ZBB Energy Corporation (ZBB)

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ZBB Energy Corporation (ZBB)

F2Q13 Earnings Call

February 14, 2013 11:00 am ET

Executives

Eric Apfelbach – President and Chief Executive Officer

Will Hogoboom – Chief Financial Officer

Charles Stankiewicz – Chief Operating Officer

Analysts

Ankur Desai – MDB Capital Group LLC

Jay Wigdae – Lakefront Partners

Presentation

Operator

Good morning ladies and gentlemen and welcome to the ZBB Energy Corporation Quarterly Earnings Conference. After prepared remarks, we will be opening the call to a Q&A period. (Operator Instructions) As a reminder, this call is being recorded.

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

Eric Apfelbach

Thank you. Good morning everybody and welcome to our quarterly conference call. This is Eric Apfelbach; I’m the President and CEO of ZBB Energy Corporation. And I’m joined here by Will Hogoboom, our CFO; and Chuck Stankiewicz, our COO. First, Will review the financials and then Chuck and I will brief you on the operating activities and comment on our global strategy and then we'll close with an overview of our business development activities. Will?

Will Hogoboom

Okay, thank you Eric and good morning everyone. Thank you for joining us today for ZBB’s conference call for our second fiscal quarter of 2013, which ended December 31, 2012. ZBB energy’s press release containing second quarter results was sent out by market wire yesterday, February 13, after the market closed. The press release may also be found on our website at zbbenergy.com. I would like to call your attention to the following Safe Harbor statement.

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 sections. 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, and expected expenses and our expectations concerning our business strategy.

Forward-looking statements involve inherent risks and uncertainties, which could cause actual 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 in 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 our subsequently filed 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. Thank you.

Now I will walk through the details of our financial results for the second quarter of 2013 as compared to the second quarter of fiscal 2012. Total revenue for the second quarter was $2.7 million, which was up over 500% from the same period a year ago. Our product revenue in the second quarter increased over 10 times from the same period a year ago. It is significant to note that with the tenfold increase in product revenue, we also increased our backlog. We had a backlog of $5.3 million as of November 5, 2012. We booked new orders of $3.5 million and we shipped our recognized revenue of $2.7 million for a current backlog as of today of $6.1 million, which is an increase of $800,000 from several months ago. These sales orders include ZBB EnerSystem and also follow-on orders for our hybrid vehicle motor controllers.

Although we continue to work on our engineering contracts, we did not report any engineering services revenue in the second quarter, because we used the milestone method of accounting for our existing engineering contracts and the current milestones were in progress, but not completed as of December 31, 2012. We have $400,000 of engineering services revenue remaining to recognize in future periods when the milestones are completed. As we have said previously, engineering services will continue to be important to our business model, but the growth in product revenue will outpace engineering revenue in future periods.

Total cost and expense for the three months that ended December 31, 2012 increased by approximately $2.4 million, which is primarily due to the following factors.

Cost of product sales in the second quarter increased $2,027,000 which was related to $2.5 million increase in commercial product sales. As we expected, (inaudible) product cost decreased in the second quarter, resulting in gross profit of almost $500,000 and a gross margin of 18%. Our gross margin increased in the second quarter from 7% in the first quarter.

We expect product margins to continue to improve in current levels as our cost cutting measures are implemented, as sales volume continues to increase and our production continues to ramp up in volume. This will enable production efficiencies and materials cost reduction from higher volume vertices. Chuck will also provide comments on our activities to reduce product costs.

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