Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ¨   No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes ¨   No x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x   No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes   ¨     No   ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   ¨

Accelerated filer   ¨

Non-accelerated filer   ¨

Smaller reporting company   x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

The aggregate market value of the voting stock held by non-affiliates, computed by reference to the last sales price on December 31, 2009, which was the last business day of the registrant's most recently completed second fiscal quarter, was $14,609,833.

Indicate the number of shares outstanding of each of the registrant’s classes of Common Stock, as of the latest practicable date. 16,558,078 Common Shares ($0.01 par value) as of September 8, 2010.

 

 

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DOCUMENTS INCORPORATED BY REFERENCE

In Part III, portions of the registrant’s 2010 Proxy Statement to be filed with the Securities and Exchange Commission within 120 days of the Registrant’s fiscal year end.

Part III – Items 10, 11, 12, 13 and 14		In the Company’s Definitive Proxy Statement in connection with its 2010 annual meeting of shareholders to be filed with the Securities and Exchange Commission no later than October 28, 2010.
Part IV - Certain exhibits listed in response to Item 15(a)		Prior filings made by the Company under the Securities Act of 1933 and the Securities Exchange Act of 1934.

 

 

 

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ZBB ENERGY CORPORATION

2010 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

		Page
PART I		3
Item 1.	Business	3
Item 1A.	Risk Factors	11
Item 1B.	Unresolved Staff Comments	17
Item 2.	Properties	17
Item 3.	Legal Proceedings	17
Item 4.	(Removed and Reserved)	17
PART II		18
Item 5.	Market for Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities	18
Item 6.	Selected Financial Data	18
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation.(restated)	18
Item 7A.	Quantitative Disclosures About Market Risk	26
Item 8.	Financial Statements and Supplementary Data	27
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	47
Item 9A.	Controls and Procedures	47
Item 9B.	Other Information	47
PART III		48
Item 10.	Directors, Executive Officers and Corporate Governance	48
Item 11.	Executive Compensation	48
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	48
Item 13.	Certain Relationships and Related Transactions, and Director Independence	48
Item 14.	Principal Accountant Fees and Services	48
PART IV		49
Item 15.	Exhibits and Financial Statement Schedules	49
Signatures		50

 

 

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PART I

 

Forward-Looking Statements

 

The following discussion should be read in conjunction with our accompanying Consolidated Financial Statements and Notes thereto included within this Annual Report on Form 10-K. In addition to historical information, this Annual Report on Form 10-K and the following discussion contain statements that are not historical facts and are considered forward-looking within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. These forward-looking statements contain projections of our future results of operations or of our financial position or state other forward-looking information. In some cases you can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “should,” “will” and “would” or similar words. We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to accurately predict or control and that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Investors are cautioned not to rely on forward-looking statements because they involve risks and uncertainties, and actual results may differ materially from those discussed as a result of various factors, including, but not limited to: the risk that unit orders will not ship, be installed and/or convert to revenue, in whole or in part; the cost and timing of developing our products and our ability to raise the necessary capital to fund such development costs; the cost and availability of raw materials for our products; market acceptance of ourZESS50 and PECC systems; our ability to establish and maintain relationships with third parties with respect to product development, manufacturing, distribution and servicing and the supply of key product components; the cost and availability of components and parts for our products; our ability to develop commercially viable products; our ability to reduce product and manufacturing costs; our ability to improve system reliability for both ZESS50 and PECC; our ability to successfully expand our product lines; competitive factors, such as price competition and competition from other traditional and alternative energy companies; our ability to manufacture products on a large-scale commercial basis our ability to protect our intellectual property; the cost of complying with current and future federal, state and international governmental regulations; the impact of deregulation and restructuring of the electric utility industry on demand for ZBB Energy’s products; and other risks and uncertainties discussed under Item IA—Risk Factors. Readers should not place undue reliance on our forward-looking statements. These forward-looking statements speak only as of the date on which the statements were made and are not guarantees of future performance. Except as may be required by applicable law, we do not undertake or intend to update any forward-looking statements after the date of this Annual Report on Form 10-K.

Item 1.

 

Business

ZBB Energy Corporation and its operating subsidiaries (“ZBB,” “we,” “us,” “our,” or the “Company”) designs, develops, manufactures and markets distributed intelligent power management platforms that integrate all types of renewable and conventional power sources with advanced large format storage technology. ZBB’s mission is to utilize these integrated systems to transform intermittent renewable energy sources into reliable power plants. ZBB is deploying its modular power platforms both off-grid, and in the “distribution” portion of the grid-operating near the loads and distributed renewable energy systems. Our ZESS POWR™ platforms are essential components for successful expansion of a truly smart grid with renewable energy. They enable customers to easily configure an intelligent power system that maximizes return on investment, power quality and grid stability simultaneously. ZBB is focused on serving the military, commercial building, electric vehicle (EV) charging and off-grid telecom market segments.

The Company was incorporated under the laws of Wisconsin in 1998. The consolidated financial statements include the accounts of the Company and those of its wholly owned subsidiaries, ZBB Technologies, Inc. which operates a manufacturing facility in Menomonee Falls, Wisconsin, and ZBB Technologies, Ltd. which has its advanced engineering and development facility in Perth, Australia. Our Corporate website address is www.zbbenergy.com.

 

Products

ZBB’s intelligent power management platforms are modular and custom configured to meet a specific customer energy need. The building blocks of a system include our proprietary Power and Energy Control Center (ZESS POWR PECC) combined with our proprietary zinc-bromide rechargeable flow battery (ZESS). We will also purchase and integrate other types of advanced energy storage in order to optimize the energy storage traits of the system. Lithium ion, advanced lead acid and ultra-capacitors are examples of storage technologies that are synergistic with our flow battery design.

 

The ZESS POWR is modular both in terms of electrical interfaces and packaging design. This allows our solutions to be configured into energy storage systems of any size and integrated with or without any generating source. Our systems fully integrate with customer control systems, smart-grid instructions and can be remotely monitored. In addition, various control options are available for the integration with the customer’s existing electrical power system or as a completely independent power plant. The ZESS POWR system enables the customer to store energy from any renewable or conventional energy source and discharge power as needed to meet their load, regardless of the generation source or real time status. Our energy storage solutions will enable expansion of renewable energy use by solving key customer problems:

 

 

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CUSTOMER PROBLEM		ZESS POWR SOLUTION
Wind and sun are unreliable energy sources		ZESS POWR stores renewable energy and feeds load as needed
Must use dirty and expensive diesel gensets during grid outages or when no grid is available		ZESS POWR can operate as back-up power and as off grid power, reducing diesel run-times or eliminating them all together
Grid becomes unstable when wind stops or clouds blow over solar panels		ZESS POWR acts as a “shock absorber” to rapid swings in renewable energy sources.
Grid needs voltage support during peaks and has congestion on “feeder lines” into high density areas		The distributed storage and intelligent power management system of ZESS POWR can be called upon to provide energy during peaks
Remote off-grid or micro-grid systems do not have reliable and cost effective power sources. Diesel fuel is too expensive.		ZESS POWR integrates solar, wind, gensets with storage, and then manages all power flows to deliver reliable power.

 

Product Benefits

 

Distributed Energy Applications

 

As penetration of distributed solar and wind energy grows, problems with managing peak demands and sudden drops due to renewable intermittency are growing. One way for a utility company to address challenges in the grid is by using energy provided by energy storage systems. The term “distributed energy” generally refers to the deployment of energy generation and energy storage resources in the distribution network of the grid. These assets are sited near the load centers where they can provide an immediate source of energy. For electric utilities our products provide a means to augment the functionality and performance of the smart grid on a localized basis.

 

Load management

 

The ZESS systems, when located near the customer, can be used to manage power and energy either controlled by the customer or the utility as a smart grid application. This results in cost savings and allows local integration of renewables and provides regulated distributed generation.

 

Power quality

 

ZESS systems provide a means to alleviate power quality problems by supplying active and reactive power locally to stabilize voltage surges and sags. The scale of the avoided costs is a major value driver for using distributed ZESS systems in conjunction with the grid.

 

Benefits to renewable energy generators

 

Renewable energy generators would use our ZESS systems to manage the power and energy of the intermittent nature of the renewable energy and dispatch as needed. Distributed renewable energy sources such as wind and solar are interconnected to the grid for optimal usage. ZESS systems enhance the value of distributed renewable resources by providing energy management. ZESS systems can operate as back-up power for grid outages, displacing diesel gensets and their associated problems.

 

Competitive Advantages

 

Since our systems combine both advanced power electronics and storage technology, we compete with both established power electronics platforms and multiple energy storage technologies, such as lead acid batteries, Lithium ion batteries, vanadium redox flow batteries and sodium sulfur batteries. We believe that the benefits delivered by our POWR PECC system are unmatched in the industry, and that our ability to integrate with storage to deliver an intelligent solution to our customers gives us a distinct competitive advantage. For our target markets, we believe our product has the following significant advantage over competing products and technologies:

 

·

Modular Construction: The ZESS flow battery is built in 50 kWh modules and the POWR PECC is designed with standardized electronics modules. This allows the system to be architected specifically to customer’s needs and easily modified to fit future needs like EV charging.

 

·

Turnkey Solution: A customer can outline their system requirements and we can deliver an expandable solution that is “plug and play”

 

 

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·

Intelligent Direct Current (DC) Buss on POWR PECC: Enables simple management of multiple power inputs, multiple storage types, and any dynamic load profile. Also enables simple expansion for future needs.

 

·

Energy density relative to lead acid batteries or vanadium redox: A larger amount of energy can be stored in a system of a given weight and size (measured in Watt Hours per Kilogram or Wh/kg), recharge cycle and overall cycle life.

 

·

Lower cost than lithium ion: It is unlikely that the Li ion storage will ever be sold for less than about $600/kW-hr, whereas we expect that our  flow batteries will reach the $300-$400/kW-hr price range depending on size and power electronics.

 

Markets

We believe that our ZESS products are available at a time when major changes are occurring in electricity supply and demand. We anticipate that the primary users of our energy storage systems will be utility companies at the distribution level, commercial/industrial users and off-grid applications. Our systems are usually combined with renewable energy (solar, wind) and other power generators.

 

Key areas for the use of ZESS systems include:

 

·

On and off grid wireless telecom towers installations that use renewable energy to reduce or eliminate diesel run time;

 

	·	Off grid power generation systems;
	·	military and remote village power

 

·

Commercial and residential building integration with renewables and/or back-up power needs; and

 

·

Small community power systems and micro-grids.

 

ZBB technology enables alternative energy growth and deployment. Specifically, we address the following issues in our target markets:

 

Renewable Energy

 

ZESS systems provide the necessary means to control intermittent renewable power generation and to optimize energy utilization. They also allow photovoltaic (PV) technology to store energy when the sun is shining and provide power when sunlight is limited. Additionally, ZESS systems can be used to store power from solar panels and shift the distribution of that power to align with the customers’ needs.

 

The ZESS system can also work in conjunction with distributed wind turbines to manage the power and energy of the intermittent nature of wind.

 

As penetration of renewable energy increases on the utility grid, the intermittent nature will have negative impact on grid stability. Integrating distributed ZESS systems eliminates this problem and allows wind and solar generation to become a dependable power source.

 

Smart Grid

 

·

The goal of the Smart Grid is to maximize the efficiency and reliability of the existing infrastructure and accommodate the continued integration of renewable power resources.

 

·

Evolution of the Smart Grid will depend on cost effective energy storage. Smart grid without smart storage equals “dumb grid”.

 

ZESS deployment is the key to establishing “off-grid” and “smart-grid” electrical systems. Since emission producing diesel generator sets are polluting, costly to maintain and fuel costs are expected to rise, interest in renewable generation for off-grid and back-up power applications has been accelerating. A combination of ZESS systems with renewable energy sources being deployed as an integrated solution, results in a reliable turn-key system capable of being independent from the utility grid or as a smart-grid solution. Such systems can be used anywhere including remote areas of the world where either no electricity exists or where there are severe outages through poor supply and inconsistent delivery, or for any consumer who prefers to be grid independent.

 

Commercial Users

 

ZESS systems can be charged during low cost off-peak periods when energy rates (kWh) and peak demand charges (kW) are low and can be discharged during higher cost on-peak hours. Demand charges (per kWh) and the differential between on peak and off peak charges (per kW) are two of many factors in the cost/benefit analysis of the ZESS. The economic advantages result from the reduction of peak demand/capacity charges deferred during on peak hours and the difference in energy prices from off peak to on peak.

 

 

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Utility Applications for Distribution Network Support

 

The ZESS systems have distribution benefits to assist power sources that are constricted by a maximum amount of power distribution capacity. When located near the end user, the stored energy is used to supplement the load demand, reducing the stress on the distribution network and/or preventing overloads that may cause blackouts or brownouts as well in addition to potentially eliminating the need to upgrade the distribution system supplying the customer load.

 

Market Opportunities and Challenges

There is little argument that intelligent energy storage is needed to scale renewable energy on the grid. The renewable energy markets are growing quickly and approaching saturation in markets like Hawaii and California. This will rapidly increase the served available market for our products. Many places around the world do not have a grid or have serious reliability issues. These segments need cost effective, reliable renewable power sources for many basic needs like clean water, refrigeration, communication and lighting.

 

The primary challenge for the intelligent storage industry is meeting the lifecycle cost and reliability targets needed for these markets. In our segments, it is believed that broad adoption will require a sale price around $500/kW-hr. In addition, the operating specifications needed to meet our customer’s requirements, like military, can be severe.

 

We continue to advance the sales and marketing process in the areas of network structure, direct key accounts, strategic relationships, marketing and industry/policy involvement. We continue to build a direct market pipeline of opportunities which include companies involved in renewable energy; renewable energy integrators involved in on-grid and off-grid applications, government facilities, telecom, and other commercial and industrial opportunities.

 

We have advanced the ZBB presence and awareness in the market through involvement in various conferences (energy storage, wind, solar and electric utility), direct marketing, marketing materials and web content, as well as continued efforts in media channels and highly visible applications.

 

Current and recently completed projects include the following:

 

As announced on September 8, 2010, we will partner with SunPower Corp. (Nasdaq: SPWRA, SPWRB) to establish a pilot program for demonstrating integration of advanced energy storage systems with existing PV systems for commercial customers. Working with a major retailer, SunPower and ZBB will demonstrate the economic and operational benefits of combining PV with a ZBB zinc bromide flow battery storage technology platform rated at 500 KWh in a commercial building application.

 

We have received an order for ZESS 50 energy storage system(s) and ZESS POWR PECC from:

 

o

SEI for the integration of solar PV with energy storage for an on grid dispatchable power plant for use at a US government facility.

 

o

NIDON for the integration of solar PV with energy storage for an elevator system that utilizes power from the grid and renewable energy in “Pulani Manor”, a mid rise, multi-family apartment located near downtown Honolulu. This system will manage the energy usage from a 20kW PV array and allows the elevator to be operated during emergency situations and extended power outages. The scalability of the ZESS system enables future input and storage from other renewable energy sources.

 

o

BC Hydro to be utilized as part of a demonstration project that uses multiple components (power generation, utilization, storage, and dispatch optimization) to provide electrical power to an isolated remote area grid with the goal of reducing reliance on diesel generation and the reduction of greenhouse gas emissions in remote communities in British Columbia. The project objective is to increase the utilization of BC Hydro’s Clayton Falls small hydro plant and reduce the reliance on diesel generators at its Ah Sin Heek generating facility

 

o

General Atomics to be utilized as a demonstration project at its headquarters in San Diego, California. This fully integrated ZESS power system will be used in an on-grid configuration with photovoltaic (PV) renewable energy generation inputs and multiple connection points for both AC and DC power requirements that will connect to the host building’s power distribution system. The ZESS POWR PECC system controls energy and power inputs, directs energy flow to and from energy storage, regulates clean power to various demonstration loads, and when available, sends excess energy to the sites larger electrical distribution system.

 

·

The development of a prototype off grid system consisting of ZESS 50 energy storage and ZESS POWR PECC hybrid for cell tower application in Africa via ZBB partner Likusasa.

 

·

The shipment of a ZESS 500 in conjunction with existing wind energy assets at the Dundalk Institute of Technology in the Republic of Ireland.

 

 

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·

The deployment of the ZBB Hybrid ZESS POWR PECC and ZESS 50 energy storage to Oregon State University for the advanced study of energy storage with wind power.

 

·

Installation of an order with Envinity, a renewable system integrator, for the delivery of two ZESS 50 energy storage devices and ZESS POWR PECC designed to integrate two solar PV arrays, ten wind turbines, a hydro generator, and a conventional generator to provide a single output power plant for an off grid application.

 

·

Completion of a $230,000 funded project with the Wisconsin Energy Independence Fund for the development of our own proprietary power conversion systems for both AC to DC and DC to DC renewable energy applications;

 

·

Research and development project (Advanced Electricity Storage Technologies project) with the Commonwealth of Australia represented by and acting through the Department of Environment and Water Resources (the “Department”) which included the production and delivery of one 500kWh energy storage system for installation into a renewable energy site in Australia. Under this contract which will be completed on September 30, 2010 the Department agreed to provide funding to us for the development of an energy storage system that will be used to demonstrate the storage and supply of renewable energy generated from photovoltaic solar panels and wind turbines already operational at the Commonwealth Scientific and Industrial Research Organization’s Newcastle Energy Centre in New South Wales, Australia. We received a total of $2.4 million (A$2.9 million) in project funding under this contract through June 30, 2010.

 

ZBB is in the process of furthering these marketing and networking efforts with additional marketing activities that will continue to raise the profile of ZBB and the ZESS brands.

 

We have designed our products so that they can be combined for use in commercial storage applications and/or integrated with renewable energy sources through the use of the ZBB hybrid power electronics. Federal and State Government initiatives to lessen the United States greenhouse gas emissions and dependency on oil and increasing concerns surrounding CO2 emissions are helping to drive this market sector.

 

We believe that solar and wind energy production has grown over the past five years and will continue to grow for so long as fossil fuel prices are increasing and global warming is viewed as a threat to the environment. Because both solar and wind are intermittent primary energy sources, both grid connected and off-grid installations require energy storage devices to optimize their capabilities and in many cases the energy storage devices are a necessity for the utilization of renewable energy.

 

We are currently addressing opportunities and engaged in fulfilling orders targeted to renewable energy markets in the United States (including Hawaii), Europe, Australia, and Africa with the intention of introducing products and services into these markets. The United States and governments throughout the world are implementing renewable energy mandates, tax credits, matching investments, and other incentives related to renewable energy and energy efficiency including the energy storage sector.

 

In conjunction with our strategic partners we are actively involved in submitting proposals to the Federal and State Governments in response to Funding Opportunity announcements issued as a result of the American Recovery and Reinvestment Act. These proposals cover opportunities for plant expansion, Smart Grid initiative, Renewable Energy Initiatives as well as research and development opportunities for applications where the Company’s technology could bring a change to market applications that we currently do not address.

 

We believe that some of the biggest challenges we face will be gaining market acceptance for our newer products and reaching the renewable energy, utility and other markets that we target. In order to be successful we must also develop a reputation of reliability, quality service and continually drive down the total cost of ownership of our products.

 

Technology

ZESS 50 Flow Battery

 

The ZBB Zinc Energy Storage System (ZESS) is a proprietary and patented flow cell battery based on zinc/bromide technology, which is very different in concept and design from more traditional methods of energy storage such as the lead/acid battery. The ZESS technology is based on the reaction between the two chemicals, zinc and bromide. ZESS is a trade mark protected name owned by ZBB Energy Corporation.

 

Unlike the lead acid and most other batteries, the ZESS uses electrodes that do not take part in the reactions but merely serve as substrates for the reactions. There is a minimal loss of performance, unlike most rechargeable batteries, from repeated cycling causing electrode material deterioration. During the charge cycle metallic zinc is plated from the electrolyte solution onto the negative electrode surfaces in the cell stacks. Bromide is then converted to Bromine at the positive electrode surface of the cell stack and is immediately stored as a safe chemically complexed organic phase in the electrolyte tank. When the ZESS discharges, the metallic zinc plated on the negative electrode dissolves in the electrolyte and is available to be plated again at the next charge cycle. In the fully discharged state the ZESS can be left indefinitely.

 

 

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The ZESS offers two to three times the energy density (75 to 85 watt-hours per kilogram) and weight savings over present lead/acid batteries. The power characteristics of the ZESS can be modified, for selected applications. Therefore, the ZESS has operational capabilities which make it extremely useful as a multi-purpose energy storage option.

 

Powr PECC

 

ZBB’s Power and Energy Control Center Technology (“PECC”) provides the ability to independently optimize the control of each generating source (or to provide the ability to increase energy production of renewable power sources by providing optimization of multiple sub-sets of the renewable sources) while having the ability to provide any combination (type, size and quantities) of controlled output (AC grid connected, AC off grid, or combination thereof for backup power, a variety of DC outputs or any combination of AC and DC outputs) all in a single factory tested package. These modules also have the ability to produce multiple output voltages, and can provide from 25 kW to 100 kW with ZESS 50 units and 125 kW to 2 MW of power coupled with multiple ZESS 50 units.

 

With advancements in the ZESS energy storage products and the incorporation of the ZESS POWR PECC, ZBB is now positioned to provide solutions to system integrators that will eliminate the segmented approach currently experienced today. The POWR PECC also provides a more economical integration that uses the complete value of ZESS energy storage and consequently gains efficiencies in storing renewable energy sources for time of use applications, providing a controlled renewable energy power plant. The ZESS product portfolio remains focused on the control of electrical power and energy with its core ZESS energy storage technology at the heart of the system and complimented with the new power conversion solutions. ZBB’s product line is ideally suited for a number of utility markets, remote area power and renewable energy applications. ZBB also plans to sell the PECC product line independent of the ZESS 50.

 

Product Design

The ZESS technology is composed of a module or a series of modules for increased power. The ZESS 50 stores 50 kWh of electrical energy and the module contains three stacks each containing 60 cells. The module dimensions are 4’ x 4’ x 6.5’, weighing 3,200 pounds. The ZESS 50 is well suited for large residential applications, commercial application with and without renewable energy sources. The ZESS 50 has rapid charging capabilities and fully charges from 0% State of Charge to 100% in approximately four hours. ZESS 50 modules can be connected in parallel or series to scale up to storage capacities of 500kWh’s.

 

The ZESS 50 provides “Turnkey” capabilities at a product level based on the ease of transporting, site locating and connecting the systems into the grid or other alternative energy generating sources. Along with ZBB’s most recent addition to the product portfolio, the ZESS POWR PECC, ZBB now provides the unique ability to automatically optimize the energy from the generating source manages the power and energy in the system and provides the customer required output whether that is to the electric grid, or off grid.

 

Our systems provide a fully integrated energy storage solution for direct connect and integration of multiple units of ZESS and or multiple types and quantities of energy generating sources including all renewable and conventional sources; while providing the customer with a single point of connection and thus eliminating system integration complexity and issues arising from variable devices and coordinating/integrating such devices in an efficient and optimal way.

 

The battery stacks are predominantly manufactured with recyclable plastics, allowing for low production costs and economical mass production while being environmentally friendly both in the manufacturing process as well as throughout the products lifecycle.

 

Competing Technologies

Lead-acid — Lead-acid is one of the oldest and most developed battery technologies. It is a low initial cost and popular choice for energy storage, but its suitability for energy management is very limited in applications that require deep discharge, long cycle life and longer term energy storage. Furthermore, the base components (lead and sulfuric acid) used in this type of battery are neither desirable to handle and recycle or to have installed in a facility without more extensive infrastructure and precautions.

 

Compared to lead-acid battery technology, we believe the zinc-bromine flow battery provides longer life-cycle, performance at a lower overall cost while utilizing materials that are more environmentally friendly. In addition, lead acid life time and performance is very sensitive to ambient temperature.

 

We believe that our product has certain superior functionality characteristics over the leading lead acid technology of comparable 50kWh system, including:

 

Vanadium Redox — A flow battery that stores energy by use of vanadium dissolved in sulfuric acid solutions. Larger system foot print, toxicity, higher installation effort, custom designed construction project.

 

 

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Sodium Sulfur (NaS) — A battery consisting of molten liquid sulfur at the positive electrode and molten metallic sodium at the negative electrode, separated by a solid beta alumina ceramic electrolyte. The battery for this device must always be maintained at high temperatures of approximately 300° C to allow the process to occur. This solution consists of significant installation effort and is typically of much larger or centralized type of energy storage as opposed to a distributed approach.

 

Sodium Nickel (NaNi) — A twenty year old technology that offers broad temperature range and high energy density but has a cost estimated 4 x lead acid pricing.

 

Polysulfide Bromide (PSB) — A flow battery system based on a regenerative fuel cell technology that provides a reversible electrochemical reaction between two salt solution electrolytes (sodium bromide and sodium polysulfide).

 

Metal-Air — Potential high energy density and low cost battery, but electrical recharging is very difficult and is still in development.

 

Lithium Ion — Also known as Li-ion, these batteries offer high energy density and high efficiency. Li-ion is widely used in small portable markets, but high manufacturing cost presently prohibits large scale industrial applications.

 

Flywheels — These primarily consist of a massive rotating cylinder operating in a low vacuum environment to improve efficiency. The main use for flywheels is for short-term uninterruptible power supply (UPS) and aerospace applications. Large scale applications would require a flywheel “farm” approach.

 

Pumped Hydro Storage — Pumped hydro storage is not a battery device, but rather, uses two reservoirs to create a limited amount of energy on demand. During off peak hours water is pumped from the lower reservoir to the upper; the water flow is reversed to generate electricity. This method is widely used but characterized by long construction times and high capital expenditure and requires a large geographic area and water supply.

 

CAES — A peaking gas turbine power plant using compressed air stored in large underground caverns inside salt rocks.

 

Super Capacitor Storage — These are devices with high power density and primarily designed for shorter duration higher power ratio of operation. Current focus is on small scale applications. Large scale applications are still under development.

 

Recent Developments

Manufacturing operations were suspended for most of the quarter ended March 31, 2010 for retooling of the stack manufacturing process related to our Version 2 module (V2). V2 encompasses improvement in efficiencies and stack life and which began manufacturing during the quarter ending September 30, 2010

 

We are currently in the process of developing of our next generation module, the version three (V3), which has substantial changes in design, function and significant cost of ownership reduction. To date, this project is very close to its original timeline and has generated substantial intellectual property (IP).

 

In addition we are currently addressing numerous opportunities in the renewable energy markets within the United States along with a diverse international marketplace with the intention of introducing products and services into these markets.

 

Our AEST project with CSIRO, an agency of the Australian Federal Government, continued throughout fiscal 2010, as planned. At the core of this project is the development of the next generation of our ZESS 50kWh module. As a development project the work program is therefore set as a series of milestones that measure and report upon the progress toward a successful outcome. This project has achieved and reported every milestone on time and on budget. The system modules have now been manufactured and assembled and this system shipped to the site in late September 2009 and was commissioned the following month. The project was underway through the end of June 2010, and will be completed with the submission of the final project report by the Company in September 2010.

 

As mentioned above, we extended our IP portfolio during fiscal 2010 with a new patent application filed for the ZESS POWR PECC system and filed internationally through the PTC. The Company is active in reviewing its IP portfolio together with other key engineering designs to ensure we protect and expand our intellectual position and to maintain this valuable technology as a cornerstone of our enterprise valuation.

 

The Company continues to develop its proprietary ZESS POWR Hybrid power electronics product for integrating ZESS energy storage technology directly with all sizes, types and numbers of renewable energy sources in a single product. This product performs the renewable energy functions that traditional inverters have done over the past while integrating with energy storage in an optimal way with a single “power plant” output for use on the electric utility grid or as an off grid power plant. With this, integrators, Independent Power Producers (IPP’s), commercial customers and electric utilities can leverage all the existing ZESS system benefits of peak demand shifting with the addition of providing a controlled and regulated renewable energy power plant. After these confirming technology efforts with our proven power electronics partners and product research in the market, the Company filed for patent in January of 2009. The combined flexibility and modularity of the ZESS energy storage combined with the flexibility and modularity of the ZESS POWR Power and Energy Control Center (PECC) has provide the Company and its customers with a “game changing solution” as stated by multiple system integrators and by its power electronic partners.

 

 

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Marketing and Sales

We continue to establish our sales and marketing staff with the recent addition of a VP of Business Development and Marketing. As such, several strategic relationships have been established with additional strategic relationships in the process of being established in the different market sectors in the form of key system integrator relationships, distributors, sales representative organizations and OEM arrangements. We are and have been focusing our sales efforts on the Energy storage integration with Renewable Energy for Electric utilities, system integrators and IPP’s, commercial and industrial customers. Additionally, we continue our focus in developing the Remote Area Power Systems and commercial customers. ZBB has introduced a fully integrated ZESS offering that provides customers with additional value to utilize a modular format for energy storage applications and/or when integrating different renewable energy resources. We do not believe that all distribution networks are appropriate for the sale of our products to utility or renewable energy companies and we therefore deal directly or through key distributors with our customers.

 

The technical characteristics of the ZESS system make it a strong candidate for a wide range of energy markets. Some markets are more established and defined than others, while some are still developing. Our strategy in reaching these markets is based on exceeding performance and cost thresholds of competing technologies and solutions. We plan to continue pursuing appropriate distribution and sales arrangements with suitably qualified channel partners with established operations capable of selling, installing and maintaining our products. At present, ZBB has established relationship in geographical areas in the northwest, the southwest, the northeast and Hawaii as well as an extension of key channels through our relationship with Eaton Corporation.

 

We have commercialized our systems for smaller Remote Area Power Systems and have established distributor relationships in developing areas. We believe these relationships will prove to be beneficial to ZBB, utilizing ZBB’s ZESS energy storage products as well as its patent pending ZESS POWR PECC. Commercial and home owner use, we may be required to utilize services of distributors that sell to regional and national chain stores and home energy product re-sellers. We do not currently have any distribution relationships for our products in this market; however these are presently being developed.

 

We have completed the process to achieve ISO 9000 certification for our Wisconsin plant and operations and are now certified as ISO 9000-2008. We have also completed the process of UL certification for our ZESS controls and in process of achieving the UL certification in the power electronics portion of the ZESS products via our power electronic supplier. We intend to pursue the power conversion market and continue to assess the demand for our products in this market; however there can be no assurance that we will be able to achieve this strategic objective. To address the lower power/energy applications such as residential and some remote power systems applications such as telecommunications (“TELCO”), we are in the process of evaluating an optimal product configuration that will address these markets in the future.

 

Our long-term strategic goal is to expand our customer base, enabling us to ultimately produce and sell energy storage systems to residential and commercial customers who want to possess an alternative energy system for their businesses or homes. Alternative energy applications have driven the marketplace for energy storage solutions to manage the power and energy being produced for either on or off grid applications.

 

The multi-faceted value of the ZESS product portfolio and system solutions for renewable energy, utility grid demand management, commercial and off grid remote power systems, backup power systems as well as Smart Grid applications have been demonstrated by the increase in customer RFQs.

 

Intellectual Property

A description of the current patented technologies, processed number of patents and patent applications, along with the jurisdiction of patent application/grant is as follows:

 

While we have not patented our flow channel technology, management believes that the technology is sufficiently difficult to develop and would require years of research to replicate. So far, we have not seen any competitor be successful in implementing the technologies necessary for manufacturing zinc bromide systems. If a competitor is able to discover our processes and manufacture this product on a commercial level, we may be materially and adversely affected. Therefore, management revisits its patent application process from time to time and may in the future file one or more patents relating to our flow channel technology as well as other technologies that we develop if it determines that the risks of disclosure are outweighed by the risks of non-protection of the patent in question.

 

 

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ZBB has recently filed for patent (patent pending) “Method and apparatus for controlling a hybrid power system” for its unique modular, flexible and standardized power electronics topology known as the ZESS POWR Power and Energy Control Center (PECC) for providing a single product integration of any combination of ZESS products, renewable energy sources and/or conventional generating sources; while providing a single or multiple outputs for a customers use, whether that be a grid connect system, and off grid system or a DC distribution system at any voltage level or a combination of all of the above.

 

Advanced Engineering and Development

 

The primary advanced engineering initiatives that the company is engaged in are the development of our Version Three (V3) ZESS flow battery module and new versions of the POWR PECC. The goal of these projects is to substantially reduce the cost of manufacture and to increase the performance of the products. In addition, new versions of the PECC are needed to cost effectively serve market segments like telecom. Our advanced engineering and development expense and cost of engineering and development revenues totaled $4.1 million and $2.9 million in years ended June 30, 2010 and 2009, respectively. We also had engineering and development revenues of $.6 million $1.1 million in years ended June 30, 2010 and 2009, respectively.

 

Employees

We currently have an aggregate of 31 full time employees, of which 26 are located at our U.S. manufacturing and corporate headquarters in Wisconsin, and five employed at our Research and Development facility in Australia. We expect staffing numbers to significantly increase as our business grows and new production equipment is deployed in accordance with our business expansion plans.

 

Sources and Availability of Raw Materials

We believe that the chemicals used in the electrolyte that we acquire are readily available and that the mixing of these substances in accordance with our specifications can be outsourced to various blending facilities. Currently, we outsource our electrolyte sorting and blending to a company in New Jersey, however, other blending facilities are also available in the United States. Similar, basic chemical raw materials are secured from Israel by the blending company on our behalf, however, the ingredients that comprise our electrolyte are not rare substances and we believe that other suppliers are available.

 

To improve manufacturing process efficiency, we outsource all basic manufacturing processes, such as injection and rotational molding for elementary component parts, and the mixing of our zinc bromide electrolyte solution, and devote our production capacity to the proprietary “value added” manufacturing of the cell stacks. We have patented designs and own all molds for all of the major parts of our cell stacks and tanks. All companies to which we outsource our manufacturing work are subject to confidentiality agreements.

 

We have developed unique, and in several cases, proprietary process technology and equipment for manufacturing of our energy storage products, the principal product components of which are electrodes, separators, flow frames and end blocks. The core manufacturing undertaken by us is the construction of hermetically sealed, leak proof cell stacks, which consist of nearly 100% plastic materials. The equipment and general techniques used by our manufacturers are generally well-known manufacturing techniques employed in several fields, including the automotive industry, and we believe that alternative sources of manufacturing are available.

 

   

 
 

To the Board of Directors and Stockholders
ZBB Energy Corporation
Milwaukee, Wisconsin

We have audited the accompanying consolidated balance sheets of ZBB Energy Corporation and subsidiaries as of June 30, 2010 and 2009, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ZBB Energy Corporation and subsidiaries at June 30, 2010 and 2009, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company continues to incur significant operating losses and has an accumulated deficit of $46,894,677 that raises substantial doubt about the Company’s ability to continue as a going concern. The Company is dependent on future debt and equity fundraising, additional sales orders, increase in margins, strategic partnerships, and/or government programs to sustain continued operations and meet past obligations. Management’s plans regarding these matters also are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/PKF LLP
New York, NY
September 7, 2010