Item 1. FINANCIAL STATEMENTS
EnSync, Inc.
Condensed Consolidated Balance Sheets
|
|
(Unaudited)
|
|
|
|
|
|
|
September 30,
2017
|
|
|
June 30,
2017
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,103,979
|
|
|
$
|
11,782,962
|
|
Accounts receivable, net
|
|
|
204,656
|
|
|
|
469,906
|
|
Inventories, net
|
|
|
2,342,562
|
|
|
|
2,482,013
|
|
Prepaid expenses and other current assets
|
|
|
413,008
|
|
|
|
247,589
|
|
Note receivable
|
|
|
168,164
|
|
|
|
171,140
|
|
Costs and estimated earnings in excess of billings
|
|
|
592,191
|
|
|
|
87,318
|
|
Deferred customer project costs
|
|
|
113,800
|
|
|
|
104,800
|
|
Project assets
|
|
|
93,010
|
|
|
|
114,971
|
|
Total current assets
|
|
|
13,031,370
|
|
|
|
15,460,699
|
|
Long-term assets:
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
2,902,104
|
|
|
|
3,446,253
|
|
Investment in investee company
|
|
|
1,897,703
|
|
|
|
1,947,728
|
|
Goodwill
|
|
|
809,363
|
|
|
|
809,363
|
|
Right of use assets-operating leases
|
|
|
130,747
|
|
|
|
150,214
|
|
Total assets
|
|
$
|
18,771,287
|
|
|
$
|
21,814,257
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
$
|
641,908
|
|
|
$
|
726,256
|
|
Accounts payable
|
|
|
1,491,125
|
|
|
|
487,185
|
|
Billings in excess of costs and estimated earnings
|
|
|
125,347
|
|
|
|
456,950
|
|
Accrued expenses
|
|
|
558,671
|
|
|
|
743,948
|
|
Customer deposits
|
|
|
165,209
|
|
|
|
90,876
|
|
Accrued compensation and benefits
|
|
|
318,938
|
|
|
|
396,890
|
|
Total current liabilities
|
|
|
3,301,198
|
|
|
|
2,902,105
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt, net of current maturities
|
|
|
331,827
|
|
|
|
331,827
|
|
Deferred revenue
|
|
|
422,638
|
|
|
|
422,638
|
|
Other long-term liabilities
|
|
|
235,226
|
|
|
|
249,920
|
|
Total liabilities
|
|
|
4,290,889
|
|
|
|
3,906,490
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
Series B redeemable convertible preferred stock ($0.01 par value, $1,000 face value),
3,000 shares authorized and issued, 2,300 shares outstanding, preference in liquidation of $5,714,363 and $5,631,086 as of September 30, 2017 and June 30, 2017, respectively
|
|
|
23
|
|
|
|
23
|
|
Series C convertible preferred stock ($0.01 par value, $1,000 face value),
28,048 shares authorized, issued, and outstanding, preference in liquidation of $8,766,036 and $12,276,682 as of September 30, 2017 and June 30, 2017, respectively
|
|
|
280
|
|
|
|
280
|
|
Common stock ($0.01 par value),
300,000,000 authorized,
55,604,327 and 55,200,963 shares issued and outstanding as of September 30, 2017 and June 30, 2017, respectively
|
|
|
1,264,358
|
|
|
|
1,260,324
|
|
Additional paid-in capital
|
|
|
142,373,350
|
|
|
|
141,822,317
|
|
Accumulated deficit
|
|
|
(128,531,438
|
)
|
|
|
(124,639,644
|
)
|
Accumulated other comprehensive loss
|
|
|
(1,583,946
|
)
|
|
|
(1,584,578
|
)
|
Total EnSync, Inc. equity
|
|
|
13,522,627
|
|
|
|
16,858,722
|
|
Noncontrolling interest
|
|
|
957,771
|
|
|
|
1,049,045
|
|
Total equity
|
|
|
14,480,398
|
|
|
|
17,907,767
|
|
Total liabilities and equity
|
|
$
|
18,771,287
|
|
|
$
|
21,814,257
|
|
See accompanying notes to condensed consolidated
financial statements.
EnSync, Inc.
Condensed Consolidated Statements of
Operations
(Unaudited)
|
|
Three months ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,362,048
|
|
|
$
|
7,656,561
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
2,066,910
|
|
|
|
7,766,143
|
|
Cost of engineering and development
|
|
|
-
|
|
|
|
937,725
|
|
Advanced engineering and development
|
|
|
1,107,344
|
|
|
|
1,001,328
|
|
Selling, general and administrative
|
|
|
2,644,274
|
|
|
|
2,552,451
|
|
Depreciation and amortization
|
|
|
97,392
|
|
|
|
154,357
|
|
Impairment of long-lived assets
|
|
|
447,000
|
|
|
|
-
|
|
Total costs and expenses
|
|
|
6,362,920
|
|
|
|
12,412,004
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(4,000,872
|
)
|
|
|
(4,755,443
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Equity in gain (loss) of investee company
|
|
|
(50,025
|
)
|
|
|
23,655
|
|
Interest income
|
|
|
7,133
|
|
|
|
11,358
|
|
Interest expense
|
|
|
(11,258
|
)
|
|
|
(12,997
|
)
|
Other income
|
|
|
69,998
|
|
|
|
8,432
|
|
Total other income (expense)
|
|
|
15,848
|
|
|
|
30,448
|
|
|
|
|
|
|
|
|
|
|
Loss before benefit for income taxes
|
|
|
(3,985,024
|
)
|
|
|
(4,724,995
|
)
|
|
|
|
|
|
|
|
|
|
Benefit for income taxes
|
|
|
-
|
|
|
|
-
|
|
Net loss
|
|
|
(3,985,024
|
)
|
|
|
(4,724,995
|
)
|
Net loss attributable to noncontrolling interest
|
|
|
93,230
|
|
|
|
82,273
|
|
Net loss attributable to EnSync, Inc.
|
|
|
(3,891,794
|
)
|
|
|
(4,642,722
|
)
|
Preferred stock dividend
|
|
|
(83,277
|
)
|
|
|
(75,445
|
)
|
Net loss attributable to common shareholders
|
|
$
|
(3,975,071
|
)
|
|
$
|
(4,718,167
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.07
|
)
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares - basic and diluted
|
|
|
55,550,492
|
|
|
|
47,753,604
|
|
See accompanying notes to condensed consolidated
financial statements.
EnSync, Inc.
Condensed Consolidated Statements of
Comprehensive Loss
(Unaudited)
|
|
Three months ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Net loss
|
|
$
|
(3,985,024
|
)
|
|
$
|
(4,724,995
|
)
|
Foreign exchange translation adjustments
|
|
|
632
|
|
|
|
766
|
|
Comprehensive loss
|
|
|
(3,984,392
|
)
|
|
|
(4,724,229
|
)
|
Net loss attributable to noncontrolling interest
|
|
|
93,230
|
|
|
|
82,273
|
|
Comprehensive loss attributable to EnSync, Inc.
|
|
$
|
(3,891,162
|
)
|
|
$
|
(4,641,956
|
)
|
See accompanying notes to condensed consolidated
financial statements.
EnSync, Inc.
Condensed Consolidated Statements of
Changes in Equity
(Unaudited)
|
|
Series B Preferred Stock
|
|
|
Series C Preferred Stock
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Accumulated
|
|
|
Accumulated
Other
Comprehensive
|
|
|
Noncontrolling
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid-in Capital
|
|
|
Deficit
|
|
|
Income (Loss)
|
|
|
Interest
|
|
Balance:
July 1, 2016
|
|
|
2,300
|
|
|
$
|
23
|
|
|
|
28,048
|
|
|
$
|
280
|
|
|
|
47,752,821
|
|
|
$
|
1,185,843
|
|
|
$
|
137,585,233
|
|
|
$
|
(120,550,108
|
)
|
|
$
|
(1,585,583
|
)
|
|
$
|
1,401,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,089,536
|
)
|
|
|
-
|
|
|
|
(352,327
|
)
|
Net currency translation
adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,005
|
|
|
|
-
|
|
Issuance of common stock,
net of costs and underwriting fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,150,000
|
|
|
|
71,500
|
|
|
|
2,024,340
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
144,728
|
|
|
|
1,447
|
|
|
|
2,144,318
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercise of stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
124,252
|
|
|
|
1,242
|
|
|
|
68,718
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercise of warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
29,162
|
|
|
|
292
|
|
|
|
(292
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance: June 30, 2017
|
|
|
2,300
|
|
|
|
23
|
|
|
|
28,048
|
|
|
|
280
|
|
|
|
55,200,963
|
|
|
|
1,260,324
|
|
|
|
141,822,317
|
|
|
|
(124,639,644
|
)
|
|
|
(1,584,578
|
)
|
|
|
1,049,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,891,794
|
)
|
|
|
-
|
|
|
|
(93,230
|
)
|
Net currency translation
adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
632
|
|
|
|
-
|
|
Issuance of common stock,
net of costs and underwriting fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
367,000
|
|
|
|
3,670
|
|
|
|
115,789
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Contribution of capital
from noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,956
|
|
Stock-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
36,364
|
|
|
|
364
|
|
|
|
435,244
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance:
September 30, 2017
|
|
|
2,300
|
|
|
$
|
23
|
|
|
|
28,048
|
|
|
$
|
280
|
|
|
|
55,604,327
|
|
|
$
|
1,264,358
|
|
|
$
|
142,373,350
|
|
|
$
|
(128,531,438
|
)
|
|
$
|
(1,583,946
|
)
|
|
$
|
957,771
|
|
See accompanying notes to condensed consolidated
financial statements.
EnSync, Inc.
Condensed Consolidated Statements of
Cash Flows
(Unaudited)
|
|
Three months ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,985,024
|
)
|
|
$
|
(4,724,995
|
)
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation of property, plant and equipment
|
|
|
97,392
|
|
|
|
156,464
|
|
Stock-based compensation, net
|
|
|
435,608
|
|
|
|
272,653
|
|
Equity in (gain) loss of investee company
|
|
|
50,025
|
|
|
|
(23,655
|
)
|
Provision for inventory reserve
|
|
|
54,928
|
|
|
|
140,690
|
|
Gain on sale of property and equipment
|
|
|
(70,000
|
)
|
|
|
(8,432
|
)
|
Interest accreted on note receivable
|
|
|
(3,024
|
)
|
|
|
(3,024
|
)
|
Impairment of long-lived assets
|
|
|
447,000
|
|
|
|
-
|
|
Changes in assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
265,250
|
|
|
|
(264,078
|
)
|
Inventories
|
|
|
84,523
|
|
|
|
(68,035
|
)
|
Prepaids and other current assets
|
|
|
(165,413
|
)
|
|
|
60,441
|
|
Costs and estimated earnings in excess of billings
|
|
|
(504,873
|
)
|
|
|
-
|
|
Deferred PPA project costs
|
|
|
-
|
|
|
|
5,174,290
|
|
Deferred customer project costs
|
|
|
(9,000
|
)
|
|
|
304,229
|
|
Project assets
|
|
|
21,961
|
|
|
|
516,017
|
|
Accounts payable
|
|
|
1,003,940
|
|
|
|
(119,542
|
)
|
Billings in excess of costs and estimated earnings
|
|
|
(331,603
|
)
|
|
|
-
|
|
Accrued expenses
|
|
|
(180,747
|
)
|
|
|
579,447
|
|
Customer deposits
|
|
|
74,333
|
|
|
|
196,417
|
|
Accrued compensation and benefits
|
|
|
(77,952
|
)
|
|
|
66,895
|
|
Deferred revenue
|
|
|
-
|
|
|
|
422,638
|
|
Other long-term liabilities
|
|
|
-
|
|
|
|
137,983
|
|
Net cash provided by (used in) operating activities
|
|
|
(2,792,676
|
)
|
|
|
2,816,403
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Expenditures for property and equipment
|
|
|
-
|
|
|
|
(9,149
|
)
|
Proceeds from sale of property and equipment
|
|
|
70,000
|
|
|
|
9,754
|
|
Payments from note receivable
|
|
|
6,000
|
|
|
|
-
|
|
Net cash provided by investing activities
|
|
|
76,000
|
|
|
|
605
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Repayments of long term debt
|
|
|
(84,348
|
)
|
|
|
(82,236
|
)
|
Proceeds from issuance of common stock
|
|
|
119,459
|
|
|
|
-
|
|
Contribution of capital from noncontrolling interest
|
|
|
1,956
|
|
|
|
-
|
|
Net cash provided by (used in) financing activities
|
|
|
37,067
|
|
|
|
(82,236
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
626
|
|
|
|
(683
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(2,678,983
|
)
|
|
|
2,734,089
|
|
Cash and cash equivalents - beginning of period
|
|
|
11,782,962
|
|
|
|
17,189,089
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents - end of period
|
|
$
|
9,103,979
|
|
|
$
|
19,923,178
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
11,452
|
|
|
$
|
10,520
|
|
Supplemental noncash information:
|
|
|
|
|
|
|
|
|
Right of use asset obtained in exchange for new operating lease
|
|
|
(19,467
|
)
|
|
|
102,943
|
|
See accompanying notes to condensed consolidated
financial statements.
EnSync, Inc.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
EnSync, Inc. and its subsidiaries, which
are often referenced as EnSync Energy for marketing and branding purposes (“EnSync Energy,” “we,” “us,”
“our,” or the “Company”) is an energy innovation company whose technologies and capabilities are designed
to deliver the least expensive, highest value and most reliable electricity. EnSync Energy’s modular technologies and services
synchronize power sources to meet dynamic and evolving energy environments, enable real-time prioritization of distributed energy
resources and provide grid stability and economic optimization. EnSync Energy offers integrated solutions from concept through
design, project finance, commissioning, and operating and maintenance, serving the commercial and industrial (“C&I”)
and multi-tenant building, utility and off-grid markets. Incorporated in 1998, EnSync Energy is headquartered in Menomonee Falls,
Wisconsin, USA, with offices in Madison, Wisconsin, Petaluma, California, Honolulu, Hawaii and Shanghai, China.
EnSync Energy develops and commercializes
product and service solutions for the distributed energy generation market, including energy management systems, energy storage
systems, applications and internet of energy platforms that link distributed energy resources with the grid network. These solutions
are critical to the transition from a “coal-centric economy” to one reliant on renewable energy sources. EnSync Energy
synchronizes conventional utility, distributed generation and storage assets to seamlessly ensure the least expensive and most
reliable electricity available, thus enabling the future of energy networks.
EnSync Energy delivers fully integrated
systems utilizing proprietary direct current power control hardware, energy management software and extensive experience with energy
storage technologies. Our internet of energy control platform adapts to ever-changing generation and load variables, as well as
changes in utility prices and programs, aiming to ensure the means to make and/or save money behind-the-meter while concurrently
providing utilities the opportunity to use distributed energy resource systems for various grid enhancing services.
EnSync Energy’s systems can easily
integrate distributed energy resources with the grid, island from the grid and serve as a microgrid, and be deployed as self-contained
microgrids, delivering electricity to sites for which no grid exists. EnSync Energy brings vital power control and energy storage
solutions to problems caused by the incorporation of increasingly pervasive renewable energy generating assets that are part of
the grid power transmission and distribution network used in commercial, industrial and multi-tenant buildings. In addition to
ensuring resilient and high-value electricity to off-takers, utilities can benefit from EnSync Energy’s systems by relying
on such assets for visibility, aggregation and control as they begin to use distributed energy resources to ensure a more fortified
grid via grid services. The Company also develops and commercializes energy management systems for off-grid applications such as
island or remote power.
Power Purchase Agreements
In addition to customer-direct systems
sales, we recently began addressing our target markets as a developer and a financial packager through the use of power purchase
agreements (“PPAs”). Navigant Research forecasts the annual market for solar plus energy storage distributed energy
systems to grow to nearly $50 billion by 2026, with a 2017 to 2026 compound annual growth rate of more than 40 percent. Under this
PPA structure, we agree to develop and supply a system that uses our and other companies’ products and the offtaker agrees
to purchase electricity from the completed system at a fixed rate for typically a 20-year period. Through these arrangements, the
offtaker receives the benefit of a low and fixed price for electricity without incurring the capital expenditures required to develop
and build the system.
Because building these PPA projects requires
significant long-term capital outlays, we do not intend to own the PPA systems and seek to sell them to third parties once we have
completed the site development process. Site development activities include: (i) finalizing the engineering design of the system,
(ii) applying for and receiving the necessary permits for construction of the system and (iii) negotiation of an interconnection
agreement with the local utility. This site development process typically takes three to four months.
Most recently, we typically do not begin
construction of a specific project until it has been sold to a third party. Accordingly, during the site development process, we
engage in a sale process and provide interested purchasers with information related to the system. The purchase price for a particular
system is determined through a formula that we believe is customary in the solar industry that takes into account the revenue stream
to be received from the offtaker discounted to present value based on customary internal rates of return for similar projects,
the costs of completing, maintaining and administering the system and certain other factors.
Once the system has been sold, we begin
construction which includes procurement of the necessary equipment, physical construction and commissioning of the system. The
construction period varies based on many internal and external factors, but is typically completed within six to nine months.
Our sales agreement with the buyer of the
system typically provides for us to receive an upfront payment and additional progress payments to be made based upon achievement
of certain key construction and commissioning milestones.
We recognize revenue from these PPA arrangements
on a percentage of completion basis as we build out and commission the system. Any excess cash received from the system purchaser
in excess of recognized revenue is recorded as billings in excess of costs and estimated earnings and carried as a liability on
our condensed consolidated financial statements. Based on our experience to date, we expect to recognize all revenue from a particular
PPA system typically within 12 months of the signing of the related PPA agreement.
We may also enter into a service agreement
with the owner of a PPA system pursuant to which we provide ongoing administrative, operating and maintenance services. These agreements
usually have a term which matches the PPA term. We recognize revenue from a service agreement ratably over the life of the related
agreement.
The condensed consolidated financial statements include the
accounts of the Company and those of its wholly-owned subsidiaries ZBB Energy Pty Ltd. (formerly known as ZBB Technologies, Ltd.),
DCfusion LLC (“DCfusion”), various PPA project subsidiaries, its eighty-five percent owned subsidiary Holu Energy LLC
(“Holu”), and its sixty percent owned subsidiary ZBB PowerSav Holdings Limited (“Holdco”) located in Hong
Kong, which was formed in connection with the Company’s investment in a China joint venture.
Interim Financial Data
The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in
the United States of America (“US GAAP”) for interim financial data and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by US GAAP for
complete financial statements. In the opinion of management, all adjustments (consisting only of adjustments of a normal and
recurring nature) considered necessary for fair presentation of the results of operations have been included. Operating
results for the three months ended September 30, 2017 are not necessarily indicative of the results that might be expected
for the year ending June 30, 2018.
The condensed consolidated balance sheet
at June 30, 2017 has been derived from audited financial statements at that date, but does not include all of the information and
disclosures required by US GAAP. For a more complete discussion of accounting policies and certain other information, refer to
the Company’s Annual Report filed on Form 10-K for the fiscal year ended June 30, 2017 filed with the Securities and Exchange
Commission (“SEC”) on September 27, 2017.
Basis of Presentation and Consolidation
The accompanying condensed consolidated
financial statements include the accounts of the Company and its wholly and majority-owned subsidiaries and have been prepared
in accordance with US GAAP and are reported in US dollars. For subsidiaries in which the Company’s ownership interest is
less than 100%, the noncontrolling interests are reported in stockholders’ equity in the condensed consolidated balance sheets.
The noncontrolling interests in net income (loss), net of tax, are classified separately in the condensed consolidated statements
of operations. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company’s
fiscal year end is June 30.
Use of Estimates
The preparation of financial statements
in conformity with US GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. It is reasonably possible that the estimates we have
made may change in the near future. Significant estimates underlying the accompanying condensed consolidated financial statements
include those related to:
|
·
|
going concern assessment;
|
|
·
|
the timing of revenue recognition;
|
|
·
|
allocation of purchase price in a business combination;
|
|
·
|
the allowance for doubtful accounts;
|
|
·
|
provisions for excess and obsolete inventory;
|
|
·
|
the lives and recoverability of property, plant and equipment and other long-lived assets, including
the testing for impairment;
|
|
·
|
testing of goodwill for impairment;
|
|
·
|
contract costs, losses and reserves;
|
|
·
|
income tax valuation allowances;
|
|
·
|
discount rates for finance and operating lease liabilities;
|
|
·
|
stock-based compensation; and
|
|
·
|
valuation of equity instruments and warrants.
|
Fair Value of Financial Instruments
The Company’s financial instruments
consist of cash and cash equivalents, accounts receivable, a note receivable, accounts payable, bank loans, notes payable, equipment
financing, equity instruments and warrants. The carrying amounts of the Company’s financial instruments approximate their
respective fair values due to the relatively short-term nature of these instruments, except for the bank loans, notes payable,
equipment financing, equity instruments and warrants. The carrying amounts of the bank loans and notes payable approximate fair
value due to the interest rate and terms approximating those available to us for similar obligations. The interest rate on the
equipment financing obligation was imputed based on the requirements described in Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) Topic 842-40-30-6. The fair value of the nonconvertible attribute and conversion
option of the Series C convertible preferred stock (the “Series C Preferred Stock”) and related warrant was determined
using the Option-Pricing Method (“OPM”) as described in the AICPA Accounting and Valuation Guide entitled Valuation
of Privately-Held-Company Equity Securities Issued as Compensation and a “with” and “without” methodology
to bifurcate the Series C Preferred Stock conversion feature. The OPM model treats the various equity securities as call options
on the total equity value contingent upon each security’s strike price or participation rights. The Black-Scholes inputs
utilized for the OPM model were: (i) an aggregate equity value estimated based on the back-solve methodology to reconcile the closing
common stock price as of the valuation date; (ii) a term in alignment with the terms of our supply agreement with SPI Energy Co.,
LTD.(“SPI”) (formerly known as Solar Power, Inc.); (iii) a risk free rate from the Federal Reserve Board’s H.15
release as of the transaction date; (iv) the volatility of the price of the Company’s publicly traded stock; and (v) the
performance vesting requirements of the equity instruments that were expected to be met.
The Company accounts for the fair value
of financial instruments in accordance with FASB ASC Topic 820, “Fair Value Measurements and Disclosures.” Fair value
is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The degree of judgment utilized in measuring the fair value of assets and liabilities
generally correlate to the level or pricing observability. FASB ASC Topic 820 describes a fair value hierarchy based on the following
three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure
fair value:
Level 1 inputs are quoted prices (unadjusted)
in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.
Level 2 inputs are inputs other than quoted
prices that are observable for the asset or liability, either directly or indirectly, for similar assets or liabilities in active
markets.
Level 3 inputs are unobservable inputs
for the asset or liability. As such, the prices or valuation techniques require inputs that are both significant to the fair value
measurement and are unobservable.
Cash and Cash Equivalents
The Company considers all highly liquid
investments with maturities of three months or less to be cash equivalents. The Company maintains its cash deposits at financial
institutions predominately in the United States, Australia, Hong Kong and China. The Company has not experienced any losses in
such accounts.
Accounts Receivable
Credit is extended based on an evaluation
of a customer’s financial condition. Accounts receivable are stated at the amount the Company expects to collect from outstanding
balances. The Company records allowances for doubtful accounts based on customer-specific analysis and general matters such as
current assessments of past due balances and economic conditions. The Company writes off accounts receivable against the allowance
when they become uncollectible. Accounts receivable are stated net of an allowance for doubtful accounts of $23,563 as of September
30, 2017 and $47,307 as of June 30, 2017. The composition of accounts receivable by aging category is as follows as of:
|
|
September 30, 2017
|
|
|
June 30, 2017
|
|
Current
|
|
$
|
118,573
|
|
|
$
|
309,156
|
|
30-60 days
|
|
|
-
|
|
|
|
-
|
|
60-90 days
|
|
|
42,278
|
|
|
|
-
|
|
Over 90 days
|
|
|
43,805
|
|
|
|
160,750
|
|
Total
|
|
$
|
204,656
|
|
|
$
|
469,906
|
|
Inventories
Inventories are stated at the lower of cost or net realizable
value, defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion,
disposal and transportation. Cost is computed using standard cost, which approximates actual cost, on a first-in, first-out basis.
The Company provides inventory write-downs on excess and obsolete inventories based on historical usage. The write-down is
measured as the difference between the cost of the inventory and net realizable value based upon assumptions about usage and charged
to the provision for inventory, which is a component of cost of sales.
Note Receivable
The Company has a note receivable from
an unrelated party. We regularly evaluate the financial condition of the borrower to determine if any reserve for an uncollectible
amount should be established. To date, no such reserve is required.
Costs and Estimated Earnings in Excess of Billings
/
Billings
in Excess of Costs and Estimated Earnings
Costs and estimated earnings in excess
of billings represent amounts earned and reimbursable under contracts accounted for under the percentage of completion method.
The timing of when we bill our customers is generally dependent upon advance billing terms, milestone billings based on the completion
of certain phases of the work, or when services are provided. Based on our historical experience, we generally consider the collection
risk related to these amounts to be low. When events or conditions indicate that the amounts outstanding may become uncollectible,
an allowance is estimated and recorded. We anticipate that substantially all of such amounts will be billed and collected over
the next twelve months.
Billings in excess of costs and estimated
earnings represents amounts billed to customers in advance of being earned under contracts accounted for under the percentage of
completion method. We anticipate that substantially all such amounts will be earned over the next twelve months.
Deferred Customer Project Costs
Deferred customer project costs consist
primarily of the costs of products delivered and services performed that are subject to additional performance obligations or customer
acceptance. These deferred customer project costs are expensed at the time the related revenue is recognized.
Project Assets
Project assets consist primarily of capitalized costs which
are incurred by the Company prior to the sale of the photovoltaic, storage or energy management systems and PPA to a third-party.
These costs are typically for the construction, installation and development of these projects. Construction and installation costs
include primarily material and labor costs. Development fees can include legal, consulting, permitting and other similar costs.
Property, Plant and Equipment
Land, building, equipment, computers, furniture
and fixtures are recorded at cost. Maintenance, repairs and betterments are charged to expense as incurred. Depreciation is provided
for all plant and equipment on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives
used for each class of depreciable asset are:
|
|
Estimated Useful
Lives
|
Manufacturing equipment
|
|
3 - 7 years
|
Office equipment
|
|
3 - 7 years
|
Building and improvements
|
|
7 - 40 years
|
The Company completed a review of the estimated
useful lives of specific assets for the three months ended September 30, 2017 and determined that there were no changes in the
estimated useful lives of assets.
Impairment of Long-Lived Assets
In accordance with FASB ASC Topic 360,
"Impairment or Disposal of Long-Lived Assets," the Company assesses potential impairments to its long-lived assets including
property, plant and equipment and intangible assets when there is evidence that events or changes in circumstances indicate that
the carrying value may not be recoverable.
If such an indication exists, the recoverable
amount of the asset is compared to the asset’s carrying value. Any excess of the asset’s carrying value over its recoverable
amount is expensed in the statement of operations. In assessing value in use, the estimated future cash flows are discounted to
their present value using a pre-tax discount rate.
On October 12, 2017, the Company accepted
an offer to sell its corporate headquarters for $2,340,000, less commissions and other customary closing costs. The sale of the
Company’s corporate headquarters is subject to customary closing contingencies, including the prospective purchaser’s
financing and due diligence. As a result, we recorded an impairment charge of $447,000 on the building and land in our condensed
consolidated statements of operation during the three months ended September 30, 2017.
Investment in Investee Company
Investee companies that are not consolidated,
but over which the Company exercises significant influence, are accounted for under the equity method of accounting. Whether or
not the Company exercises significant influence with respect to an investee depends on an evaluation of several factors including,
among others, representation on the investee company’s board of directors and ownership level, which is generally a 20% to
50% interest in the voting securities of the investee company. Under the equity method of accounting, an investee company’s
accounts are not reported in the Company’s condensed consolidated balance sheets and statements of operations; however, the
Company’s share of the earnings or losses of the investee company is reflected in the caption ‘‘Equity in gain
(loss) of investee company” in the condensed consolidated statements of operations. The Company’s carrying value in
an equity method investee company is reported in the caption ‘‘Investment in investee company’’ in the
Company’s condensed consolidated balance sheets.
When the Company’s carrying value
in an equity method investee company is reduced to zero, no further losses are recorded in the Company’s condensed consolidated
financial statements unless the Company guaranteed obligations of the investee company or has committed additional funding. When
the investee company subsequently reports income, the Company will not record its share of such income until it equals or exceeds
the amount of its share of losses not previously recognized.
Goodwill
Goodwill is recognized as the excess cost
of an acquired entity over the net amount assigned to assets acquired and liabilities assumed. Goodwill is not amortized but reviewed
for impairment annually as of June 30 or more frequently if events or changes in circumstances indicate that its carrying value
may be impaired. These conditions could include a significant change in the business climate, legal factors, operating performance
indicators, competition, or sale or disposition of a significant portion of a reporting unit. The Company has one reporting unit.
The first step of the impairment test requires
the comparing of a reporting unit’s fair value to its carrying value. If the carrying value is less than the fair value,
no impairment exists and the second step is not performed. If the carrying value is higher than the fair value, there is an indication
that impairment may exist and the second step must be performed to compute the amount of the impairment. In the second step, the
impairment is computed by estimating the fair values of all recognized and unrecognized assets and liabilities of the reporting
unit and comparing the implied fair value of reporting unit goodwill with the carrying amount of that unit’s goodwill. The
Company determined fair value as evidenced by market capitalization, and concluded that there was no need for an impairment charge
as of September 30, 2017 and June 30, 2017.
Accrued Expenses
Accrued expenses consist of the Company’s present obligations
related to various expenses incurred during the period and includes a reserve for estimated contract losses, other accrued expenses
and warranty obligations.
Warranty Obligations
The Company typically warrants its products
for the shorter of twelve months after installation or eighteen months after date of shipment. Warranty costs are provided for
estimated claims and charged to cost of product sales as revenue is recognized. Warranty obligations are also evaluated quarterly
to determine a reasonable estimate for the replacement of potentially defective materials of all energy storage systems that have
been shipped to customers within the warranty period.
While the Company actively engages in monitoring
and improving its evolving battery and production technologies, there is only a limited product history and relatively short time
frame available to test and evaluate the rate of product failure. Should actual product failure rates differ from the Company’s
estimates, revisions are made to the estimated rate of product failures and resulting changes to the liability for warranty obligations.
In addition, from time to time, specific warranty accruals may be made if unforeseen technical problems arise.
The following is a summary of accrued warranty activity:
|
|
Three months ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Beginning balance
|
|
$
|
239,173
|
|
|
$
|
27,207
|
|
Accruals for warranties during the period
|
|
|
852
|
|
|
|
5,915
|
|
Net settlements during the period
|
|
|
(34,610
|
)
|
|
|
(157,330
|
)
|
Adjustments relating to preexisting warranties
|
|
|
(8,724
|
)
|
|
|
148,481
|
|
Ending balance
|
|
$
|
196,691
|
|
|
$
|
24,273
|
|
The Company offers extended warranty contracts
to its customers. These contracts typically cover a period up to twenty years and include advance payments that are recorded initially
as long-term deferred revenue. Revenue is recognized in the same manner as the costs incurred to perform under the extended warranty
contracts. Costs associated with these extended warranty contracts are expensed to cost of product sales as incurred. A summary
of changes to long-term deferred revenue for extended warranty contracts is as follows:
|
|
Three months ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Beginning balance
|
|
$
|
431,700
|
|
|
$
|
-
|
|
Deferred revenue for new extended warranty contracts
|
|
|
-
|
|
|
|
422,638
|
|
Deferred revenue recognized
|
|
|
(938
|
)
|
|
|
-
|
|
Ending balance
|
|
|
430,762
|
|
|
|
422,638
|
|
Less: current portion of deferred revenue for extended warranty contracts
|
|
|
8,124
|
|
|
|
-
|
|
Long-term deferred revenue for extended warranty contracts
|
|
$
|
422,638
|
|
|
$
|
422,638
|
|
Revenue Recognition
Revenues are recognized when persuasive
evidence of a contractual arrangement exists, delivery has occurred or services have been rendered, the seller’s price to
buyer is fixed and determinable and collectability is reasonably assured. The portion of revenue related to installation and final
acceptance, is deferred until such installation and final customer acceptance are completed.
From time to time, the Company may enter
into separate agreements at or near the same time with the same customer. The Company evaluates such agreements to determine whether
they should be accounted for individually as distinct arrangements or whether the separate agreements are, in substance, a single
multiple element arrangement. The Company evaluates whether the negotiations are conducted jointly as part of a single negotiation,
whether the deliverables are interrelated or interdependent, whether the fees in one arrangement are tied to performance in another
arrangement, and whether elements in one arrangement are essential to another arrangement. The Company’s evaluation involves
significant judgment to determine whether a group of agreements might be so closely related that they are, in effect, part of a
single arrangement.
Our collaboration agreements typically
involve multiple elements or deliverables, including upfront fees, contract research and development, milestone payments, technology
licenses or options to obtain technology licenses and royalties. For these arrangements, revenues are recognized in accordance
with FASB ASC Topic 605-25, “Revenue Recognition – Multiple Element Arrangements.” The Company’s revenues
associated with multiple element contracts is based on the selling price hierarchy, which utilizes vendor-specific objective evidence
(“VSOE”) when available, third-party evidence (“TPE”) if VSOE is not available, and if neither is available
then the best estimate of the selling price is used. The Company utilizes best estimate for its multiple deliverable transactions
as VSOE and TPE do not exist. To be considered a separate element, the product or service in question must represent a separate
unit under SEC Staff Accounting Bulletin 104, and fulfill the following criteria: the delivered item(s) has value to the customer
on a standalone basis; there is objective and reliable evidence of the fair value of the undelivered item(s); and if the arrangement
includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered
probable and substantially in our control. For arrangements containing multiple elements, revenue from time and materials based
service arrangements is recognized as the service is performed. Revenue relating to undelivered elements is deferred at the estimated
fair value until delivery of the deferred elements. If the arrangement does not meet all criteria above, the entire amount of the
transaction is deferred until all elements are delivered.
The portion of revenue related to engineering
and development is recognized ratably upon delivery of the goods or services pertaining to the underlying contractual arrangement
or revenue is recognized as certain activities are performed by the Company over the estimated performance period.
For PPA projects with no identified buyer
until at or near the completion of the project, the Company recognizes revenue for the sales of PPA projects following the guidance
in FASB ASC Topic 360, “Accounting for Sales of Real Estate.” We record the sale as revenue after the initial and continuing
investment requirements have been met and whether collectability from the buyer is reasonably assured, which generally occurs at
the end of a project. We may align our revenue recognition and release our project assets or deferred PPA project costs to cost
of sales with the receipt of payment from the buyer if the sale has been consummated and we have transferred the usual risks and
rewards of ownership to the buyer.
For PPA projects with an identified buyer,
the Company recognizes revenue for the sales of PPA projects using the percentage of completion method for recording revenues on
long term contracts under FASB ASC Topic 605-35, “Construction-Type and Production-Type Contracts,” measured by the
percentage of cost incurred to date to estimated total cost for each contract. That method is used because management considers
total cost to be the best available measure of progress on contracts. Because of inherent uncertainties in estimating costs, it
is at least reasonably possible that the estimates used will change within the near term.
The Company charges shipping and handling
fees when products are shipped or delivered to a customer, and includes such amounts in product revenues and shipping costs in
cost of sales. The Company reports its revenues net of estimated returns and allowances.
Revenues for the three months ended September
30, 2017 were comprised of three significant customers (90% of revenues) and revenues for the three months ended September 30,
2016 were comprised of one significant customer (93% of revenues).
The Company had four significant customers
with an aggregate outstanding receivable balance of $168,823 (82% of accounts receivable, net) as of September 30, 2017. The Company
had three significant customers with an aggregate outstanding receivable balance of $336,685 (72% of accounts receivable, net)
as of June 30, 2017.
Engineering, Development, and License Revenues
We assess whether a substantive milestone
exists at the inception of our agreements. In evaluating if a milestone is substantive we consider whether:
|
·
|
Substantive uncertainty exists as to the achievement of the milestone event at the inception of
the arrangement;
|
|
·
|
The achievement of the milestone involves substantive effort and can only be achieved based in
whole or in part on our performance or the occurrence of a specific outcome resulting from our performance;
|
|
·
|
The amount of the milestone payment appears reasonable either in relation to the effort expended
or the enhancement of the value of the delivered item(s);
|
|
·
|
There is no future performance required to earn the milestone; and
|
|
·
|
The consideration is reasonable relative to all deliverables and payment terms in the arrangement.
|
If any of these conditions are not met,
we do not consider the milestone to be substantive and we defer recognition of the milestone payment and recognize it as revenue
over the estimated period of performance, if any.
The Company recorded Engineering and development
costs of $937,725 related to a Research and Development Agreement (the “R&D Agreement”) with Lotte Chemical Corporation
(“Lotte”) for the three months ended September 30, 2016. Pursuant to the R&D Agreement, the Company agreed to develop
and provide to Lotte a 500kWh zinc bromide flow battery system, including a zinc bromide chemical flow battery module and related
software, on the terms and conditions set forth in the R&D Agreement. The Company does not expect to receive any additional
cash payments under the R&D Agreement and Amended License Agreement with Lotte. As of September 30, 2017, and June 30, 2017,
the Company had no billed or unbilled amounts from engineering and development contracts in process.
Advanced Engineering and Development Expenses
In accordance with FASB ASC Topic 730,
“Research and Development,” the Company expenses advanced engineering and development costs as incurred. These costs
consist primarily of materials, labor and allocable indirect costs incurred to design, build and test prototype units, as well
as the development of manufacturing processes for these units. Advanced engineering and development costs also include consulting
fees and other costs.
To the extent these costs are separately
identifiable, incurred and funded by advanced engineering and development type agreements with outside parties, they are shown
separately on the condensed consolidated statements of operations as a “Cost of engineering and development.”
Stock-Based Compensation
The Company measures all “Share-Based
Payments," including grants of stock options, restricted shares and restricted stock units (“RSUs”) in its condensed
consolidated statements of operations based on their fair values on the grant date, which is consistent with FASB ASC Topic 718,
“Stock Compensation,” guidelines.
Accordingly, the Company measures share-based
compensation cost for all share-based awards at the fair value on the grant date and recognizes share-based compensation over the
service period for awards that are expected to vest. The fair value of stock options is determined based on the number of shares
granted and the price of the shares at grant, and calculated based on the Black-Scholes valuation model.
The Company compensates its outside directors
with RSUs and cash. The grant date fair value of the RSU awards is determined using the closing stock price of the Company’s
common stock (the “Common Stock”) on the day prior to the date of the grant, with the compensation expense amortized
over the vesting period of RSU awards, net of estimated forfeitures.
The Company only recognizes expense for
those options or shares that are expected ultimately to vest, using two attribution methods to record expense, the straight-line
method for grants with only service-based vesting or the graded-vesting method, which considers each performance period, for all
other awards. See further discussion of stock-based compensation in Note 9.
Advertising Expense
Advertising costs of $92,696 and $41,943
were incurred for the three months ended September 30, 2017 and September 30, 2016, respectively. These costs were charged to selling,
general, and administrative expenses as incurred.
Income Taxes
The Company records deferred income taxes
in accordance with FASB ASC Topic 740, “Accounting for Income Taxes.” FASB ASC Topic 740 requires recognition of deferred
income tax assets and liabilities for temporary differences between the tax basis of assets and liabilities and the amounts at
which they are carried in the financial statements, based upon the enacted tax rates in effect for the year in which the differences
are expected to reverse. In addition, a valuation allowance is recognized if it is more likely than not that some or all of the
deferred income tax assets will not be realized in the foreseeable future. Deferred income tax assets are reviewed for recoverability
based on historical taxable income, the expected reversals of existing temporary differences, tax planning strategies and projections
of future taxable income. As a result of this analysis, the Company has provided for a valuation allowance against its net deferred
income tax assets as of September 30, 2017 and June 30, 2017.
The Company applies a more-likely-than-not
recognition threshold for all tax uncertainties as required under FASB ASC Topic 740, which only allows the recognition of those
tax benefits that have a greater than fifty percent likelihood of being sustained upon examination by the taxing authorities.
The Company’s U.S. Federal income
tax returns for the years ended June 30, 2014 through June 30, 2017 and the Company’s Wisconsin income tax returns for the
years ended June 30, 2013 through June 30, 2017 are subject to examination by taxing authorities. On August 2, 2017, the United
States Internal Revenue Service (“IRS”) notified the Company of an income tax audit for the tax period ended June 30,
2015. The Company cannot reasonably estimate the ultimate outcome of the IRS audit; however, it believes that it has followed applicable
U.S. tax laws and will defend its income tax positions.
Foreign Currency
The Company uses the United States dollar
as its functional and reporting currency, while the Australian dollar and Hong Kong dollar are the functional currencies of its
foreign subsidiaries. Assets and liabilities of the Company’s foreign subsidiaries are translated into United States dollars
at exchange rates that are in effect at the balance sheet date while equity accounts are translated at historical exchange rates.
Income and expense items are translated at average exchange rates which were applicable during the reporting period. Translation
adjustments are recorded in accumulated other comprehensive loss as a separate component of equity in the condensed consolidated
balance sheets.
Loss per Share
The Company follows the FASB ASC Topic 260, “Earnings
per Share,” provisions which require the reporting of both basic and diluted earnings (loss) per share. Basic earnings (loss)
per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings (net loss) per share reflect the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into common stock. In accordance with the FASB ASC Topic 260,
any anti-dilutive effects on net income (loss) per share are excluded.
Concentrations of Credit Risk
Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of cash, accounts receivable and costs and estimated earnings
in excess of billings.
The Company maintains significant cash
deposits primarily with one financial institution. The Company has not previously experienced any losses on such deposits. Additionally,
the Company performs periodic evaluations of the relative credit rating of the institution as part of its banking strategy.
Concentrations of credit risk with respect
to accounts receivable and costs and estimated earnings in excess of billings are limited due to accelerated payment terms in current
customer contracts and creditworthiness of the current customer base.
Reclassifications
Certain amounts previously reported have
been reclassified to conform to the current presentation. The reclassifications did not impact prior period results of operations,
cash flows, total assets, total liabilities, or total equity.
Segment Information
The Company has determined that it operates
as one reportable segment.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements
are issued by the FASB or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless
otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective and not included
below will not have a material impact on our financial position or results of operations upon adoption.
In May 2017, the FASB issued Accounting
Standards Update (“ASU”) 2017-09 – Compensation – Stock Compensation (Topic 718): Scope of Modification
Accounting. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the
classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The guidance is
effective prospectively for all companies for annual periods and interim periods within those annual periods beginning on or after
December 15, 2017. The Company is currently assessing the impact the adoption of ASU 2017-09 will have on its condensed consolidated
financial statements.
In January 2017, the FASB issued ASU No.
2017-04 – Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. To simplify the
subsequent measurement of goodwill, the amendments eliminate Step 2 from the goodwill impairment test, under which in computing
the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment
testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be
required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under the amendments
in ASU 2017-04, the annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with
its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting
unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting
unit. In addition, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered
when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit
with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform
Step 2 of the goodwill impairment test. The guidance is effective prospectively for annual or any interim goodwill impairment tests
in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests
performed on testing dates after January 1, 2017. The Company does not expect adoption of this guidance to have a significant impact
on its condensed consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15
– Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments (a consensus of the
Emerging Issues Task Force). The amendments in ASU 2016-15 addresses eight specific cash flow issues and is intended to reduce
diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows.
The guidance is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. The Company
does not expect adoption of this guidance to have a significant impact on its condensed consolidated financial statements.
In May 2016, the FASB issued ASU 2016-11
– Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting
Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting (SEC Update). ASU 2016-11
rescinds the certain SEC Staff Observer comments that are codified in Topic 605, Revenue Recognition, and Topic 932, Extractive
Activities – Oil and Gas, effective upon the adoption of Topic 606. Specifically, registrants should not rely on the following
SEC Staff Observer comments upon adoption of Topic 606: (a) Revenue and Expense Recognition for Freight Services in Process, (b)
Accounting for Shipping and Handling Fees and Costs, (c) Accounting for Consideration Given by a Vendor to a Customer (including
Reseller of the Vendor’s Products), (d) Accounting for Gas-Balancing Arrangements (that is, use of the “entitlements
method”). In addition, as a result of the amendments in Update 2014-16, the SEC staff is rescinding its SEC Staff Announcement,
“Determining the Nature of a Host Contract Related to a Hybrid Instrument Issued in the Form of a Share under Topic 815,”
effective concurrently with ASU 2014-16. The Company is currently assessing the impact the adoption of ASU 2016-11 will have on
its condensed consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09
– Compensation – Stock Compensation (Topic 780): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09
modifies US GAAP by requiring the following, among others: (1) all excess tax benefits and tax deficiencies are to be recognized
as income tax expense or benefit on the income statement (excess tax benefits are recognized regardless of whether the benefit
reduces taxes payable in the current period); (2) excess tax benefits are to be classified along with other income tax cash flows
as an operating activity in the statement of cash flows; (3) in the area of forfeitures, an entity can still follow the current
US GAAP practice of making an entity-wide accounting policy election to estimate the number of awards that are expected to vest
or may instead account for forfeitures when they occur; and (4) classification as a financing activity in the statement of cash
flows of cash paid by an employer to the taxing authorities when directly withholding shares for tax withholding purposes. ASU
2016-09 is effective for annual periods beginning after January 1, 2017, including interim periods. Early adoption is permitted.
The Company was required to adopt this standard beginning July 1, 2017. The adoption of this guidance did not have a material impact
on the Company’s condensed consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11
– Inventory (Topic 330): Simplifying the Measurement of Inventory. The amendment was issued to modify the process in which
entities measure inventory. The amendment does not apply to inventory measured using last-in, first-out (“LIFO”) or
the retail inventory method. This amendment requires entities to measure inventory at the lower of cost and net realizable value.
Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion,
disposal and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method.
The amendments are effective for fiscal years beginning after December 31, 2016, including interim periods within those fiscal
years on a prospective basis with earlier application permitted as of the beginning of an interim or annual reporting period. The
Company was required to adopt this standard beginning July 1, 2017. The adoption of this guidance did not have a material impact
on the Company’s condensed consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15
– Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40). The update
requires management to perform a going concern assessment if there is substantial doubt about an entity’s ability to continue
as a going concern within one year of the financial statement issuance date. Under the new standard, the definition of substantial
doubt incorporates a likeliness threshold of “probable” that is consistent with the current use of the term defined
in US GAAP for loss contingencies (Topic 450 – Contingencies). Management will need to consider conditions that are known
and reasonably knowable at the financial statement issuance date and determine whether the entity will be able to meet its obligations
within the one-year period. Additional disclosures are required if it is probable that the entity will be unable to meet its current
obligations. The amendments in this ASU will be effective for annual periods ending after December 15, 2016. Early adoption is
permitted. The Company was required to adopt this standard beginning July 1, 2017. The adoption of this guidance did not have a
material impact on the Company’s condensed consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09
– Revenue from Contracts with Customers (Topic 606). The amendment outlines a single comprehensive model for entities to
use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including
industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer
of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled
in exchange for those goods or services. In applying the revenue model to contracts within its scope, an entity identifies the
contract(s) with a customer, identifies the performance obligations in the contract, determines the transaction price, allocates
the transaction price to the performance obligations in the contract and recognizes revenue when the entity satisfies a performance
obligation. ASU 2014-09 also includes additional disclosure requirements regarding revenue, cash flows and obligations related
to contracts with customers. In addition, the FASB issued ASU 2015-14 – Revenue from Contracts with Customers (Topic 606):
Deferral of the Effective Date (issued August 2015); ASU 2016-08 – Revenue from Contracts with Customers (Topic 606): Principal
versus Agent Considerations (Reporting Revenue Gross versus Net) (issued March 2016); ASU 2016-10 – Revenue from Contracts
with Customers – Identifying Performance Obligations and Licensing (issued April 2016); ASU 2016-12 – Revenue from
Contracts with Customers – Narrow-Scope Improvements and Practical Expedients (issued May 2016); ASU 2016-20 – Technical
Corrections and Improvements to Topic 606, Revenue from Contracts with Customers (issued December 2016); and ASU 2017-13 - Revenue
Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842) Amendments
to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements
and Observer Comments (issued September 2017), which deferred the effective date of ASU 2014-09 for all entities by one year and
clarified the guidance on certain items such as reporting revenue as a principal versus agent, identifying performance obligations,
accounting for intellectual property licenses, assessing collectability, presentation of sales taxes, impairment testing for contract
costs, disclosure of performance obligations, and provided additional implementation guidance. Public business entities should
apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods
within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15,
2016, including interim reporting periods within that reporting period. The guidance permits companies to either apply the requirements
retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment.
As of September 30, 2017, and subject to the potential effects of any new related ASUs issued by the FASB, as well as the Company’s
ongoing evaluation of transactions and contracts, the Company does not expect adoption of this guidance to have a significant impact
on its condensed consolidated financial statements. The Company anticipates adopting this guidance at the beginning of fiscal 2019
using the full retrospective approach.
NOTE 2 - MANAGEMENT'S PLANS AND FUTURE OPERATIONS
The accompanying condensed consolidated
financial statements have been prepared on the basis of a going concern which contemplates that the Company will be able to realize
assets and discharge its liabilities in the normal course of business. Accordingly, they do not give effect to any adjustments
that would be necessary should the Company be required to liquidate its assets. The Company incurred a net loss of $3,891,794 attributable
to EnSync, Inc. for the three months ended September 30, 2017, and as of September 30, 2017 has an accumulated deficit of $128,531,438
and total equity of $14,480,398. The ability of the Company to settle its total liabilities of $4,290,889 and to continue as a
going concern is dependent upon raising additional investment capital to fund our business plan, increasing revenues and achieving
profitability. The accompanying condensed consolidated financial statements do not include any adjustments that might result from
the outcome of these uncertainties.
We believe that cash and cash equivalents on hand at September
30, 2017, and other potential sources of cash, including net cash we generate from closing on projects in our backlog, will be
sufficient to fund our current operations through the first quarter of fiscal 2019. While we believe our pipeline of projects is
deep, there can be no assurances that projects will close in a timely manner to meet our cash requirements. We are also working
to improve operations and enhance cash balances by continuing to drive cost improvements, reducing our spend on research and development
and selling our corporate headquarters. Also, we are currently exploring potential financing options that may be available to us,
including strategic partnership transactions, PPA project financing facilities, and if necessary, additional sales of Common Stock
under our current and future shelf registrations with the SEC. However, we have no commitments to obtain any additional funds,
and there can be no assurance such funds will be available on acceptable terms or at all. If the Company is unable to increase
revenues and achieve profitability in a timely fashion or obtain additional required funding, the Company’s financial condition
and results of operations may be materially adversely affected and the Company may not be able to continue operations, execute
our growth plan, take advantage of future opportunities or respond to customers and competition.
NOTE 3 - CHINA JOINT VENTURE
On August 30, 2011, the Company entered
into agreements providing for the establishment of a joint venture to develop, produce, sell, distribute and service advanced storage
batteries and power electronics in China (the “China Joint Venture”). The China Joint Venture was established upon
receipt of certain governmental approvals from China which were received in November 2011. China Joint Venture partners include
Holdco, AnHui XinLong Electrical Co., Wuhu Huarui Power Transmission and Transformation Engineering Co. and Wuhu Fuhai-Haoyan Venture
Investment, L.P., a branch of Shenzhen Oriental Fortune Capital Co., Ltd.
The China Joint Venture operates through
a jointly-owned Chinese company located in Wuhu City, Anhui Province named Anhui Meineng Store Energy Co., Ltd. (“Meineng
Energy”). Meineng Energy assembles and manufactures the Company’s products for sale in the power management industry
on an exclusive basis in mainland China and on a non-exclusive basis in Hong Kong and Taiwan. In addition, Meineng Energy manufactures
certain products for EnSync pursuant to a supply agreement under which we pay Meineng Energy 120% of its direct costs incurred
in manufacturing such products.
Pursuant to a Joint Venture Agreement between
Holdco and Anhui Xinrui Investment Co., Ltd, a Chinese limited liability company, and subsequent investment agreements, Meineng
Energy has been capitalized with approximately $14.8 million of equity capital as of September 30, 2017 and June 30, 2017.
The Company’s investment in Meineng
Energy was made through Holdco. Pursuant to a Limited Liability Company Agreement of Holdco between ZBB Cayman Corporation and
PowerSav New Energy Holdings Limited (“PowerSav”), the Company contributed technology to Holdco via a license agreement
with an agreed upon value of approximately $4.1 million and $200,000 in cash in exchange for a 60% equity interest. PowerSav agreed
to contribute to Holdco $3.3 million in cash in exchange for a 40% equity interest. For financial reporting purposes, Holdco’s
assets and liabilities are consolidated with those of the Company and PowerSav’s 40% interest in Holdco is included in the
Company’s consolidated financial statements as a noncontrolling interest. As of September 30, 2017 and June 30, 2017, the
Company’s indirect investment in Meineng Energy, after accounting for the Company’s share of the earnings or losses,
was $833,625 and $814,546, respectively. As of September 30, 2017 and June 30, 2017, Company’s indirect investment percentage
in Meineng Energy equals approximately 30%.
The Company’s basis in the technology
contributed to Holdco was $0 due to US GAAP requirements related to research and development expenditures. The difference between
the Company’s basis in this technology and the valuation of the technology by Meineng Energy of approximately $4.1 million
is accounted for by the Company through the elimination of the amortization expense recognized by Meineng Energy related to the
technology.
The Company’s President and Chief
Executive Officer (“President and CEO”) has served as the Chief Executive Officer of Meineng Energy since December
2011. The President and CEO owns an indirect 6% equity interest in Meineng Energy.
The Company has the right to appoint a
majority of the members of the Board of Directors of Holdco and Holdco has the right to appoint a majority of the members of the
Board of Directors of Meineng Energy.
Pursuant to a Management Services Agreement
between Holdco and Meineng Energy (the “Management Services Agreement”), Holdco will provide certain management services
to Meineng Energy in exchange for a management services fee equal to five percent of Meineng Energy’s net sales for the five
year period beginning on the first day of the first quarter in which the Meineng Energy achieves operational breakeven results,
and three percent of Meineng Energy’s net sales for the subsequent three years, provided the payment of such fees will terminate
upon Meineng Energy completing an initial public offering on a nationally recognized securities exchange. To date, no management
service fee revenues have been recognized by Holdco under the Management Services Agreement.
Pursuant to a License Agreement (as amended
on July 1, 2014) between Holdco and Meineng Energy, Holdco granted to Meineng Energy (1) an exclusive royalty-free license to manufacture
and distribute the Company’s ZBB EnerStore, zinc bromide flow battery, version three (V3) (50KW) (and any other zinc bromide
flow battery product developed internally by us based on the V3 EnerStore, ranging from 50kWh to 500kWh module design) and ZBB
EnerSection, power and energy control center (up to 250KW) (the “Products”) in mainland China in the power supply management
industry and (2) a non-exclusive royalty-free license to manufacture and distribute the Products in Hong Kong and Taiwan in the
power supply management industry.
Pursuant to a Research and Development
Agreement with Meineng Energy, Meineng Energy may request the Company to provide research and development services upon commercially
reasonable terms and conditions. Meineng Energy would pay the Company’s fully-loaded costs and expenses incurred in providing
such services.
Activity with Meineng Energy is summarized
as follows:
|
|
Three months ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Product sales to Meineng Energy
|
|
$
|
13,008
|
|
|
$
|
59,147
|
|
Cost of product sales to Meineng Energy
|
|
|
11,211
|
|
|
|
63,897
|
|
Product purchases from Meineng Energy
|
|
|
12,900
|
|
|
|
710,580
|
|
The total amount due to Meineng Energy is as follows:
|
|
September 30, 2017
|
|
|
June 30, 2017
|
|
Net amount due to Meineng Energy
|
|
$
|
(3,452
|
)
|
|
$
|
(12,299
|
)
|
The operating results for Meineng Energy
are summarized as follows:
|
|
Three months ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
$
|
4,646
|
|
|
$
|
779,155
|
|
Gross profit (loss)
|
|
|
(1,086
|
)
|
|
|
103,421
|
|
Loss from operations
|
|
|
(373,926
|
)
|
|
|
(202,887
|
)
|
Net loss
|
|
|
(346,905
|
)
|
|
|
(187,473
|
)
|
NOTE 4 - BUSINESS COMBINATIONS
DCfusion
On February 28, 2017, EnSync formed and
became the controlling owner of DCfusion, partnering with two industry veteran consultants (the “DCfusion Founders”)
who are highly regarded leaders in direct current (“DC”) system engineering design and consulting. Each DCfusion Founder
became an employee of DCfusion upon the closing of the DCfusion transaction on February 28, 2017. The transaction was accounted
for as a business combination under US GAAP. The primary reason for the business acquisition was to benefit from the DCfusion Founders’
decades of customer applied DC system design and consulting experience, which complements EnSync Energy's application engineering.
DCfusion also brings a unique and substantial pipeline of potential projects in vertical markets that rely on the consultative
expertise of the DCfusion Founders, and the authoritative voice of policies, programs and standards shaping the DC-centric technical
and market landscape.
No cash was required to complete the transaction. The
Company incurred approximately $31,700 of advisory and legal costs in connection with the business acquisition of DCfusion during
the third quarter of fiscal year 2017. DCfusion operates as a subsidiary of EnSync, Inc.
NOTE 5 - INVENTORIES
Net inventories are comprised of the following
as of:
|
|
September 30, 2017
|
|
|
June 30, 2017
|
|
Raw materials and subassemblies
|
|
$
|
2,338,027
|
|
|
$
|
2,477,418
|
|
Work in progress
|
|
|
4,535
|
|
|
|
4,595
|
|
Total
|
|
$
|
2,342,562
|
|
|
$
|
2,482,013
|
|
NOTE 6 - NOTE RECEIVABLE
On September 23, 2014, the Company was
issued a $150,000 convertible promissory note, as amended, from an unrelated party. The note accrues interest at 8% per annum on
the outstanding principal amount. On January 27, 2017, the Company negotiated new repayment terms with the unrelated party and
extended the maturity date to the earlier of (a) the date on which the borrower has secured a total of $500,000 or more in additional
financing from any source or (b) December 31, 2022. If at the maturity date the note and accrued interest has not been paid in
full, the Company may convert the principal and interest outstanding into shares of the unrelated party’s convertible preferred
stock at the then-current valuation.
NOTE 7 - PROPERTY, PLANT & EQUIPMENT
Property, plant and equipment are comprised
of the following:
|
|
September 30, 2017
|
|
|
June 30, 2017
|
|
Land
|
|
$
|
179,713
|
|
|
$
|
217,000
|
|
Building and improvements
|
|
|
3,122,662
|
|
|
|
3,532,375
|
|
Manufacturing equipment
|
|
|
3,188,277
|
|
|
|
4,255,385
|
|
Office equipment
|
|
|
454,562
|
|
|
|
454,562
|
|
Total, at cost
|
|
|
6,945,214
|
|
|
|
8,459,322
|
|
Less: accumulated depreciation
|
|
|
(4,043,110
|
)
|
|
|
(5,013,069
|
)
|
Property, plant and equipment, net
|
|
$
|
2,902,104
|
|
|
$
|
3,446,253
|
|
The Company recorded depreciation expense
of $97,392 and $156,464 for the three months ended September 30, 2017 and September 30, 2016, respectively.
See Impairment of Long-Lived Assets under
Note 1 of the Notes to Condensed Consolidated Financial Statements for a discussion of the impairment charge related to the proposed
sale of the Company’s corporate headquarters.
NOTE 8 - LONG-TERM DEBT
The Company’s long-term debt consisted
of the following:
|
|
September 30, 2017
|
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable to Wisconsin Economic Development Corporation payable in monthly installments of $23,685, including interest at 2%, with the final payment due May 1, 2018; collateralized by equipment purchased with the loan proceeds and substantially all assets of the Company not otherwise collateralized.
|
|
$
|
188,089
|
|
|
$
|
257,959
|
|
|
|
|
|
|
|
|
|
|
Bank loan payable in fixed monthly installments of $6,800 of principal and interest at a rate of 0.25% below prime, as defined, subject to a floor of 5% with any remaining principal and interest due at maturity on June 1, 2018; collateralized by the building and land.
|
|
|
453,819
|
|
|
|
468,297
|
|
|
|
|
|
|
|
|
|
|
Equipment finance obligation
under sale-leaseback, interest payable in quarterly installments ranging between $1,510 and $2,555 at an imputed interest
rate of approximately 2.44% over 20 years ending March 31, 2036.
|
|
|
331,827
|
|
|
|
331,827
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
973,735
|
|
|
|
1,058,083
|
|
Less: current maturities of long-term debt
|
|
|
(641,908
|
)
|
|
|
(726,256
|
)
|
Long-term debt, net of current maturities
|
|
$
|
331,827
|
|
|
$
|
331,827
|
|
Maximum aggregate annual principal payments as of September
30, 2017 are as follows:
2018
|
|
$
|
641,908
|
|
2019
|
|
|
-
|
|
2020
|
|
|
-
|
|
2021
|
|
|
-
|
|
2022
|
|
|
-
|
|
Thereafter
|
|
|
331,827
|
|
|
|
$
|
973,735
|
|
NOTE 9 - EMPLOYEE AND DIRECTOR EQUITY INCENTIVE PLANS
The Company previously adopted the 2002
Stock Option Plan (“2002 Plan”) in which a stock option committee could grant up to 1,000,000 shares to key employees
or non-employee members of the board of directors. The options vest in accordance with specific terms and conditions contained
in an employment agreement. If vesting terms and conditions are not defined in an employment agreement, then the options vest as
determined by the stock option committee. If the vesting period is not defined in an employment agreement or by the stock option
committee, then the options immediately vest in full upon death, disability, or termination of employment. Vested options expire
upon the earlier of either the five-year anniversary of the vesting date or termination of employment. No shares are available
to be issued for future awards under the 2002 Plan.
The Company also previously adopted the
2007 Equity Incentive Plan (“2007 Plan”) that authorized the board of directors or a committee to grant up to 300,000
shares to employees and directors of the Company. Unless defined in an employment agreement or otherwise determined, the options
vest ratably over a three-year period. Options expire 10 years after the date of grant. No shares are available to be issued for
future awards under the 2007 Plan.
In November 2010, the Company adopted the
2010 Omnibus Long-Term Incentive Plan (“2010 Omnibus Plan”) which authorizes a committee of the board of directors
to grant stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock, other stock-based
awards and cash awards. The 2010 Omnibus Plan, as amended, authorizes up to 11,950,000 shares plus shares of Common Stock underlying
any outstanding stock option of other awards granted by any predecessor employee stock plan of the Company that is forfeited, terminated,
or cancelled without issuance of shares, to employees, officers, non-employee members of the board of directors, consultants and
advisors. Unless otherwise determined, options vest ratably over a three-year period and expire 8 years after the date of grant.
At the annual meeting of shareholders held on November 14, 2016, the Company’s shareholders approved an amendment of the
2010 Omnibus Plan which increased the number of shares of the Company’s Common Stock available for issuance pursuant to awards
under the 2010 Omnibus Plan by 4,000,000 to 11,950,000.
In November 2012, the Company adopted the
2012 Non-Employee Director Equity Compensation Plan, as amended (“2012 Director Equity Plan”), under which the Company
may issue up to 4,400,000 restricted stock unit awards and other equity awards to our non-employee directors pursuant to the Company’s
director compensation policy. At the annual meeting of shareholders held on November 14, 2016, the Company’s shareholders
approved an amendment of the 2012 Director Equity Plan which increased the number of shares of the Company’s Common Stock
available for issuance pursuant to awards under the 2012 Director Equity Plan by 1,200,000 to 4,400,000.
As of September 30, 2017, there were a
total of 1,366,493 shares available to be issued for future awards under the 2010 Omnibus Plan and 1,729,170 shares available to
be issued for future awards under the 2012 Director Equity Plan.
The fair value of each option granted is
estimated on the date of grant using the Black-Scholes option-pricing method. The Company uses historical data to estimate the
expected price volatility, the expected option life and the expected forfeiture rate. The Company has not made any dividend payments
nor does it have plans to pay dividends in the foreseeable future. The following assumptions were used to estimate the fair value
of options granted during the three months ended September 30, 2017 and September 30, 2016 using the Black-Scholes option-pricing
model:
|
|
Three months ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Expected life of option (years)
|
|
|
4
|
|
|
|
4
|
|
Risk-free interest rate
|
|
|
1.66 - 1.69%
|
|
|
|
0.93 - 1.07%
|
|
Assumed volatility
|
|
|
113.62 - 113.75%
|
|
|
|
104.69 - 108.34%
|
|
Expected dividend rate
|
|
|
0.00%
|
|
|
|
0.00%
|
|
Expected forfeiture rate
|
|
|
6.15 - 6.72%
|
|
|
|
7.42 - 7.88%
|
|
Time-vested and performance-based stock
awards, including stock options and RSUs are accounted for at fair value at date of grant. Compensation expense is recognized over
the requisite service and performance periods.
The Company’s results of operations include compensation
expense for stock options and RSUs granted under its various equity incentive plans. The amount recognized in the condensed consolidated
financial statements related to stock-based compensation was $435,608 and $272,653, based on the amortized grant date fair value
of options and RSUs, during the three months ended September 30, 2017 and September 30, 2016, respectively.
Information with respect to stock option activity is as follows:
|
|
Number
of
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Average
Remaining
Contractual Life
(in years)
|
|
Balance at June 30, 2016
|
|
|
6,111,360
|
|
|
$
|
0.88
|
|
|
|
6.96
|
|
Options granted
|
|
|
2,654,100
|
|
|
|
0.59
|
|
|
|
|
|
Options exercised
|
|
|
(124,252
|
)
|
|
|
0.56
|
|
|
|
|
|
Options forfeited
|
|
|
(391,910
|
)
|
|
|
2.55
|
|
|
|
|
|
Balance at June 30, 2017
|
|
|
8,249,298
|
|
|
|
0.71
|
|
|
|
6.50
|
|
Options granted
|
|
|
27,000
|
|
|
|
0.46
|
|
|
|
|
|
Options forfeited
|
|
|
(226,333
|
)
|
|
|
1.91
|
|
|
|
|
|
Balance at September 30, 2017
|
|
|
8,049,965
|
|
|
|
0.68
|
|
|
|
6.27
|
|
The following table summarizes information relating to the stock
options outstanding as of September 30, 2017:
|
|
Outstanding
|
|
|
Exercisable
|
|
Range of Exercise Prices
|
|
Number
of
Options
|
|
|
Average
Remaining
Contractual Life
(in years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
of
Options
|
|
|
Average
Remaining
Contractual Life
(in years)
|
|
|
Weighted
Average
Exercise
Price
|
|
$0.28 to $1.00
|
|
|
7,235,065
|
|
|
|
6.48
|
|
|
$
|
0.52
|
|
|
|
2,766,466
|
|
|
|
6.03
|
|
|
$
|
0.54
|
|
$1.01 to $2.50
|
|
|
662,150
|
|
|
|
5.02
|
|
|
|
1.48
|
|
|
|
510,150
|
|
|
|
4.71
|
|
|
|
1.61
|
|
$2.51 to $5.00
|
|
|
82,200
|
|
|
|
1.71
|
|
|
|
3.98
|
|
|
|
82,200
|
|
|
|
1.71
|
|
|
|
3.98
|
|
$5.01 to $6.95
|
|
|
70,550
|
|
|
|
1.50
|
|
|
|
5.90
|
|
|
|
70,550
|
|
|
|
1.50
|
|
|
|
5.90
|
|
Balance at September 30, 2017
|
|
|
8,049,965
|
|
|
|
6.27
|
|
|
|
0.68
|
|
|
|
3,429,366
|
|
|
|
5.64
|
|
|
|
0.89
|
|
During the three months ended September
30, 2017, options to purchase 27,000 shares were granted to employees exercisable at $0.39 to $0.48 per share based on various
service-based vesting terms from July 2017 through September 2020 and exercisable at various dates through September 2025. During
the three months ended September 30, 2016, options to purchase 182,500 shares were granted to employees exercisable at $0.35
to $0.88 per share based on service-based and performance-based vesting terms from July 2016 through September 2019 and exercisable
at various dates through September 2024.
The aggregate intrinsic value of outstanding options totaled
$481,010 and was based on the Company’s adjusted closing stock price of $0.52 as of September 30, 2017.
Information with respect to unvested employee stock option activity
is as follows:
|
|
Number
of
Options
|
|
|
Weighted
Average
Grant Date
Fair Value
Per Share
|
|
|
Average
Remaining
Contractual Life
(in years)
|
|
Balance at June 30, 2016
|
|
|
4,852,367
|
|
|
$
|
0.54
|
|
|
|
7.42
|
|
Options granted
|
|
|
2,654,100
|
|
|
|
0.59
|
|
|
|
|
|
Options vested
|
|
|
(2,110,085
|
)
|
|
|
0.57
|
|
|
|
|
|
Options forfeited
|
|
|
(199,284
|
)
|
|
|
0.80
|
|
|
|
|
|
Balance at June 30, 2017
|
|
|
5,197,098
|
|
|
|
0.54
|
|
|
|
6.93
|
|
Options granted
|
|
|
27,000
|
|
|
|
0.46
|
|
|
|
|
|
Options vested
|
|
|
(422,166
|
)
|
|
|
0.74
|
|
|
|
|
|
Options forfeited
|
|
|
(181,333
|
)
|
|
|
0.66
|
|
|
|
|
|
Balance at September 30, 2017
|
|
|
4,620,599
|
|
|
|
0.52
|
|
|
|
6.74
|
|
Total fair value of options granted for
the three months ended September 30, 2017 and September 30, 2016 was $9,319 and $112,368, respectively. At September 30, 2017,
there was $764,181 in unrecognized compensation cost related to unvested stock options, which is expected to be recognized over
a weighted average period of 1.4 years.
The Company compensates its directors with
RSUs and cash. On November 14, 2016, 581,816 RSUs were granted to the Company’s directors in partial payment of director’s
fees through November 2017 under the 2012 Director Equity Plan. As of September 30, 2017, 563,635 of the RSUs from the November
14, 2016 grant had vested and 18,181 had forfeited.
On November 17, 2015, 864,000 RSUs were
granted to the Company's directors in partial payment of director's fees through November 2016 under the 2012 Director Equity Plan.
As of September 30, 2016, all of the RSUs from the November 17, 2015 grant had vested.
On November 14, 2016, the Company’s
CEO was awarded 750,000 RSUs under the 2010 Omnibus Plan that will vest over three years, beginning on November 14, 2017. Additionally,
an executive of the Company was awarded 340,000 RSUs under the 2010 Omnibus Plan that will vest in August of 2019.
On November 17, 2015, the Company’s
CEO was awarded 1,500,000 RSUs under the 2010 Omnibus Plan. 750,000 of these RSUs vest over three years, beginning on November
17, 2016. As of September 30, 2017, 250,000 of the 750,000 that vest over three years beginning on November 17, 2016 from the November
17, 2015 grant had vested. The remaining 750,000 of these RSUs vest upon the satisfaction of certain performance targets that must
be met on or before December 31, 2017.
As of September 30, 2017, there were 2,340,000
of unvested RSUs and $1,263,289 in unrecognized compensation cost. Generally, shares of Common Stock related to vested RSUs are
to be issued six months after the holder’s separation from service with the Company.
Information with respect to RSU activity is as follows:
|
|
Number of
Restricted
Stock Units
|
|
|
Weighted
Average
Valuation
Price Per Unit
|
|
Balance at June 30, 2016
|
|
|
4,029,244
|
|
|
$
|
1.03
|
|
RSUs granted
|
|
|
1,671,816
|
|
|
|
1.15
|
|
Shares issued
|
|
|
(144,728
|
)
|
|
|
0.75
|
|
Balance at June 30, 2017
|
|
|
5,556,332
|
|
|
|
1.07
|
|
RSUs granted
|
|
|
-
|
|
|
|
-
|
|
RSUs forfeited
|
|
|
(18,181
|
)
|
|
|
0.99
|
|
Shares issued
|
|
|
(36,364
|
)
|
|
|
0.99
|
|
Balance at September 30, 2017
|
|
|
5,501,787
|
|
|
|
1.07
|
|
NOTE 10 - WARRANTS
On August 7, 2017, 220,000 warrants were
issued in connection with a professional services agreement. The warrants are exercisable at $0.40 per share and vest upon the
satisfaction of certain performance targets that must be met on or before March 31, 2018. The warrants expire in March 2021.
On June 22, 2017, 357,500 warrants were
issued in connection with the Underwriting Agreement entered into with Roth Capital Partners, LLC as part of underwriting compensation
which provided for the sale of $2.5 million of Common Stock on June 22, 2017. The warrants are exercisable at $0.42 per share and
expire in June 2022.
On February 28, 2016, 45,000 warrants were
issued as partial payment for services. The warrants are exercisable at $0.37 per share and expire in February 2019. In October
2016, 45,000 warrants were exercised via a cashless exercise resulting in the issuance of 29,162 shares of Common Stock of the
Company.
On June 19, 2012, 579,061 warrants were
issued in connection with the Underwriting Agreement entered into with MDB Capital Group, LLC as part of underwriting compensation
which provided for the sale of $12 million of Common Stock on June 19, 2012. The warrants were exercisable at $2.375 per share
and the remaining unexercised warrants of 306,902 expired in June 2017.
On May 1, 2012, 511,604 warrants were issued
in connection with Securities Purchase Agreements entered into with certain investors providing for the sale of a total of $2,465,000
of Zero Coupon Convertible Subordinated Notes on May 1, 2012. The warrants were exercisable at $2.65 per share and expired in May
2017.
On September 26, 2013, 3,157,894 warrants
were issued in connection with Securities Purchase Agreements entered into with certain investors providing for the sale of a total
of $3.0 million of Series B Convertible Preferred Stock (the “Series B Preferred Stock”) on September 26, 2013. The
warrants were exercisable at $0.95 per share and the remaining unexercised warrants of 1,710,525 expired in September 2016.
On September 26, 2013, 81,579 warrants
were issued as placement agent’s compensation in connection with the sale of $3.0 million of Series B Preferred Stock on
September 26, 2013. The warrants were exercisable at $0.95 per share and expired in September 2016.
Information with respect to warrant activity is as follows:
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise Price
Per Share
|
|
Balance at June 30, 2016
|
|
|
2,655,610
|
|
|
$
|
1.43
|
|
Warrants granted
|
|
|
357,500
|
|
|
|
0.42
|
|
Warrants exercised
|
|
|
(45,000
|
)
|
|
|
0.37
|
|
Warrants expired
|
|
|
(2,610,610
|
)
|
|
|
1.45
|
|
Balance at June 30, 2017
|
|
|
357,500
|
|
|
|
0.42
|
|
Warrants granted
|
|
|
220,000
|
|
|
|
0.40
|
|
Balance at September 30, 2017
|
|
|
577,500
|
|
|
|
0.41
|
|
NOTE 11 - BASIC AND DILUTED NET LOSS PER SHARE
Basic net loss per common share is computed
by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period
reported. Diluted net loss per common share is computed giving effect to all dilutive potential common shares that were outstanding
for the period reported. Diluted potential common shares consist of incremental shares issuable upon exercise of stock options
and warrants and conversion of preferred stock. In computing diluted net loss per share for the three months ended September 30,
2017 and September 30, 2016, no adjustment has been made to the weighted average outstanding common shares as the assumed exercise
of outstanding options and warrants and conversion of preferred stock is anti-dilutive.
Potential common shares not included in
calculating diluted net loss per share are as follows:
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
Stock options and restricted stock units
|
|
|
13,551,752
|
|
|
|
10,088,754
|
|
Stock warrants
|
|
|
577,500
|
|
|
|
863,506
|
|
Series B preferred shares
|
|
|
3,594,065
|
|
|
|
3,256,046
|
|
Total
|
|
|
17,723,317
|
|
|
|
14,208,306
|
|
NOTE 12 - EQUITY
Series B Convertible Preferred Stock
On September 26, 2013, the
Company entered into a Securities Purchase Agreement with certain investors providing for the sale of 3,000 shares of Series
B Preferred Stock. Certain Directors of the Company purchased 500 shares. 700 shares of the Series B Preferred Stock have
been converted into 822,867 shares of Common Stock of the Company. Shares of Series B Preferred Stock were sold for $1,000
per share (the “Stated Value”) and accrue dividends on the Stated Value at an annual rate of 10%. The net
proceeds to the Company were $2,909,873, after deducting offering expenses. At September 30, 2017, 2,300 shares of Series B
Preferred Stock remain outstanding and were convertible into 3,594,065 shares of Common Stock of the Company at a conversion
price equal to $0.95. Upon any liquidation, dissolution or winding up of the Company, holders of Preferred Stock are entitled
to receive out of the assets of the Company an amount equal to two times the Stated Value, plus any accrued and unpaid
dividends thereon. At September 30, 2017, the liquidation preference of the Preferred Stock was $5,714,363. In connection
with the purchase of the Series B Preferred Stock, investors received warrants to purchase a total of 3,157,895 shares of
Common Stock at an exercise price of $0.95. These warrants expired on September 27, 2016.
Series C Convertible Preferred Stock
On July 13, 2015, we entered into a Securities
Purchase Agreement with SPI in connection with entering into a global strategic partnership, which includes a Securities Purchase
Agreement, a Supply Agreement and a Governance Agreement. Pursuant to the Securities Purchase Agreement, we sold SPI for an aggregate
purchase price of $33,390,000 a total of (i) 8,000,000 shares of Common Stock based on a purchase price per share of $0.6678 and
(ii) 28,048 shares Series C Preferred Stock based on a price of $0.6678 per common equivalent. The Series C Preferred Stock were
potentially convertible, subject to the completion of projects under our Supply Agreement with SPI, into a total of up to 42,000,600
shares of Common Stock. Pursuant to the Securities Purchase Agreement, the Company also issued to SPI a warrant to purchase 50,000,000
shares of Common Stock for an aggregate purchase price of $36,729,000 (the “Warrant”), at a per share exercise price
of $0.7346. The Warrant would have become exercisable only once SPI purchased and paid for 40 megawatts of projects, as defined
in the Supply Agreement.
At closing of the SPI transaction on July
13, 2015, the Company recognized the fair value of $6.8 million for the Common Stock (determined by reference to the closing price
of the Company’s Common Stock on the NYSE American) as an increase to equity. The Company also recognized as equity the fair
value of $13.3 million for the Series C Preferred Stock ignoring the contingent convertibility on the closing date. This price
was determined using the OPM model and a “with” and “without” methodology to bifurcate the Series C Preferred
Stock conversion feature. The OPM model treats the various equity securities as call options on the total equity value contingent
upon each securities strike price or participation rights. The cash received by the Company in excess of the fair value of the
Common Stock and the nonconvertible attribute of the Series C Preferred Stock of $13,290,000 was recorded as deferred revenue.
This amount was allocated to the Supply Agreement under which the Company expected to perform in the future and would be recognized
as revenue as sales occurred under the Supply Agreement.
Pursuant to the Supply Agreement, the Company
agreed to sell and SPI agreed to purchase products and services offered by the Company from time to time, including energy management
system solutions for solar projects. Under the Supply Agreement, SPI agreed to purchase energy storage systems with a total combined
power output of 40 megawatts over a four-year period, as provided for in the Supply Agreement.
SPI never made any purchases under the
Supply Agreement. Due to SPI’s failure to meet its purchase obligations, on May 4, 2017 the Company terminated the Supply
Agreement. As a result of the termination of the Supply Agreement, it is no longer possible for SPI to satisfy the conditions that
would have enabled it to convert the Series C Preferred Stock or exercise the Warrant, and for the Company to recognize revenue
as sales occurred under the Supply Agreement. Applying guidance from ASC 405-20, liabilities should be derecognized only when the
obligor is legally released from the obligation, which occurred for the Company upon the exercise of the termination rights. Since
the Supply Agreement termination was not standard operating revenues of the Company, the derecognition of the deferred revenue
liability resulted in a gain and was recorded as other income in the fourth quarter of fiscal year 2017.
The Series C Preferred Stock are non-voting,
are perpetual, are not eligible for dividends, and are not redeemable. Upon any liquidation, dissolution, or winding up of the
Company (a “Liquidation”) or a Fundamental Transaction (as defined in the Certificate of Designation for the Series
C Preferred Stock), holders of the Series C Preferred Stock are entitled to receive out of the assets of the Company an amount
equal to the higher of (1) the Stated Value, which was $28,048,000 as of September 30, 2017 and (2) the amount payable to the holder
if it had converted the shares into Common Stock immediately prior to the Liquidation or Fundamental Transaction, for each share
of the Series C Preferred Stock after any distribution or payment to the holders of the Series B Preferred Stock and before any
distribution or payment shall be made to the holders of the Company’s existing Common Stock, and if the assets of the Company
shall be insufficient to pay in full such amounts, then the entire assets to be distributed shall be ratably distributed in accordance
with respective amount that would be payable on such shares if all amounts payable thereon were paid in full, which was $8,766,036
as of September 30, 2017. While the Series C Preferred Stock is outstanding, the Company may not pay dividends on its Common Stock
and may not redeem more than $100,000 in Common Stock per year.
In connection with the closing of the SPI
transaction and pursuant to the Securities Purchase Agreement, the Company entered into the Governance Agreement. Under
the Governance Agreement, for so long as SPI holds at least 10,000 Series C Preferred Stock or 25 million shares of Common Stock
or Common Stock equivalents (the “Requisite Shares”), SPI has certain rights regarding the Company’s Board of
Directors and other select governance rights.
The Governance Agreement provides that
for so long as SPI holds the Requisite Shares, the Company will not take any of the following actions without the affirmative vote
of SPI: (a) change the conduct by the Company’s business; (b) change the number or manner of appointment of the directors
on the board; (c) cause the dissolution, liquidation or winding-up of the Company or the commencement of a voluntary proceeding
seeking reorganization or other similar relief; (d) other than in the ordinary course of conducting the Company’s business,
cause the incurrence, issuance, assumption, guarantee or refinancing of any debt if the aggregate amount of such debt and all other
outstanding debt of the Company exceeds $10 million; (e) cause the acquisition, repurchase or redemption by the Company of any
securities junior to the Series C Preferred Stock; (f) cause the acquisition of an interest in any entity or the acquisition of
a substantial portion of the assets or business of any entity or any division or line of business thereof or any other acquisition
of material assets, in any such case where the consideration paid exceeds $2 million, or cause the Company to engage in other Fundamental
Transactions (as defined in the Certificate of Designation of Preferences, Rights and Limitations of the Series C Convertible Preferred
Stock); (g) cause the entering into by the Company of any agreement, arrangement or transaction with an affiliate that calls for
aggregate payments (other than payment of salary, bonus or reimbursement of reasonable expenses) in excess of $120,000; (h) cause
the commitment to capital expenditures in excess of $7 million during any fiscal year; (i) cause the selection or replacement of
the auditors of the Company; (j) enter into of any partnership, consortium, joint venture or other similar enterprise involving
the payment, contribution, or assignment by the Company or to the Company of money or assets greater than $5 million; (k) amend
or otherwise change its Articles of Incorporation or By-Laws or equivalent organizational documents of the Company or any subsidiary
in any manner that materially and adversely affects any rights of SPI; (l) amend or otherwise change the Articles of Incorporation
or By-Laws or equivalent organizational documents of any Subsidiary in any manner; (m) grant, issue or sell any equity securities
(with certain limited exceptions); (n) declare, set aside, make or pay any dividend or other distribution, payable in cash, stock,
property or otherwise, with respect to any of its capital stock; provided, however, that the dividends called for by Section 3(b)
of the Certificate of Designation of Preferences, Rights and Limitations of the Company’s Series B Convertible Preferred
Stock shall nonetheless continue to accrue and accumulate on each share of the Company’s Series B Preferred Stock; (o) reclassify,
combine, split or subdivide, directly or indirectly, any of its capital stock; (p) permit any item of material intellectual property
to lapse or to be abandoned, dedicated, or disclaimed, fail to perform or make any applicable filings, recordings or other similar
actions or filings, or fail to pay all required fees and taxes required or advisable to maintain and protect its interest in such
intellectual property; or (q) enter into any contract, arrangement, understanding or other similar agreement with respect to any
of the foregoing. Additionally, the Governance Agreement provides a preemptive right to SPI in the case of certain issuances of
equity securities.
On August 30, 2016, SPI entered into a
Share Purchase Agreement (the “Share Purchase Agreement”) with Melodious Investments Company Limited (“Melodious”)
pursuant to which SPI sold to Melodious the 8,000,000 outstanding shares of Common Stock and 11,353 outstanding shares of Series
C Preferred Stock for a total purchase price of $17.0 million (which is equal to the price SPI paid for such securities). The Share
Purchase Agreement provides that if the purchased shares of Series C Preferred Stock are not converted into shares of Common Stock
within six months following the closing date, Melodious will have the right to require SPI to repurchase such shares for a price
equal to approximately 102% of the price paid by Melodious for such shares (plus 10% interest accrued from the closing date). Following
the sale of such securities, SPI continues to hold the Requisite Shares, and the Governance Agreement remains in effect. In April
2017, Melodious requested SPI repurchase the 11,353 shares of Series C Preferred Stock for a total purchase price of $11.6 million.
The transaction was completed on July 26, 2017.
Common Stock
June 22, 2017 Underwritten Public Offering
On June 22, 2017, the Company completed
an underwritten public offering of its Common Stock at a price to the public of $0.35 per share. The Company sold a total of 7,150,000
shares of its Common Stock in the offering for net proceeds of $2,095,840, after deducting the underwriting discount and expenses.
The Company granted the underwriter an option to purchase up to 1,072,500 additional shares of Common Stock to cover over-allotments,
if any. In July 2017, the Company sold an additional 367,000 shares of its Common Stock under the over-allotment option for net
proceeds of $119,459, after deducting the underwriting discount and expenses.
NOTE 13 - COMMITMENTS
Leasing Activities
Operating Leases
Operating lease expense recognized during
the three months ended September 30, 2017 and September 30, 2016 was $21,264 and $14,524, respectively. Operating lease expense
is included in operating expenses in the condensed consolidated statements of operations. As of September 30, 2017 and June 30,
2017, the carrying value of the right of use asset was $130,747 and $150,214, respectively, and is separately stated on the condensed
consolidated balance sheets. The related short-term and long-term liabilities as of September 30, 2017 were $60,475 and $70,272
and as of June 30, 2017 were $65,004 and $85,210, respectively. The short-term and long-term liabilities are included in “Accrued
expenses” and “Other long-term liabilities,” respectively, in the condensed consolidated balance sheets.
Information regarding the weighted-average
remaining lease term and the weighted-average discount rate for operating leases are summarized below:
|
|
September 30, 2017
|
|
|
June 30, 2017
|
|
Weighted-average remaining lease term (in years) Operating
leases
|
|
|
2.20
|
|
|
|
2.37
|
|
Weighted-average discount rate Operating leases
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
The table below reconciles the undiscounted
cash flows for the first five years and total of the remaining years to the operating lease liabilities recorded in the condensed
consolidated balance sheet as of September 30, 2017:
2018
|
|
$
|
48,769
|
|
2019
|
|
|
64,297
|
|
2020
|
|
|
24,955
|
|
2021
|
|
|
-
|
|
2022
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
Total undiscounted lease payments
|
|
|
138,021
|
|
Present value adjustment
|
|
|
(7,274
|
)
|
Net operating lease liabilities
|
|
$
|
130,747
|
|
Short-term Leases
The Company leases facilities in Honolulu,
Hawaii, Milwaukee, Wisconsin and Shanghai, China from unrelated parties under lease terms that will expire over the next twelve
months. Monthly rent for the twelve-month rental periods is between $400 and $2,010 per month. Rent expense of $8,922 and $23,761
was recognized during the three months ended September 30, 2017 and September 30, 2016. Short-term rent expense is included in
operating expenses in the condensed consolidated statement of operations.
NOTE 14 - RETIREMENT PLANS
The Company sponsors a defined contribution
retirement plan under Section 401(k) of the Internal Revenue Code, the EnSync, Inc. 401(k) Savings Plan. Employees may elect to
contribute up to the IRS annual contribution limit. The Company matches employees’ contributions up to 4% of eligible compensation
and Company contributions are limited in any year to the amount allowable by government tax authorities. Eligible employees are
100% immediately vested. Total employer contributions recognized in the condensed consolidated statements of operations under this
plan were $51,753 and $48,818 for the three months ended September 30, 2017 and September 30, 2016, respectively.
NOTE 15 - INCOME TAXES
The Company had no current or deferred
provision (benefit) for income taxes for the three months ended September 30, 2017 or September 30, 2016. The income tax provision
for the three months ended September 30, 2017 and September 30, 2016 was determined by applying an estimated annual effective tax
rate of 0.0% to the loss before income taxes. The estimated effective income tax rate was determined by applying statutory tax
rates to pretax loss adjusted for certain permanent book to tax differences and tax credits, and the continuing assessment of a
valuation allowance against all of the deferred income tax assets that will not be realized in the foreseeable future. Deferred
income tax assets are reviewed for recoverability based on historical taxable income, the expected reversals of existing temporary
differences, tax planning strategies and projections of future taxable income. As a result of this analysis, the Company has provided
for a valuation allowance against its net deferred income tax assets as of September 30, 2017 and June 30, 2017.
NOTE 16 - RELATED PARTY TRANSACTIONS
On September 7, 2016, the Company
entered into a Membership Interest Purchase Agreement (“MIPA”) with Theodore Peck, the CEO of the Company’s
85% owned subsidiary, Holu. Pursuant to the MIPA, the Company will sell to Theodore Peck all of the issued and outstanding
membership interests of a PPA entity for $592,000, subject to the terms of a Promissory Note, a Security Agreement and a
Pledge Agreement. The transaction is considered to be executed upon terms that are in the normal course of operations.
Revenues for the total contract of $592,000 and expenses of $573,353 was recognized in the Company’s
condensed consolidated statement of operations for third quarter of fiscal 2017.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis
of our financial position and results of operations should be read in conjunction with our unaudited condensed consolidated financial
statements and notes thereto included elsewhere in this Form 10-Q, as well as our audited consolidated financial statements and
notes thereto included in the Company’s Annual Report filed on Form 10-K for the fiscal year ended June 30, 2017.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities 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 as “believe,” “expect,” “may,”
“will,” “should,” “could,” “seek,” “intend,” “plan,” “goal,”
“estimate,” “anticipate” or other comparable terms. All statements other than statements of historical
facts included in this Quarterly Report on Form 10-Q regarding our strategies, prospects, financial condition, operations, costs,
plans and objectives are forward-looking statements. Examples of forward-looking statements include, among others, statements we
make regarding our ability to monetize our PPA assets, statements regarding the sufficiency of our capital resources, expected
operating losses, expected revenues, expected expenses and our expectations concerning our business strategy. Forward-looking statements
are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations
and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends,
the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent
uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our
actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore,
you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial
condition to differ materially from those indicated in the forward-looking statements include, among others, the following: our
historical and anticipated future operation losses and our ability to continue as a going concern; our ability to raise the necessary
capital to fund our operations and the risk of dilution to shareholders from capital raising transactions; our ability to remain
listed on the NYSE American; the effects of a sale or transfer of a large number of shares of our common stock; the competiveness
of the industry in which we compete; our ability to successfully commercialize new products, including our Matrix
TM
Energy Management, DER Flex
TM
, DER Supermodule
TM
System and Agile
TM
Hybrid Storage Systems; our
ability to lower our costs and increase our margins; the failure of our products to perform as planned; our ability to improve
the performance of our products; our ability to build quality and reliable products and market perception of our products; our
ability to grow rapidly while successfully managing our growth; our ability to maintain our current and establish new strategic
partnerships; our dependence on sole source and limited source suppliers; our limited experience manufacturing our products on
a large-scale basis; our product, customer and geographic concentration, and lack of revenue diversification; the ability of SPI
to influence key decision making; the potential of Melodious to acquire complete control; the effect laws and regulations of the
Chinese government may have on our China Joint Venture; our ability to enforce our agreements in Asia; our ability to retain our
managerial personnel and to attract additional personnel; our ability to manage our international operations; the length and variability
of our sales cycle; our increased emphasis on larger and more complex system solutions; our lack of experience in the PPA business;
our reliance of third-party suppliers and contractors when developing and constructing systems for our PPA business; our dependence
on governmental mandates and the availability of rebates, tax credits and other economic incentives related to alternative energy
resources and the regulatory treatment of third-party owned solar energy systems; our ability to protect our intellectual property
and the risk we may infringe on the intellectual property of others; the cost of protecting our intellectual property; future acquisitions
could disrupt our business and dilute our stockholders; and the other risks and uncertainties discussed in the Risk Factors and
in Management's Discussion and Analysis of Financial Condition and Results of Operations sections of the Company’s Annual
Report on Form 10-K for the fiscal year ended June 30, 2017. We undertake no obligation to publicly update any forward-looking
statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments
or otherwise.
OVERVIEW
EnSync is an energy innovation company
whose technologies and capabilities are designed to deliver the least expensive, highest value and most reliable electricity. EnSync
Energy’s modular technologies and services synchronize power sources to meet dynamic and evolving energy environments, enable
real-time prioritization of DERs and provide grid stability and economic optimization. EnSync Energy offers integrated solutions
from concept through design, project finance, commissioning, and operating and maintenance, serving the C&I and multi-tenant
building, utility and off-grid markets.
EnSync develops and commercializes product
and service solutions for the distributed energy generation market, including energy management systems, energy storage systems,
applications and internet of energy platforms that link distributed energy resources with the grid network. These solutions are
critical to the transition from a “coal-centric economy” to one reliant on renewable energy sources. EnSync synchronizes
conventional utility, distributed generation and storage assets to seamlessly ensure the least expensive and most reliable electricity
available, thus enabling the future of energy networks.
EnSync delivers fully integrated systems
utilizing proprietary direct current power control hardware, energy management software and extensive experience with energy storage
technologies. Our internet of energy control platform adapts to ever-changing generation and load variables, as well as changes
in utility prices and programs, aiming to ensure the means to make and/or save money behind-the-meter while concurrently providing
utilities the opportunity to use distributed energy resource systems for various grid enhancing services.
EnSync Energy’s systems can easily
integrate distributed energy resources with the grid, island from the grid and serve as a microgrid, and be deployed as self-contained
microgrids, delivering electricity to sites for which no grid exists. EnSync Energy brings vital power control and energy storage
solutions to problems caused by the incorporation of increasingly pervasive renewable energy generating assets that are part of
the grid power transmission and distribution network used in commercial, industrial and multi-tenant buildings. In addition to
ensuring resilient and high-value electricity to off-takers, utilities can benefit from EnSync Energy’s systems by relying
on such assets for visibility, aggregation and control as they begin to use distributed energy resources to ensure a more fortified
grid via grid services. The Company also develops and commercializes energy management systems for off-grid applications such as
island or remote power.
Power Purchase Agreements
In addition to customer-direct systems
sales, we recently began addressing our target markets as a developer and a financial packager through the use of PPAs. Navigant
Research forecasts the annual market for solar plus energy storage distributed energy systems to grow to nearly $50 billion by
2026, with a 2017 to 2026 compound annual growth rate of more than 40 percent. Under this PPA structure, we agree to develop and
supply a system that uses our and other companies’ products and the offtaker agrees to purchase electricity from the completed
system at a fixed rate for typically a 20-year period. Through these arrangements, the offtaker receives the benefit of a low and
fixed price for electricity without incurring the capital expenditures required to develop and build the system.
Because building these PPA projects requires
significant long-term capital outlays, we do not intend to own the PPA systems and seek to sell them to third parties once we have
completed the site development process. Site development activities include: (i) finalizing the engineering design of the system,
(ii) applying for and receiving the necessary permits for construction of the system and (iii) negotiation of an interconnection
agreement with the local utility. This site development process typically takes three to four months.
Most recently, we typically do not begin
construction of a specific project until it has been sold to a third party. Accordingly, during the site development process, we
engage in a sale process and provide interested purchasers with information related to the system. The purchase price for a particular
system is determined through a formula that we believe is customary in the solar industry that takes into account the revenue stream
to be received from the offtaker discounted to present value based on customary internal rates of return for similar projects,
the costs of completing, maintaining and administering the system and certain other factors.
Once the system has been sold, we begin
construction which includes procurement of the necessary equipment, physical construction and commissioning of the system. The
construction period varies based on many internal and external factors, but is typically completed within six to nine months.
Our sales agreement with the buyer of the
system typically provides for us to receive an upfront payment and additional progress payments to be made based upon achievement
of certain key construction and commissioning milestones.
We recognize revenue from these PPA arrangements
on a percentage of completion basis as we build out and commission the system. Any excess cash received from the system purchaser
in excess of recognized revenue is recorded as billings in excess of costs and estimated earnings and carried as a liability on
our condensed consolidated financial statements. Based on our experience to date, we expect to recognize all revenue from a particular
PPA system typically within 12 months of the signing of the related PPA agreement.
We may also enter into a service agreement
with the owner of a PPA system pursuant to which we provide ongoing administrative, operating and maintenance services. These agreements
usually have a term which matches the PPA term. We recognize revenue from a service agreement ratably over the life of the related
agreement.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no material changes in
the Company’s critical accounting policies and estimates since the September 27, 2017 filing of its Annual Report on Form
10-K for the fiscal year ending June 30, 2017.
As discussed in our annual report, the
preparation of our financial statements conforms to US GAAP, which requires management, in applying our accounting policies, to
make estimates and assumptions that have an important impact on our reported amounts of assets, liabilities, revenue, expenses
and related disclosures at the date of our financial statements.
On an on-going basis, management evaluates
its estimates and bases its estimates and judgments on historical experience and on various other factors that are believed to
be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results may differ from management’s estimates.
The most significant accounting estimates
inherent in the preparation of the Company's financial statements include revenue recognition, estimates as to the realizability
of our inventory assets, impairment of long lived assets, goodwill assessment, warranty obligations, stock-based compensation and
going concern assessment.
Refer to Note 1 of the Notes to Condensed Consolidated Financial
Statements for further detail of our significant accounting estimates inherent in the preparation of our financial statements.
NEW ACCOUNTING PRONOUNCEMENTS
Refer to Note 1 of the Notes to Condensed
Consolidated Financial Statements for a discussion of recently issued accounting pronouncements.
RESULTS OF OPERATIONS
Three months ended September 30, 2017 compared with the
three months ended September 30, 2016
Revenue
Our revenues for the three
months ended September 30, 2017 decreased $5,294,513, or 69.2%, to $2,362,048 compared to the three months ended September
30, 2016. The decrease in our revenues was attributable to our sales of PPA systems to AEP Onsite Partners under the
completed contract method in the prior year, offset by revenues on PPA systems sold under the percentage of completion method
in the three months ended September 30, 2017. On July 27, 2016, we sold PPA systems to AEP Onsite Site Partners for proceeds of
$7,526,500. During the three months ended September 30, 2016, the Company recognized $7,103,862 of revenues from the sale of
the PPA systems and $422,638 was deferred and will be recognized over the warranty term.
Costs and Expenses
Total costs and expenses for the three
months ended September 30, 2017 decreased $6,049,084, or 48.7%, to $6,362,920 compared to the three months ended September 30,
2016. This decrease in total costs and expenses was primarily due to the following factors:
|
·
|
$5,699,233 decrease in costs of product sales principally due to the cost of product sales associated
with lower sales of PPA systems, offset by improved margins on current year PPA projects;
|
|
·
|
$937,725 decrease in costs of engineering and development due to timing of costs incurred under
the Lotte R&D Agreement in the prior year with no similar projects in the current year; and
|
|
·
|
$56,965 decrease in depreciation and amortization expense as a result of aging fixed assets that
have reached the end of their useful life.
|
These decreases were
offset by a $447,000 impairment charge on the building and land related to the proposed sale of our corporate headquarters.
Other Income (Expense)
Total other income (expense) for the three
months ended September 30, 2017 decreased by $14,600, or 48%, to income of $15,848, as compared to income of $30,448 for the three
months ended September 30, 2016. The decrease in other income (expense) was attributable to an equity in loss of investee company
related to our China Joint Venture of $50,025 in the three months ended September 30, 2017, as compared to an equity in gain of
investee company of $23,655 in the three months ended September 30, 2016; offset by a $61,568 increase in gain on sale of property
plant and equipment in the three months ended September 30, 2017, as compared to the three months ended September 30, 2016.
Net Loss
Our net loss for the three months ended
September 30, 2017 decreased by $750,928, or 16.2%, to $3,891,794 from the $4,642,722 net loss for the three months ended September
30, 2016. This decrease in net loss was primarily due to improved PPA project margins and the decrease in costs of engineering
and development related to the Lotte R&D Agreement from the three months ended September 30, 2016.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, our research, advanced
engineering and development, and operations have been primarily financed through debt and equity financings, and engineering, government
and other research and development contracts. Total capital stock and paid in capital as of September 30, 2017 was $143,638,011
compared with $143,082,944 as of June 30, 2017. We had an accumulated deficit of $128,531,438 as of September 30, 2017 compared
to $124,639,644 as of June 30, 2017. At September 30, 2017 we had net working capital of $9,730,172 compared to $12,967,353 as
of June 30, 2017. Our shareholders’ equity as of September 30, 2017 and June 30, 2017, exclusive of noncontrolling interests,
was $13,522,627 and $16,858,722, respectively.
On June 22, 2017, the Company completed
an underwritten public offering of its Common Stock at a price to the public of $0.35 per share. The Company sold a total of 7,517,000
shares of its Common Stock, including over-allotments, in the offering for net proceeds of $2,215,299, after deducting the underwriting
discount and expenses.
At September 30, 2017, our principal sources
of liquidity were our cash and cash equivalents, which totaled $9,103,979, and accounts receivable of $204,656.
We believe that cash and cash equivalents
on hand at September 30, 2017, and other potential sources of cash, including net cash we generate from closing on projects in
our backlog, will be sufficient to fund our current operations through the first quarter of fiscal 2019. While we believe our pipeline
of projects is deep, there can be no assurances that projects will close in a timely manner to meet our cash requirements. We are
also working to improve operations and enhance cash balances by continuing to drive cost improvements, reducing our spend on research
and development and selling our corporate headquarters. Also, we are currently exploring potential financing options that may be
available to us, including strategic partnership transactions, PPA project financing facilities, and if necessary, additional sales
of common stock under our current and future shelf registrations with the SEC. However, we have no commitments to obtain any additional
funds, and there can be no assurance such funds will be available on acceptable terms or at all. If the Company is unable to increase
revenues and achieve profitability in a timely fashion, the Company’s financial condition and results of operations may be
materially adversely affected and the Company may not be able to continue operations, execute our growth plan, take advantage of
future opportunities or respond to customers and competition.
Cash Flows
Cash decreased $2,678,983 in the three
months ended September 30, 2017, ending the period at $9,103,979. Cash increased $2,734,089 in the three months ended September
30, 2016, ending the period at $19,923,178. The increase in the usage of cash in the three months ended September 30, 2017,
as compared to the prior year, is primarily due to the following:
Operating Activities
Our operating activities used cash of $2,792,676
for the three months ended September 30, 2017, as compared to cash generated $2,816,043 in the three months ended September 30,
2016. The increase in the cash used in the three months ended September 30, 2017 is attributable to the conversion of deferred
PPA project costs into cash related to the PPA systems sold to AEP Onsite Partners in the prior year; offset by the timing of engineering,
procurement and construction vendor payments in the three months ended September 30, 2017.
Investing Activities
Our investing activities provided cash
of $76,000 for the three months ended September 30, 2017, as compared to cash provided of $605 in the three months ended September
30, 2016. The increase is attributable to increased sales of property plant and equipment in the three months ended September 30,
2017 as compared to the prior year.
Financing Activities
Our financing activities provided cash
of $37,607 for the three months ended September 30, 2017, as compared to cash used of $82,236 in the three months ended September
30, 2016. The increase is attributable to the sale in July 2017 of an additional 367,000 shares of our Common Stock under the over-allotment
option for net proceeds of $119,459, after deducting the underwriting discount and expenses.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements
as of September 30, 2017.