate inverter or converter for each input whether on AC power or DC power. However, the EnerSection would eliminate that requirement and integrate both AC and DC components into a plug and play system whereby each input would have its own "bucket" within the system to connect to, and thus, generate a significant savings for the end user
At the conclusion of the R&R conference, ZBB, which had less than $1 million in sales last year, had between $5 and $7 million in backlog that was awaiting UL certification before the company could begin shipping and working through its backlog. Realizing that ZBB was much more than a one dimensional battery/storage company, and having witnessed the UL certification process take much longer with three different companies than the three different CEOs had promised and expected, I felt that a delayed UL certification would present a good buying opportunity in ZBB. After the R&R conference and going into the quiet period, the stock price began to retreat and a share supply and demand imbalance began to take shape. At this point, I had climbed my wall of worry, and I started to build a position in ZBB Energy.
Over the next couple months, ZBB tightened its partnership with Honam, hired an additional 21 people or increased its employee headcount by 38% with the bulk of the hiring coming in sales, marketing and operations. ZBB also increased the depth and experience of its board of directors in financing expertise, signed a joint development, license and a stock purchase agreement with a major unnamed global technology company, received its Chinese joint venture business registration and first Chinese sales, and on January 12, 2012 received the first of three UL certifications for its 25kw inverter.
In the press release announcing the UL certification, Apfelbach had this to say:
"The UL certification is a great milestone for our company. The combination of certified grid-tie inverter electronics and our patented DC based ZBB EnerSection offer customers in the distributed grid a turn-key intelligent system. The strategic design wins in our backlog have been driven by the benefits of this offering. ZBB is uniquely positioned to deliver integrated storage solutions in markets where certification is required for grid interconnected systems." "We can now begin shipping product from our backlog to customers who've been waiting for UL grid-tie capabilities."
At this time, ZBB is the only storage and power control manufacturer that has a UL 1741 grid-tie certification. As such, this certification is expected to be a major competitive advantage in getting new orders and building backlog. Therefore, I expect the sales and marketing team to begin selling in earnest, and over the next couple weeks and months, there will be a string of purchase announcements. At some point later this year, the 60kw and 125kw inverters, which are based on the 25kw platform, will also be certified and move into the sales pipeline.
Company Basics -
ZBB is not only a battery storage company, but also a technology agnostic supplier of power control electronics. In power projects, the power control electronics often cost 70% of the total sticker price, whereas in energy projects, the power electronics garner approximately 40% of the total price. As a consequence, the UL certification will allow ZBB to ramp potentially significant sales as a power electronics equipment vendor, while it continues to improve its V3 ZBB flow battery for wide scale implementation. At this time, I do not have the information to dial deeper into what ZBB's potential share of the 70% and 40% cost of the various power control electronics components implemented in a project will be. However, it stands to reason that ZBB's proprietary software will generate a higher margin than third-party hardware also utilized in the power control electronics package.
- The EnerSection allows an end user to optimize and utilize all of the various power value streams available.
- The V3 flow battery presents one of the lowest cost storage methods available.
A combination of the two allows the end user to :
- Avoid demand charges
- Avoid turning loads off due to Demand Response
- Enable higher penetration of renewable
- Peak shave/time shift to lower rates
- Manage DC circuits
At this stage of the game, the price is trading at approximately $0.81 after retreating from a high last year of $1.59. The market cap is approximately $26.3 million and the company has approximately 36.6 million shares outstanding and 44.5 million shares fully diluted. The company has LT debt of $4.5 million structured over a multiple year horizon, a manufacturing space of 85,000 sq ft, and 34% ownership of the Chinese joint venture. Its auditor is Baker Tilly, the eighth largest accountancy in the world, and company counsel is K&L Gates, an international law firm with forty (40) offices around the world.
Previously, the company has stated on numerous occasions in the past that it could reach cash flow positive at a run rate of approximately $20 million per year. And the company currently has the capacity to support approximately $36 million in annual revenues with very little capital expenditures. However, I believe that with all of the recent hiring the run rate to breakeven has probably risen slightly.
- Commercial Buildings
- Remote Operations
- Communication Towers
- Electric Vehicle Charging
As most people reading this article already know, Pike Research predicts global investment in energy storage products to reach $122 billion by 2021, and China will be the largest market of that demand. ZBB plans to fight for a small piece of many of the subdivisions of this market. By itself, ZBB expects the communications towers market that was discussed in the first conference call that I mentioned to see a total investment of $18 billion by 2015. See, January 2012 ZBB Investor Presentation.
At this point, I don't know how to quantify the 380vDC application other than to say that Intel has been pushing a conversion to a DC standard since it wrote a white paper on the topic in 2005. Over the last two years, the movement has caught a headwind and appears to be rolling forward with a number of strong advocates and test sites. See, EPRI - slide 8. The initial inertia to a change in standards of this magnitude is monumental. However, if these test sites are successful, ZBB will be on the forefront of a large change in the paradigm of the grid from AC to DC.
In ZBB's recent January Investor Presentation on the slide discussing the partnership with the large unnamed technology company, ZBB stated that the Partner is targeting lower cost for large scale grid storage. This indicates to me that while ZBB and its partners continue to work furiously towards a reasonable price point for large scale ZBB flow battery deployment, ZBB is still not there yet and a major push in revenues this year will likely come from power control electronics.
Further, while insiders have shown the wherewithal to fund the company and ability to bring outside investors, there is no guarantee that this will continue or that the hiring of sales people will actually materialize in sales.
Additionally, since 9/30/09, ZBB has tripled its shares outstanding from 12.4 million shares to 36.6 million shares outstanding, and while I expect that the percentage increase will slow, I also expect that ZBB will continue to fund growth through additional share issuances.
Notwithstanding the foregoing warnings, it is my humble opinion that the tide has changed at ZBB, the market has under-appreciated the impact of the UL announcement, and in 2012, ZBB will spread its wings as a growth story.
Disclosure: The author is long shares in both ZBB Energy and Axion Power.