10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2011

or

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to________

Commission File Number 001-33540

(Exact name of registrant as specified in its charter)

Wisconsin	39-1987014
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)

N93 W14475 Whittaker Way, Menomonee Falls, WI  53051

(Address of principal executive offices)

(262) 253-9800

(Registrant’s telephone number)

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

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

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

Large accelerated filer   o Accelerated filer            o Non-accelerated filer o      Smaller reporting company þ

(Do not check if a smaller reporting company)

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Shares Outstanding as of February 9, 2012
Common Stock, $.01 par value per share	41,055,079

ZBB Energy Corporation

Form 10-Q

TABLE OF CONTENTS

	PART I. FINANCIAL INFORMATION (*)	Page
Item 1.	Condensed Consolidated Financial Statements	1
	Condensed Consolidated Balance Sheets (unaudited), December 31, 2011 and June 30, 2011	1
	Condensed Consolidated Statements of Operations (unaudited), Three and Six Months Ended December 31, 2011 and 2010	2
	Condensed Consolidated Statements of Changes in Equity (unaudited), Six Months Ended December 31, 2011 and year ended June 30, 2011	3
	Condensed Consolidated Statements of Cash Flows (unaudited), Six Months Ended December 31, 2011 and 2010	4
	Notes to Condensed Consolidated Financial Statements (unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3.	Defaults upon Senior Securities	37
Item 4.	Mine Safety Disclosures	37
Item 5.	Other Information	37
Item 6.	Exhibits	37
	Signatures	38

(*) All of the financial statements contained in this Quarterly Report are unaudited with the exception of the financial information at June 30, 2011, which has been derived from our audited financial statements at that date and should be read in conjunction therewith. Our audited financial statements as of June 30, 2011 and for the year then ended, and the notes thereto, can be found in our Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on September 8, 2011.

ZBB ENERGY CORPORATION
Condensed Consolidated Balance Sheets
	December 31, 2011 (Unaudited)			June 30, 2011
Assets
Current assets:
Cash and cash equivalents	$	1,680,543		$	2,910,595
Accounts receivable, net		361,238			171,622
Inventories		2,737,483			1,662,850
Prepaid and other current assets		144,358			56,462
Refundable income tax credit		117,190			164,640
Total current assets		5,040,812			4,966,169
Long-term assets:
Property, plant and equipment, net		5,725,411			4,766,871
Investment in investee company		1,582,017			-
Intangible assets, net		1,508,119			1,811,507
Goodwill		803,079			803,079
Total assets	$	14,659,438		$	12,347,626
Liabilities and Equity
Current liabilities:
Bank loans and notes payable	$	909,560		$	779,088
Accounts payable		1,865,752			961,221
Accrued expenses		471,830			695,273
Deferred revenues		1,836,998			1,528,482
Accrued compensation and benefits		120,862			289,996
Total current liabilities		5,205,002			4,254,060
Long-term liabilities:
Bank loans and notes payable		3,654,717			3,937,056
Total liabilities		8,859,719			8,191,116
Equity
Series A preferred stock ($0.01 par value, $10,000 face value)
10,000,000 authorized, 575.1280 and 355.4678 issued, preference in liquidation of $6,133,947 and $3,715,470 as of December 31, 2011 and June 30, 2011, respectively		6,133,947			3,715,470
Common stock ($0.01 par value); 150,000,000 authorized
36,623,476 and 29,912,415 shares issued		359,324			299,124
Additional paid-in capital		65,268,044			60,777,286
Notes receivable - common stock		(6,124,890	)		(3,707,799	)
Treasury stock - 13,833 shares		(11,136	)		(11,136	)
Accumulated deficit		(59,749,441	)		(55,343,683	)
Accumulated other comprehensive loss		(1,584,961	)		(1,572,752	)
Total ZBB Energy Corporation Equity		4,290,887			4,156,510
Noncontrolling interest		1,508,832			-
Total equity		5,799,719			4,156,510
Total liabilities and equity	$	14,659,438		$	12,347,626
See accompanying notes to condensed consolidated financial statements

1

ZBB ENERGY CORPORATION
Condensed Consolidated Statements of Operations (Unaudited)
	Three months ended December 31,						Six months ended December 31,
	2011			2010			2011			2010
Revenues
Product sales	$	240,921		$	49,742		$	467,028		$	49,742
Engineering and development		200,000			184,939			1,611,750			184,939
Total Revenues		440,921			234,681			2,078,778			234,681
Costs and Expenses
Cost of product sales		187,620			79,058			344,291			79,058
Cost of engineering and development		-			-			481,107			-
Advanced engineering and development		1,186,352			586,582			1,885,735			1,425,855
Selling, general, and administrative		1,421,690			1,278,261			3,099,687			2,356,989
Depreciation and amortization		410,595			85,178			729,776			171,261
Total Costs and Expenses		3,206,257			2,029,079			6,540,596			4,033,163
Loss from Operations		(2,765,336	)		(1,794,398	)		(4,461,818	)		(3,798,482	)
Other Income (Expense)
Equity in loss of investee company		(58,710	)		-			(58,710	)		-
Interest income		3,279			2,420			9,968			4,210
Interest expense		(58,823	)		(46,869	)		(118,491	)		(78,876	)
Other income		250			573			4,263			573
Total Other Income (Expense)		(114,004	)		(43,876	)		(162,970	)		(74,093	)
Loss before provision (benefit) for Income Taxes		(2,879,340	)		(1,838,274	)		(4,624,788	)		(3,872,575	)
Provision (benefit) for Income Taxes		(111,800	)		-			(181,800	)		-
Net loss		(2,767,540	)		(1,838,274	)		(4,442,988	)		(3,872,575	)
Net loss attributable to noncontrolling interest		37,230			-			37,230			-
Net Loss Attributable to ZBB Energy Corporation	$	(2,730,310	)	$	(1,838,274	)	$	(4,405,758	)	$	(3,872,575	)
Net Loss per share-
Basic and diluted	$	(0.08	)	$	(0.09	)	$	(0.14	)	$	(0.22	)
Weighted average shares-basic and diluted:
Basic		33,681,776			20,196,322			32,089,356			17,803,353
Diluted		33,681,776			20,196,322			32,089,356			17,803,353
See accompanying notes to condensed consolidated financial statements.

2

ZBB Energy Corporation
Condensed Consolidated Statements of Changes in Equity (Unaudited)
	Number of Shares		Series A Preferred Stock		Number of Shares		Common Stock		Additional Paid-in Capital			Notes Receivable - Common Stock			Treasury Stock			Accumulated Deficit			Accumulated Other Comprehensive (Loss)			Noncontrolling Interest			Comprehensive Loss
Balance: July 1, 2010						14,915,389	$	149,155	$	49,770,987		$	-		$	(11,136	)	$	(46,894,677	)	$	(1,563,052	)
Comprehensive Loss:
Net loss																			(8,449,006	)							$	(8,449,006	)
Net translation         adjustment																						(9,700	)					(9,700	)
Total Comprehensive Loss																											$	(8,458,706	)
Issuance of common stock, net of costs and underwriting fees						13,123,929		131,239		9,137,291		$	(3,529,644	)
Issuance of commitment fee shares						893,097		8,930		579,306
Issuance of common stock for acquisition of net assets of Tier Electronics						800,000		8,000		912,000
Equity issuance costs						180,000		1,800		(833,840	)
Conversion of debenture notes payable to preferred stock		52.4678	$	524,678
Issuance of preferred stock, net of issuance costs		303.0000		3,030,000
Conversion of cash settled RSU's to stock settled RSU's										315,833
Stock-based compensation										866,512
Interest on notes receivable - common stock										178,155			(178,155	)
Accretion of dividends on preferred stock				160,792						(160,792	)
Issuance of warrants										11,834
Balance: June 30, 2011		355.4678		3,715,470		29,912,415		299,124		60,777,286			(3,707,799	)		(11,136	)		(55,343,683	)		(1,572,752	)
Comprehensive Loss:
Net loss																			(4,405,758	)				$	(37,230	)	$	(4,442,988	)
Net translation          adjustment																						(12,209	)					(12,209	)
Total Comprehensive Loss																											$	(4,455,197	)
Issuance of preferred stock, net of issuance costs		219.6602		2,197,240		6,711,061		60,200		3,837,594			(2,187,330	)
Stock-based compensation										644,640
Interest on notes receivable - common stock										229,761			(229,761	)
Accretion of dividends on preferred stock				221,237						(221,237	)
Issuance of subsidiary shares to noncontrolling interest																									1,546,062
Balance: December 31, 2011		575.1280	$	6,133,947		36,623,476	$	359,324	$	65,268,044		$	(6,124,890	)	$	(11,136	)	$	(59,749,441	)	$	(1,584,961	)	$	1,508,832
See accompanying notes to condensed consolidated financial statements

3

ZBB ENERGY CORPORATION
Condensed Consolidated Statements of Cash Flows (Unaudited)
	Six months ended December 31,
	2011				2010
Cash flows from operating activities
Net loss	$	(4,442,988	)		$	(3,872,575	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of property, plant and equipment		349,388				171,261
Amortization of intangible assets		380,388				-
Stock-based compensation		644,640				310,788
Equity in loss of investee company		58,710				-
Changes in assets and liabilities
Accounts receivable		(189,616	)			6,879
Inventories		(1,151,633	)			(69,854	)
Prepaids and other current assets		(87,896	)			(180,463	)
Refundable income taxes		47,450				-
Accounts payable		904,531				143,363
Accrued compensation and benefits		(169,134	)			(221,153	)
Accrued expenses		(206,541	)			(79,034	)
Deferred revenues		308,516				214,511
Net cash used in operating activities		(3,554,185	)			(3,576,277	)
Cash flows from investing activities
Expenditures for property and equipment		(1,307,927	)			(318,310	)
Investment in investee company		(1,640,728	)			-
Net cash used in investing activities		(2,948,655	)			(318,310	)
Cash flows from financing activities
Proceeds from bank loans and notes payable		-				1,300,000
Repayments of bank loans and notes payable		(151,867	)			(219,501	)
Proceeds from issuance of debenture notes payable		-				517,168
Proceeds from issuance of Series A preferred stock		2,197,240				490,000
Proceeds from issuance of Common Stock		1,887,398				1,174,187
Common stock issuance costs		(176,934	)			-
Proceeds from noncontrolling interest		1,546,062
Net cash provided by financing activities		5,301,899				3,261,854
Effect of exchange rate changes on cash and cash equivalents		(29,111	)			8,587
Net decrease in cash and cash equivalents		(1,230,052	)			(624,146	)
Cash and cash equivalents - beginning of period		2,910,595				1,235,635
Cash and cash equivalents - end of period	$	1,680,543			$	611,489
Cash paid for interest	$	105,451			$	26,749
Cash received for income tax credit		223,703				-
Supplemental non-cash investing and financing activities:
Conversion of debenture notes payable to Series A preferred stock	$	-		$		524,678
Issuance of common stock for discounted notes receivable		2,187,330				1,001,883
Issuance of common stock as consideration for equity issuance costs		-				683,634
Conversion of cash settled RSUs to stock settled RSUs		-				315,833
Issuance of warrants for purchase of property and equipment		-				11,834
See accompanying notes to condensed consolidated financial statements.

4

ZBB ENERGY CORPORATION

Notes to Condensed Consolidated Financial Statements (unaudited)

December 31, 2011

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

ZBB Energy Corporation (“ZBB” or the “Company”) develops and manufactures distributed energy storage solutions based upon the Company’s proprietary zinc bromide rechargeable electrical energy storage technology and proprietary power electronics systems.  A developer and manufacturer of modular, scalable and environmentally friendly power systems (“ZBB Enersystem™”), ZBB Energy was founded in 1998 and is headquartered in Wisconsin, USA with offices also located in Perth, Western Australia. As described in Note 2 in January 2011 the Company acquired substantially all of the net assets of Tier Electronics LLC and as described in Note 3 in December 2011 the Company contributed assets to ZBB Powersav Holdings Limited which contributed assets to a joint venture in China.

The Company provides advanced electrical power management platforms targeted at the growing global need for distributed renewable energy, energy efficiency, power quality, and grid modernization.  The Company and its power electronics subsidiary, Tier Electronics LLC, have developed a portfolio of intelligent power management platforms that directly integrate multiple renewable and conventional onsite generation sources with rechargeable zinc bromide flow batteries and other storage technology. The Company also offers advanced systems to directly connect wind and solar equipment to the grid and systems that can form various levels of micro-grids.  Tier Electronics participates in the energy efficiency markets through its hybrid vehicle control systems, and power quality markets with its line of regulation solutions. Together, these platforms solve a wide range of electrical system challenges in global markets for utility, governmental, commercial, industrial and residential end customers.

The consolidated financial statements include the accounts of the Company and those of its wholly-owned subsidiaries, ZBB Technologies, Inc. and Tier Electronics LLC which operate manufacturing facilities in Menomonee Falls, Wisconsin, and ZBB Technologies, Ltd. which has its advanced engineering and development facility in Perth, Australia and its sixty percent owned subsidiary ZBB Powersav Holdings Limited located in Hong Kong which was formed in connection with the Company’s investment in the 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 (“GAAP”) for interim financial information 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 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 six month period ended December 31, 2011 are not necessarily indicative of the results that might be expected for the year ending June 30, 2012.

The condensed consolidated balance sheet at June 30, 2011 has been derived from audited financial statements at that date, but does not include all of the information and disclosures required by 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, 2011.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and have been prepared in accordance with GAAP. All significant intercompany accounts and transactions have been eliminated upon consolidation.

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 and Australia.  At times such balances may exceed insurable limits.  The Company has not experienced any losses in such accounts.

Accounts Receivable

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 $80,000, as of December 31, 2011 and June 30, 2011.

5

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or market and consist of raw materials, work in progress and finished goods held for resale.

Costs incurred in bringing each product to its present location and conditions are accounted for as follows:

●   Raw materials – purchased cost of direct material

●   Finished goods and work-in-progress – purchased cost of direct material plus direct labor plus a proportion of manufacturing overheads.

The Company evaluates the recoverability of its slow moving or obsolete inventories at least quarterly. The Company estimates the recoverable cost of such inventory by product type while considering factors such as its age, historic and current demand trends, the physical condition of the inventory as well as assumptions regarding future demand. The Company’s ability to recover its cost for slow moving or obsolete inventory can be affected by such factors as general market conditions, future customer demand and relationships with suppliers.

Property, Plant and Equipment

Land, building, equipment, computers and furniture and fixtures are recorded at cost.  Maintenance, repairs and betterments are charged to expense. 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 is:

	Estimated Useful Lives
Manufacturing equipment	3 - 7 years
Office equipment	3 - 7 years
Building and improvements	7 - 40 years

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 reflected within the Company’s 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 loss of investee company” in the Consolidated Statements of Operations. The Company’s carrying value in an equity method Investee company is reflected in the caption ‘‘Investment in investee company’’ in the Company’s 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 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 the amount of its share of losses not previously recognized.

Intangible Assets

Intangible assets generally result from business acquisitions.  The Company accounted for the January 21, 2011 acquisition of Tier Electronics LLC by assigning the purchase price to identifiable tangible and intangible assets and liabilities.  Assets acquired and liabilities assumed were recorded at their estimated fair values.  Intangible assets consist of a non-compete agreement, license agreement, and trade secrets.

Amortization is recorded for intangible assets with determinable lives. Intangible assets are amortized using the straight line method over the three year estimated useful lives of the respective assets.

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 each year 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 determined that it has two reporting units – ZBB Energy Storage and Power Electronics Systems, and Tier Electronics Power Conversion Systems.

6

Testing for the impairment of goodwill involves a two-step process. The first step of the impairment test requires the comparing of a reporting units 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.  Based on this method, the Company determined fair value as evidenced by market capitalization, and concluded that there was no need for an impairment charge as of December 31, 2011 and June 30, 2011.

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.  Management has determined that there were $0 and $219,213 long-lived assets impaired as of December 31, 2011 and June 30, 2011, respectively (see Note 6).

Warranty Obligations

The Company typically warrants its products for twelve months after installation or eighteen months after date of shipment, whichever first occurs. Warranty obligations are 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.

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.

During the year ended June 30, 2010, battery stack manufacturing issues were discovered as a result of an internal test failure.  As a result, the Company has implemented several manufacturing process changes to eliminate the potential for future failures and has adjusted its warranty obligations accordingly.  We will adjust our warranty rates in future periods as these processes are implemented and tested.

As of December 31, 2011 and June 30, 2011, included in the Company’s accrued expenses were $122,803 and $413,203, respectively, related to warranty obligations.  Such amounts are included in accrued expenses in the accompanying consolidated balance sheets.

The following is a summary of accrued warranty activity:

	Six Months and Year Ended
	December 31, 2011			June 30, 2011
Beginning balance	$	413,203		$	520,000
Accruals for warranties during the period		-			176,662
Settlements during the perioid		(50,400	)		(283,459	)
Adjustments relating to preexisting warranties		(240,000	)		-
Ending balance	$	122,803		$	413,203

7

Revenue Recognition

Revenues are recognized when persuasive evidence of a contractual arrangement exits, 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.

For sales arrangements containing multiple elements (products or services), revenue relating to undelivered elements is deferred at the estimated fair value until delivery of the deferred elements. 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. If the arrangement does not meet all criteria above, the entire amount of the transaction is deferred until all elements are delivered. Revenue from time and materials based service arrangements is recognized as the service is performed.

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.

The Company charges shipping and handling fees when products are shipped or delivered to a customer, and includes such amounts in net revenues. The Company reports its revenues net of estimated returns and allowances.

Revenues from government funded research and development contracts are recognized proportionally as costs are incurred and compared to the estimated total research and development costs for each contract. In many cases, the Company is reimbursed only a portion of the costs incurred or to be incurred on the contract. Government funded research and development contracts are generally multi-year, cost-reimbursement and/or cost-share type contracts. The Company is reimbursed for reasonable and allocable costs up to the reimbursement limits set by the contract.

Total revenues of $440,921 and $2,078,778 were recognized for the three and six months ended December 31, 2011, respectively, and were comprised of one significant customer (81% of total revenues).    Total revenues of $234,681 were recognized for both the three and six months ended December 31, 2010, and were comprised of two significant customers (100% of total revenues). The Company had one significant customer with an outstanding accounts receivable balance of $226,702 (82% of accounts receivable) and $171,622 (100% of accounts receivable) at December 31, 2011 and June 30, 2011, respectively.

Engineering and Development Revenues

On April 8, 2011, the Company entered into a Collaboration Agreement (the “Collaboration Agreement”) with Honam Petrochemical Corporation (“Honam”), a division of LOTTE Petrochemical, pursuant to which the Company agreed with Honam to collaborate on the further technical development of the Company’s third generation Zinc Bromide flow battery module (the “Version 3 Battery Module”).  Pursuant to the Collaboration Agreement, Honam is required to pay us a total of $3,000,000 dollars as follows:  (1) $1,000,000 within 10 days following the execution of the Collaboration Agreement (subsequently received on April 9, 2011); (2) $500,000 by June 30, 2011 (subsequently received on June 30, 2011); (3) $1,200,000 by October 10, 2011 (subsequently received on October 10, 2011) and (4) $300,000 within 10 days after a single V3 Battery Module test station  is set up at Honam’s research and development center.  The Company has recognized $2,300,000 as revenue as of December 31, 2011 based on performance milestones achieved and deferred the balance of $400,000 of the $1,000,000 upfront payment which is being recognized as certain activities are performed by the Company over the estimated 15 month performance period.  The unamortized balance of deferred revenue will be recognized over the estimated remaining performance period (6 months).  Pursuant to the Collaboration Agreement, the parties are required to negotiate a license agreement under which upon the completion of the collaboration project and the receipt by the Company of all payments due under the Collaboration Agreement, the Company shall grant to Honam: (1) a fully paid-up, exclusive and royalty-free license to sell and manufacture the Version 3 Battery Module in Korea and (2) non-exclusive rights to sell the Version 3 Battery Module in Japan, Thailand, Taiwan, Malaysia, Vietnam and Singapore.  In connection with such non-exclusive rights, Honam will be required to pay a royalty to the Company.

Included in engineering and development revenues were $200,000 and $1,600,000 respectively, for the three and six months ended December 31, 2011 related to the Collaboration Agreement.  Engineering and development costs related to the collaboration agreement totaled $0 and $481,107 for the three and six months ended December 31, 2011.  The financial statements for the three and six months ended December 31, 2010 did not include engineering and development revenue and costs related to the Collaboration Agreement.

On June 29, 2007, ZBB Technologies Ltd (“ZBB Technologies”), an Australian subsidiary of the Company, and the Commonwealth of Australia (the “Commonwealth”) represented by and acting through the Department of Environment and Water Resources (the “Department”), entered into an agreement for project funding under the Advanced Electricity Storage Technologies (“AEST”) program (the “AEST agreement”) whereby the Department agreed to provide funding to ZBB Technologies for the development of an energy storage system to be used to demonstrate the storage and supply of renewable energy generated from photovoltaic solar panels and wind turbines already operational at the Commonwealth Scientific and Industrial Research Organization’s (“CSIRO”) Newcastle Energy Centre in New South Wales, Australia.

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The AEST agreement provided for a three year term under which the Commonwealth provided $2.6 million in project funding over several periods, totaling $1.35 million in year one, $1.01 million in year two and $0.24 million in year three, as certain development progress “milestones” were met by ZBB Technologies to the satisfaction of the Commonwealth.

The Company owns any assets, including battery storage systems, acquired with the funding from the contract.  The Company granted the government of Australia a free, non-exclusive license to intellectual property created in the project for their own internal use.

The Company fulfilled its obligations under the AEST agreement and received a final payment of $184,939 in December 2010 which was recognized as engineering and development revenues during the three months ended December 31, 2010.

As of December 31, 2011 and June 30, 2011, the Company had no unbilled amounts from engineering and development contracts. The Company received $437,408 and $971,949 in customer payments from engineering and development contract revenue,  representing deposits in advance of performance of the allowable work, as of December 31, 2011 and June 30, 2011, respectively.

Advanced Engineering and Development Expenses

The Company expenses advanced engineering and development costs as incurred. These costs consist primarily of labor, overhead, and materials to build prototype units, materials for testing, develop manufacturing processes and 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 consolidated statements of operations as a “cost of engineering and development revenues.”

Stock-Based Compensation

The Company measures all “Share-Based Payments", including grants of stock options, restricted shares and restricted stock units, to be recognized in its consolidated statement of operations based on their fair values on the grant date, 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 recognition of 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 primarily with restricted stock units (“RSUs”) rather than cash.  The RSUs were classified as liability awards as of June 30, 2010 because the RSUs were to be paid in cash upon vesting. On November 10, 2010, the June 30, 2010 RSUs were converted to stock based RSUs and were credited to additional paid-in capital. The grant date fair value of the restricted stock unit awards was determined using the closing stock price of the Company’s common stock on the day prior to the date of the grant, with the compensation expense amortized over the vesting period of restricted stock unit awards, net of estimated forfeitures.

The Company only recognizes expense to its statements of operations 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 Note 10.

Income Taxes

The Company records deferred income taxes in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 740, “Accounting for Income Taxes.” This ASC 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. The Company establishes a valuation allowance when necessary to reduce deferred income tax assets to the amount expected to be realized.  There were no net deferred income tax assets recorded as of December 31, 2011 and June 30, 2011.

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The Company applies a more-likely-than-not recognition threshold for all tax uncertainties as required under 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, 2008 through June 30, 2011 and the Company’s Wisconsin and Australian income tax returns for the years ended June 30, 2007 through June 30, 2011 are subject to examination by taxing authorities.

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 accumulated in Accumulated Other Comprehensive Loss as a separate component of Equity in the consolidated balance sheets. No gain or loss on translation is included in the net loss.

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.  For the six months ended December 31, 2011 and December 31, 2010 there were 7,711,897 and 5,547,719 of underlying options, restricted stock units and warrants that are excluded, respectively.

Concentrations of Credit Risk and Fair Value

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable.

The Company maintains significant cash deposits primarily with three financial institutions, which at times may exceed insured limits. The Company has not previously experienced any losses on such deposits. Additionally, the Company performs periodic evaluations of the relative credit rating of these institutions as part of its investment strategy.

Concentrations of credit risk with respect to accounts receivable are limited due to accelerated payment terms in current customer contracts and creditworthiness of the current customer base.

The carrying amounts of cash and cash equivalents, accounts receivable, other current assets, accounts payable and accrued expenses approximate fair value due to the short-term nature of these instruments. The carrying value of bank loans and notes payable approximate fair value based on their terms which reflect market conditions existing as of December 31, 2011 and June 30, 2011.

Comprehensive income (loss)

The Company reports its comprehensive income (loss) in accordance with the FASB ASCtopic 220 “Comprehensive Income”, which requires presentation of the components of comprehensive earnings. Comprehensive income (loss) consists of net income (loss) for the period plus or minus any net currency translation adjustments applicable for three and six months ended December 31, 2011 and December 31, 2010 is presented as follows:

	Three months ended December 31,						Six months ended December 31,
	2011			2010			2011			2010
Net loss	$	(2,767,540	)	$	(1,838,274	)	$	(4,442,988	)	$	(3,872,575	)
Net translation adjustment		10,297			(4,229	)		(12,209	)		(23,668	)
Comprehensive loss	$	(2,757,243	)	$	(1,842,503	)	$	(4,455,197	)	$	(3,896,243	)

Use of Estimates

The preparation of financial statements in conformity with U.S. 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 consolidated financial statements include those related to:

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●   the timing of revenue recognition;

●   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 goodwill and other intangible assets;

●   contract costs and reserves;

●   warranty obligations;

●   income tax valuation allowances;

●   stock-based compensation; and

●   fair values of assets acquired and liabilities assumed in a business combination.

Reclassifications

Certain amounts previously reported have been reclassified to conform to the current presentation.

Recent Accounting Pronouncements

In September 2011, the FASB issued an update to ASC 350, Intangibles — Goodwill and Other. This ASU amends the guidance in ASC 350-20 on testing for goodwill impairment. The revised guidance allows entities testing for goodwill impairment to have the option of performing a qualitative assessment before calculating the fair value of the reporting unit. The ASU does not change how goodwill is calculated or assigned to reporting units, nor does it revise the requirement to test annually for impairment. The ASU is limited to goodwill and does not amend the annual requirement for testing other indefinite-lived intangible assets for impairment. The ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We will adopt this ASU for our 2012 goodwill impairment testing. We do not expect this ASU to have a material impact, if any, on our consolidated condensed financial statements.

In June 2011, the Financial Accounting Standards Board (FASB) issued new accounting guidance related to the presentation of comprehensive income that eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Under this guidance, an entity can elect to present items of net income and other comprehensive income in one continuous statement or two consecutive statements. This guidance is effective for us beginning July 1, 2012. We do not believe the adoption of this guidance will have a material effect on our consolidated financial statements and related disclosures.

In May 2011, the FASB issued updated accounting guidance related to fair value measurements and disclosures that result in common fair value measurements and disclosures between U.S. GAAP and International Financial Reporting Standards. This guidance includes amendments that clarify the application of existing fair value measurements and disclosures, in addition to other amendments that change principles or requirements for fair value measurements or disclosures. This guidance is effective for us beginning January 1, 2012. We do not believe the adoption of this guidance will have a material effect on our consolidated financial statements and related disclosures.

NOTE 2 – BUSINESS ACQUISITION

On January 21, 2011 (“Closing Date”), the Company entered into an Asset Purchase Agreement under which the Company acquired substantially all of the net assets of Tier Electronics LLC (“Seller”) used in connection with the Seller’s business of developing, manufacturing, marketing and selling power electronics products for and to original equipment manufacturers in various industries.  The purchase price was comprised of (1) a $1.35 million promissory note issued by the Company, (2) 800,000 shares of the Company’s common stock, and (3) payment of approximately $245,000 of the Seller’s obligations.  The promissory note is in the principal amount of $1,350,000 and bears interest at eight percent.  The principal balance of the note is payable in three equal installments of $450,000 on the first, second and third anniversaries of the Closing Date.  Accrued interest is payable monthly.  If the federal capital gains tax rate exceeds 15% and or the State of Wisconsin capital gains tax rate exceeds 5.425% at any time prior to the payment in full of the unpaid principal balance and accrued interest on the promissory note, then the principal amount of the promissory note (retroactive to January 21, 2011) shall be increased by an amount equal to the product of (a) the aggregate amount of federal and state capital gain realized by the Seller or Seller’s sole member, as applicable, in connection with the acquisition, multiplied by (b) the difference between (i) the combined federal and State of Wisconsin capital gains tax rate as of the date of calculation, minus (ii) the combined federal and State of Wisconsin capital gains tax rate of 20.425% as of January 21, 2011.  Any adjustment to the principal amount of the promissory note shall be effected by increasing the amount of the last payment due under the promissory note without affecting the next regularly scheduled payment(s) under the promissory note.  The following table reconciles the purchase price to the cash consideration paid:

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Total purchase price	$	2,515,071
Less debt and equity issued to Seller:
Note payable		(1,350,000	)
Common stock		(920,000	)
Total debt and equity issued to Seller		(2,270,000	)
Total cash paid		245,071
Less cash acquired		(19,149	)
Acquisition of business, net of cash acquired	$	225,922

The primary reason for the acquisition was to add a base of business so that the Company now offers a full range of energy storage, utilization, and management solutions that range from wind and solar converters to power quality, micro-grid systems, and hybrid electric drives for vehicles.

The Company accounted for the acquisition using the purchase method under U.S. GAAP.  The purchase method requires that assets acquired and liabilities assumed in a business combination be recognized at fair value.  The Company finalized the purchase price allocation during the three month period ended December 31, 2011.  A summary of the allocation of the assets acquired and the liabilities assumed in connection with the acquisition based on their estimated fair values is as follows:

Cash and cash equivalents	$	19,149
Accounts receivable		225,081
Inventories		772,932
Property and equipment		4,500
Other intangible assets		2,198,097
Accounts payable		(141,003	)
Accrued expenses		(203,823	)
Deferred revenue		(359,862	)
Net assets acquired	$	2,515,071

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 fair value of the assets and liabilities has been determined by management, with the assistance of an independent valuation firm, and are based on significant inputs that are generally not observable in the market (level 3 measurements).  Key assumptions that were used by management are as follows:

Financial Assets and Liabilities

Accounts receivable, accounts payable and accrued expenses, were valued at stated value, which approximates fair value.

Inventories were valued at fair value based on estimated net realizable value less costs to complete and sales costs.  Deferred revenues were valued at fair value based on the amounts that will be applied as customer credits to future shipments.

Property and Equipment

Property and equipment were valued based on the estimated market value of similar equipment.

Other Intangible Assets

The Company acquired certain identifiable intangible assets as part of the transaction which included:  $310,888 in a non-compete agreement, $288,087 in a license agreement, and $1,599,122 in a trade secrets agreement.  The fair values of these intangibles were estimated based upon an income approach methodology. Critical inputs into the valuation model for these intangibles include estimations of expected revenue and attrition rates, expected operating margins and capital requirements.  The other intangible assets were assigned an estimated useful life of three years.

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Acquisition Related Expenses

Included in the consolidated statement of operations for the period from January 21, 2011 (date of acquisition) to June 30, 2011 were transaction expenses aggregating approximately $150,000 for advisory and legal costs incurred in connection with the business acquisition.

Tier Electronics LLC operates as a wholly owned subsidiary of the Company.  Tier Electronics LLC leases its facility from the former owner of the Seller under a lease agreement expiring December 31, 2014.  The first year rental is $84,000 per annum and is subject to an annual CPI adjustment.  The Company is required to pay real estate taxes and other occupancy costs related to the facility.

In connection with this acquisition the Company awarded inducement options to purchase a total of 750,000 shares of the Company’s common stock at an exercise price of $1.15 to certain members of management of Tier Electronics, LLC.  The options vest as follows: (1) 420,000 will vest in three equal annual installments beginning on December 31, 2011 based on achievement of certain revenue targets and (2) 330,000 vest in three equal annual installments beginning on January 21, 2012.

Unaudited Pro Forma Information

The following unaudited pro forma financial information summarizes the results of operations for the period indicated as if the acquisition had been completed as of July 1, 2010.

These pro forma amounts do not purport to be indicative of the results that would have actually been obtained if the acquisition occurred as of July 1, 2010 or that may be obtained in the future.

	Unaudited						Unaudited
	Three months ended December 31,						Six Months Ended December 31,
	2011			2010			2011			2010
Revenues	$	440,921		$	234,681		$	2,078,778		$	794,576
Loss from Operations		(2,765,336	)		(1,871,595	)		(4,461,818	)		(4,011,697	)
Net loss	$	(2,730,310	)	$	(1,945,464	)	$	(4,405,758	)		(4,144,573	)
Net Loss per share-
Basic and diluted	$	(0.08	)	$	(0.09	)	$	(0.14	)	$	(0.22	)
Weighted average shares-basic and diluted:
Basic		33,681,776			20,996,322			32,089,356			18,603,353
Diluted		33,681,776			20,996,322			32,089,356			18,603,353

Pro forma information primarily reflects adjustments relating to interest on the promissory note and the amortization of the intangible assets acquired in the acquisition.

NOTE 3 – CHINA JOINT VENTURE

On August 30, 2011, the Company entered into agreements providing for establishment of a joint venture to develop, produce, sell, distribute and service advanced storage batteries and power electronics in China (the “Joint Venture”).  Joint venture partners include PowerSav, Inc. (“Powersav”), AnHui Xinlong Electrical Co. and Wuhu Huarui Power Transmission & Transformation Engineering Co.  The Joint Venture was established upon receipt of certain governmental approvals from China which were received in November 2011.

The Joint Venture operates through a jointly-owned Chinese company located in Wuhu City, Anhui Province named Anhui Meineng Store Energy Co., Ltd. (“AHMN”).  AHMN intends to initially assemble and ultimately manufacture 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 connection with the Joint Venture, on August 30, 2011 the Company and certain of its subsidiaries entered into the following agreements:

● Joint Venture Agreement of Anhui Meineng Store Energy Co., Ltd. (the “China JV Agreement”) by and between ZBB PowerSav Holdings Limited, a Hong Kong limited liability company (“ Holdco”), and Anhui Xinrui Investment Co., Ltd, a Chinese limited liability company; and

● Limited Liability Company Agreement of ZBB PowerSav Holdings Limited by and between ZBB Cayman Corporation and PowerSav, Inc. (the “Holdco Agreement”).

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In connection with the Joint Venture, upon establishment of AHMN, the Company and certain of its subsidiaries entered into the following agreements:

● Management Services Agreement by and between AHMN and Holdco (the “Management Services Agreement”);

● License Agreement by and between Holdco and AHMN (the “License Agreement”); and

● Research and Development Agreement by and between the Company and AHMN (the “Research and Development Agreement”).

Pursuant to the China JV Agreement, it is anticipated that AHMN  will be capitalized with approximately $13.6 million of equity capital.  The Company’s only capital contributions to the Joint Venture will be a contribution of technology to AHMN via the License Agreement and $200,000 in cash.  The Company’s indirect interest in AHMN equals approximately 33%.

The Company’s investment in AHMN will be made through Holdco, a holding company formed with PowerSav.  Pursuant to the Holdco Agreement, the Company agreed to contribute to Holdco technology via a license agreement with an agreed upon value of approximately $4.4 million and $200,000 in cash in exchange for a 60% equity interest and PowerSav agreed to contribute to Holdco $3.3 million in cash in exchange for a 40% equity interest.  The initial capital contributions (consisting of the Company’s technology contribution and one half of required cash contributions) were made in December 2011. 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.  AHMN had a net loss from continuing operations and a net loss of $171,949 of which $58,710 is attributable to the investee on the Company’s condensed consolidated statements of operations (unaudited).

The Company has the right to appoint a majority of the members of the Board of Directors of Hong Kong Holdco and Hong Kong Holdco has the right to appoint a majority of the members of the Board of Directors of AHMN.

Pursuant to the Management Services Agreement Holdco will provide certain management services to the AHMN in exchange for a management services fee equal to five percent of AHMN’s net sales for the first five years and three percent of AHMN’s net sales for the subsequent three years.

Pursuant to the License Agreement, Holdco granted to AHMN (1) an exclusive royalty-free license to manufacture and distribute the Company’s ZBB Enerstore™, Zinc Bromide flow battery, version three (v3) battery (50KW) and ZBB Enersection™, POWR PECC (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 the Research and Development Agreement, AHMN may request the Company to provide research and development services upon commercially reasonable terms and conditions.  AHMN would pay the Company’s fully-loaded costs and expense incurred in providing such services.

NOTE 4 - GOING CONCERN

The consolidated financial statements as of December 31, 2011 and for the six months then ended have been prepared on the basis of a going concern which contemplates that the Company will be able to realize assets and discharge liabilities in the normal course of business. Accordingly, they do not give effect to adjustments that would be necessary should the Company be required to liquidate its assets. The Company incurred a net loss of $4,405,758 for the six months ended December 31, 2011 and as of December 31, 2011 has an accumulated deficit of $59,749,441 and total ZBB Energy Corporation equity of $4,290,887.  The ability of the Company to meet its total liabilities of $8,859,719 and to continue as a going concern is dependent upon the availability of future funding and achieving profitability.  The accompanying financial statements do not include any adjustments that might result from the outcome of these uncertainties.

The Company believes, with the financing sources in place and with other potential financing sources, that it will be able to raise the capital necessary to fund operations through at least June 30, 2012.  The Company’s sources of additional capital in the year ending June 30, 2012 include the raising of additional capital pursuant to an agreement with Socius CG II, Ltd. (“Socius”), as described in Note 12. As of December 31, 2011, there was approximately $4.2 million of availability under this facility.  However, this facility places certain restrictions on our ability to draw on it.  For example, our ability to submit a tranche notice under the Socius Agreement is subject to certain conditions including that: (1) a registration statement covering our sale of shares of common stock to Socius in connection with the tranche is effective and (2) the issuance of such shares would not result in Socius and its affiliates beneficially owning more than 9.99% of our common stock.  These limitations have been carefully considered by the Company and notwithstanding such limitations management has successfully utilized this facility and believes it will continue to be able to do so.  As described in Note 12, during the three months ended December 31, 2011, the Company delivered a tranche notice to Socius pursuant to which Socius purchased $750,000 of Series A preferred stock.  However, there can be no assurances that unforeseen circumstances will not jeopardize the Company’s ability to draw on this and other potential financing sources.

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Accordingly, the Company is currently exploring various alternatives including debt and equity financing vehicles, strategic partnerships, and/or government programs that may be available to the Company, as well as trying to generate additional sales and increase margins.  As described in Note 1, in April 2011, the Company entered into a Collaboration Agreement with Honam Petrochemical Corporation (“Honam”), a division of LOTTE Petrochemical, pursuant to which during the nine months ended December 31, 2011 Honam paid the Company a total of $2.7 million.  Pursuant to the Collaboration Agreement Honam is required to pay an additional $300,000 within 10 days after a V3 single stack test station is set up at Honam’s research and development center.

As described in Note 12, in the six months ended December 31, 2011 the Company raised approximately $1.8 million through the sale of shares of Company common stock to certain investors. As described in Note 17, the Company raised approximately $2,895,000 through the sale of shares of Company stock to certain investors in February 2012.  However, the Company has 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 obtain additional funding and improve its operations, the Company’s financial condition and results of operations may be materially adversely affected and the Company may not be able to continue operations.

NOTE 5 - INVENTORIES

Inventories are comprised of the following as of December 31, 2011 and June 30, 2011:

	December 31, 2011		June 30, 2011
Raw materials	$	1,737,214	$	1,146,720
Work in progress		1,000,269		439,130
Total	$	2,737,483	$	1,585,850

NOTE 6– PROPERTY, PLANT & EQUIPMENT

Property, plant, and equipment are comprised of the following as of December 31, 2011 and June 30, 2011:

	December 31, 2011			June 30, 2011
Land	$	217,000		$	217,000
Building and improvements		3,334,131			2,559,266
Manufacturing equipment		4,336,065			2,901,912
Office equipment		302,499			217,074
Construction in process		150,623			1,215,400
Total, at cost		8,340,318			7,110,652
Less, accumulated depreciation		(2,614,907	)		(2,343,781	)
Property, Plant & Equipment, Net	$	5,725,411		$	4,766,871

During the year ended June 30, 2011, manufacturing equipment previously used in production and development activities were identified as impaired or had reached the end of their respective useful lives due to changing product and manufacturing technologies.  Upon write-down the manufacturing equipment and accumulated depreciation accounts were adjusted accordingly and $219,213 was charged to operations during the years ended June 30, 2011.  The adjustments were reported as impairment and other equipment charges.  For the three and six months ended December 31, 2011 the Company has not identified any equipment as impaired or having reached the end of its respective life.

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NOTE 7– INTANGIBLE ASSETS

Intangible assets are comprised of the following as of December 31, 2011 and June 30, 2011:

	December 31, 2011			June 30, 2011
Non-compete agreement	$	310,888		$	300,000
License agreement		288,087			278,000
Trade secrets		1,599,122			1,543,922
Total, at cost		2,198,097			2,121,922
Less, accumulated amortization		(689,978	)		(310,415	)
Intangible Assets, Net	$	1,508,119		$	1,811,507
Estimated amortization expense for fiscal periods subsequent to December 31, 2011 are as follows:
2012	$	363,475
2013		732,699
2014		411,945
	$	1,508,119

NOTE 8 – GOODWILL

The Company acquired ZBB Technologies, Inc., a wholly-owned subsidiary, through a series of transactions in March 1996.  The goodwill amount of $1.134 million, the difference between the price paid for ZBB Technologies, Inc. and the net assets of the acquisition, amortized through fiscal 2002, resulted in the net goodwill amount of $803,079 as of December 31, 2011 and June 30, 2011.

The Company accounts for goodwill in accordance with FASB ASC topic 350-20, “Intangibles - Goodwill and Other - Goodwill” under which goodwill and other intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests. The implied fair value of goodwill is the amount determined by deducting the estimated fair value of all tangible and identifiable intangible net assets of the reporting unit to which goodwill has been allocated from the estimated fair value of the reporting unit. If the recorded value of goodwill exceeds its implied value, an impairment charge is recorded for the excess.

NOTE 9 – BANK LOANS AND NOTES PAYABLE

The Company's debt consisted of the following as of December 31, 2011 and June 30, 2011:

	December 31, 2011		June 30, 2011
Bank loans and notes payable-current	$	909,560	$	779,088
Bank loans and notes payable-long term		3,654,717		3,937,056
Total	$	4,564,277	$	4,716,144

On January 21, 2011 the Company entered into a promissory note for $1,350,000 with TE Holdings Group, LLC in connection with the acquisition of the net assets of Tier Electronics LLC.  The promissory note is in the principal amount of $1,350,000 and bears interest at eight percent.  The principal balance of the note is payable in three equal installments of $450,000 on the first, second and third anniversaries of the promissory note.  Accrued interest is payable monthly. If the federal capital gains tax rate exceeds 15% and or the State of Wisconsin capital gains tax rate exceeds 5.425% at any time prior to the payment in full of the unpaid principal balance and accrued interest on the promissory note, then the principal amount of the promissory note (retroactive to January 21, 2011) shall be increased by an amount equal to the product of (a) the aggregate amount of federal and state capital gain realized by the Seller or Seller’s sole member, as applicable, in connection with the acquisition, multiplied by (b) the difference between (i) the combined federal and State of Wisconsin capital gains tax rate as of the date of calculation, minus (ii) the combined federal and State of Wisconsin capital gains tax rate of 20.425% as of January 21, 2011.  Any adjustment to the principal amount of the promissory note shall be effected by increasing the amount of the last payment due under the promissory note without affecting the next regularly scheduled payment(s) under the promissory note.  The loan was amended in January 2012.  The initial payment of $450,000 to be made on January 21, 2012 will be made in three equal installments of $150,000 on February 21, March 21 and April 7, 2012.  Interest will accrue and be paid monthly on the unpaid balance in accordance with the original agreement.  The outstanding principal balance was $1,350,000 at December 31, 2011 and June 30, 2011.

On April 7, 2010 the Company entered into a loan agreement for $1,300,000 with the Wisconsin Department of Commerce.  Payments of principal and interest under this loan are deferred until May 31, 2012.  The interest rate is 2%.  Payments of $22,800 per month are required starting June 1, 2012 with a final payment due on May 1, 2017.  Borrowings were not received until July 2010.  The loan is collateralized by the equipment purchased with the loan proceeds and substantially all assets of the Company not otherwise collateralized.  The Company is required to maintain and increase a specified number of employees, and the interest rate is increased in certain cases for failure to meet this requirement.  The outstanding principal balance was $1,300,000 at December 31, 2011 and June 30, 2011 respectively.

16

On July 1, 2009 the Company entered into a loan agreement to finance new production equipment.  The $156,000 bank note was collateralized by specific equipment, interest at 5.99%.  The note with a balance of $107,155 as of June 30, 2010 was paid off during June 2011.

On May 14, 2008 the Company entered into two loan agreements to refinance its building and land in Menomonee Falls, Wisconsin:

The first loan requires a fixed monthly payment of principal and interest at a rate of .25% below the prime rate, subject to a floor of 5% as of June 30, 2011 and 2010 with any principal balance due at maturity on June 1, 2018 and collateralized by the building and land.  The outstanding principal balance was $741,816 and $763,338 at December 31, 2011 and June 30, 2011, respectively.

The second loan is a secured promissory note guaranteed by the U.S. Small Business Administration, requiring monthly payments of principal and interest at a rate of 5.5% until May 1, 2028.   The outstanding principal balance was $779,729 and $794,074 at December 31, 2011 and June 30, 2011, respectively.  The loan is collateralized by a mortgage on the building and land.

On November 28, 2008 the Company entered into a loan agreement with a bank.  The note is collateralized by specific equipment, requiring monthly payments of $21,000 of principal and interest; rate equal to the prime rate subject to a floor of 4.25%; maturity date of July 1, 2012. The outstanding principal balance was $392,731 and $508,733 at December 31, 2011 and June 30, 2011, respectively.

An equipment loan with a balance of $48,900 as of June 30, 2010 was paid in full in November 2010.

Maximum aggregate annual principal payments for fiscal periods subsequent to December 31, 2011 are as follows:

2012	$	626,570
2013		1,021,838
2014		815,883
2015		346,466
2016		356,327
2017 and thereafter		1,397,193
	$	4,564,277

The loan agreements with the bank require the Company to meet certain operating ratios.  The Company was not in compliance with such covenants as of December 31, 2011, for which a waiver was obtained from the bank on June 27, 2011 which waived the covenants through June 29, 2012.

NOTE 10 – EMPLOYEE/DIRECTOR EQUITY INCENTIVE PLANS

During the six months ended December 31, 2011 and 2010, the Company’s results of operations include compensation expense for stock options granted and restricted shares vested under its equity incentive plans. The amount recognized in the financial statements related to stock-based compensation was $644,640 and $310,788, based on the amortized grant date fair value of options during the six months ended December 31, 2011 and 2010, respectively.

At the annual meeting of shareholders held on November 10, 2010, the Company’s shareholders approved the Company’s 2010 Omnibus Long-Term Incentive Plan (the “Omnibus Plan”). The Omnibus Plan authorizes the board of directors or a committee thereof, to grant the following types of equity awards under the Omnibus Plan:  Incentive Stock Options (“ISOs”), Non-qualified Stock Options (“NSOs”), Stock Appreciation Rights (“SARs”), Restricted Stock, Restricted Stock Units (“RSUs”), cash- or stock-based Performance awards (as defined in the Omnibus Plan) and other stock-based awards. Four million shares of common stock are reserved for issuance under the Omnibus Plan.  In connection with the adoption of the Omnibus Plan the Company’s Board of Directors froze the Company’s other stock option plans and no further grants may be made under those plans.

On November 10, 2010, (1) a total of 511,143 RSUs were granted to the Company’s directors in payment of directors fees through November 2011 pursuant to the Company’s Director Compensation Policy, (2) a total of 574,242 RSUs previously issued to the Company’s directors pursuant to this policy and which provided for cash settlement were converted to stock settled RSUs, and (3) 315,000 RSUs were granted in total to a consultant and to the Company’s President and CEO.  On November 9, 2011, an additional 548,051 RSUs were granted to the Company’s directors in payment of directors fees through November 2012.

17

During the six months ended December 31, 2011 options to purchase 654,500 shares were granted to employees exercisable at prices from $0.59 to $1.16 and exercisable at various dates through December 2019.  As of December 31, 2011, an additional 991,064 shares are available to be issued under the Omnibus Plan.

On January 21, 2011, the Compensation Committee of the Company’s Board of Directors awarded inducement options to purchase a total of 750,000 shares of the Company’s common stock at an exercise price of $1.15 to certain members of management of Tier Electronics LLC.  The options vest as follows: (1) 420,000 will vest in three equal annual installments beginning on December 31, 2011 based on achievement of certain revenue targets, (2) 330,000 vest in three equal annual installments beginning on the one-year anniversary of the grant date.  At December 31, 2011, 140,000 of the 420,000 shares vested and 110,000 of the 330,000 shares vested on January 21, 2012.

During March 2011, the expiration date of 75,000 options held by a former director of the Company was extended from March 31, 2011 to April 30, 2011, and the expiration date of 125,000 options was extended from March 31, 2011 to December 31, 2011.  The Company recorded an expense of $45,676 in connection with these extensions.  At December 31, 2011, the remaining 125,000 options expired.

During 2007 the Company established the 2007 Equity Incentive Plan (the “2007 Plan”) that authorized the Board of Directors or a committee thereof to grant options to purchase up to a maximum of 1,500,000 shares to employees and directors of the Company.  No options were issued under the 2007 Plan during the six months ended December 31, 2011.  During the year ended June 30, 2011, 74,500 options were granted to employees at exercise prices from $0.46 to $0.64 and expiration dates from August 2018 to October 2018 and 150,189 options were forfeited.  As of December 31, 2011, there were no options available to be issued under the 2007 Plan.

During 2005, the Company established an Employee Stock Option Scheme (the “2005 Plan”) that authorized the board of directors or a committee thereof to grant options to employees and directors of the Company. The maximum number of options available to be granted in aggregate at any time under the 2005 Plan was the number equivalent to 5% of the total number of issued shares of the Company including all shares in underlying options under the Company’s stock option and incentive plans. No options were issued under the 2005 Plan during the six months ended December 31, 2011 and 2010.  At December 31, 2011, options to purchase 50,000 shares with an exercise price of $3.82 and an expiration date of June 20, 2012 were outstanding.  As of December 31, 2011, there were no options available to be issued under the 2005 Plan.

In 2002 the Company established the 2002 Stock Option Plan (the “SOP”) whereby a stock option committee was given the discretion to grant up to 579,107 options to purchase shares to key employees of the Company.  No options were issued under the 2002 Plan during the six months ended December 31, 2011 and 2010.  During the year ended June 30, 2011 there were 100,000 options forfeited.   At December 31, 2011 there were 375,000 options outstanding with exercise prices from $0.49 to $3.59 and exercise dates up to June 2018.  As of December 31, 2011, there were no options available to be issued under the SOP.

The Compensation Committee of the Company’s Board of Directors awarded two inducement option grants covering a total of 500,000 shares to the Company’s new President and CEO in January 2010.  The first grant is an option to purchase 400,000 shares of common stock with the following vesting terms: one third of the shares vested on January 7, 2011 and the balance vest in 24 monthly installments beginning on January 31, 2011 and ending on December 31, 2012.  The second grant is an option to purchase 100,000 shares of common stock which  vested in two equal installments on June 30, 2010 and December 31, 2010, respectively, based on the satisfaction of certain performance targets for the six-month periods then ended.  Both options have an exercise price of $1.33 per share which was equal to the closing price of the Company’s common stock on January 7, 2010 and are not exercisable as to any portion of the option after the fifth anniversary of the date on which that portion vests.  The options are subject to other terms and conditions specified in the related option agreements.

The Compensation Committee of the Company’s Board of Directors awarded two inducement option grants covering a total of 500,000 shares to the Company’s new Executive Vice President – Operations in November 2011, with an exercise price of $0.79 per share, which was the closing price of the Company’s common stock on the NYSE Amex on the date of his appointment.  100,000 of these options will vest based on the achievement of certain performance targets.  The remaining 400,000 of these options will vest over three years with the first one-third vesting on November 9, 2012 and the remaining two-thirds vesting in 24 equal monthly installments beginning in December 2012.

In aggregate for all plans, at December 31, 2011, the Company has a total of 4,144,303 options outstanding, 1,948,436 RSUs outstanding, and 991,064 shares available for future grant under the Omnibus Plan.

18

Information with respect to stock option activity under the employee and director plans is as follows:

	Number of Options			Weighted-Average Exercise Price Per Share
Balance at July 1, 2010		2,316,992		$	1.92
Options granted		1,230,500			1.02
Options forfeited		(150,189	)		2.51
Options exercised		(75,000	)		1.09
Balance at June 30, 2011		3,322,303			1.55
Options granted		1,154,500			0.84
Options forfeited		(332,500	)		1.08
Balance at December 31, 2011		4,144,303		$	1.39

The following table summarizes information relating to the stock options outstanding at December 31, 2011:

	Outstanding			Exercisable
Range of Exercise Prices	Number of Options	Average Remaining Contractual Life (in years)	Weighted Average Exercise Price	Number of Options	Weighted Average Exercise Price
$0.46 to $1.69	3,619,303	6.8	$                           1.06	1,131,748	$                 1.22
$3.59 to $3.82	525,000	3.1	$                           3.61	525,000	$                 3.61
Balance at December 31, 2011	4,144,303	6.4	$                           1.39	1,656,748	$                 1.98

During the six months ended December 31, 2011 options to purchase 654,500 shares were granted to employees  exercisable at prices from $0.59 to $1.16 per share based on various service and performance based vesting terms from July 2011 through December 2014 and exercisable at various dates through December 2019. During the six months ended December 31, 2010 options to purchase 294,500 shares were granted to employees exercisable at prices from $0.46 to $0.64 per share based on various service and performance based vesting terms from August 2010 through November 2013 and exercisable at various dates through December 2018.

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 six months ended December 31, using the Black-Scholes option-pricing model:

	2012		2011
Expected life of option (years)		2.5		2.5
Risk-free interest rate		.24 - .55%		.52-.685%
Assumed volatility		104 - 107%		62-114%
Expected dividend rate		0		0
Expected forfeiture rate		5.3 - 6.8%		0

Time-vested and performance-based stock awards, including stock options, restricted stock and restricted stock units, are accounted for at fair value at date of grant.  Compensation expense is recognized over the requisite service and performance periods.

19

A summary of the status of unvested employee stock options as of December 31, 2011 and June 30, 2011 and changes during the six months and year ended, is presented below:

	Number of  Options			Weighted-Average Grant Date Fair Value Per Share
Balance at July 1, 2010		987,500		$	0.77
Granted		1,230,500			0.58
Vested		(476,526	)		0.49
Forfeited		(6,250	)		0.29
Balance at June 30, 2011		1,735,224			0.62
Granted		1,154,500			0.84
Vested		(194,669	)		1.06
Forfeited		(332,500	)		1.08
Balance at December 31, 2011		2,362,555		$	0.99

Total fair value of options granted in the six months ended December 31, 2011 and 2010 was $576,618 and $107,689, respectively.  At December 31, 2011 there was $725,691 in unrecognized compensation cost related to unvested stock options, which is expected to be recognized over the next 3 years.

During the fourth quarter of fiscal 2010 the Company agreed to compensate its directors with restricted stock units (“RSUs”) rather than cash.  As a result included in accrued compensation and benefits at June 30, 2010 was $182,500 related to these awards. The RSUs were classified as liability awards because the RSUs were expected to be paid in cash upon vesting. These RSUs were converted to 574,242 stock settled RSUs in November 2010 and $182,500 was transferred from accrued compensation and benefits to additional paid-in capital.  The cash settled RSUs that were converted to stock settled RSUs were 100% vested upon conversion.  There were also $212,450 in directors’ fees expense and $7,000 in consulting fees expense settled with RSUs for the six months ended December 31, 2011.   As of December 31, 2011 there were 661,037 unvested RSUs outstanding which will vest through May 6, 2014.  At December 31, 2011 there was $577,498 in unrecognized compensation cost related to unvested RSUs, which is expected to be recognized through May 6, 2014.  Vested RSUs are payable six months after the holder’s separation from service with the Company.

The table below summarizes the status of restricted stock unit balances:

	Number of Restricted Stock Units		Weighted-Average Valuation Price Per Unit
Conversion of cash settled RSUs		574,242	$	0.55
RSUs granted		826,143		0.80
RSUs forfeited		-		-
Balance at June 30, 2011		1,400,385		0.70
RSUs granted		548,051		0.77
RSUs forfeited		-		-
Balance at December 31, 2011		1,948,436	$	0.72

NOTE 11 - NON RELATED PARTY WARRANTS

At December 31, 2011 there were outstanding warrants to purchase 40,000 common shares issued by the Company to an equipment supplier in January 2011 exercisable at $0.56 per share and which expire in January 2014.  The fair value of the warrants was $11,834 and is included in the cost of the equipment.

20

At December 31, 2011 there were outstanding warrants to purchase 1,121,875 common shares acquired by certain purchasers of Company shares in March 2010 exercisable at $1.04 per share and which expire in September 2015.

At December 31, 2011 there were outstanding warrants to purchase 358,333 common shares acquired by certain purchasers of Company shares in August 2009 exercisable at $1.33 per share and which expire in August 2015.

At December 31, 2011 there were outstanding warrants to purchase 50,000 shares acquired by Empire Financial Group, Ltd. as part of the underwriting compensation in connection with our United States public offering which are exercisable at $7.20 per share and which expire in June 2012.

At December 31, 2011 there are warrants to purchase 48,950 shares issued and outstanding to Strategic Growth International in connection with capital raising activities in 2007, with an expiration date of June 2012 and with an exercise price of $7.20.

Warrants to purchase 120,023 common shares acquired by Empire Financial Group, Ltd. in 2006 exercisable at $3.23 per share expired during September 2011.

The table below summarizes non-related party warrant balances:

	Number of Warrants			Weighted-Average Exercise Price Per Share
Balance at July 1, 2010		1,846,031		$	1.76
Warrants granted		3,067,797			1.24
Warrants expired		-			-
Warrants exercised		(3,027,797	)		(1.25	)
Balance at June 30, 2011		1,886,031			1.73
Warrants granted (See Note 12)		4,132,553			0.53
Warrants expired		(266,873	)		(3.56	)
Warrants exercised (See Note 12)		(4,132,553	)		(0.55	)
Balance at December 31, 2011		1,619,158		$	1.47

NOTE 12 – EQUITY

On August 30, 2010, the Company entered into an amended and restated securities purchase agreement (“Socius Agreement”) with Socius CG II, Ltd. (“Socius”). Pursuant to the Socius Agreement the Company has the right over a term of two years, subject to certain conditions, to require Socius to purchase up to $10 million of redeemable subordinated debentures and/or shares of redeemable Series A preferred stock in one or more tranches.  The debentures bear interest at an annual rate of 10% and the shares of Series A preferred stock accumulate dividends at the same rate.  Both the debentures and the shares of Series A preferred stock are redeemable at the Company’s election at any time after the one year anniversary of issuance.  Neither the debentures nor the Series A preferred shares are convertible into common stock.

On November 10, 2010, the Company’s Board of Directors approved a certificate of designation of preferences, rights and limitations to authorize shares of Series A preferred stock in accordance with the terms of the Socius Agreement.  Upon the authorization of Series A preferred stock and in accordance with the terms of the Socius Agreement, the $517,168 of outstanding debentures issued by the Company to Socius CG II, Ltd. on September 2, 2010, and $7,510 of accrued interest were exchanged into 52.468 shares of Series A preferred stock.  In addition, in accordance with the Socius Agreement, any future tranches under the Socius Agreement will involve shares of Series A preferred stock instead of debentures.

Under the Socius Agreement, in connection with each tranche Socius is obligated to purchase that number of shares of our common stock equal in value to 135% of the amount of the tranche at a per share price equal to the closing bid price of the common stock on the trading day preceding our delivery of the tranche notice.  Socius may pay for the shares it purchases at its option, in cash or a collateralized promissory note.  Any such promissory note will bear interest at 2.0% per year and is collateralized by securities owned by Socius with a fair market value equal to the principal amount of the promissory note. The entire principal balance and interest on the promissory note is due and payable on the later of the fourth anniversary of the date of the promissory note or when we have redeemed all the Series A preferred stock issued by us to Socius under the Socius Agreement, and may be applied by us toward the redemption of the shares of Series A preferred stock held by Socius.

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Our ability to submit a tranche notice is subject to certain conditions including that: (1) a registration statement covering our sale of shares of common stock to Socius in connection with the tranche is effective and (2) the issuance of such shares would not result in Socius and its affiliates beneficially owning more than 9.99% of our common stock.

Under the terms of the Socius Agreement, the Company was obligated to pay Socius a commitment fee in the form of shares of common stock or cash, at the option of the Company, in the amount of $500,000 if it is paid in cash and $588,235 if it is paid in shares of common stock. Payment of the commitment fee occurred 50% at the closing of the first tranche and 50% at the closing of the second tranche.

On September 2, 2010 the Company delivered the first tranche notice under the Socius Agreement pursuant to which on September 20, 2010 Socius purchased $517,168 of debentures.  In connection with this tranche, (1) Socius purchased 1,163,629 shares of common stock for a total purchase price of $698,177 and at a per share purchase price of $0.60 and (2) the Company issued to Socius 490,196 shares of common stock in payment of the commitment fee payable in connection with the tranche. As consideration for the common stock it purchased, Socius issued a collateralized promissory note maturing, the later of September 2, 2014 or when the Series A preferred shares are redeemed by the Company.  Management expects to redeem the Series A preferred stock on September 20, 2014.  The promissory note was recorded at a discount of $183,922 determined by discounting the promissory note at a rate of 10%.  The promissory note is included in the stockholders equity section of the Company’s condensed consolidated balance sheets because the promissory note was received in exchange for the issuance of common stock.

On November 12, 2010 the Company delivered the second tranche notice under the Socius Agreement pursuant to which on November 29, 2010 Socius purchased $490,000 of Series A preferred stock.  In connection with this tranche, (1) Socius purchased 906,165 shares of common stock for a total purchase price of $661,500 and at a per share purchase price of $0.73 and (2) the Company issued to Socius 402,901 shares of common stock in payment of the commitment fee payable in connection with the tranche. As consideration for the common stock it purchased, Socius issued a collateralized promissory note maturing, the later of November 12, 2014 or when the Series A preferred shares are redeemed by the Company.  Management expects to redeem the Preferred Shares on November 29, 2014.  The promissory note was recorded at a discount of $173,872 determined by discounting the promissory note at a rate of 10%.  The promissory note is included in the stockholders equity section of the Company’s condensed consolidated balance sheets because the promissory note was received in exchange for the issuance of common stock.

On January 12, 2011 the Company delivered the third tranche notice under the Socius Agreement pursuant to which on January 27, 2011 Socius purchased from the Company $2,020,000 of Series A preferred stock.  In connection with the tranche, (1) Socius purchased 1,934,042 shares of common stock for a total purchase price of $2,727,000 and at a per share purchase price of $1.41. As consideration for the Common Stock Socius purchased, Socius issued a collateralized promissory note maturing, the later of January 12, 2015 or when the Series A preferred shares are redeemed by the Company.  Management expects to redeem the Preferred Shares on January 17, 2015. The promissory note was recorded at a discount of $716,777 determined by discounting the promissory note at a rate of 10%.  The promissory note is included in the stockholders equity section of the Company’s condensed consolidated balance sheets because the promissory note was received in exchange for the issuance of common stock.

On March 16, 2011 the Company delivered the fourth tranche notice under the Socius Agreement pursuant to which on March 31, 2011 Socius purchased from the Company $520,000 of Series A preferred stock.  In connection with the tranche, (1) Socius purchased 557,142 shares of common stock for a total purchase price of $702,000 and at a per share purchase price of $1.26. As consideration for the Common Stock Socius purchased, Socius issued a collateralized promissory note maturing, the later of March 16, 2015 or when the Series A preferred shares are redeemed by the Company.  Management expects to redeem the Preferred Shares on March 31, 2015. The promissory note was recorded at a discount of $184,461determined by discounting the promissory note at a rate of 10%.  The promissory note is included in the stockholders equity section of the Company’s condensed consolidated balance sheets because the promissory note was received in exchange for the issuance of common stock.

On September 8, 2011 the Company delivered the fifth and sixth tranche notices under the Socius Agreement pursuant to which on September  30, 2011 Socius purchased from the Company $1,447,240 of Series A preferred stock.  In connection with the tranches, Socius purchased 2,621,359 shares of common stock for a total purchase price of $1,953,775 and at an average per share purchase price of $0.75. As consideration for the Common Stock Socius purchased, Socius issued a collateralized promissory notes maturing, the later of September 8, 2015 or when the Series A preferred shares are redeemed by the Company.  Management expects to redeem the Preferred Shares on September 30, 2015. The promissory notes were recorded at a discount of $512,815 determined by discounting the promissory notes at a rate of 10%.  The promissory notes are included in the stockholders equity section of the Company’s condensed consolidated balance sheets because the promissory notes were received in exchange for the issuance of common stock.

On November 16, 2011 the Company delivered the seventh tranche notice under the Socius Agreement pursuant to which on December 2, 2011 Socius purchased from the Company $750,000 of Series A preferred stock.  In connection with the tranche, (1) Socius purchased 1,511,194 shares of common stock for a total purchase price of $1,012,500 and at a per share purchase price of $0.67. As consideration for the Common Stock Socius purchased, Socius issued a collateralized promissory note maturing, the later of November 16, 2015 or when the Series A preferred shares are redeemed by the Company.  Management expects to redeem the Preferred Shares on November 30, 2015. The promissory note was recorded at a discount of $266,130 determined by discounting the promissory note at a rate of 10%.  The promissory note is included in the stockholders equity section of the Company’s condensed consolidated balance sheets because the promissory note was received in exchange for the issuance of common stock.

22

The Company’s accounting for the 2% notes receivable – common stock is to accrue interest on the discounted notes receivable at 10% as a credit to additional paid in capital.  The Company’s accounting for the Series A preferred stock is to accrete dividends at 10% as a charge to additional paid in capital.

In the event of liquidation, dissolution or winding up (whether voluntary or involuntary) of the Company, the holders of shares of Series A preferred stock shall be entitled to be paid the full amount payable on such shares upon the liquidation, dissolution or winding up of the corporation fixed by the Board of Directors with respect to such shares, if any, before any amount shall be paid to the holders of the Common Stock.  The liquidation preference of the outstanding Series A preferred stock was $6,133,947 and $3,715,470 as of December 31, 2011 and June 30, 2011, respectively.  Redemption or liquidation may be paid by application of the Socius notes receivable.

On October 12, 2010, the Company entered into Stock Purchase Agreements with certain investors providing for the sale of a total of 3,329,467 shares of the Company’s common stock for an aggregate purchase price of $1,435,000 at a price per share of $0.431.  The closing took place on October 15, 2010.  The net proceeds to the Company after deducting $60,000 of offering costs, were $1,375,000.

On December 29, 2010 and January 3, 2011 the Company entered into Stock Purchase Agreements with certain investors providing for the issuance of a total of 2,103,532 shares of the Company’s common stock for an aggregate purchase price of $2,000,000 at a weighted average price per share of $0.95.  The closing took place on January 12, 2011.  The net proceeds to the Company, after deducting $57,000 of offering costs, were $1,943,000.

On June 14 and 15, 2011 we entered into Stock Purchase Agreements with certain investors providing for the issuance of a total of 3,049,463 shares of the Company’s common stock for an aggregate purchase price of $2,527,000 at a weighted average price per share of $0.83.  The closing took place on June 17, 2011.  The net proceeds to the Company, after deducting $153,000 of offering costs, were $2,374,000.

On December 13, 2011, the Company entered into Stock Purchase Agreements with a strategic investor previously known to the Company and certain Company officers and directors providing for the sale of a total of 1,167,340 shares of common stock for an aggregate purchase price of $875,505 at a price per share equal to $0.75 which was the closing price of the Company’s common stock on December 12, 2011.  On December 14, 2011, the Company entered into Stock Purchase Agreements with certain investors providing for the sale of a total of 1,425,000 shares of the Company’s common stock for an aggregate purchase price of $1,011,893 at a price per share of $0.7101 which was the closing price of the Company’s common stock on December 13, 2011.  The closing for both transactions took place on December 16, 2011.  The net proceeds to the Company after deducting $65,978 of offering costs were $1,821,420.

NOTE 13 – COMMITMENTS

Leasing Activities

The Company leases its Australian research and development facility from a non-related Australian company under the terms of a lease that expired October 31, 2011.  The rental rate was $75,596 per annum (A$72,431) and was subject to an annual CPI adjustment. Rent expense was $23,017 and $43,210 for the three months and six months ended December 31, 2011, respectively, and $18,763 and $39,355 for the three and six months ended December 31, 2010, respectively.  The Company renewed the lease on its Australian research and development facility through October 31, 2016 at rental rate of $95,855 per annum (A$95,000) subject to an annual CPI adjustment.  The Company also leases a building from an officer of its subsidiary, Tier Electronics LLC, who is also a shareholder and director, under a lease agreement expiring December 31, 2014.  The first year rental is $84,000 per annum and is subject to an annual CPI adjustment.  The rent expense for the three  and six months ended December 31, 2011 was $21,000 and $42,000, respectively.  The Company is required to pay real estate taxes and other occupancy costs related to the facility.  The future payments required under the terms of the leases for fiscal periods subsequent to December 31, 2011are as follows:

2012	$	91,642
2013		183,285
2014		141,285
2015		99,285
	$	515,497

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Employment Contracts

The Company has entered into employment contracts with executives and management personnel. The contracts provide for salaries, bonuses and stock option grants, along with other employee benefits. The employment contracts generally have no set term and can be terminated by either party. There is a provision for payments of nine months to eighteen months of annual salary as severance if we terminate a contract without cause, along with the acceleration of certain unvested stock option grants.

NOTE 14 - RETIREMENT PLANS

All Australian based employees are entitled to varying degrees of benefits on retirement, disability, or death.  The Company contributes to an accumulation fund on behalf of the employees under an award which is legally enforceable.  For U.S. employees, the Company has a 401(k) plan.  All active participants are 100% vested immediately.  Expenses under these plans were $27,324 and $42,780 for the three and six months ended December 31, 2011, respectively.  Expenses under these plans were $12,548 and $22,404 for the three and six months ended December 31, 2010, respectively.

NOTE 15— INCOME TAXES

The provision (benefit) for income taxes consists of the following:

	Six months ended December 31,
	2011			2010
Current	$	(181,800	)	$	-
Deferred		-			-
Provision (benefit) for income taxes	$	(181,800	)	$	-

The Company accounts for income taxes using an asset and liability approach which generally requires the recognition of deferred income tax assets and liabilities based on the expected future income tax consequences of events that have previously been recognized in the Company’s financial statements or tax returns. 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 December 31, 2011 and 2010.

During the three and six months ended December 31, 2011, the Company recorded a $181,800 credit (benefit) for income taxes which represents a pro rata portion of an estimate of a refundable research and development tax credit we expect to receive from the government of Australia for the fiscal year ending June 30, 2012 based on the qualified expenditures the Company incurred during the three and six months ended December 31, 2011.The Company recorded an estimated income tax refund receivable of $164,640 for the year ended June 30, 2011 for the estimated refund related to qualified expenditures during the year ended June 30, 2011, related to a refundable Australian research and development tax credit for the year ended June 30, 2011.  The Company recognized a refund of $415,315 for expenditures incurred during the year ended June 30, 2010 for a refund claim filed in March 2011.  The Company became aware of the refund opportunity in March 2011and as a result had not provided for a benefit during the six month period ended December 31, 2010.  The Company has provided a valuation allowance against all deferred income tax assets as it is more likely than not that its deferred income tax assets are not currently realizable due to the net operating losses incurred by the Company since its inception.

The Company’s combined effective income tax rate differed from the U.S. federal statutory income rate as follows:

	Six months ended December 31,
	2011		2010
Income tax benefit computed at the U.S. federal statutory rate		-34%		-34%
Australia research and development credit		-4		0
Change in valuation allowance		34		34
Total		-4%		0%

Significant components of the Company’s net deferred income tax assets as of December 31, 2011 and June 30, 2011 were as follows:

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	December 31, 2011			June 30, 2011
Federal net operating loss carryforwards		14,920,208		$	13,481,428
Federal - other		3,128			221,795
Wisconsin net operating loss carryforwards		1,762,387			1,544,877
Australia net operating loss carryforwards		1,485,393			1,560,010
Deferred income tax asset valuation allowance		(17,989,775	)		(16,808,110	)
Total deferred income tax assets	$	-		$	-

The Company has U.S. federal net operating loss carryforwards of approximately $44 million as of December 31, 2011, that expire at various dates between June 30, 2015 and 2032.  The Company also has $600,000 in other federal deferred tax assets comprised of charitable contributions carryforwards and intangible amortization.  The Company has U.S. federal research and development tax credit carryforwards of approximately $48,000 as of December 31, 2011 that expire at various dates through June 30, 2030.  As of December 31, 2011, the Company has approximately $34 million of Wisconsin net operating loss carryforwards that expire at various dates between June 30, 2013 and 2027.  As of December 31, 2011, the Company also has approximately $4 million of Australian net operating loss carryforwards available to reduce future taxable income of its Australian subsidiaries with an indefinite carryforward period.

A reconciliation of the beginning and ending balance of unrecognized income tax benefits is as follows:

	Six Months Ended December 31, 2011			Year Ended June 30, 2011
Beginning balance	$	219,500		$	-
Additions based on tax positions related to the current period		-			219,500
Additions for tax positions of prior years		-			-
Reductions for tax positions of prior years		-			-
Settlements		-			-
Lapses of statutes of limitations		-			-
Effect of foreign currency translation		(10,480	)
Ending balance	$	209,020		$	219,500

The unrecognized income tax benefits relate to the credit the Company claimed during fiscal 2011 related to a refundable Australian research and development tax credit for qualified expenditures incurred during fiscal year 2010.  If recognized, it would favorably affect the effective income tax rate.  The amount is included in accrued expenses in the accompanying condensed consolidated balance sheets.

NOTE 16 – BUSINESS SEGMENT INFORMATION

The Company reports its financial results in two reportable business segments: ZBB Energy Storage and Power Electronic Systems and Tier Electronics Power Conversion Systems.

The ZBB Energy Storage and Power Electronics Systems business segment designs and manufactures advanced electrical power management platforms enabling the growing global need for distributed renewable energy, energy storage, energy efficiency, power quality, and grid modernization. The Company’s intelligent power management platforms integrate multiple renewable and conventional onsite generation sources with rechargeable zinc bromide flow batteries and other storage technologies to ensure optimal energy availability for on grid and off grid applications, while maximizing the use of renewable energy sources.  The Company solves a wide range of global electrical system challenges for diverse applications in commercial building, telecommunications, defense, utility and industrial markets.

The Tier Electronics Power Conversion Systems business segment designs and manufactures state of the art digital power converters for power quality, alternative energy, and military markets.  These power converters are designed to be fully programmable and feature DSP controls with very high levels of integration that reduce costs while increasing performance.

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The operating results for the two business segments are as follows:

	Three months ended December 31,						Six months ended December 31,
	2011			2010			2011			2010
Revenues:
ZBB Energy Storage and Power Electronics Systems	$	277,618		$	234,681		$	1,689,368		$	234,681
Tier Electronics Power Conversion Systems		163,303			-			389,410			-
Total	$	440,921		$	234,681		$	2,078,778		$	234,681
	Three months ended December 31,						Six months ended December 31,
		2011			2010			2011			2010
Loss from Operations:
ZBB Energy Storage and Power Electronics Systems	$	(2,281,768	)	$	(1,794,398	)	$	(3,558,222	)	$	(3,798,482	)
Tier Electronics Power Conversion Systems		(483,568	)		-		$	(903,596	)		-
Total	$	(2,765,336	)	$	(1,794,398	)	$	(4,461,818	)	$	(3,798,482	)

The accounting policies of the business segments are the same as those for the consolidated Company.

Total assets for the two business segments are as follows:

	December 31, 2011		June 30, 2011
ZBB Energy Storage and Power Electronics Systems	$	11,510,497	$	10,161,151
Tier Electronics Power Conversion Systems		3,148,941		2,186,475
Total	$	14,659,438	$	12,347,626

NOTE 17 — SUBSEQUENT EVENTS

On January 31, 2012 and February 1, 2012 we entered into Stock Purchase Agreements with certain investors including certain members of the Company’s Board of Directors and management providing for the issuance of a total of 4,431,603 shares of the Company’s common stock for an aggregate purchase price of $3,165,000 at a weighted average price per share of $0.71.  The closing took place on February 7, 2012.  The net proceeds to the Company, after deducting approximately $270,000 of offering costs, were $2,895,000.

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ZBB ENERGY CORPORATION

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

ZBB Energy Corporation (“We,” “Us,” “Our,” “ZBB” or the “Company”) develops and manufactures modular, scalable and environmentally friendly power systems (ZBB Enersystem™) based upon the Company’s proprietary zinc bromide rechargeable electrical energy storage technology.  The following information should be read in conjunction with the financial statements and notes thereto in Part I, Item 1 of this Quarterly Report and with the audited financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2011 as filed by us with the SEC on September 8, 2011.

We provide advanced electrical power management platforms targeted at the growing global need for distributed renewable energy, energy efficiency, power quality, and grid modernization.  We and our power electronics subsidiary, Tier Electronics LLC, have developed a portfolio of intelligent power management platforms that directly integrate multiple renewable and conventional onsite generation sources with rechargeable zinc bromide flow batteries and other storage technology. We also offer advanced systems to directly connect wind and solar equipment to the grid and systems that can form various levels of micro-grids.  Tier Electronics LLC participates in the energy efficiency markets through its hybrid vehicle control systems, and power quality markets with its line of regulation solutions. Together, these platforms solve a wide range of electrical system challenges in global markets for utility, governmental, commercial, industrial and residential end customers.  The Company was founded in 1998 and is headquartered in Wisconsin, USA with offices also located in Perth, Western Australia.

On January 21, 2011 (“Closing Date”), we entered into an Asset Purchase Agreement under which we acquired substantially all of the net assets of Tier Electronics LLC (“Seller”) used in connection with the Seller’s business of developing, manufacturing, marketing and selling power electronics products for and to original equipment manufacturers in various industries.  The purchase price was comprised of (1) a $1.35 million promissory note issued by the Company, (2) 800,000 shares of the Company’s common stock, and (3) payment of approximately $245,000 of Seller’s obligations.  The promissory note is in the principal amount of $1,350,000 and bears interest at a fixed annual rate equal to eight percent.  The principal balance of the note is payable in three equal installments of $450,000 on the first, second and third anniversaries of the Closing Date.  Accrued interest is payable monthly.  If the federal capital gains tax rate exceeds 15% and or the State of Wisconsin capital gains tax rate exceeds 5.425% at any time prior to the payment in full of the unpaid principal balance and accrued interest on the promissory note, then the principal amount of the promissory note (retroactive to January 21, 2011) shall be increased by an amount equal to the product of (a) the aggregate amount of federal and state capital gain realized by the Seller or Seller’s sole member, as applicable, in connection with the acquisition, multiplied by (b) the difference between (i) the combined federal and State of Wisconsin capital gains tax rate as of the date of calculation, minus (ii) the combined federal and State of Wisconsin capital gains tax rate of 20.425% as of January 21, 2011.  Any adjustment to the principal amount of the promissory note shall be effected by increasing the amount of the last payment due under the promissory note without affecting the next regularly scheduled payment(s) under the promissory note.   The loan was amended in January 2012.  The initial payment of $450,000 to be made on January 21, 2012 will be made in three equal installments of $150,000 on February 21, March 21 and April 7, 2012.  Interest will accrue and be paid monthly on the unpaid balance in accordance with the original agreement.   Tier Electronics LLC operates as a wholly-owned subsidiary of the Company.

On April 8, 2011, we entered into a Collaboration Agreement (the “Collaboration Agreement”) with Honam Petrochemical Corporation (“Honam”), a division of LOTTE Petrochemical, pursuant to which we agreed with Honam to collaborate on the further technical development of our third generation ZBB Enerstore™, Zinc Bromide flow battery module (the “Version 3 Battery Module”).  Pursuant to the Collaboration Agreement, Honam is required to pay us a total of $3 million dollars as follows: (1) $1 million within 10 days following execution of the Collaboration Agreement (subsequently received on April 19, 2011); (2) $500,000 by June 30, 2011 (subsequently received on June 30, 2011); (3) $1.2 million by October 10, 2011 (subsequently received on October 10, 2011) and (4) $300,000 within 10 days after a single Version 3 Battery Module test station is set up at Honam’s research and development center.  Pursuant to the Collaboration Agreement, the parties are required to negotiate a license agreement under which upon the completion of the collaboration project and the receipt by the Company of all payments due under the Collaboration Agreement, the Company shall grant to Honam: (1) a fully paid-up, exclusive and royalty-free license to sell and manufacture the Version 3 Battery Module in Korea and (2) non-exclusive rights to sell the Version 3 Battery Module in Japan, Thailand, Taiwan, Malaysia, Vietnam and Singapore.  In connection with such non-exclusive rights, Honam is required to pay a royalty to the Company.

On August 30, 2011, the Company entered into agreements providing for establishment of a joint venture to develop, produce, sell, distribute and service advanced storage batteries and power electronics in China (the “Joint Venture”).  Joint venture partners include PowerSav, Inc. (Powersav)., AnHui Xinlong Electrical Co. and Wuhu Huarui Power Transmission & Transformation Engineering Co.

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The Joint Venture was established upon receipt of certain governmental approvals from China which were received in November 2011. The Joint Venture operates through a jointly-owned Chinese company located in Wuhu City, Anhui Province named Anhui Meineng Store Energy Co., Ltd. (the “JV Company”).  The JV Company will initially assemble and ultimately manufacture 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 connection with the Joint Venture, on August 30, 2011 the Company and certain of its subsidiaries entered into the following agreements:

● Joint Venture Agreement of Anhui Meineng Store Energy Co., Ltd. (the “China JV Agreement”) by and between ZBB PowerSav Holdings Limited, a Hong Kong limited liability company (“Hong Kong Holdco”), and Anhui Xinrui Investment Co., Ltd, a Chinese limited liability company; and

● Limited Liability Company Agreement of ZBB PowerSav Holdings Limited by and between ZBB Cayman Corporation and PowerSav, Inc.

In connection with the Joint Venture, upon establishment of the JV Company, the Company and certain of its subsidiaries entered into the following agreements:

● Management Services Agreement by and between the JV Company and Hong Kong Holdco (the “Management Services Agreement”);

● License Agreement by and between Hong Kong Holdco and the JV Company (the “License Agreement”); and

● Research and Development Agreement by and between the Company and the JV Company (the “Research and Development Agreement”).

Pursuant to the China JV Agreement, the JV Company is capitalized with approximately $13.6 million of equity capital.  The Company’s only capital contribution to the Joint Venture is a contribution of technology to the JV Company via the License Agreement and $200,000 in cash.  The Company’s indirect interest in the JV Company equals approximately 33%.

The Company’s investment in the JV Company was made through Hong Kong Holdco, a holding company formed with PowerSav and to which the Company will make a cash capital contribution of $200,000 ($100,000 contribution made on December 1, 2011).  The Company owns 60% of Hong Kong Holdco’s equity interests.  The Company has the right to appoint a majority of the members of the Board of Directors of Hong Kong Holdco and Hong Kong Holdco has the right to appoint a majority of the members of the Board of Directors of the JV Company.

Pursuant to the Management Services Agreement Hong Kong Holdco provides certain management services to the JV Company in exchange for a management services fee equal to five percent of the JV Company’s net sales for the first five years and three percent of the JV Company’s net sales for the subsequent three years.

Pursuant to the License Agreement, Hong Kong Holdco has granted to the JV Company (1) an exclusive royalty-free license to manufacture and distribute the Company’s ZBB Enerstore™, Zinc Bromide flow battery, version three (v3) battery (50KW) and ZBB Enersection™, POWR PECC (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 the Research and Development Agreement, the JV Company may request the Company to provide research and development services upon commercially reasonable terms and conditions.  The JV Company would pay the Company’s fully-loaded costs and expenses incurred in providing such services.

Risks and Uncertainties

The following discussion of the consolidated financial position and results of operations of the Company should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this form 10-Q and the Company’s annual report filed on form 10-K for the fiscal year ended June 30, 2011. In addition to historical information, this discussion contains forward-looking statements such as statements of the Company’s expectations, plans, objectives and beliefs. These statements use such words as “may,” “will,” “expect,” “anticipate,” “believe,” “plan,” and other similar terminology.

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In addition to the risks and uncertainties faced generally by participants in the renewable energy industry, we face the following risks and uncertainties:

●   Our stock price could be volatile and our trading volume may fluctuate substantially.

●   We have incurred losses and anticipate incurring continuing losses.

●   We will need additional financing.

●   Our industry is highly competitive and we may be unable to successfully compete.

●   Successful commercialization of our next generation ZBB Enerstore™,  Zinc Bromide flow battery, version three (V3) and receipt of UL 1741 certification for the ZBB Enersection™ POWR PECC are critical component of our growth plans.

●   If our products do not perform as promised, we could experience increased costs, lower margins and harm to our reputation.

●   Our relationships with our strategic partners may not be successful and we may not be successful in establishing additional partnerships, which could adversely affect our ability to commercialize our products and services.

●   Shortages or delay of supplies of component parts may adversely affect our operating results until alternate sources can be developed.

●   We have no experience manufacturing our products on a large-scale basis and may be unable to do so at our manufacturing facilities.

●   We may experience difficulties in integrating the business of Tier Electronics LLC and could fail to realize the potential benefits of the acquisition.

●   Our China joint venture could be adversely affected by the laws and regulations of the Chinese government, our lack of decision-making authority and disputes between us and the Joint Venture.

●   Business practices in Asia may entail greater risk and dependence upon the personal relationships of senior management than is common in North America, and therefore some of our agreements with other parties in China and South Korea could be difficult or impossible to enforce.

●   Our success depends on our ability to retain our managerial personnel and to attract additional personnel.

●   We market and sell, and plan to market and sell, our products in numerous international markets. If we are unable to manage our international operations effectively, our business, financial condition and results of operations could be adversely affected.

●   Our financial results may vary significantly from period-to-period due to long and unpredictable sales cycles for some of our products and the cyclical nature of certain end-markets into which we sell our products, which may in turn lead to volatility in our stock price.

●   Businesses and consumers might not adopt alternative energy solutions as a means for obtaining their electricity and power needs, and therefore our revenues may not increase, and we may be unable to achieve and then sustain profitability.

●   The success of our business depends on our ability to develop and protect our intellectual property rights, which could be expensive.

●   We may be subject to claims that we infringe the intellectual property rights of others, and unfavorable outcomes could harm our business.

●   If our shareholders’ equity continues to remain below the minimum requirement, our common stock may be delisted from the NYSE Amex, which would cause our common stock to become less liquid.

●   We have never paid cash dividends and do not intend to do so.

For further information concerning these risks and uncertainties see the Risk Factors sections of our Annual Report on Form 10-K for the year ended June 30, 2011 and in any subsequently filed Quarterly Reports on Form 10-Q.

New Accounting Pronouncements

In September 2011, the FASB issued an update to ASC 350, Intangibles — Goodwill and Other. This ASU amends the guidance in ASC 350-20 on testing for goodwill impairment. The revised guidance allows entities testing for goodwill impairment to have the option of performing a qualitative assessment before calculating the fair value of the reporting unit. The ASU does not change how goodwill is calculated or assigned to reporting units, nor does it revise the requirement to test annually for impairment. The ASU is limited to goodwill and does not amend the annual requirement for testing other indefinite-lived intangible assets for impairment. The ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We will adopt this ASU for our 2012 goodwill impairment testing. We do not expect this ASU to have a material impact, if any, on our consolidated condensed financial statements.

In June 2011, the Financial Accounting Standards Board (FASB) issued new accounting guidance related to the presentation of comprehensive income that eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Under this guidance, an entity can elect to present items of net income and other comprehensive income in one continuous statement or two consecutive statements. This guidance is effective for us beginning July 1, 2012. We do not believe the adoption of this guidance will have a material effect on our consolidated financial statements and related disclosures.

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In May 2011, the FASB issued updated accounting guidance related to fair value measurements and disclosures that result in common fair value measurements and disclosures between accounting principles generally accepted in the United States (U.S. GAAP) and International Financial Reporting Standards. This guidance includes amendments that clarify the application of existing fair value measurements and disclosures, in addition to other amendments that change principles or requirements for fair value measurements or disclosures. This guidance is effective for us beginning January 1, 2012. We do not believe the adoption of this guidance will have a material effect on our consolidated financial statements and related disclosures.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America and related disclosures require management to make estimates and assumptions.

We believe that the following are our most critical accounting estimates and assumptions the Company must make in the preparation of its consolidated financial statements and related disclosures:

Accounts Receivable

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.

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or market and consist of raw materials, work in progress and finished goods held for resale.

Costs incurred in bringing each product to its present location and conditions are accounted for as follows:

●   Raw materials – purchased cost of direct material

●   Finished goods and work-in-progress – purchased cost of direct material plus direct labor plus a proportion of manufacturing overheads.

The Company evaluates the recoverability of its slow moving or obsolete inventories at least quarterly. The Company estimates the recoverable cost of such inventory by product type while considering factors such as its age, historic and current demand trends, the physical condition of the inventory as well as assumptions regarding future demand. The Company’s ability to recover its cost for slow moving or obsolete inventory can be affected by such factors as general market conditions, future customer demand and relationships with suppliers.

Property, Plant and Equipment

Land, building, equipment, computers and furniture and fixtures are recorded at cost.  Maintenance, repairs and betterments are charged to expense. 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 is:

	Estimated Useful Lives
Manufacturing equipment	3 - 7 years
Office equipment	3 - 7 years
Building and improvements	7 - 40 years

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 reflected within the Company’s 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 loss of investee company” in the Consolidated Statements of Operations. The Company’s carrying value in an equity method Investee company is reflected in the caption ‘‘Investment in investee company’’ in the Company’s Consolidated Balance Sheets.

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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 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 the amount of its share of losses not previously recognized.

Intangible Assets

Intangible assets generally result from business acquisitions.  The Company accounted for the January 21, 2011 acquisition of Tier Electronics LLC by assigning the purchase price to identifiable tangible and intangible assets and liabilities.  Assets acquired and liabilities assumed were recorded at their estimated fair values.  Other intangible assets consist of a non-compete agreement, license agreement, and trade secrets.

Amortization is recorded for other intangible assets with determinable lives. Other intangible assets are amortized using the straight line method over the three year estimated useful lives of the respective assets.

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.

Testing for the impairment of goodwill involves a two-step process. The first step of the impairment test requires the comparing of a reporting units 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.

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.

Warranty Obligations

The Company typically warrants its products for twelve months after installation or eighteen months after date of shipment, whichever first occurs. Warranty obligations are 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.

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.

During the year ended June 30, 2010, battery stack manufacturing issues were discovered as a result of an internal test failure.  As a result, the Company has implemented several manufacturing process changes to eliminate the potential for future failures and has adjusted its warranty obligations accordingly.  We will adjust our warranty rates in future periods as these processes are implemented and tested.

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Revenue Recognition

Revenues are recognized when persuasive evidence of a contractual arrangement exits, 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.

For sales arrangements containing multiple elements (products or services), revenue relating to undelivered elements is deferred at the estimated fair value until delivery of the deferred elements. 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. If the arrangement does not meet all criteria above, the entire amount of the transaction is deferred until all elements are delivered. Revenue from time and materials based service arrangements is recognized as the service is performed.

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.

The Company charges shipping and handling fees when products are shipped or delivered to a customer, and includes such amounts in net revenues. The Company reports its revenues net of estimated returns and allowances.

Revenues from government funded research and development contracts are recognized proportionally as costs are incurred and compared to the estimated total research and development costs for each contract. In many cases, the Company is reimbursed only a portion of the costs incurred or to be incurred on the contract. Government funded research and development contracts are generally multi-year, cost-reimbursement and/or cost-share type contracts. The Company is reimbursed for reasonable and allocable costs up to the reimbursement limits set by the contract.

Income Taxes

The Company records deferred income taxes in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 740, “Accounting for Income Taxes.” This ASC 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. The Company establishes a valuation allowance when necessary to reduce deferred income tax assets to the amount expected to be realized.

The Company applies a more-likely-than-not recognition threshold for all tax uncertainties as required under 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.

Use of Estimates

The preparation of financial statements in conformity with U.S. 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 consolidated financial statements include those related to:

●   the timing of revenue recognition;

●   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 such as goodwill and other intangible assets;

●   contract costs and reserves;

●   warranty obligations;

●   income tax valuation allowances;

●   stock-based compensation; and

●   fair values of assets acquired and liabilities assumed in a business combination.

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Results of Operations

Three months ended December 31, 2011 compared with the three months ended December 31, 2010:

Revenue and Other income:

Our revenues for the three months ended December 31, 2011 and December 31, 2010 were $440,921 and $234,681, respectively.  This increase of $206,240 was the result of a $191,179 increase in commercial product sales and revenues and a $15,061 increase in engineering and development revenues as compared to the three months ended December 31, 2010.  The increase in commercial product sales and revenues principally consisted of sales attributable to our Tier Electronics Power Conversion Systems business which we acquired in January 2011.  Engineering and development revenues for the 2011 period consisted primarily of revenue recognized under the Honam Collaboration agreement which is being recognized over the estimated performance period through March 2012.  Engineering and development revenues for the 2010 period consisted of the final revenues under the AEST project.

Other income for the three months ended December 31, 2011 reflects an increase in interest income of $859 compared to the three months ended December 31, 2010, due primarily to increased investment balances.

Cost and Expenses and Other Expense:

Total costs and expenses for the three months ended December 31, 2011 and 2010 were $3,206,257 and $2,029,079, respectively. This increase of $1,177,178 in the three months ended December 31, 2011 was primarily due to the following factors:

●   $187,620 of costs of product sales during the fiscal 2012 period compared to $79,058 of costs of products sales during the fiscal 2011 period;

●   Increase in advanced engineering and development expenses of approximately $599,770 due to an increase in the Company’s engineering and development activities for its next generation battery module and PECC systems;

●   Increase in selling, general, and administrative expenses of $143,429 due primarily to the inclusion of $257,407 related to Tier Electronics in the fiscal 2012 period partially offset by decreases in various expenses;

●   Increase in depreciation and amortization expenses of $325,417 primarily due to the amortization of intangible assets related to the Tier acquisition beginning in January 2011.

Other expenses for the three months ended December 31, 2011 and 2010 consisted primarily of interest expenses of $58,823 and $46,869, respectively, and a $58,710 equity in loss of investee company.

Income Taxes (Benefit):

During the three months ended December 31, 2011, we recorded a $111,800 benefit for income taxes which represents a pro rata estimate of a refundable research and development tax credit we expect to receive from the government of Australia for the fiscal year ending June 30, 2012 related to the qualified expenditures we incurred during the three months ended December 31, 2011.

Net Loss:

Our net loss for the three months ended December 31, 2011 increased by $892,036 to $2,730,310 from the $1,838,274 net loss for the three months ended December 31, 2010.

Six months ended December 31, 2011 compared with the six months ended December 31, 2010:

Revenue and Other income:

Our revenues for the six months ended December 31, 2011 and December 31, 2010 were $2,078,778 and $234,681, respectively.  This increase of $1,844,097 was the result of a $417,286 increase in commercial product sales and revenues and a $1,426,811 increase in engineering and development revenues as compared to the six months ended December 31, 2010.  The increase in commercial product sales and revenues consisted of sales principally attributable to our Tier Electronics Power Conversion Systems business which we acquired in January 2011.  Engineering and development revenues for the 2011 period consisted primarily of revenue recognized under the Honam Collaboration agreement which is being recognized over the estimated performance period through March 2012.  Engineering and development revenues for the 2010 period consisted of the final revenues under the AEST project.

33

Other income for the six months ended December 31, 2011 reflects an increase in interest income of $5,758 compared to the six months ended December 31, 2010, due primarily to increasing investment balances.

Cost and Expenses and Other Expense:

Total costs and expenses for the six months ended December 31, 2011 and 2010 were $6,540,596 and $4,033,163, respectively. This increase of $2,507,433 in the six months ended December 31, 2011 was primarily due to the following factors:

●   $344,291 of costs of product sales during the fiscal 2012 period compared to $79,058 of costs of products sales during the fiscal 2011 period;

●   $481,107 of costs of engineering and development revenues during the fiscal 2012 period compared to $0 of costs of engineering and development revenues during the fiscal 2011 period;

●   Increase in advanced engineering and development expenses of approximately $460,000 due to an increase in the Company’s engineering and development activities for its next generation Enerstore battery module and Enersection PECC systems;

●   Increase in selling, general, and administrative expenses of $742,698 due primarily to the inclusion of $537,203 related to Tier Electronics in the fiscal 2012 period, and an  increase in stock based compensation of $323,000 partially offset by decreases in other expenses;

●   Increase in depreciation and amortization expenses of $558,515 primarily due to the amortization of intangible assets related to the Tier acquisition beginning in January 2011.

Other expenses for the six months ended December 31, 2011 and 2010 consisted primarily of interest expenses of $118,491 and $78,876, respectively, and a $58,710 equity in loss of investee company.

Income Taxes (Benefit):

During the six months ended December 31, 2011, we recorded a $181,800 benefit for income taxes which represents a pro rata estimate of a refundable research and development tax credit we expect to receive from the government of Australia for the fiscal year ending June 30, 2012 related to the qualified expenditures we incurred during the six months ended December 31, 2011.

Net Loss:

Our net loss for the six months ended December 31, 2011 increased by $533,183 to $4,405,758 from the $3,872,575 net loss for the six months ended December 31, 2010.

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 government and other research and development contracts.  Total paid in capital as of December 31, 2011 was $65,268,044 and $60,777,286 as of June 30, 2011.   We had a cumulative deficit of $59,749,441 as of December 31, 2011 compared to a cumulative deficit of $55,343,683 as of June 30, 2011.  At December 31, 2011 we had a working capital deficit of $164,190 compared to a June 30, 2011 working capital surplus of $712,109.  Our total equity as of December 31, 2011 and June 30, 2011 was $5,799,719 and $4,156,510, respectively.  We expect capital expenditures for property and equipment during fiscal 2012 to approximate $2,000,000.

On August 30, 2010 we entered into an amended and restated securities purchase agreement (the “Socius Agreement”) with Socius CG II, Ltd. (“Socius”). Pursuant to the Socius Agreement we have the right over a term of two years, subject to certain conditions, to require Socius to purchase up to $10 million of redeemable subordinated debentures and/or shares of redeemable Series A preferred stock in one or more tranches.  The debentures bear interest at an annual rate of 10% and the shares of Series A preferred stock accumulate dividends at the same rate.  Both the debentures and the shares of Series A preferred stock are redeemable at our election at any time after the one year anniversary of issuance.  Neither the debentures nor the Series A preferred shares are convertible into common stock.  Shares of Series A preferred stock were authorized in November 2010.  Upon authorization, the outstanding debentures were automatically converted into shares of Series A preferred stock. Under the Socius Agreement, in connection with each tranche Socius is obligated to purchase that number of shares of our common stock equal in value to 135% of the amount of the tranche at a per share price equal to the closing bid price of the common stock on the trading day preceding our delivery of the tranche notice. Socius may pay for the shares it purchases at its option, in cash or with a secured promissory note. Our ability to submit a tranche notice is subject to certain conditions including that: (1) a registration statement covering our sale of shares of common stock to Socius in connection with the tranche is effective and (2) the issuance of such shares would not result in Socius and its affiliates beneficially owning more than 9.99% of our common stock.  As of December 31, 2011, there was approximately $4.2 million available on this facility.  This facility expires in August 2012.

34

During the three months ended December 31, 2011 we delivered a total of one tranche notice under the Socius Agreement pursuant to which Socius purchased from us $750,000 of preferred stock.   In connection with the tranches, Socius purchased 1,511,194 shares of common stock for a total purchase price of $1,012,500 and at a per share weighted average purchase price of $0.50. Socius paid for the shares of common stock it purchased with collateralized promissory notes maturing the later of four years or when we have redeemed all preferred stock issued by us to Socius under the Socius Agreement.

On December 13, 2011, the Company entered into Stock Purchase Agreements with a strategic investor previously known to the Company and certain Company officers and directors providing for the sale of a total of 1,167,340 shares of common stock for an aggregate purchase price of $875,505 at a price per share equal to $0.75 which was the closing price of the Company’s common stock on December 12, 2011.  On December 14, 2011, the Company entered into Stock Purchase Agreements with certain investors providing for the sale of a total of 1,425,000 shares of the Company’s common stock for an aggregate purchase price of $1,011,893 at a price per share of $0.7101 which was the closing price of the Company’s common stock on December 13, 2011.  The closing for both transactions took place on December 16, 2011.  The net proceeds to the Company after deducting $65,978 of offering costs were $1,821,420.

Our investment capital requirements will depend upon numerous factors, including our ability to control expenses, the progress of our engineering and development programs, the success of our marketing and sales efforts and our ability to obtain alternative funding sources such as government grants.  In order to actively manage financing risk, the board of directors has worked with management to carefully consider financing alternatives and to implement cost containment measures.  Actions taken by the board of directors and management in fiscal 2012 include: 1) actively pursue additional sources of capital to fund working capital and operating needs; 2) pursue government grant and federal stimulus package opportunities; 3) file a new $25 million universal shelf registration statement with the SEC as described in further detail below; and 4) pursue potential strategic transactions such as the Tier acquisition, Honam collaboration and China joint venture transaction through which we may grow our business and/or obtain non-dilutive financing.

On January 31, 2011 we filed with the SEC a universal shelf registration statement on Form S-3 covering the offer and sale from time to time of up to $25 million of securities, which may include additional securities issued pursuant to the Socius Agreement as well as other equity, debt and other securities as described in the registration statement. The SEC declared this registration statement effective on March 21, 2011.  While we do not have any immediate plans to offer securities under this shelf registration, it is intended to give the Company the flexibility to take advantage of financing opportunities as needed or deemed desirable in light of market or other conditions.

Following the end of the period covered by this quarterly report on Form 10-Q, on January 30, 2012 and February 1, 2012 we entered into Stock Purchase Agreements with certain investors including certain members of the Company’s Board of Directors and management providing for the issuance of a total of 4,431,603 shares of the Company’s common stock for an aggregate purchase price of $3,165,000 at a weighted average price per share of $0.71.  The closing took place on February 7, 2012.  The net proceeds to the Company, after deducting $270,000 of offering costs, were $2,895,000.

We believe we have the necessary financing vehicles in place, including the Socius Agreement described above, to fund the Company through the end of fiscal 2012.  However, there can be no assurances that unforeseen circumstances will not jeopardize the Company’s ability to draw on these financing vehicles.  Therefore, we are continuing to seek additional sources of funds to add to the financing vehicles already in place.  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 we are unable to obtain such needed capital, our financial condition and results of operations may be materially adversely affected and we may not be able to continue operations.

Operating Activities

Our operating activities used net cash of $3,696,608 for the six months ended December 31, 2011.  Cash used in operations resulted from a net loss of $4,442,988 reduced by $1,433,126 in non-cash adjustments and increased by $544,323 in net changes to working capital.  Non-cash adjustments included $644,640 of stock based compensation expense, and $729,776 of depreciation and amortization expense.  Net changes in working capital was primarily due to an increase in inventories of $1,151,633 offset by an increase in accounts payable of $904,531.

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Investing Activities

Our investing activities used net cash of $2,806,232 for the six months ended December 31, 2011, resulting from cash used for the purchase of property and equipment and the Company’s investment in the China joint venture company.

Financing Activities

Our financing activities provided net cash of $5,301,899 for the six months ended December 31, 2011.  Net cash provided by financing activities was comprised of $2,197,240 in proceeds from issuance of preferred stock under the Socius Agreement, $1,877,398 in proceeds from the issuance of common stock, and $1,546,062 in proceeds from the noncontrolling interest offset by repayments of $151,867 of principal on bank loans and notes payable and $176,934 in common stock issuance costs.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements as of December 31, 2011.

Item 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable for smaller reporting companies.

Item 4.     CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report.  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that material information relating to the Company is accumulated and communicated to management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

Changes in Internal Controls

During the period covered by this quarterly report on Form 10-Q, the Company has not made any changes to its internal control over financial reporting (as referred to in Paragraph 4(b) of the Certifications of the Company’s principal executive officer and principal financial officer included as exhibits 31.1 and 31.2 filed with this report) that have materially affected, or are reasonably likely to affect the Company’s internal control over financial reporting.

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Not applicable.

ITEM 1A. RISK FACTORS

We operate in a rapidly changing environment that involves a number of risks that could materially affect our business, financial condition or future results, some of which are beyond our control.  In addition to the other information set forth in this report, the risks and uncertainties that we believe are most important for you to consider are discussed in Part I, “Item 1A. Risk Factors” in our most recent Annual Report on Form 10-K and in any subsequent Quarterly Reports on Form 10-Q.

36

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS

The exhibits required to be filed as a part of this report are listed in the Exhibit Index.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ZBB ENERGY CORPORATION
February 9, 2012	By:	/s/Eric C. Apfelbach
	Name:	Eric C. Apfelbach
	Title:	Chief Executive Officer
		(Principal Executive Officer)
February 9, 2012	By:	/s/ Will Hogoboom
	Name:	Will Hogoboom
	Title:	Chief Financial Officer
		(Principal financial officer and
		Principal accounting officer)

38

EXHIBIT INDEX

Item 15(c) Exhibits:

Exhibit No.	Description	Incorporated by Reference to
10.1	Anhui Meineng Store Energy Co., Ltd. Supplemental Agreement to the Joint Venture Agreement by and between ZBB PowerSav Holdings Limited and Anhui Xinlong Investment Management Co., Ltd, dated November 15, 2011
10.2	License Agreement by and between ZBB PowerSav Holdings Ltd. and Anhui Meineng Store Energy Co., Ltd., dated November 11, 2011
10.3	Management Services Agreement by and between ZBB Powersav Holdings Ltd. and Anhui Meineng Store Energy Co., Ltd., dated November 11, 2011.
10.4	Offer letter between ZBB Energy Corporation and Charles Stankiewicz dated November 3, 2011
10.5	Form of Nonstatutory Option Agreements issued on November 9, 2011 to Charles Stankiewicz
10.6	Form of Stock Purchase Agreement, dated December 13, 2011	Current Report on Form 8-K filed on December 15, 2011
10.7	Form of Stock Purchase Agreement, dated December 14, 2011	Current Report on Form 8-K filed on December 15, 2011
10.8	Placement Agency Agreement between ZBB Energy Corporation and MDB Capital Group, LLC, dated December 14, 2011	Current Report on Form 8-K filed on December 15, 2011
10.9	Form of Registration Rights Agreement, dated December 13, 2011
31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	Interactive Data Files

39

EX-10.1

Exhibit 10.1

Execution Version

安徽美能储能系统有限公司

合资协议的补充协议

ANHUI MEINENG STORE ENERGY CO., LTD.

SUPPLEMENTAL AGREEMENT TO THE JOINT VENTURE AGREEMENT

本合资协议的补充协议（下称“本协议”）于2011年11月15日由（i）ZBB POWERSAV HOLDINGS LIMITED，一家香港的有限责任公司（下称“香港控股公司”）和（ii）安徽鑫东投资管理有限公司，一家中国的有限责任公司（下称“内资合资公司”）签署。香港控股公司和内资合资公司以下可合称为“双方”，可独称为“一方”。

This Supplemental Agreement to the Joint Venture Agreement (hereinafter as this “Agreement”) is entered into on November 15, 2011 by and between (i) ZBB POWERSAV HOLDINGS LIMITED, a Hong Kong limited liability company (“Hong Kong Holdco”) and (ii) ANHUI XINDONG INVESTMENT MANAGEMENT CO., LTD., a Chinese limited liability company (“China JV”).Hong Kong Holdco and the China JV are sometimes referred to collectively herein as the “Parties”and individually as a “Party.”

鉴于，

Whereas,

为设立安徽美能储能系统有限公司（下称“合资公司”），双方均作为合资公司投资方于2011年08月17日签署合资协议（下称“合资协议”）。现为合资公司的批准与登记程序，双方拟签署本协议，修订合资协议。

For the purpose of establishing Anhui Meineng Store Energy Co., Ltd. (hereinafter as the “Joint Venture Company”), the Parties, as investors of the Joint Venture Company, entered into a Joint Venture Agreement (hereinafter as the “Joint Venture Agreement”) dated August 17, 2011.  Now, for the purpose of the approval and registration procedures of the Joint Venture Company, the Parties intend to enter into this Agreement to amend and modify the Joint Venture Agreement.

1

Execution Version

为此，以上述目的和其他双方承认充分价值的对价，双方共同签署如下协议：

NOW THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:

1.   修订合资公司名称

Amendment to the Joint Venture Company Name

根据合资协议“目的称述”第一段的语言：“合资公司名称暂定为安徽美能储能有限公司，实际名称以经审批机关审核的名称预核准通知书所载名称为准”，且现根据2011年11月1日安徽省工商行政管理局出具的企业名称预先核准通知书，合资公司中文名称确认为“安徽美能储能系统有限公司”，合资协议（包括全部合资协议后附附件）内出现“安徽美能储能有限公司”的文字均改为“安徽美能储能系统有限公司”。

Pursuant to the first section of the “STATEMENT OF PURPOSE” under the Joint Venture Agreement, which states: “a Sino – foreign equity joint venture company (the “Company”), the name of which is temporarily Anhui Meineng Store Energy Co., Ltd. (Chinese name:安徽美能储能有限公司) and subsequently shall be what is verified on the Name Verification Notification by the Approval Authority as defined below”, and pursuant to the Company Name Pre-approval Notice issued by the Anhui Administration of Industry and Commerce on November 1, 2011, which confirms the Chinese name of the Joint Venture Company as “安徽美能储能系统有限公司”, the words “安徽美能储能有限公司”, wherever they may appear in the Joint Venture Agreement (including all Exhibits attached thereto), shall be revised to “安徽美能储能系统有限公司”.

2.   修订注册资本与投资总额

Amendment to the Registered Capital and Total Investment

2

Execution Version

合资协议第4.1条原为：

Article 4.1 of the Joint Venture Agreement originally written as:

 4.1注册资本：合资公司初始注册资本为8720万人民币（下称：注册资本），具体出资信息详见附件A。但是如果：（i）双方初始出资资产于评估之时，相关中国当局认定，依适用法律之规定，该等资产不值附件A所述之价值，且（ii）届时，该等投资方在收到上述（i）所述认定通知10个工作日内，未能按附件A所载金额追加出资到位；那么，本协议自动终止，且无需双方采取任何进一步行动，并且，对合资公司的此前出资应将立即退还原来的相关出资方。

4.1Registered Capital.  The initial registered capital of the Company shall be Eighty Seven Million Two Hundred Thousand Renminbi (RMB 87,200,000) (“Registered Capital”), which will be contributed by the Parties in the amounts, and forms, as set forth on Exhibit A; provided, however, that if (i) upon an assessment of the initial assets to be contributed by the Parties hereunder, the relevant People’s Republic of China Governmental Authority determines under Applicable Law that certain assets do not warrant the valuations set forth on Exhibit A and (ii) whereupon, unless the JV Investors contribute such amount of funds as is necessary to maintain the Percentage Ownership Interests of the JV Investors as set forth on Exhibit A within ten (10) Business Days of the JV Investors’ receipt of notice of the occurrence of (i) hereof, this Agreement shall terminate automatically without any further actions by the Parties and all previous contributions to the Company shall be returned promptly to the relevant JV Investor who made such contribution originally.

修改为：

Shall be amended as:

 4.1注册资本与投资总额：合资公司初始注册资本为13625852美元（下称：注册资本），具体出资信息详见下述第4.3条与附件A。但是如果：（i）双方初始出资资产于评估之时，相关中国当局认定，依适用法律之规定，该等资产不值附件A所述之价值，且（ii）届时，该等投资方在收到上述（i）所述认定通知10个工作日内，未能按附件A所载金额追加出资到位；那么，本协议自动终止，且无需双方采取任何进一步行动，并且，对合资公司的此前出资应将立即退还原来的相关出资方。合资公司投资总额为2000万美金（下称：投资总额）；投资总额与注册资本的差额可以境外借款或任何其它合法方式融资。

3

Execution Version

4.2 Registered Capital and Total Investment. The initial registered capital of the Company shall be thirteen million six-hundred and twenty-five thousand eight-hundred and fifty-two U.S. dollars (US$13,625,852) (“Registered Capital”), which will be contributed by the Parties in the amounts, and forms, as set forth in Article 4.3 below and on Exhibit A; provided, however, that if (i) upon an assessment of the initial assets to be contributed by the Parties hereunder, the relevant People’s Republic of China Governmental Authority determines under Applicable Law that certain assets do not warrant the valuations set forth on Exhibit A and (ii) whereupon, unless the JV Investors contribute such amount of funds as is necessary to maintain the Percentage Ownership Interests of the JV Investors as set forth on Exhibit A within ten (10) Business Days of the JV Investors’ receipt of notice of the occurrence of (i) hereof, this Agreement shall terminate automatically without any further actions by the Parties and all previous contributions to the Company shall be returned promptly to the relevant JV Investor who made such contribution originally.  The total investment amount of the Company shall be twenty million U.S. dollars (US$20,000,000) (“Total Investment Amount”).  The difference between the Total Investment Amount and the Registered Capital may be financed by external debt or any other legal means.

3.   修订注册资本实缴计划

Amendment to the Payment Schedule of Initial Registered Capital Contributions

合资协议第4.3条原为：

Article 4.3 of the Joint Venture Agreement originally written as:

4

Execution Version

4.3 初始注册资本实缴计划：合资投资方的任一方应将按其出资比例分二期支付：

(a)第一期支付：合资公司经审批机关颁发营业执照日之次日起第30日。本期支付出资额如下：

（i）香港控股公司支付总计人民币36,700,000元，其中，10,500,000以现金，其余26,200,000元将由香港控股公司的股东ZBB能源的关联机构ZBB威州能源公司以香港控股公司的名义向合资公司授予知识产权的形式支付。

（ii）内资合资公司支付现金总计人民币20,000,000元。

(b)第二期支付：不迟于2012年6月1日。本期支付出资额如下：

（i）香港控股公司支付现金总计人民币10,500,000元。

（ii）内资合资公司总计支付现金人民币20,000,000元。

4.3 Payment Schedule of Initial Registered Capital Contributions.  Each of the JV Investors shall contribute to the Company its corresponding portion of the initial registered capital of the Company in two (2) installments:

(a)First Installment.  The JV Investors shall contribute the respective amounts listed below within thirty (30) days following the issuance of the Business License to the Company by the Approval Authority:

 (i)  Hong Kong Holdco shall contribute an aggregate amount of Thirty Six Million Seven Hundred Thousand Renminbi (RMB 36,700,000), of which Ten Million Five Hundred Thousand Renminbi (RMB 10,500,000) will be contributed in cash and Twenty Six Million Two Hundred Thousand Renminbi (RMB 26,200,000) will be credited to Hong Kong Holdco for the intellectual property rights granted to the Company by ZBB Corp., an Affiliate of Hong Kong Holdco member, ZBB Energy; and

5

Execution Version

	(ii)	the China JV shall contribute an aggregate amount in cash of Twenty Million Renminbi (RMB 20,000,000).
(b)	Second Installment.  The JV Investors shall contribute the respective amounts listed below by June 1, 2012:
	(i)	Hong Kong Holdco shall contribute an aggregate amount in cash of Ten Million Five Hundred Thousand Renminbi (RMB 10,500,000); and
	(ii)	the China JV shall contribute an aggregate amount in cash of Twenty Million Renminbi (RMB 20,000,000).

修改为：

Shall be amended as:

4.3初始注册资本实缴计划：合资投资方的任一方应将按其出资比例分二期支付：

(a)第一期支付：合资公司经审批机关颁发营业执照日之次日起第30日，本期支付出资额如下：

（i）香港控股公司支付总计5734733美元，其中，1640727.5美元以现金，其余4094006美元将由香港控股公司的股东ZBB能源的关联机构ZBB威州能源公司以香港控股公司的名义向合资公司授予知识产权的形式支付。

（ii）内资合资公司支付现金总计3125295.5美元等值人民币。

(b)第二期支付：不迟于2012年6月1日。本期支付出资额如下：

（i）香港控股公司支付现金总计1640727.5美元。

（ii）内资合资公司支付现金总计3125295.5美元等值人民币。

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Execution Version

(b)第二期支付：不迟于2012年6月1日。本期支付出资额如下：

（i）香港控股公司支付现金总计1640727.5美元。

（ii）内资合资公司支付现金总计3125295.5美元等值人民币。

4.3 Payment Schedule of Initial Registered Capital Contributions.  Each of the JV Investors shall contribute to the Company its corresponding portion of the initial registered capital of the Company in two (2) installments:

(a)First Installment.  The JV Investors shall contribute the respective amounts listed below within thirty (30) days following the issuance of the Business License to the Company by the Approval Authority

	(i)	Hong Kong Holdco shall contribute an aggregate amount of five million seven-hundred and thirty-four thousand seven-hundred and thirty three U.S. dollars (US$5,734,733), of which one million six-hundred and forty thousand seven-hundred and twenty-seven U.S. dollars and fifty cents (US$1,640,727.5) will be contributed in cash and four million ninety-four thousand and six U.S. dollars (US$4,094,006) contributed by granting an license of intellectual property rights to the Company by ZBB Corp., an Affiliate of Hong Kong Holdco and ZBB Energy, in the name of Hong Kong Holdco; and
	(ii)	the China JV shall contribute in RMB an aggregate amount equal to three million one-hundred and twenty-five thousand two-hundred and ninety five U.S. dollars and fifty cents (US$3,125,295.5) in cash.
(b)	Second Installment.  The JV Investors shall contribute the respective amounts listed below by June 1, 2012:
	(i)	Hong Kong Holdco shall contribute an aggregate amount of one million six-hundred and forty thousand seven-hundred and twenty-seven U.S. dollars and fifty cents (US$1,640,727.5) in cash; and

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Execution Version

 (ii)  the China JV shall contribute in RMB an aggregate amount equal to three million one-hundred and twenty-five thousand two-hundred and ninety five U.S. dollars and fifty cents (US$3,125,295.5) in cash.

4.   修订附件A：合资公司投资双方信息

Amendment to Exhibit A: JV Investor Information

合资协议附件A表格原为：

The table under Exhibit A of the Joint Venture Agreement originally written as:

合资投资方	主要营业地	法定代表人	注册资本	占有比例
香港控股公司			47,200,000人民币。 其中： 现金：21,000,000人民币； 知识产权折合26,200,000 人民币，由ZBB威州能源公司以许可协议项下 的许可代为出资。	54.13%
内资合资公司			40,000,000人民币	45.87%
总计			87,200,000人民币	100%

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Execution Version

JV Investor	Principal Office	Legal Representative	Registered Capital	Percentage Ownership Interest
Hong Kong Holdco			RMB 47,200,000 (RMB 21,000,000 contributed in cash; the remaining RMB 26,200,000 will be credited to Hong Kong Holdco for ZBB Corp.’s grant of a license to certain Intellectual Property under the License Agreement for purposes of determining the Percentage Ownership Interests of the Investors	54.13%
China JV			RMB 40,000,000	45.87%
Total			RMB 87,200,000	100%

修改为：

Shall be amended as:

合资投资方	主要营业地	法定代表人	注册资本	占有比例
香港控股公司			7375461美金。	54.13%

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Execution Version

公司	其中： 现金：3281455美元； 知识产权折合4094006美元，由ZBB威州能源公司通过香港控股公司以许可 协议项下的许可代为出资。
内资合资公司	6250391美元等值人民币	45.87%
总计	13625852美元	100%

JV Investor	Principal Office	Legal Representative	Registered Capital	Percentage  Ownership  Interest
Hong Kong Holdco			US$7,375,461 (US$3,281,455 contributed in cash; the remaining US$ 4,094,006 will contributed by ZBB Corp.’s grant of a license to certain Intellectual Property under the License Agreement in the name of Hong Kong Holdco	54.13%
China JV			US$6,250,391 equivalent in RMB	45.87%
Total			US$13,625,852	100%

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5.   其他条款

Other Terms

剩余合资协议条款应不变。

Remaining terms of the Joint Venture Agreement are not amended.

6.   语言

Language

本协议以中英文双语签署；中英文均有同等效力。

This Agreement is executed in both the Chinese and English languages.  Each language shall be equally effective.

7.   副本

Counterparts

本协议可签署任意数目的副本，每一副本构成原件文件，但所有的该等副本构成同一文件。

This Agreement may be executed in any number of counterparts, and each counterpart shall constitute an original instrument, but all such separate counterparts shall constitute one and the same instrument.

(以下无正文，附后签字页)

(Remainder of page intentionally left blank, Signature Page to follow)

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（签字页）

(Signature Page)

有鉴于此，双方在上述日期签署本协议。

IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date above first written.

香港控股公司： ZBB PowerSav Holdings Limited “Hong Kong Holdco” ZBB PowerSav Holdings Limited	内资合资公司 安徽鑫东投资管理有限公司 “China JV” Anhui Xindong Investment Management Co., Ltd.
授权代表 / Authorized Signatory： Daniel Anthony Nordloh 职位/Title: 董事Director ______________________________	授权代表 / Authorized Signatory： 束龙胜 职位/Title: 董事长 Chairman of the Board ______________________________

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EX-10.2

Exhibit 10.2

EXECUTION VERSION

ANHUI MEINENG STORE ENERGY CO., LTD.

ZBB POWERSAV HOLDINGS LTD.

LICENSE AGREEMENT

This LICENSE AGREEMENT (the “License Agreement”) is made and entered into as of November 11, 2011 (“License Effective Date”), by and between ZBB POWERSAV HOLDINGS LTD., a Hong Kong limited liability company (“Hong Kong Holdco”), and ANHUI MEINENG STORE ENERGY CO., LTD., a Chinese limited liability company (the “Company”).  Hong Kong Holdco and the Company are referred to collectively herein as the “Parties” and individually as a “Party.”

STATEMENT OF PURPOSE

ZBB Energy Corporation, a Wisconsin corporation, (“ZBB Energy”) designs and manufactures ZBB Products (as defined below) and owns the related intellectual property therein.

ZBB Cayman Corporation, an Affiliate of ZBB Energy, is a member of Hong Kong Holdco.  Hong Kong Holdco is a member of, and joint venture partner in, the Company along with the other member, the China JV (as defined below).  Hong Kong Holdco and the China JV are parties to the JV Agreement (as defined below).

In conjunction with its indirect relationship with the Company through its Affiliates, ZBB Energy has licensed to Hong Kong Holdco certain intellectual property of ZBB Energy associated with the ZBB Products (as defined below), including its energy storage and power control technology, for the purposes of Hong Kong Holdco sublicensing such intellectual property to the Company.  This sublicense will enable the Company (i) to manufacture, have made, reproduce, distribute, offer to sell, sell and service certain ZBB Products in Greater China (as defined below); (ii) to incorporate that technology in the Company Products (as defined below; collectively with the ZBB Products, the “Products”) for manufacture and sale in Greater China and (iii) to provide certain support services in conjunction with the same.

The Parties desire to enter into this License Agreement for the purpose of setting forth the rights and obligations of the Parties with respect to the licensed intellectual property described above.

NOW THEREFORE, in consideration of the aforesaid Statement of Purpose, the mutual terms, provisions, covenants and agreements set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:

1.   DEFINITIONS.

1.1For purposes of this License Agreement, the following capitalized terms have the respective meanings set forth below:

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EXECUTION VERSION

“Business Day” means a day on which commercial banks in Shanghai, China generally are open to conduct their regular banking business.

“Business Plans” means, collectively, the (i) the initial business plan of the Company, covering the period running from the Effective Date through the end of the fifth full Fiscal Year after the Effective Date, as agreed upon by the JV Investors and adopted by the Board and (ii) any subsequent business plan of the Company, as approved by the Board pursuant to the terms of the JV Agreement, and in effect from time to time.

“Company Documents” means this License Agreement, the JV Agreement, the Business Plans, the Management Services Agreement, the R&D Agreement and the Articles of Association of the Company, as amended from time to time.

“Company Products” means authorized Company products designed, manufactured, distributed or sold by the Company that incorporate, in whole or in part, ZBB Products and/or related IPR.

“Greater China” means Mainland China, Hong Kong and Taiwan.

“Intellectual Property Rights” or “IPR” means all intellectual property and proprietary rights throughout the world, whether existing under statute or at common law or equity, now or hereafter in force or recognized, including: (a) trade secrets, trademarks, service marks, copyrights (including all other literary and author rights), patents, inventions, designs, logos and trade dress, moral rights, mask works, rights of personality, publicity, and privacy, rights in customer information, rights (if any) in domain names; (b) any application or right to apply for any of the rights referred to in clause (a); (c) all renewals, reissues, extensions, divisions, continuations, continuations in part, future equivalents, and restorations thereof, now or hereafter in force and effect; and (d) all rights or causes of action for infringement or misappropriation of any of the foregoing, including the right to collect and retain damages from those causes of action.

“JV Agreement” means that certain Joint Venture Agreement of the Company, of even date herewith, by and between (i) Hong Kong Holdco and (ii) Anhui Xindong Investment Management Co. Ltd. (the “China JV”), a Chinese limited liability company, each a “JV Investor”.

“Mainland China” means the People’s Republic of China, excluding Hong Kong and Macau.

“Management Services Agreement” means that certain Management Services Agreement, of even date herewith, by and between Hong Kong Holdco and the Company.

“Power Management Industry” means all industry sectors related to power supply management.

“R&D Agreement” means that certain Research and Development Agreement, of even date herewith, by and between (i) ZBB Energy and (ii) the Company.

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EXECUTION VERSION

“Related Agreements” means (i) the JV Agreement, (ii) the Management Services Agreement and (iii) the R&D Agreement.

“Telecom Industry” means any and all industry sectors related to the telecommunications industry, including but not limited to: telephone, radio, television, internet, or other data (analog or digital) transmission goods and services, satellite goods and services, wired or wireless communication goods and services including local area networks and wide area networks, and any other similar goods and services.

“ZBB Products” means certain ZBB Energy product families, which are designated by Hong Kong Holdco on Exhibit A hereto, as may be amended by Hong Kong Holdco from time to time, and any related IPR.

1.2Other Definitions.  Terms not otherwise defined, but used, herein that are defined in any Related Agreement shall have the same meaning as in such Related Agreement when used in this Agreement, unless the context otherwise requires.

2.   LICENSE.

2.1Exclusive License.  Conditioned upon the Company’s full compliance with all of the terms herein and in the Related Agreements, including any Exhibits attached thereto, Hong Kong Holdco hereby grants to the Company an exclusive, non-assignable, non-transferable, non-sublicensable, royalty-free, limited license to the ZBB Products to manufacture, reproduce, distribute, offer to sell, sell, and service ZBB Products and to incorporate the same into the development, manufacture, distribution, and sale of the Company Products during the term of this License Agreement, all such uses being limited to the Power Management Industry in Mainland China.

2.2Non-Exclusive License.  Conditioned upon the Company’s full compliance with all of the terms herein and in the Related Agreements, including any Exhibits attached thereto, Hong Kong Holdco hereby grants to the Company a non-exclusive, non-assignable, non-transferable, non-sublicensable, royalty-free, limited license to distribute, offer to sell, sell, and service ZBB Products and the Company Products, all such used being limited to the Power Management Industry in Hong Kong and Taiwan.

2.3Trademarks.  Hong Kong Holdco hereby grants to the Company a non-assignable, non-transferable, non-sublicensable, royalty-free, limited license to use the ZBB trademarks as set forth in Exhibit A (“Trademarks”) in conjunction with the rights sublicensed in Sections 2.1 and 2.2.  All use of the Trademarks by the Company will inure to the benefit of Hong Kong Holdco.  The Company further agrees that the nature and quality of all goods distributed, offered for sale, or sold and services rendered by the Company in conjunction with the Trademarks will conform to the standards set by and be under the control of Hong Kong Holdco.

2.4License Limitations.  In addition to the conditions set forth in Sections 2.1, 2.2, and 2.3, the licenses granted in Sections 2.1, 2.2, and 2.3 are expressly conditioned upon the Company’s compliance with the following terms and conditions:

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EXECUTION VERSION

(a)   The Company will not manufacture, or have manufactured, the ZBB Products or the Company Products outside of Mainland China.  Such limitation extends to those geographical regions considered part of Greater China (i.e., Hong Kong and Taiwan).

(b)   The Company will not reverse engineer, decompile, modify or disassemble the ZBB Products in any way, except and only to the extent such activity is permitted by law notwithstanding this limitation.

(c)   The Company will use the Trademarks on all ZBB Products, the Company Products, and any other goods incorporating, in whole or in part, the ZBB Products.

(d)   The Company will only use the Trademarks on authorized ZBB Products, the Company Products, and other goods incorporating, in whole or in part, the ZBB Products.

(e)   The Company may not make any representations, warranties, or other commitments on behalf of Hong Kong Holdco to any third party.

(f)   The Company must comply with all obligations as set forth herein and any other Company Documents.

3.   TELECOM INDUSTRY FIRST RIGHT OF REFUSAL.

If Hong Kong Holdco receives notice from ZBB Energy that a third party has proposed to ZBB Energy a Commercially Feasible joint venture opportunity in the Telecom Industry within Greater China, Hong Kong Holdco will notify the Company of the same and provide a summary of the proposal as promptly as practicable.  Following receipt of such notice and summary from Hong Kong Holdco, the Company shall have ninety (90) days to propose to ZBB Energy a similar Commercially Feasible joint venture opportunity agreeable to ZBB Energy.  “Commercially Feasible” means a credible, commercially and technically feasible opportunity to qualify ZBB Products in the Telecom Industry in Greater China.  If the Company does not propose a Commercially Feasible joint opportunity to ZBB Energy or if the Company’s proposal is not acceptable to ZBB Energy, the Parties will amend this License Agreement in order to grant to the Company a non-exclusive, non-assignable, non-transferable, non-sublicensable, royalty-free limited license to the ZBB Products to manufacture, reproduce and distribute the ZBB Products and to incorporate the same into the development, manufacture and distribution of the Company Products during the term of this License Agreement in the Telecom Industry in Mainland China.

4.   INTELLECTUAL PROPERTY OWNERSHIP.

4.1Independently Developed IPR.  Each Party will retain ownership of any and all IPR that the Party owned on or before the License Effective Date.  Additionally, any IPR developed on or after the License Effective Date by either Party independently, and without the use of any of the IPR of the other Party, will be owned solely by the developing Party (collectively, “Independently Developed IPR”).

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EXECUTION VERSION

4.2Newly Developed IP.  All IPR developed by Company and Hong Kong Holdco in any derivative works of, modifications of, or improvements to the ZBB Products or the Company Products under this Agreement will be solely owned by Company (subject to Hong Kong Holdco’s ownership of Independently Developed IPR), regardless of whether the IPR is developed solely by a Party or jointly by the Parties (“Newly Developed IP”).  Hong Kong Holdco hereby assigns to Company, all rights, title and interest in and to all Newly Developed IP.  At the Company’s sole expense, Hong Kong Holdco will execute and deliver all instruments and take all other action as may be requested by the Company to perfect or protect the Company’s rights in the Newly Developed IP.  At the Company’s sole expense, Hong Kong Holdco will cooperate with the Company in the filing and prosecution of any copyright or patent applications that the Company may elect to file on the Newly Developed IP or in inventions and designs relating to the Newly Developed IP.  To the maximum extent permitted by law, Hong Kong Holdco waives all moral rights in the Newly Developed IP.  The Company hereby grants to Hong Kong Holdco an exclusive, perpetual, royalty-free, sublicensable license to manufacture, have made, reproduce, distribute, offer to sell, sell, and service the Newly Developed IP in all industry sectors in any and all territories other than Greater China and in any and all industry sectors other than the Power Management Industry in Greater China.

4.3No Other Rights.  Except as expressly granted in this License Agreement, the Company has no other rights in the ZBB Products.  Hong Kong Holdco is not obligated to provide the Company with (a) updates to the ZBB Products or (b) support for the ZBB Products.  All rights not expressly granted are reserved by and retained by Hong Kong Holdco.

5.   CONFIDENTIALITY.

Each Party (the "Receiving Party") undertakes to retain in confidence the terms of this License Agreement and all other non-public information, technology, materials and know-how of the other Party (“Disclosing Party”) disclosed or acquired by the Receiving Party pursuant to or in connection with this License Agreement that is either designated as proprietary and/or confidential or, by the nature of the circumstances surrounding disclosure, ought in good faith to be treated as proprietary and/or confidential ("Confidential Information"); provided, that each Party may disclose the terms and conditions of this License Agreement to its immediate legal and financial consultants in the ordinary course of its business.  Neither Party may use any Confidential Information with respect to which it is the Receiving Party for any purpose other than to carry out the activities contemplated by this License Agreement.  Each Party agrees to use commercially reasonable efforts to protect Confidential Information of the other Party, and in any event, to take precautions at least as great as those taken to protect its own confidential information of a similar nature.  Each Party will also notify the other promptly in writing if such Party learns of any unauthorized use or disclosure of any Confidential Information that it has received from the other Party, and will cooperate in good faith to remedy the occurrence to the extent reasonably possible.  The restrictions set forth in this Section do not apply to any information that: (a) was known by the Receiving Party without obligation of confidentiality prior to disclosure thereof by the other Party; (b) was in or entered the public domain through no fault of the Receiving Party; (c) is disclosed to the Receiving Party by a third party legally entitled to make the disclosure without violation of any obligation of confidentiality; (d) is required to be disclosed by applicable laws or regulations (but in that event, only to the extent required to be disclosed, and provided that the Disclosing Party is given the opportunity to review and redact the License Agreement prior to disclosure); or (e) is independently developed by the Receiving Party without reference to any Confidential Information of the other Party.  Upon request of the Disclosing Party, the Receiving Party will return to the Disclosing Party all materials, in any medium, that contain or reveal all or any part of any Confidential Information of the Disclosing Party.  Each Party acknowledges that breach of this provision by it would result in irreparable harm to the other Party, for which money damages would be an insufficient remedy, and therefore that the other Party will be entitled to seek injunctive relief to enforce the provisions of this Section.

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EXECUTION VERSION

6.   DISCLAIMER OF WARRANTIES.

THE ZBB PRODUCTS ARE PROVIDED TO THE COMPANY “AS IS” WITHOUT WARRANTY OF ANY KIND.  THE ENTIRE RISK AS TO THE RESULTS AND PERFORMANCE OF THE ZBB PRODUCTS IS ASSUMED BY THE COMPANY.  HONG KONG HOLDCO DISCLAIMS ALL WARRANTIES, WHETHER EXPRESS, IMPLIED OR STATUTORY, INCLUDING BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, AND WARRANTIES OF TITLE AND NONINFRINGEMENT, WITH RESPECT TO THE ZBB PRODUCTS.

7.   INDEMNITY.

7.1Indemnity Obligation.  The Company will, at its sole expense, defend (upon request), indemnify and hold harmless Hong Kong Holdco and ZBB Energy, and their respective directors, officers, employees, agents, and independent contractors (collectively, "Indemnitees") from and against, and pay for, any and all judgments, liabilities, bona fide settlements, penalties, losses, costs, damages, and other expenses (including reasonable fees of attorneys and other professionals) arising out of or related to the use of the ZBB Products.

7.2Right to Counsel; Payment.  Hong Kong Holdco and ZBB Energy will have the right to employ separate counsel, at such entity’s sole expense, and participate in the defense of any claim.  The Company will reimburse Hong Kong Holdco or ZBB Energy, as applicable, upon demand, for any payments made or loss suffered by any of the Indemnitees at any time, based upon the judgment of any court of competent jurisdiction or pursuant to a bona fide compromise or settlement of any claim, regarding any damages related to any claim under this Section.  The Company will not settle any claim or action on Hong Kong Holdco or ZBB Energy’s behalf without first obtaining Hong Kong Holdco or ZBB Energy’s written consent, as applicable.

8.   TERM.

8.1Term.  This License Agreement shall commence on the License Effective Date and shall continue in full force and effect until the termination of this License Agreement by either Party as set forth below.

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EXECUTION VERSION

8.2Termination for Cause.  Either Party may terminate this License Agreement for an uncured Cause (as defined below) upon at least thirty (30) days prior written notice to the other Party.  If the subject Cause is not cured within such thirty (30) day period, then the Party providing notice may terminate this Agreement.  “Cause” means the material breach or default of the Party in the performance of the terms of this Agreement.

8.3Termination for Bankruptcy.  If a Party is declared bankrupt or insolvent by a court of competent jurisdiction, or is dissolved or liquidated due to adverse financial conditions, the other Party may terminate this License Agreement upon at least thirty (30) days prior written notice to such Party.

8.4Termination of the JV Agreement.  If the JV Agreement is terminated in accordance with the terms thereof, this License Agreement shall terminate automatically, effective immediately, without any further action by the Parties; provided, further for the avoidance of doubt, if Hong Kong Holdco exercises a buy or sell option pursuant to the terms of the JV Agreement, this License Agreement shall terminate automatically, effective immediately.

9.   EFFECTS OF TERMINATION.

The provisions of this License Agreement required to survive the termination of this License Agreement to carry out their full intent and purposes, including Sections 4, 5, 6, 7, 8 and 10 shall survive termination of this License Agreement either for the duration set forth in the applicable Section or, if no duration is specified, indefinitely.

10.   GOVERNING LAW; DISPUTE RESOLUTION.

10.1Governing Law.  The validity, construction and enforceability of this License Agreement shall be governed by and construed in accordance with the laws of the People’s Republic of China.

10.2Discussions and Arbitration.  The Parties will discuss and finally settle all disputes between them arising out of this License Agreement (including with respect to this Section 10), in accordance with the Domestic Arbitration Rules of Hong Kong International Arbitration Centre.  The Company shall at all times maintain authorized agents in each of the United States and Wuhu City, AnHui Province, the People’s Republic of China to receive, for and on its behalf service of any summons, complaint or other legal process.

11.   MISCELLANEOUS PROVISIONS.

11.1Notices and Other Communications.  Any and all notices, requests, demands and other communications required by or otherwise contemplated to be made under this License Agreement or Applicable Law shall be in writing and in English and shall be provided by one or more of the following means and shall be deemed to have been duly given (a) if delivered personally, when received; (b) if transmitted by facsimile, on the date of transmission with receipt of a transmittal confirmation or (c) if by international courier service, on the fourth (4th) Business Day following the date of deposit with such courier service, or such earlier delivery date as may be confirmed in writing to the sender by such courier service. All such notices, requests, demands and other communications shall be addressed as follows:

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EXECUTION VERSION

If to the Company:

ANHUI MEINENG STORE ENERGY SYSTEM CO., LTD.

No. 15 Yangmin Road (N)

Jiujiang Economic Development Zone

Wuhu Anhui  241007

If toHong Kong Holdco:

Mr. Daniel A. Nordloh

ZBB PowerSav Holdings Limited

N93 W14475 Whittaker Way

Menomonee Falls, WI 53051

with a copy (which copy shall not constitute notice) to:

Mr. Mark Busch and Mr. Eliab Erulkar

K&L Gates LLP

Hearst Tower, 47th Floor

214 North Tryon Street

Charlotte, North Carolina, USA 28202

or to such other address or facsimile number as a Party may specify to the other Party from time to time in writing.

11.2Severability.  If any provision in this License Agreement shall be found or be held to be invalid or unenforceable then the meaning of said provision shall be construed, to the extent feasible, so as to render the provision enforceable, and if no feasible interpretation would save such provision, it shall be severed from the remainder of this License Agreement which shall remain in full force and effect.  In such event, the Parties shall use their respective best efforts to negotiate in good faith a substitute, valid and enforceable provision or agreement that most nearly affects the Parties’ intent in entering into this License Agreement.

11.3References to this License Agreement; Headings.  Unless otherwise indicated, references to sections and exhibits herein are to sections of, and exhibits to, this License Agreement.  Words such as “herein,” “hereby,” “hereinafter,” “hereof,” “hereto,” and “hereunder” refer to this License Agreement as a whole, unless the context otherwise requires.  The subject headings of the sections of this License Agreement are for reference only, and shall not affect the construction or interpretation of any of the provisions of this License Agreement.

11.4Further Assurances.  The Parties shall each perform such acts, execute and deliver such instruments and documents, and do all such other things as may be reasonably necessary to carry out the provisions of this License Agreement.

11.5No Waiver.  No waiver of any term or condition of this License Agreement shall be valid or binding on a Party unless the same shall have been set forth in a written document, specifically referring to this License Agreement and duly signed by the waiving Party.  The failure of a Party to enforce at any time any of the provisions of this License Agreement, or the failure to require at anytime performance by the other Party of any of the provisions of this License Agreement, shall in no way; be construed to be a present or future waiver of such provisions, nor in any way affect the ability of a Party to enforce each and every such provision thereafter.

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EXECUTION VERSION

11.6Entire Agreement; Amendments.  The terms and conditions contained in this License Agreement and the Related Agreements (including the exhibits hereto and thereto) constitute the entire agreement between the Parties and supersede all previous agreements and understandings, whether oral or written, between the Parties with respect to the subject matter hereof and thereof.  No agreement or understanding amending this License Agreement shall be binding upon any Party unless set forth in a written document which expressly refers to this License Agreement and which is signed and delivered by duly authorized representatives of each Party.

11.7Assignment.  No Party shall have the right to assign its rights or obligations under this License Agreement without the written consent of the other Party.  Any assignment or purported assignment not made in accordance with this Section shall be void and of no force and effect.  This License Agreement shall inure to the benefit of, and shall be binding upon, the Parties and their respective successors and permitted assigns.

11.8No Agency.  The Parties are independent contractors.  Nothing contained herein or done in pursuit of this License Agreement shall be construed as establishing a partnership, joint venture or similar relationship between the Parties for any purpose whatsoever.

11.9No Third Party Beneficiaries.  This License Agreement is made solely and specifically between and for the benefit of the Parties and their respective successors and assigns, and no other Person, unless express provision is made herein to the contrary, shall have any rights, interests or claims hereunder or be entitled to any benefits under or on account of this License Agreement as a third party beneficiary or otherwise.

11.10Incidental and Consequential Damages.  No Party will be liable to any other Party under any contract, negligence, strict liability or other theory for any indirect, incidental or consequential damages (including without limitation lost profits) with respect to a breach of this License Agreement.

11.11Counterparts.  This License Agreement may be executed in any number of counterparts, and each counterpart shall constitute an original instrument, but all such separate counterparts shall constitute one and the same instrument.

[SIGNATURES APPEAR ON NEXT PAGE]

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EXECUTION VERSION

IN WITNESS WHEREOF, the Parties have executed this License Agreement as of the License Effective Date.

“Hong Kong Holdco” ZBB PowerSav Holdings Limited	“Company” Anhui Meineng Store Energy Co., Ltd.
/s/ Dan Nordloh                                                                By: (Sign)	/s/ Bradley L. Hansen                                                                By: (Sign)
Dan Nordloh                                                                  Name: (Print)	Bradley L. Hansen                                                                       Name: (Print)
Title: Director	Title: CEO

Page 10 of 12

[Signature Page - License Agreement]

EXHIBIT A

ANHUI MEINENG STORE ENERGY CO., LTD.

ZBB POWERSAV HOLDINGS LIMITED

LICENSE AGREEMENT

EXHIBIT A

ZBB PRODUCTS

1.           Energy Storage.

ZBB Version 3 Zinc Bromide Flow Battery / 50kWh Current Design

2.           Power Electronics.

ZBB Power & Energy Control Center (PECC) up to 250KW

ZBB TRADEMARKS

Page 11 of 12

EX-10.3

Exhibit 10.3

EXECUTION VERSION

ANHUI MEINENG STORE ENERGY CO., LTD.

ZBB POWERSAV HOLDINGS LIMITED

MANAGEMENT SERVICES AGREEMENT

THIS MANAGEMENT SERVICES AGREEMENT (this “Agreement”) is made and entered into as of November 11, 2011 (the “Effective Date”), by and between ANHUI MEINENG STORE ENERGY CO., LTD., a Chinese limited liability company (the “Company”) and ZBB POWERSAV HOLDINGS LIMITED, a Hong Kong limited liability company (“Hong Kong Holdco”).  The Company and Hong Kong Holdco are referred to collectively herein as the “Parties” and individually as a “Party”.

STATEMENT OF PURPOSE

The Company has been formed for the purposes of (i) sourcing, marketing and distributing (A) certain product families of ZBB Energy Corporation, an affiliate of Hong Kong Holdco (the “ZBB Products”) and (B) certain new products that may be developed by the Company, which incorporate, in whole or in part, the ZBB Products (the “Company Products”, collectively with the ZBB Products, the “Products”); (ii) integrating the Products into other technologies and (iii) rendering certain services in support of such Products.

In order to enable the Company to accomplish its objectives and strategies as set forth in the Company Documents (as defined below), the Company wishes to engage Hong Kong Holdco to provide certain administrative and management services to the Company (the “Management Services”), to be performed in accordance with directives of the Board of Directors of the Company (the “Board”) and otherwise in accordance with the terms and conditions set forth in this Agreement.

NOW, THEREFORE, in consideration of the aforesaid Statement of Purpose, the mutual terms, provisions, covenants and agreements set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:

1.DEFINITIONS.

1.1Certain Definitions.  For purposes of this Agreement, the following capitalized terms have the respective meanings set forth below:

“Business Day” means a day on which commercial banks in Shanghai, China generally are open to conduct their regular banking business.

“Business Plans” means, collectively, the (i) the initial business plan of the Company, covering the period running from the Effective Date through the end of the fifth full Fiscal Year after the Effective Date, as agreed upon by the JV Investors and adopted by the Board and (ii) any subsequent business plan of the Company, as approved by the Board pursuant to the terms of the JV Agreement, and in effect from time to time.

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EXECUTION VERSION

“China Accounting Principles” means generally accepted accounting principles (“GAAP”) in the People’s Republic of China (or any other country which the JV Investors may agree to in writing) as set forth in pronouncements of the Chinese Institute of Certified Public Accountants, as consistently applied.

“Company Documents” means this Agreement, the JV Agreement, the Business Plans, the License Agreement, the R&D Agreement and the Articles of Association of the Company, as amended from time to time.  To the extent that Hong Kong Holdco is not a party to any of the aforesaid documents, Hong Kong Holdco has been provided with a copy of the same.

“Intellectual Property Rights” or “IPR” means all intellectual property and proprietary rights throughout the world, whether existing under statute or at common law or equity, now or hereafter in force or recognized, including: (i) trade secrets, trademarks, service marks, copyrights (including all other literary and author rights), patents, inventions, designs, logos and trade dress, moral rights, mask works, rights of personality, publicity and privacy, rights in customer information and rights (if any) in domain names; (ii) any application or right to apply for any of the rights referred to in clause (i); (iii) all renewals, reissues, extensions, divisions, continuations, continuations in part, future equivalents and restorations thereof, now or hereafter in force and effect and (iv) all rights or causes of action for infringement or misappropriation of any of the foregoing, including the right to collect and retain damages from those causes of action.

“JV Agreement” means that certain Joint Venture Agreement of the Company, of even date herewith, by and between (i) Hong Kong Holdco and (ii) Anhui Xindong Investment Management Co. Ltd., a Chinese limited liability company, each of which is a “JV Investor”.

“License Agreement” means that certain License Agreement, of even date herewith, by and between (i) Hong Kong Holdco and (ii) the Company.

“Net Sales” means (i) the total gross price (A) for all Products sold by or through the Company and (B) for all Services rendered by or through the Company in support of the same, during the applicable period reduced by (ii) sales and use taxes, deposit fees and any refunds, discounts, rebates or allowances made by the Company contemporaneously with the same.

“R&D Agreement” means that certain Research and Development Agreement, of even date herewith, by and between (i) ZBB Energy Corporation, a Wisconsin corporation (“ZBB Energy”) and (ii) the Company.

“Related Agreements” means (i) the JV Agreement, (ii) the License Agreement and (iii) the R&D Agreement.

“U.S. Accounting Principles” means generally accepted accounting principles (“GAAP”) in the United States (or any other country which the JV Investors may agree to in writing) as set forth in pronouncements of the Financial Accounting Standards Board (and its predecessors) and the American Institute of Certified Public Accountants, as consistently applied.

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EXECUTION VERSION

1.2Other Definitions.  Terms not otherwise defined, but used, herein that are defined in any Related Agreement shall have the same meaning as in such Related Agreement when used in this Agreement, unless the context otherwise requires.

2.DUTIES AND RESPONSIBILITIES OF HONG KONG HOLDCO.

2.1Generally.  During the term of this Agreement, Hong Kong Holdco will provide to the Company the Management Services that are set forth on Exhibit A hereto (which may be amended from time to time by the parties in writing), all in accordance with the Business Plans and subject at all times to (i) all applicable provisions of the Company Documents and (ii) the other terms and conditions set forth herein.

2.2Personnel; Other Resources.

(a)Hong Kong Holdco shall employ personnel sufficient in numbers and expertise to carry out the Management Services.  Subject to the approval of the Board, Hong Kong Holdco may engage such services of accountants, legal counsel and other third-party service providers as may be required to carry out the Management Services, or as may otherwise be reasonably requested by the Company from time to time.  All such persons shall not be subject to the discretion or control of the Company for any purpose and shall remain at all times employees of, or contractors to, Hong Kong Holdco (such employees and contractors collectively referred to as “Hong Kong Holdco Personnel”).

(b)Hong Kong Holdco is solely responsible for Hong Kong Holdco Personnel, and shall have full responsibility and authority for decisions regarding termination of Hong Kong Holdco Personnel.  Hong Kong Holdco shall: (i) pay when due all costs and expenses of Hong Kong Holdco Personnel providing services pursuant to this Agreement; (ii) process all payrolls for Hong Kong Holdco Personnel who are its employees and are providing services pursuant to this Agreement and (iii) shall pay for, and administer, all fringe benefit programs for which such Hong Kong Holdco Personnel may be eligible.  Upon reasonable request by the Board, Hong Kong Holdco shall provide the Company with evidence that all such payments have been made.

2.3Specific Restrictions and Limitations.

(a)Hong Kong Holdco shall use commercially reasonable efforts to (i) carry out the Management Services (and any other duties and responsibilities set forth herein), in such a manner as to comply with provisions of the Company Documents of which it is aware and to ensure the Company’s compliance with the same and (ii) take no action which would be materially inconsistent with or constitute a breach of the same.

(b)Hong Kong Holdco shall refrain from engaging in, causing the Company to engage in, or recommending to the Company participation in any activities that would (i) be in conflict with the Company Documents or (ii) be in material violation of (A) any applicable laws, rules or regulations or (B) the policies, requirements and restrictions to which the Company itself is subject by way of agreement, applicable law or otherwise and of which Hong Kong Holdco has been informed and agrees.

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EXECUTION VERSION

(c)Hong Kong Holdco shall (i) maintain accurate accounting and reporting systems, books and records relating to the Management Services performed by Hong Kong Holdco in accordance with the U.S. Accounting Principles and (ii) make such books and records accessible for reasonable inspection by the Board at any time during ordinary business hours.

3.COMPENSATION.

3.1Reimbursement of Expenses.  The Company will reimburse Hong Kong Holdco, on a dollar-for-dollar basis, for out-of-pocket expenses incurred by Hong Kong Holdco in preparing to render, and rendering, the Management Services (including the reasonable travel expenses of Hong Kong Holdco Personnel) within fifteen (15) days of Hong Kong Holdco’s submission to the Company of statements of account in sufficient detail to evidence the same and the consistency of such expenses with the Business Plans or any other applicable requests of the Board.

3.2Management Fee.  The Company will pay to Hong Kong Holdco a quarterly management fee (the “Management Fee”) in arrears within fifteen (15) days following the last day of each Fiscal Year quarter of the Company then ending, or ratable part thereof (September 30, December 31, March 31, and June 30).  The Management Fee shall be determined as follows:

(a)If the Company concludes an initial public offering on a nationally recognized securities exchange (“IPO”) within the first five (5) years immediately following the Effective Date, the Management Fee will be equal to five percent (5%) of the Company’s Net Sales during a subject fiscal quarter until the IPO.  After such period, any Management Fee to be paid to Hong Kong Holdco under this Agreement will be mutually determined by the Parties.

(b)If the Company does not conclude an IPO within the first five (5) years immediately following the Effective Date, the Management Fee will be equal to (i) five percent (5%) of the Company’s Net Sales during a subject fiscal quarter within the first five (5) years immediately following the Effective Date, and (ii) three percent (3%) of the Company’s Net Sales during a subject fiscal quarter for the immediately following three (3) years.  After such periods, any Management Fee to be paid to Hong Kong Holdco under this Agreement will be mutually determined by the Parties.

3.3Taxes.  All taxes, duties or fees of any nature whatsoever levied by any government authority on or pertaining specifically to the Management Services are to be borne and paid by Hong Kong Holdco.

3.4Currency.  The Parties acknowledge that the Management Fee, and any reimbursements pursuant to Section 3.1, will be paid by the Company to Hong Kong Holdco in U.S. Dollars.  For purposes of calculating the amounts payable to Hong Kong Holdco hereunder, the Parties shall use the applicable exchange rate in effect as of the last day of the subject fiscal quarter (as published in The Wall Street Journal, Asia Edition) when converting invoices denominated in currency other than U.S. Dollars.

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EXECUTION VERSION

4.TERM AND TERMINATION.

4.1Term.  This Agreement shall commence on the Effective Date and shall continue in full force and effect until the termination of this Agreement by either Party as set forth below.

4.2Termination for Cause.  Either Party may terminate this Agreement for an uncured Cause (as defined below) upon at least ninety (90) days prior written notice to the other Party.  If the subject Cause is not cured within such ninety (90) day period, then the Party providing notice may terminate this Agreement.  “Cause” means the material breach or default of the Party in the performance of the terms of this Agreement.

4.3Termination for Bankruptcy.  If a Party is declared bankrupt or insolvent by a court of competent jurisdiction, or is dissolved or liquidated due to adverse financial conditions, the other Party may terminate this Agreement upon at least thirty (30) days prior written notice to such Party.

4.4Termination of the JV Agreement.  If the JV Agreement is terminated in accordance with the terms thereof, this Agreement shall automatically terminate without any further action by the Parties.

5.EFFECTS OF TERMINATION.

The provisions of this Agreement required to survive the termination of this Agreement to carry out their full intent and purposes, including Sections 3 (to the extent of earned but unpaid compensation), 6, 7 and 8 shall survive termination of this Agreement either for the duration set forth in the applicable Section or, if no duration is specified, indefinitely.

6. CONFIDENTIALITY.

Each Party (the "Receiving Party") undertakes to retain in confidence the terms of this Agreement and all other non-public information, technology, materials and know-how of the other Party (“Disclosing Party”) disclosed or acquired by the Receiving Party pursuant to or in connection with this Agreement that is either designated as proprietary and/or confidential or, by the nature of the circumstances surrounding disclosure, ought in good faith to be treated as proprietary and/or confidential ("Confidential Information"); provided, that each Party may disclose the terms and conditions of this Agreement to its immediate legal and financial consultants in the ordinary course of its business.  Neither Party may use any Confidential Information with respect to which it is the Receiving Party for any purpose other than to carry out the activities contemplated by this Agreement.  Each Party agrees to use commercially reasonable efforts to protect Confidential Information of the other Party, and in any event, to take precautions at least as great as those taken to protect its own confidential information of a similar nature.  Each Party will also notify the other promptly in writing if such Party learns of any unauthorized use or disclosure of any Confidential Information that it has received from the other Party, and will cooperate in good faith to remedy the occurrence to the extent reasonably possible.  The restrictions set forth in this Section do not apply to any information that: (a) was known by the Receiving Party without obligation of confidentiality prior to disclosure thereof by the other Party; (b) was in or entered the public domain through no fault of the Receiving Party; (c) is disclosed to the Receiving Party by a third party legally entitled to make the disclosure without violation of any obligation of confidentiality; (d) is required to be disclosed by applicable laws or regulations (but in that event, only to the extent required to be disclosed, and provided that the Disclosing Party is given the opportunity to review and redact the Agreement prior to disclosure); or (e) is independently developed by the Receiving Party without reference to any Confidential Information of the other Party.  Upon request of the Disclosing Party, the Receiving Party will return to the Disclosing Party all materials, in any medium, that contain or reveal all or any part of any Confidential Information of the Disclosing Party.  Each Party acknowledges that breach of this provision by it would result in irreparable harm to the other Party, for which money damages would be an insufficient remedy, and therefore that the other Party will be entitled to seek injunctive relief to enforce the provisions of this Section.

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EXECUTION VERSION

7.OWNERSHIP; INTELLECTUAL PROPERTY RIGHTS.

The Company acknowledges and agrees that any Intellectual Property Rights developed by Hong Kong Holdco in connection with the rendering of the Management Services belongs solely to Hong Kong Holdco.  The Company hereby assigns all right, title and interest in and to such intellectual property, including all IPR, to Hong Kong Holdco.

8. GOVERNING LAW; DISPUTE RESOLUTION.  

8.1Governing Law.  The validity, construction and enforceability of this Agreement shall be governed by and construed in accordance with the laws of the People’s Republic of China.

8.2Discussions and Arbitration.  The Parties will discuss and finally settle all disputes between them arising out of this Agreement (including with respect to this Section 8), in accordance with the Domestic Arbitration Rules of Hong Kong International Arbitration Centre.  The Company shall at all times maintain authorized agents in each of the United States and Wuhu City, AnHui Province, the People’s Republic of China to receive, for and on its behalf, service of any summons, complaint or other legal process.

9.MISCELLANEOUS PROVISIONS.

9.1Language; Notices and Other Communications.  English shall be the language of the operative Agreement, and all terms and provisions hereof shall be interpreted and construed accordingly.  Any and all notices, requests, demands and other communications required by or otherwise contemplated to be made under this Agreement or Applicable Law shall be in writing and in English and shall be provided by one or more of the following means and shall be deemed to have been duly given (a) if delivered personally, when received; (b) if transmitted by facsimile, on the date of transmission with receipt of a transmittal confirmation or (c) if by international courier service, on the fourth (4th) Business Day following the date of deposit with such courier service, or such earlier delivery date as may be confirmed in writing to the sender by such courier service. All such notices, requests, demands and other communications shall be addressed as follows:

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EXECUTION VERSION

If to the Company:

ANHUI MEINENG STORE ENERGY SYSTEM CO., LTD.

No. 15 Yangmin Road (N)

Jiujiang Economic Development Zone

Wuhu Anhui  241007

If toHong Kong Holdco:

Mr. Daniel A. Nordloh

ZBB PowerSav Holdings Limited

N93 W14475 Whittaker Way

Menomonee Falls, WI 53051

with a copy (which copy shall not constitute notice) to:

Mr. Mark Busch and Mr. Eliab Erulkar

K&L Gates LLP

Hearst Tower, 47th Floor

214 North Tryon Street

Charlotte, North Carolina, USA 28202

or to such other address or facsimile number as a Party may specify to the other Party from time to time in writing.

9.2Severability.  If any provision in this Agreement shall be found or be held to be invalid or unenforceable then the meaning of said provision shall be construed, to the extent feasible, so as to render the provision enforceable, and if no feasible interpretation would save such provision, it shall be severed from the remainder of this Agreement which shall remain in full force and effect.  In such event, the Parties shall use their respective best efforts to negotiate in good faith a substitute, valid and enforceable provision or agreement that most nearly affects the Parties’ intent in entering into this Agreement.

9.3References to this Agreement; Headings.  Unless otherwise indicated, references to sections and exhibits herein are to sections of, and exhibits to, this Agreement.  Words such as “herein,” “hereby,” “hereinafter,” “hereof,” “hereto,” and “hereunder” refer to this Agreement as a whole, unless the context otherwise requires.  The subject headings of the sections of this Agreement are for reference only, and shall not affect the construction or interpretation of any of the provisions of this Agreement.

9.4Further Assurances.  The Parties shall each perform such acts, execute and deliver such instruments and documents, and do all such other things as may be reasonably necessary to carry out the provisions of this Agreement.

9.5No Waiver.  No waiver of any term or condition of this Agreement shall be valid or binding on a Party unless the same shall have been set forth in a written document, specifically referring to this Agreement and duly signed by the waiving Party.  The failure of a Party to enforce at any time any of the provisions of this Agreement, or the failure to require at anytime performance by the other Party of any of the provisions of this Agreement, shall in no way; be construed to be a present or future waiver of such provisions, nor in any way affect the ability of a Party to enforce each and every such provision thereafter.

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EXECUTION VERSION

9.6Entire Agreement; Amendments.  The terms and conditions contained in this Agreement and the Related Agreements (including the exhibits hereto and thereto) constitute the entire agreement between the Parties and supersede all previous agreements and understandings, whether oral or written, between the Parties with respect to the subject matter hereof and thereof.  No agreement or understanding amending this Agreement shall be binding upon any Party unless set forth in a written document which expressly refers to this Agreement and which is signed and delivered by duly authorized representatives of each Party.

9.7Assignment.  No Party shall have the right to assign its rights or obligations under this Agreement without the written consent of the other Party.  Any assignment or purported assignment not made in accordance with this Section shall be void and of no force and effect.  This Agreement shall inure to the benefit of, and shall be binding upon, the Parties and their respective successors and permitted assigns.

9.8No Agency.  The Parties are independent contractors.  Nothing contained herein or done in pursuit of this Agreement shall be construed as establishing a partnership, joint venture or similar relationship between the Parties for any purpose whatsoever.

9.9No Third Party Beneficiaries.  This Agreement is made solely and specifically between and for the benefit of the Parties and their respective successors and assigns, and no other Person, unless express provision is made herein to the contrary, shall have any rights, interests or claims hereunder or be entitled to any benefits under or on account of this Agreement as a third party beneficiary or otherwise.

9.10Incidental and Consequential Damages.  No Party will be liable to any other Party under any contract, negligence, strict liability or other theory for any indirect, incidental or consequential damages (including without limitation lost profits) with respect to a breach of this Agreement.

9.11Counterparts.  This Agreement may be executed in any number of counterparts, and each counterpart shall constitute an original instrument, but all such separate counterparts shall constitute one and the same instrument.

[SIGNATURES APPEAR ON NEXT PAGE]

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EXECUTION VERSION

IN WITNESS WHEREOF, the Parties have executed this Management Services Agreement as of the Effective Date.

“Company” Anhui Meineng Store Energy Co., Ltd.	“Hong Kong Holdco” ZBB PowerSav Holdings Limited
/s/ Bradley L. Hansen                                                                                  By: (Sign)	/s/ Dan Nordloh                                                                                             By: (Sign)
Bradley L. Hansen                                                                           Name: (Print)	Dan Nordloh                                                                                          Name: (Print)
Title: CEO	Title: Director

[Signature Page – Management Services Agreement]

1

EXHIBIT A

ANHUI MEINENG STORE ENERGY CO., LTD.

ZBB POWERSAV HOLDINGS LIMITED

MANAGEMENT SERVICES AGREEMENT

EXHIBIT A

Management Services

This Exhibit is an attachment to, and is incorporated by reference into, that certain MANAGEMENT SERVICES AGREEMENT (the “Agreement”) between ANHUI MEINENG STORE ENERGY CO., LTD. (the “Company”) and ZBB POWERSAV HOLDINGS LIMITED (“Hong Kong Holdco”).  Unless otherwise defined herein, capitalized terms shall have the same meanings as in the main body of the Agreement.

MANAGEMENT SERVICES

Hong Kong Holdco shall provide the following Management Services to the Company, at all times subject to the supervision and direction of the Board and pursuant to contracts of the Company with third parties, as applicable:

(a)provide to the Company, to the extent required, office space, equipment and other facilities and any related services (which will be provided by Hong Kong Holdco’s officers and Hong Kong Holdco Personnel);

(b)manage and coordinate the manufacturing process for the Products and associated material sourcing;

(c)manage design and customer engineering activities, including related problem solving;

(d)establish a technology transfer team to assist with the successful transfer and start-up of technology;

(e)assist the Company in establishing a China supply chain for the production of certain ZBB Products with China origin parts;

(f)assist in the establishment, and expansion, of operations;

(g)provide sales and marketing assistance, including customer support; the establishment, and implementation, of sales plans and talent recruitment;

A-1

EXHIBIT A

(h)provide technical training, technology roadmap generation, operational execution and management guidance;

(i)report to the Board, or to any committee or officers of the Company acting pursuant to the authority of the Board, on a monthly basis or at such other times and in such detail as the Board deems appropriate, in order to enable the Company to determine that (i) the policies, requirements, restrictions and obligations to which the Company is subject are being observed and complied with; (ii) the objectives of the Business Plans are being met and (iii) Hong Kong Holdco’s obligations hereunder are being fulfilled; and

(j)provide any other functions and services as may be requested by the Board in support of the objectives and strategies of the Company, as set forth in the Business Plans, and the fulfillment of its obligations under the Company Documents.

A-2

EX-10.4

Exhibit 10.4

October 24, 2011

Mr. Charles W. Stankiewicz

31 Hawk Feather Circle

Madison, WI 53717

Dear Charles:

On behalf of the President and Chief Executive Officer of ZBB Energy Corporation (“ZBB”), I am delighted to invite you to join our company as its Executive Vice President-Operations, and as a member of our Board of Directors. This letter agreement sets forth the terms of your employment.

1.           Position:

Ÿ You will serve as ZBB’s Executive Vice President-Operations and report to ZBB’s President and Chief Executive Officer. Your services to ZBB will be performed in Menomonee Falls, Wisconsin. You acknowledge, however, that you may be required to travel in connection with the performance of your duties hereunder.

Ÿ This offer is conditional based on approval from the company’s Compensation Committee.

Ÿ As a condition to your appointment, you will be required to enter into a Restrictive Covenant Agreement (Exhibit “A”).

Ÿ During your employment by ZBB, you may accept a position on the board of directors of any company that does not directly compete with the business of ZBB, provided such position is approved in advance by ZBB’s Board of Directors.

Ÿ Nothing contained in this letter will be construed as conferring upon you any right to remain employed by ZBB or any of its subsidiaries or affiliates or affect the right of ZBB or any of its subsidiaries or its affiliates to terminate your employment at any time for any reason or no reason, subject to the obligations of ZBB as set forth herein.

2.           Salary:

Ÿ You will be entitled to an annual salary of $225,000, payable in accordance with ZBB’s normal salaried payroll practices.

Ÿ The President & Chief Executive Officer will review, at least annually, your overall compensation with a view to increasing it if, in the sole judgment of the President & Chief Executive Officer, the performance of ZBB or your services merit such an increase.

Ÿ ZBB shall be entitled to withhold from amounts to be paid to you hereunder any federal, state, or local withholding or other taxes or charges which it is required to withhold under applicable law.

Ÿ You shall be entitled to an annual cash bonus of up to $100,000 based on meeting specific Profit & Loss (P&L) metrics (to be determined).

3.           Options:

Ÿ Effective as of the date of your appointment, you will receive two option awards.

Ÿ You will be granted an option to purchase 400,000 shares with an exercise price equal to the closing price of ZBB’s common stock on the NYSE Amex on the date of your appointment. This option will be an Inducement Option.

o Vesting will be over 3 years with the first 1/3 vesting one year from the start of your employment and the remaining 2/3 vesting in 24 equal monthly installments as of the end of each calendar month beginning on November 9, 2012 and ending on November 9, 2014.

o This option will immediately vest upon a “Change of Control” of ZBB.  The definition of “Change of Control” is attached as an exhibit to this letter.

o The option will not be exercisable as to any portion thereof after the eighth anniversary of the grant date.

o The option will have such other terms and conditions specified in the form of option agreement provided to you.

Ÿ You will also be granted an option to purchase 100,000 shares with the same exercise price specified above.

o The option will vest in two equal installments upon the Compensation Committee’s confirmation that certain performance targets are met (to be determined).

o The option will not be exercisable as to any portion thereof after the eighth anniversary of the grant date.

o The option will have such other terms and conditions specified in the form of option agreement provided to you.

4.           Commuting and Other Expenses:

Ÿ We will reimburse your commuting expenses to and from ZBB’s corporate offices in the following manner:

o IRS mileage reimbursement for miles that exceed 60 miles round trip to and from your home to ZBB’s corporate offices.

o This reimbursement will not exceed $10,000 per year.

Ÿ Expenses for other company travel will be reimbursed in accord with ZBB’s travel policy.

5.           Benefits:

Ÿ During the term of your employment by ZBB, ZBB will provide you with, and you will be eligible for, all benefits of employment generally made available to the senior executives of ZBB (collectively, the “Benefit Plans”), subject to and on a basis consistent with the terms, conditions and overall administration of such Benefit Plans. You will be considered for participation in Benefit Plans which by the terms thereof are discretionary in nature (such as stock option plans) on the same basis as other executive personnel of ZBB of similar rank.

Ÿ You will receive four (4) weeks of Personal Time Off (PTO) per calendar year, in accordance with Company policy in effect from time to time.

Ÿ You will also receive 10 paid holidays per calendar year, in accordance with Company policy in effect from time to time.

6.           Benefits Upon Termination:

Ÿ Without giving effect to the timing of the payment of your base salary for 2011 as set forth in Section 2, above, you will be entitled to a severance payment in an amount equal to four (4) months of your annual base salary as then in effect paid in accordance with ZBB’s normal salaried payroll practices as then in effect in the event (a) ZBB terminates your employment for any reason other than “Cause” or “Disability”, (b) you terminate your employment with ZBB for “Good Reason”, or (c) you die.  In the event your employment with ZBB is terminated due to “Disability,” you will be entitled to a severance payment in an amount equal to your base salary as then in effect from the date of termination through the date on which benefits under the long-term disability policy begin, but in no event longer than 90 days, paid in accordance with ZBB’s normal salaried payroll practices as then in effect.  The definitions of “Cause”, “Disability” and “Good Reason” are attached as an exhibit to this letter.  In each case, this severance benefit will be contingent on your execution of a release in a form acceptable to ZBB which is not withdrawn or otherwise revoked within the applicable statutory and/or regulatory time periods or otherwise.  You will also be entitled to all accrued and unpaid benefits under any Benefit Plans in which you participate through the date of termination.

Ÿ If you terminate your employment with ZBB for “Good Reason”, and if you elect to continue your health insurance coverage under the Consolidated Omnibus Budget Reconciliation Act (“COBRA”) following such termination, then ZBB shall pay your monthly premium under COBRA until the earlier of:  (i) the last day of the four month period following such termination or (ii) the date on which you are offered or obtain health insurance coverage in connection with new employment or self-employment.  If you are not eligible for COBRA coverage because you have waived health insurance coverage, then, subject to the dollar limits above, ZBB shall pay your monthly premium for long-term disability conversion coverage until the earlier of:  (i) the last day of the four month period following such termination or (ii) the date on which you are offered or obtain long-term disability insurance coverage in connection with new employment or self-employment

Ÿ If you terminate your employment with ZBB other than for “Good Reason” or ZBB terminates your employment for “Cause”, you will be entitled to the payment of any accrued but unpaid base salary through the date of termination, plus all accrued and unpaid benefits under any Benefit Plans in which you participate through the date of termination.  In either case, you will not be entitled to any severance payment and you will not be entitled to the payment of the premiums specified above.

Ÿ As a condition to your appointment, you will be required to enter into a restrictive covenant agreement.  If you breach the provisions of the restrictive covenant agreement, then you shall forfeit any unpaid severance payments and COBRA coverage premiums as of the time of ZBB’s determination of the breach, and you shall repay to ZBB any severance payments and COBRA coverage premiums you have received as of the time of ZBB’s determination of the breach as soon as practicable after ZBB provides a written demand for payment to you.

Ÿ As a condition to your appointment, you will be required to provide a resignation from the Board of Directors in the form previously provided to you.

Ÿ You hereby represent and warrant that you are not bound by any employment or confidentiality agreement or other obligation or commitment, whether contractual or otherwise, that would be inconsistent, or place you in a position of conflict, with your position as Executive Vice President-Operations of ZBB or this letter agreement.

7.           Timing; Miscellaneous Provisions:

Ÿ The date of your appointment as Executive Vice President-Operations of ZBB will be November 9, 2011.

Ÿ This offer is conditional based on completion of a drug test with a negative result and background check.

Ÿ This letter agreement shall be binding upon any successor (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of ZBB’s business and/or assets.  For all purposes under this Agreement, the term “ZBB” shall include any successor to ZBB’s business and/or assets which become bound by this letter agreement.

Ÿ This letter agreement and all of your rights hereunder shall inure to the benefit of, and be enforceable by, your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.

Ÿ Notices and all other communications contemplated by this letter agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by overnight courier or U.S. registered or certified mail, return receipt requested and postage prepaid.  In the case of notices to you, notices shall be addressed to you at the home address which you most recently communicated to ZBB in writing.  In the case of notices to ZBB, notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its Secretary.

Ÿ No provision of this letter agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by you and by an authorized officer of ZBB (other than you).  No waiver by either party of any breach of, or of compliance with, any condition or provision of this letter agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time.

Ÿ No other agreements, representations or understandings (whether oral or written and whether express or implied) which are not expressly set forth or referenced in this letter agreement have been made or entered into by either party with respect to the subject matter hereof.  This letter agreement and the other agreements, representations and understandings expressly set forth or referenced herein contain the entire understanding of the parties with respect to the subject matter hereof.

Ÿ Any termination of this letter agreement shall not release either ZBB or you from our respective obligations to the date of termination nor from the provisions of this letter agreement which, by necessary or reasonable implication, are intended to apply after termination of this letter agreement.

Ÿ The validity, interpretation, construction and performance of this letter agreement shall be governed by the laws of the State of Wisconsin (other than provisions governing the choice of law).

Ÿ The invalidity or unenforceability of any provision or provisions of this letter agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect.

Ÿ This letter agreement and all your rights and obligations hereunder are personal to you and may not be transferred or assigned by you at any time.  ZBB may assign its rights under this letter agreement to any entity that assumes ZBB’s obligations hereunder in connection with any sale or transfer of all or a substantial portion of ZBB’s assets to such entity.

Ÿ This letter agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

We feel that this offer reflects the confidence we have in your ability to guide the growth of ZBB and to achieve a significant enhancement of shareholder value.  We very much look forward to having you join us as our Executive Vice President-Operations.  If you agree to the terms of this letter agreement, please execute the letter agreement below.

 With warm regards,

 ZBB ENERGY CORPORATION

 Eric Apfelbach

 President & Chief Executive Officer

Agreed and accepted as of November 3, 2011.

____________________

Charles Stankiewicz

EX-10.5

Exhibit 10.5

ZBB ENERGY CORPORATION

NONSTATUTORY STOCK OPTION AGREEMENT

This Nonstatutory Stock Option Agreement (this “Agreement”) is executed as of November 9, 2011, by and between ZBB ENERGY CORPORATION, a Wisconsin corporation (the “Company”), and Charles W. Stankiewicz (“Employee”).

W I T N E S S E T H:

WHEREAS, the Compensation Committee of the Board of Directors of the Company wishes to grant Employee a Nonstatutory Stock Option in conjunction with Employee’s appointment as Executive Vice President-Operations of the Company subject to the terms provided in this Agreement; and

WHEREAS, the Compensation Committee of the Board of Directors of the Company anticipates that this Agreement will promote the best interests of the Company and its shareholders by providing Employee a proprietary interest in the Company with a stronger incentive to put forth maximum effort for the continued success and growth of the Company and its subsidiaries.

NOW, THEREFORE, in consideration of the benefits that the Company will derive in connection with the services to be rendered by Employee, the Company and Employee hereby agree as follows:

1.  Determinations by Administrator.  The Administrator (as defined below) shall make all interpretations, rules and regulations necessary to administer this Agreement, and such determinations of the Administrator shall be binding upon Employee.  For purposes of this Agreement, the term “Administrator” shall mean the Compensation Committee of the Board of Directors.

2.  Option; Number of Shares; Option Price.  The Option (as defined below) granted hereunder is intended to be a nonstatutory stock option and therefore, shall not qualify as an incentive stock option pursuant to Section 422 of the Internal Revenue Code of 1986, as amended.  Employee shall have the right and option to purchase all or any part of an aggregate of [________] shares of $0.01 par value common stock of the Company (“Share(s)”) at the purchase price of $0.79 per Share (the “Option”), which is equal to the Fair Market Value (as defined below) of a Share as of the date of this Agreement.  For purposes of this Agreement, the term “Fair Market Value” shall mean, as of any date, the closing price of a Share on the NYSE Amex.

3.  Vesting and Expiration.

(a)           Vesting.  The Option shall vest (become exercisable) and remain exercisable only in accordance with Annex 1 attached hereto.

(b)           Expiration.  To the extent not previously exercised according to the terms hereof,  the Option shall expire on the eighth anniversary of the date hereof.

4.  Exercise Period.

(a)           Disability.  Upon Employee’s termination of employment due to a Disability, Employee shall have one (1) year from the date of such termination to exercise the Option granted hereunder as to all or part of the Shares subject to this Option; provided, however, that this Option shall not be exercisable subsequent to the expiration date specified in Section 3(b), above.

(b)           Death.  Upon Employee’s termination of employment due to death, the Option, as to all or any part of the Shares subject to this Option, shall be exercisable:

(1)           for one (1) year after Employee’s death, but in no event subsequent to the expiration dates specified in Section 3(b), above; and

(2)           only (i) by the designated beneficiary of Employee (such designation to be made in writing at such time and in such manner as the Administrator shall approve or prescribe), or, if Employee dies without a surviving designated beneficiary, (ii) by the personal representative, administrator, or other representative of the estate of Employee, or by the person or persons to whom the deceased rights of Employee under the Option shall pass by will or the laws of descent and distribution.  Employee may change the beneficiary designation at any time, by giving written notice to the Administrator, subject to such conditions and requirements as the Administrator may prescribe in accordance with applicable law.

(c)           Other Terminations of Employment.  Upon Employee’s termination of employment for any reason other than those specified above in this Section 4, Employee shall have ninety (90) days from the date of such termination to exercise the Option as to all or part of the Shares, provided Employee has a present right to exercise such Option as of the date of such termination; provided, however, that the Option shall not be exercisable subsequent to the expiration dates specified in Section 3(b), above.  Notwithstanding the foregoing, if Employee’s employment is terminated for Cause (as defined in Employee’s offer letter of employment dated October 24, 2011 (the “Offer Letter”)), to the extent the Option held by Employee is not effectively exercised prior to such termination, it shall lapse immediately upon such termination.

(d)           Extension of Exercise Period.  The Administrator may in its sole discretion extend the period permitted for exercise of the Option upon Employee’s termination of employment as otherwise provided in this Section 4 if allowable under applicable law.

5.  Method of Exercising Option.  Except as otherwise permitted by the Administrator, the Option shall be exercisable by delivery to the Company (to the attention of its Secretary), at its offices in Menomonee Falls, Wisconsin, of (i) written notice identifying the Option and stating the number of Shares with respect to which it is being exercised, (ii) payment in full of the exercise price of the Shares then being acquired as provided in Section 6, below, and (iii) execution of such other documentation as is determined to be necessary or appropriate by the Administrator from time to time the form of which shall be provided to Employee at the time of execution and delivery of this Agreement.  The Company shall have the right to delay the issue or delivery of any Shares to be delivered hereunder until (i) the completion of such registration or qualification of such Shares under federal, state, or foreign law, ruling, or regulation as the Company shall deem to be necessary or advisable, and (ii) receipt from Employee of such documents and information as the Administrator may deem necessary or appropriate in connection with such registration or qualification or the issuance of Shares hereunder.

6.  Payment of Exercise Price.  The exercise price shall be payable in whole or in part in cash, Shares held by Employee, other property, or such other consideration consistent with the Agreement’s purpose and applicable law as may be determined by the Administrator from time to time.  Except as otherwise determined by the Administrator at the time of grant, such price shall be paid in cash in full at the time that the Option is exercised.  If Employee is permitted by the Administrator to pay all or a part of the exercise price in Shares and elects to do so, Employee may make such payment by delivering to the Company a number of Shares, either directly or by attestation, which are equal in value to the purchase or exercise price hereunder.  For this purpose, all Shares so delivered shall be valued per share at the Fair Market Value (as defined above; provided, however, if a Share is not susceptible to valuation by the above method, the term “Fair Market Value” of a Share shall mean the fair market value of a Share as the Administrator may determine in conformity with pertinent law) of a Share on the business day immediately preceding the day on which such Shares are delivered.

7.  Prohibition Against Transfer.  Unless otherwise provided by the Administrator and except as provided below, the Option, and the rights and privileges conferred hereby, may not be transferred by Employee, and shall be exercisable during the lifetime of Employee only by Employee.  The Option shall not be subjected to execution, attachment or similar process.  Employee shall have the right to transfer the Option upon Employee’s death, either to Employee’s designated beneficiary (such designation to be made in writing at such time and in such manner as the Administrator shall approve or prescribe), or, if Employee dies without a surviving designated beneficiary, by the terms of Employee’s will or under the laws of descent and distribution, subject to any limitations set forth in this Agreement and all such distributees shall be subject to all terms and conditions of this Agreement to the same extent as Employee would be if still living.

8.  Nature of Option.  Employee shall not have any interest in any fund or in any specific asset or assets of the Company by reason of the Option granted hereunder, or any right to exercise any of the rights or privileges of a stockholder with respect to the Option until Shares are issued in connection with any exercise.

9.  Adjustment provisions.

(a)           Share Adjustments.  In the event of any stock dividend, stock split, recapitalization, merger, consolidation, combination or exchange of shares of Company stock, or the like, as a result of which shares of any class shall be issued in respect of the outstanding Shares, or the Shares shall be changed into the same or a different number of the same or another class of stock, or into securities of another person, cash or other property (not including a regular cash dividend), the number of Shares subject to the Option and the exercise price applicable to the Option shall be appropriately adjusted in such equitable and proportionate amount as determined by the Administrator.  No fractional Share shall be issued under the Agreement resulting from any such adjustment but the Administrator in its sole discretion may make a cash payment in lieu of a fractional Share.

(b)           Acquisitions.  In the event of a merger or consolidation of the Company with another corporation or entity, or a sale or disposition by the Company of all or substantially all of its assets, the Administrator shall, in its sole discretion, have authority to provide for (i) waiver in whole or in part of any remaining restrictions or vesting requirements in connection with the Option granted hereunder, (ii) the conversion of the outstanding Option into cash, (iii) the conversion of the Option into the right to receive securities, including options, of another person or entity upon such terms and conditions as are determined by the Administrator in its sole discretion and/or (iv) the lapse of the Option after notice in writing has been given that the Option may be exercised within a set period from the date of such notice and that any Option not exercised within such period shall lapse.

(c)           Binding Effect.  Without limiting the generality of what is provided in Section 1 hereof and for avoidance of doubt, any adjustment, waiver, conversion or other action taken by the Administrator under this Section 9 shall be conclusive and binding on Employee and the Company and any respective successors and assigns.

10.  Notices.  Any notice to be given to the Company under the terms of this Agreement shall be given in writing to the Company at its offices in Menomonee Falls, Wisconsin.  Any notice to be given to Employee may be addressed to Employee’s address as it appears on the payroll records of the Company or any subsidiary thereof.  Any such notice shall be deemed to have been duly given if and when actually received by the party to whom it is addressed, as evidenced by a written receipt to that effect.

11.  Taxes.  The Company may require payment or reimbursement of or may withhold any minimum tax that it believes is required as a result of the grant or exercise of the Option, and the Company may defer making delivery with respect to Shares or cash payable hereunder or otherwise until arrangements satisfactory to the Company have been made with respect to such withholding obligations.

12.  Rights of Employee.  The Option, and any payments or other benefits received by Employee under the Option, is discretionary and shall not be deemed a part of Employee’s regular, recurring compensation for any purpose, including without limitation for purposes of termination, indemnity, or severance pay law of any country and shall not be included in, nor have any effect on, the determination of benefits under any other employee benefit plan, contract or similar arrangement provided to Employee unless expressly so provided by such other plan, contract or arrangement, or unless the Administrator expressly determines otherwise.

13.  Amendment.  The Administrator may amend the Agreement; provided, however, that Employee’s consent to such action shall be required unless the Administrator determines that the action, taking into account any related action, would not materially and adversely affect Employee.  However, notwithstanding any other provision of the Agreement, the Administrator may not adjust or amend the exercise price of the Option, whether through amendment, cancellation and replacement grants, or any other means, except in accordance with Section 9 hereof.

14.  No Right To Employment.  The Agreement shall not confer upon Employee any right to continue employment with the Company or a subsidiary, nor shall it interfere in any way with the right of the Company or such subsidiary to terminate Employee’s employment any time.

15.  Severability.  In the event any provision of this Agreement shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Agreement, and this Agreement shall be construed and enforced as if the illegal or invalid provision had not been included.

16.  Governing Law. This Agreement and all actions taken hereunder shall be governed by, and construed in accordance with, the laws of the State of Wisconsin, applied without regard to the laws of any other jurisdiction that otherwise would govern under conflict of law principles.

IN WITNESS WHEREOF, the Company has caused these presents to be executed as of the date and year first above written, which is the date of the granting of the Option evidenced hereby.

ZBB ENERGY CORPORATION
By:	________________________________________
	Name:
	Title:

The undersigned Employee hereby accepts the foregoing Option and agrees to the several terms and conditions hereof.

______________________________________________

Employee

EX-10.9

Exhibit 10.9

REGISTRATION RIGHTS AGREEMENT

THIS REGISTRATION RIGHTS AGREEMENT (this “Agreement”) dated as of December 13, 2011 is entered into by and among ZBB Energy Corporation, a Wisconsin corporation (the “Company”), and the stockholders of the Company signatory hereto (each a “Stockholder” and collectively, “Stockholders”).

WHEREAS, this Agreement is entered into in connection with the issuance of shares of the Company’s common stock (the “Common Stock”) to Stockholders as contemplated by that certain Stock Purchase Agreement dated as of the date hereof (the “Stock Purchase Agreement”);

NOW, THEREFORE, in consideration of the premises and the mutual promises herein contained, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows:

1.   Definitions.

Holder:  Any Stockholder so long as such Stockholder owns any Registrable Securities and any of such Stockholder’s respective successors and assigns who acquire rights in accordance with this Agreement with respect to Registrable Securities, directly or indirectly from such Stockholder, or from such other successor and assign, and who agree in writing, in form and substance reasonably satisfactory to the Company, to be bound hereby.

Registration Expenses:  Any and all reasonable expenses actually incurred incident to performance of or compliance with this Agreement other than underwriting and brokerage discounts and commissions, all fees and expenses of counsel for any Holder or Holder, transfer taxes and other expenses, if any, relating to the sale or disposition of such Holder’s Registrable Securities pursuant to a Registration Statement.

Registrable Securities:  All or part of the shares of Common Stock issued to Stockholders pursuant to the Stock Purchase Agreement; provided, however, that shares of Common Stock shall not be Registrable Securities if and to the extent that (i) a Registration Statement with respect to such Common Stock shall have been declared effective under the Securities Act and such shares of Common Stock shall have been disposed of in accordance with such Registration Statement, (ii) such shares of Common Stock may be distributed to the public in accordance with Rule 144 (or any successor provision) promulgated under the Securities Act, or (iii) such shares of Common Stock shall have been otherwise transferred and new shares of Common Stock, which do not bear restrictions against further transfer, shall have been issued by the Company.

Registration Statement:  Any registration statement of the Company filed with the SEC which applies to any of the Registrable Securities (in whole or in part), including the prospectus included therein, all amendments and any supplements to such Registration Statement, including post-effective amendments, all exhibits and all material incorporated by reference in such Registration Statement.

SEC:  The United States Securities and Exchange Commission.

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Securities Act:  The Securities Act of 1933, as amended from time to time, or any successor statute, and the rules and regulations of the SEC thereunder, all as in effect at the time.

2.   Registration under the Securities Act:

(a)   Demand Registration.  At any time during the two year period commencing upon the date hereof, the holders of at least fifty percent (50%) of the Registrable Securities may notify the Company that they intend to offer or cause to be offered for public sale all or any portion of their Registrable Securities in a registered public offering on Form S-3.  Such requests shall be in writing and shall state the number of shares of Registrable Securities to be disposed of and the intended method of disposition of such shares by such holder or holders.  The Company will use its best efforts to expeditiously effect the registration of all Registrable Securities whose holders request participation in such registration under the Securities Act, but only to the extent provided for in this Agreement; provided, however, that the Company shall not be required to effect registration pursuant to a request under this Section 2(a) more than once.

(b)   Right to Piggyback.  Subject to Sections 2(d) hereof, if at any time during the two year period commencing upon the date hereof, the Company proposes to file a Registration Statement under the Securities Act with respect to any offering of shares of Common Stock by the Company for its own account and/or on behalf of any of its security holders (including a registration pursuant to Section 2(a) above) and the registration form to be used may be used for the registration of Registrable Securities (other than (i) a registration on Form S-8 or S-4 or any successor form, (ii) a registration relating to a transaction subject to Rule 145 under the Securities Act, (iii) any registration of securities as it relates to an offering and sale to management of the Company pursuant to any employee stock plan or other employee benefit plan arrangement or (iv) any registration pursuant to the Amended and Restated Securities Purchase Agreement dated August 30, 2010 between the Company and Socius CG II, Ltd.) then, as soon as practicable (but in no event less than twenty (20) days prior to the proposed date of filing such Registration Statement), the Company shall give written notice of such proposed filing to the Holders, and such notice shall offer the Holders the opportunity to register such number of Registrable Securities as the Holders may request (a “Registration Request“).  Subject to Section 2(d), the Company shall include in such Registration Statement all Registrable Securities requested within fifteen (15) days after the receipt of any such notice (which request shall specify the Registrable Securities intended to be disposed of by the Holders) to be included in the registration for such offering pursuant to a Registration Request; provided, however, that if, at any time after giving written notice of its intention to register shares of Common Stock and prior to the effective date of the Registration Statement filed in connection with such registration, the Company shall determine for any reason not to register or to delay registration of such shares of Common Stock, the Company may, at its election, give written notice of such determination to the Holders of Registrable Securities and, thereupon, (i) in the case of a determination not to register, shall be relieved of its obligation to register any Registrable Securities in connection with such registration, and (ii) in the case of a determination to delay registering, shall be permitted to delay registering any Registrable Securities, for the same period as the delay in registering such shares of Common Stock.

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(c)   Expenses.  The Registration Expenses of the Holders of Registrable Securities will be paid by the Company in a Registration Request.  Underwriting or brokerage discounts and commissions, transfer taxes, if any, and any expenses of a Holder for counsel relating to the sale or disposition of such Holder’s Registrable Securities pursuant to such Registration Statement shall be borne by the Holder.

(d)   Underwriter’s Cutback.  Notwithstanding Section 2(b), if a Registration Request involves an underwritten offering being made on behalf of the Company, and the managing underwriter or underwriters advise the Company in writing that in their opinion the number of shares of Common Stock requested to be included in such registration exceeds the number which can be sold in such offering or would be reasonably likely to adversely affect the price or distribution of the shares of Common Stock offered in such offering or the timing thereof, then the shares of Common Stock to be included in such registration shall be the number of shares of Common Stock, adjusted on a pro rata basis based on the number of shares requested to be registered, that, in the opinion of such underwriter or underwriters, can be sold without an adverse effect on the price, timing or distribution of the shares of Common Stock to be included.

3.   Registration Procedures.  In connection with the Company’s obligations under Section 2 hereof, the Company shall use it best efforts to effect or cause to be effected the registration of the Registrable Securities under the Securities Act to permit offers and sales in accordance with the intended method or methods of distribution thereof.  In addition, and as a condition to Stockholder’s right pursuant to Section 2(b), Stockholder shall execute such underwriting agreement and otherwise sell the Registrable Securities on the same terms as applicable to the offering of shares pursuant to such registration generally.

4.   Indemnification.

(a)   The Company agrees to indemnify, to the extent permitted by law, each Holder of Registrable Securities, its officers and directors and each person or entity who controls such Holder (within the meaning of the Securities Act) against all losses, claims, damages, liabilities and expenses caused by any untrue statement of material fact contained in any registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are caused by or contained in any information furnished in writing to the Company by such Holder expressly for use therein or by such Holder’s failure to deliver a copy of the registration statement or prospectus or any amendments or supplements thereto after the Company has furnished such holder with same.

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(b)   In connection with any registration statement in which a Holder of Registrable Securities is participating, each such Holder will furnish to the Company in writing such information and affidavits as the Company reasonably requests for use in connection with any such registration statement or prospectus and, to the extent permitted by law, will indemnify the Company, its directors and officers and each person or entity who controls the Company (within the meaning of the Securities Act) against any losses, claims, damages, liabilities and expenses resulting from any untrue statement of material fact contained in the registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or omission is contained in any information or affidavit so furnished in writing by such Holder; provided that the obligation to indemnify will be several, not joint and several, among such Holder of Registrable Securities and the liability of each such Holder of Registrable Securities will be in proportion to and limited to the net amount received by such Holder from the sale of Registrable Securities pursuant to such registration statement.

(c)   Any person or entity entitled to indemnification hereunder will (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification; provided, however, that failure to give such notice will not prejudice such person’s or entity’s right to indemnification from the indemnifying party, except as to any losses suffered by such person or entity which are attributable to such person’s or entity’s failure to promptly give such notice to such indemnifying party and (ii) unless in such indemnified party’s reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party.  The indemnifying party will not be subject to any liability for any settlement made by the indemnified party without its consent (but such consent will not be unreasonably withheld).  An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim.

(d)   The indemnification provided for under this Agreement will remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director or controlling person or entity of such indemnified party and will survive the transfer of securities and the termination of this Agreement.  The Company also agrees to make such provisions as are reasonably requested by any indemnified party for contribution to such party in the event the Company’s indemnification is unavailable for any reason.

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5.   Miscellaneous.

(a)   Amendments and Waivers.  The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the Company has obtained the written consent of Holder holding at least two-thirds of the Registrable Securities to such amendment, modification, or supplement or waiver or consents to such departures.

(b)   Notices.  All notices and other communications provided for or permitted under this Agreement shall be in writing and given in accordance with the notice provision in the Stock Purchase Agreement.

(c)   Governing Law.  This Agreement shall be governed by and construed in accordance with the internal laws of the State of Wisconsin.

(d)   Severability.  In the event that any one or more of the provisions contained herein, or the application, thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby.

(e)   Successors and Assigns.  All covenants and agreements in this Agreement by or on behalf of any of the parties hereto will bind and inure to the benefit of the respective permitted successors and assigns of the parties hereto whether so expressed or not.  The registration rights of the Holder under this Agreement may be transferred to any transferee who lawfully acquires Registrable Securities; provided, that the Company is given written notice by the Holder at the time of such transfer stating the name and address of the transferee and identifying the securities with respect to which the rights under this Agreement are being assigned; and provided, further, that such transferee is a person who is reasonably satisfactory to the Company and executes an agreement in writing agreeing to be bound by the provisions of this Agreement.

[SIGNATURE PAGE FOLLOWS]

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IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written.

 ZBB ENERGY CORPORATION

 By: 

        Eric C. Apfelbach

        President and Chief Executive Officer

[Registration Rights Agreement]

Signature Page to Registration Rights Agreement

 Purchaser

 Signature of Purchaser

 Title, if Purchaser is an entity

 Address:

EX-31.1

CERTIFICATION   Exhibit 31.1

I, Eric C. Apfelbach, Chief Executive Officer of ZBB Energy Corporation, certify that:

1. I have reviewed this quarterly report on Form 10-Q of ZBB Energy Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s  internal control over financial reporting that occurred during the registrant’s  most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

February 9, 2012	/s/  Eric C. Apfelbach
	Eric C. Apfelbach
	(Principal Executive Officer)

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EX-31.2

CERTIFICATION  Exhibit 31.2

I, Will Hogoboom, Chief Financial Officer of ZBB Energy Corporation, certify that:

1. I have reviewed this quarterly report on Form 10-Q of ZBB Energy Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s  disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

February 9, 2012	/s/ Will Hogoboom
	Will Hogoboom
	(Principal Financial Officer)

41

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of ZBB Energy Corporation (the “Company”) on Form 10-Q for the period ended December 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Eric C. Apfelbach, Chief Executive Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, to my knowledge, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

A signed original of this written statement required by Section 906 has been provided to ZBB Energy Corporation and will be retained by ZBB Energy Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

February 9, 2012	/s/  Eric C. Apfelbach
	Eric C. Apfelbach
	(Principal Executive Officer)

42

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of ZBB Energy Corporation (the “Company”) on Form 10-Q for the period ended December 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Will Hogoboom, Chief Financial Officer of the Company, certify, pursuant to section Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, to my knowledge, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

A signed original of this written statement required by Section 906 has been provided to ZBB Energy Corporation and will be retained by ZBB Energy Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

February 9, 2012	/s/  Will Hogoboom
	Will Hogoboom
	(Principal Financial Officer)

43

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CHINA JOINT VENTURE

6 Months Ended

Dec. 31, 2011

Notes to Financial Statements

CHINA JOINT VENTURE

NOTE 3 – CHINA JOINT VENTURE

On August 30, 2011, the Company entered into agreements providing for establishment of a joint venture to develop, produce, sell, distribute and service advanced storage batteries and power electronics in China (the “Joint Venture”).  Joint venture partners include PowerSav, Inc. (“Powersav”), AnHui Xinlong Electrical Co. and Wuhu Huarui Power Transmission & Transformation Engineering Co.  The Joint Venture was established upon receipt of certain governmental approvals from China which were received in November 2011.

The Joint Venture operates through a jointly-owned Chinese company located in Wuhu City, Anhui Province named Anhui Meineng Store Energy Co., Ltd. (“AHMN”).  AHMN intends to initially assemble and ultimately manufacture 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 connection with the Joint Venture, on August 30, 2011 the Company and certain of its subsidiaries entered into the following agreements:

● Joint Venture Agreement of Anhui Meineng Store Energy Co., Ltd. (the “China JV Agreement”) by and between ZBB PowerSav Holdings Limited, a Hong Kong limited liability company (“ Holdco”), and Anhui Xinrui Investment Co., Ltd, a Chinese limited liability company; and

● Limited Liability Company Agreement of ZBB PowerSav Holdings Limited by and between ZBB Cayman Corporation and PowerSav, Inc. (the “Holdco Agreement”).

In connection with the Joint Venture, upon establishment of AHMN, the Company and certain of its subsidiaries entered into the following agreements:

● Management Services Agreement by and between AHMN and Holdco (the “Management Services Agreement”);

● License Agreement by and between Holdco and AHMN (the “License Agreement”); and

● Research and Development Agreement by and between the Company and AHMN (the “Research and Development Agreement”).

Pursuant to the China JV Agreement, it is anticipated that AHMN  will be capitalized with approximately $13.6 million of equity capital.  The Company’s only capital contributions to the Joint Venture will be a contribution of technology to AHMN via the License Agreement and $200,000 in cash.  The Company’s indirect interest in AHMN equals approximately 33%.

The Company’s investment in AHMN will be made through Holdco, a holding company formed with PowerSav.  Pursuant to the Holdco Agreement, the Company agreed to contribute to Holdco technology via a license agreement with an agreed upon value of approximately $4.4 million and $200,000 in cash in exchange for a 60% equity interest and PowerSav agreed to contribute to Holdco $3.3 million in cash in exchange for a 40% equity interest.  The initial capital contributions (consisting of the Company’s technology contribution and one half of required cash contributions) were made in December 2011. 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.  AHMN had a net loss from continuing operations and a net loss of $171,949 of which $58,710 is attributable to the investee on the Company’s condensed consolidated statements of operations (unaudited).

The Company has the right to appoint a majority of the members of the Board of Directors of Hong Kong Holdco and Hong Kong Holdco has the right to appoint a majority of the members of the Board of Directors of AHMN.

Pursuant to the Management Services Agreement Holdco will provide certain management services to the AHMN in exchange for a management services fee equal to five percent of AHMN’s net sales for the first five years and three percent of AHMN’s net sales for the subsequent three years.

Pursuant to the License Agreement, Holdco granted to AHMN (1) an exclusive royalty-free license to manufacture and distribute the Company’s ZBB Enerstore™, Zinc Bromide flow battery, version three (v3) battery (50KW) and ZBB Enersection™, POWR PECC (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 the Research and Development Agreement, AHMN may request the Company to provide research and development services upon commercially reasonable terms and conditions.  AHMN would pay the Company’s fully-loaded costs and expense incurred in providing such services.

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BUSINESS ACQUISITION

6 Months Ended

Dec. 31, 2011

Notes to Financial Statements

BUSINESS ACQUISITION

NOTE 2 – BUSINESS ACQUISITION

On January 21, 2011 (“Closing Date”), the Company entered into an Asset Purchase Agreement under which the Company acquired substantially all of the net assets of Tier Electronics LLC (“Seller”) used in connection with the Seller’s business of developing, manufacturing, marketing and selling power electronics products for and to original equipment manufacturers in various industries.  The purchase price was comprised of (1) a $1.35 million promissory note issued by the Company, (2) 800,000 shares of the Company’s common stock, and (3) payment of approximately $245,000 of the Seller’s obligations.  The promissory note is in the principal amount of $1,350,000 and bears interest at eight percent.  The principal balance of the note is payable in three equal installments of $450,000 on the first, second and third anniversaries of the Closing Date.  Accrued interest is payable monthly.  If the federal capital gains tax rate exceeds 15% and or the State of Wisconsin capital gains tax rate exceeds 5.425% at any time prior to the payment in full of the unpaid principal balance and accrued interest on the promissory note, then the principal amount of the promissory note (retroactive to January 21, 2011) shall be increased by an amount equal to the product of (a) the aggregate amount of federal and state capital gain realized by the Seller or Seller’s sole member, as applicable, in connection with the acquisition, multiplied by (b) the difference between (i) the combined federal and State of Wisconsin capital gains tax rate as of the date of calculation, minus (ii) the combined federal and State of Wisconsin capital gains tax rate of 20.425% as of January 21, 2011.  Any adjustment to the principal amount of the promissory note shall be effected by increasing the amount of the last payment due under the promissory note without affecting the next regularly scheduled payment(s) under the promissory note.  The following table reconciles the purchase price to the cash consideration paid:

Total purchase price	$	2,515,071
Less debt and equity issued to Seller:
Note payable		(1,350,000	)
Common stock		(920,000	)
Total debt and equity issued to Seller		(2,270,000	)
Total cash paid		245,071
Less cash acquired		(19,149	)
Acquisition of business, net of cash acquired	$	225,922

The primary reason for the acquisition was to add a base of business so that the Company now offers a full range of energy storage, utilization, and management solutions that range from wind and solar converters to power quality, micro-grid systems, and hybrid electric drives for vehicles.

The Company accounted for the acquisition using the purchase method under U.S. GAAP.  The purchase method requires that assets acquired and liabilities assumed in a business combination be recognized at fair value.  The Company finalized the purchase price allocation during the three month period ended December 31, 2011.  A summary of the allocation of the assets acquired and the liabilities assumed in connection with the acquisition based on their estimated fair values is as follows:

Cash and cash equivalents	$	19,149
Accounts receivable		225,081
Inventories		772,932
Property and equipment		4,500
Other intangible assets		2,198,097
Accounts payable		(141,003	)
Accrued expenses		(203,823	)
Deferred revenue		(359,862	)
Net assets acquired	$	2,515,071

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 fair value of the assets and liabilities has been determined by management, with the assistance of an independent valuation firm, and are based on significant inputs that are generally not observable in the market (level 3 measurements).  Key assumptions that were used by management are as follows:

Financial Assets and Liabilities

Accounts receivable, accounts payable and accrued expenses, were valued at stated value, which approximates fair value.

Inventories were valued at fair value based on estimated net realizable value less costs to complete and sales costs.  Deferred revenues were valued at fair value based on the amounts that will be applied as customer credits to future shipments.

Property and Equipment

Property and equipment were valued based on the estimated market value of similar equipment.

Other Intangible Assets

The Company acquired certain identifiable intangible assets as part of the transaction which included:  $310,888 in a non-compete agreement, $288,087 in a license agreement, and $1,599,122 in a trade secrets agreement.  The fair values of these intangibles were estimated based upon an income approach methodology. Critical inputs into the valuation model for these intangibles include estimations of expected revenue and attrition rates, expected operating margins and capital requirements.  The other intangible assets were assigned an estimated useful life of three years.

Acquisition Related Expenses

Included in the consolidated statement of operations for the period from January 21, 2011 (date of acquisition) to June 30, 2011 were transaction expenses aggregating approximately $150,000 for advisory and legal costs incurred in connection with the business acquisition.

Tier Electronics LLC operates as a wholly owned subsidiary of the Company.  Tier Electronics LLC leases its facility from the former owner of the Seller under a lease agreement expiring December 31, 2014.  The first year rental is $84,000 per annum and is subject to an annual CPI adjustment.  The Company is required to pay real estate taxes and other occupancy costs related to the facility.

In connection with this acquisition the Company awarded inducement options to purchase a total of 750,000 shares of the Company’s common stock at an exercise price of $1.15 to certain members of management of Tier Electronics, LLC.  The options vest as follows: (1) 420,000 will vest in three equal annual installments beginning on December 31, 2011 based on achievement of certain revenue targets and (2) 330,000 vest in three equal annual installments beginning on January 21, 2012.

Unaudited Pro Forma Information

The following unaudited pro forma financial information summarizes the results of operations for the period indicated as if the acquisition had been completed as of July 1, 2010.

These pro forma amounts do not purport to be indicative of the results that would have actually been obtained if the acquisition occurred as of July 1, 2010 or that may be obtained in the future.

	Unaudited						Unaudited
	Three months ended December 31,						Six Months Ended December 31,
	2011			2010			2011			2010
Revenues	$	440,921		$	234,681		$	2,078,778		$	794,576
Loss from Operations		(2,765,336	)		(1,871,595	)		(4,461,818	)		(4,011,697	)
Net loss	$	(2,730,310	)	$	(1,945,464	)	$	(4,405,758	)		(4,144,573	)
Net Loss per share-
Basic and diluted	$	(0.08	)	$	(0.09	)	$	(0.14	)	$	(0.22	)
Weighted average shares-basic and diluted:
Basic		33,681,776			20,996,322			32,089,356			18,603,353
Diluted		33,681,776			20,996,322			32,089,356			18,603,353

Pro forma information primarily reflects adjustments relating to interest on the promissory note and the amortization of the intangible assets acquired in the acquisition.

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Condensed Consolidated Balance Sheets (USD $)	Dec. 31, 2011	Jun. 30, 2011
Assets
Cash and cash equivalents	$ 1,680,543	$ 2,910,595
Accounts receivable, net	361,238	171,622
Inventories	2,737,483	1,662,850
Prepaid and other current assets	144,358	56,462
Refundable income tax credit	117,190	164,640
Total current assets	5,040,812	4,966,169
Long-term assets:
Property, plant and equipment, net	5,725,411	4,766,871
Investment in investee company	1,582,017	0
Intangible assets, net	1,508,119	1,811,507
Goodwill	803,079	803,079
Total assets	14,659,438	12,347,626
Liabilities and Shareholders' Equity
Bank loans and notes payable	909,560	779,088
Accounts payable	1,865,752	961,221
Accrued expenses	471,830	695,273
Deferred revenues	1,836,998	1,528,482
Accrued compensation and benefits	120,862	289,996
Total current liabilities	5,205,002	4,254,060
Long-term liabilities:
Bank loans and notes payable	3,654,717	3,937,056
Total liabilities	8,859,719	8,191,116
Shareholders' equity
Series A preferred stock ($0.01 par value, $10,000 face value) 10,000,000 authorized, 575.1280 and 355.4678 issued, preference in liquidation of $6,133,947 and $3,715,470 as of December 31, 2011 and June 30, 2011, respectively	6,133,947	3,715,470
Common stock ($0.01 par value); 150,000,000 authorized 36,623,476 and 29,912,415 shares issued	359,324	299,124
Additional paid-in capital	65,268,044	60,777,286
Notes receivable - common stock	(6,124,890)	(3,707,799)
Treasury stock - 13,833 shares	(11,136)	(11,136)
Accumulated deficit	(59,749,441)	(55,343,683)
Accumulated other comprehensive loss	(1,584,961)	(1,572,752)
Total ZBB Energy Corporation Equity	4,290,887	4,156,510
Noncontrolling interest	1,508,832	0
Total equity	5,799,719	4,156,510
Total liabilities and shareholders' equity	$ 14,659,438	$ 12,347,626

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Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $)	6 Months Ended
	Dec. 31, 2011	Dec. 31, 2010
Cash flows from operating activities
Net loss	$ (4,442,988)	$ (3,872,575)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of property, plant and equipment	349,388	171,261
Amortization of intangible assets	380,388	0
Stock-based compensation	644,640	310,788
Equity in loss of investee company	58,710	0
Changes in assets and liabilities
Accounts receivable	(189,616)	6,879
Inventories	(1,151,633)	(69,854)
Prepaids and other current assets	(87,896)	(180,463)
Refundable income taxes	47,450	0
Accounts payable	904,531	143,363
Accrued compensation and benefits	(169,134)	(221,153)
Accrued expenses	(206,541)	(79,034)
Deferred revenues	308,516	214,511
Net cash used in operating activities	(3,554,185)	(3,576,277)
Cash flows from investing activities
Expenditures for property and equipment	(1,307,927)	(318,310)
Investment in investee company	(1,640,728)	0
Net cash used in investing activities	(2,948,655)	(318,310)
Cash flows from financing activities
Proceeds from bank loans and notes payable	0	1,300,000
Repayments of bank loans and notes payable	(151,867)	(219,501)
Proceeds from issuance of debenture notes payable	0	517,168
Proceeds from issuance of Series A preferred stock	2,197,240	490,000
Proceeds from issuance of Common Stock	1,887,398	1,174,187
Common stock issuance costs	(176,934)	0
Proceeds from noncontrolling interest	1,546,062	0
Net cash provided by financing activities	5,301,899	3,261,854
Effect of exchange rate changes on cash and cash equivalents	(29,111)	8,587
Net decrease in cash and cash equivalents	(1,230,052)	(624,146)
Cash and cash equivalents - beginning of period	2,910,595	1,235,635
Cash and cash equivalents - end of period	1,680,543	611,489
Cash paid for interest	105,451	26,749
Cash received for income tax credit	223,703	0
Supplemental schedule of non-cash investing and financing activities:
Conversion of debenture notes payable to Series A preferred stock	0	524,678
Issuance of common stock for discounted notes receivable	2,187,330	1,001,883
Issuance of common stock as consideration for equity issuance costs	0	683,634
Conversion of cash settled RSUs to stock settled RSUs	$ 0	$ 315,833
Issuance of warrants for purchase of property and equipment	0	11,834

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BUSINESS SEGMENT INFORMATION

6 Months Ended

Dec. 31, 2011

Notes to Financial Statements

BUSINESS SEGMENT INFORMATION

NOTE 16 – BUSINESS SEGMENT INFORMATION

The Company reports its financial results in two reportable business segments: ZBB Energy Storage and Power Electronic Systems and Tier Electronics Power Conversion Systems.

The ZBB Energy Storage and Power Electronics Systems business segment designs and manufactures advanced electrical power management platforms enabling the growing global need for distributed renewable energy, energy storage, energy efficiency, power quality, and grid modernization. The Company’s intelligent power management platforms integrate multiple renewable and conventional onsite generation sources with rechargeable zinc bromide flow batteries and other storage technologies to ensure optimal energy availability for on grid and off grid applications, while maximizing the use of renewable energy sources.  The Company solves a wide range of global electrical system challenges for diverse applications in commercial building, telecommunications, defense, utility and industrial markets.

The Tier Electronics Power Conversion Systems business segment designs and manufactures state of the art digital power converters for power quality, alternative energy, and military markets.  These power converters are designed to be fully programmable and feature DSP controls with very high levels of integration that reduce costs while increasing performance.

The operating results for the two business segments are as follows:

	Three months ended December 31,						Six months ended December 31,
	2011			2010			2011			2010
Revenues:
ZBB Energy Storage and Power Electronics Systems	$	277,618		$	234,681		$	1,689,368		$	234,681
Tier Electronics Power Conversion Systems		163,303			-			389,410			-
Total	$	440,921		$	234,681		$	2,078,778		$	234,681
	Three months ended December 31,						Six months ended December 31,
		2011			2010			2011			2010
Loss from Operations:
ZBB Energy Storage and Power Electronics Systems	$	(2,281,768	)	$	(1,794,398	)	$	(3,558,222	)	$	(3,798,482	)
Tier Electronics Power Conversion Systems		(483,568	)		-		$	(903,596	)		-
Total	$	(2,765,336	)	$	(1,794,398	)	$	(4,461,818	)	$	(3,798,482	)

The accounting policies of the business segments are the same as those for the consolidated Company.

Total assets for the two business segments are as follows:

	December 31, 2011		June 30, 2011
ZBB Energy Storage and Power Electronics Systems	$	11,510,497	$	10,161,151
Tier Electronics Power Conversion Systems		3,148,941		2,186,475
Total	$	14,659,438	$	12,347,626

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

6 Months Ended

Dec. 31, 2011

Notes to Financial Statements

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

ZBB Energy Corporation (“ZBB” or the “Company”) develops and manufactures distributed energy storage solutions based upon the Company’s proprietary zinc bromide rechargeable electrical energy storage technology and proprietary power electronics systems.  A developer and manufacturer of modular, scalable and environmentally friendly power systems (“ZBB Enersystem™”), ZBB Energy was founded in 1998 and is headquartered in Wisconsin, USA with offices also located in Perth, Western Australia. As described in Note 2 in January 2011 the Company acquired substantially all of the net assets of Tier Electronics LLC and as described in Note 3 in December 2011 the Company contributed assets to ZBB Powersav Holdings Limited which contributed assets to a joint venture in China.

The Company provides advanced electrical power management platforms targeted at the growing global need for distributed renewable energy, energy efficiency, power quality, and grid modernization.  The Company and its power electronics subsidiary, Tier Electronics LLC, have developed a portfolio of intelligent power management platforms that directly integrate multiple renewable and conventional onsite generation sources with rechargeable zinc bromide flow batteries and other storage technology. The Company also offers advanced systems to directly connect wind and solar equipment to the grid and systems that can form various levels of micro-grids.  Tier Electronics participates in the energy efficiency markets through its hybrid vehicle control systems, and power quality markets with its line of regulation solutions. Together, these platforms solve a wide range of electrical system challenges in global markets for utility, governmental, commercial, industrial and residential end customers.

The consolidated financial statements include the accounts of the Company and those of its wholly-owned subsidiaries, ZBB Technologies, Inc. and Tier Electronics LLC which operate manufacturing facilities in Menomonee Falls, Wisconsin, and ZBB Technologies, Ltd. which has its advanced engineering and development facility in Perth, Australia and its sixty percent owned subsidiary ZBB Powersav Holdings Limited located in Hong Kong which was formed in connection with the Company’s investment in the 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 (“GAAP”) for interim financial information 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 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 six month period ended December 31, 2011 are not necessarily indicative of the results that might be expected for the year ending June 30, 2012.

The condensed consolidated balance sheet at June 30, 2011 has been derived from audited financial statements at that date, but does not include all of the information and disclosures required by 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, 2011.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and have been prepared in accordance with GAAP. All significant intercompany accounts and transactions have been eliminated upon consolidation.

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 and Australia.  At times such balances may exceed insurable limits.  The Company has not experienced any losses in such accounts.

Accounts Receivable

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 $80,000, as of December 31, 2011 and June 30, 2011.

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or market and consist of raw materials, work in progress and finished goods held for resale.

Costs incurred in bringing each product to its present location and conditions are accounted for as follows:

●   Raw materials – purchased cost of direct material

●   Finished goods and work-in-progress – purchased cost of direct material plus direct labor plus a proportion of manufacturing overheads.

The Company evaluates the recoverability of its slow moving or obsolete inventories at least quarterly. The Company estimates the recoverable cost of such inventory by product type while considering factors such as its age, historic and current demand trends, the physical condition of the inventory as well as assumptions regarding future demand. The Company’s ability to recover its cost for slow moving or obsolete inventory can be affected by such factors as general market conditions, future customer demand and relationships with suppliers.

Property, Plant and Equipment

Land, building, equipment, computers and furniture and fixtures are recorded at cost.  Maintenance, repairs and betterments are charged to expense. 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 is:

	Estimated Useful Lives
Manufacturing equipment	3 - 7 years
Office equipment	3 - 7 years
Building and improvements	7 - 40 years

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 reflected within the Company’s 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 loss of investee company” in the Consolidated Statements of Operations. The Company’s carrying value in an equity method Investee company is reflected in the caption ‘‘Investment in investee company’’ in the Company’s 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 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 the amount of its share of losses not previously recognized.

Intangible Assets

Intangible assets generally result from business acquisitions.  The Company accounted for the January 21, 2011 acquisition of Tier Electronics LLC by assigning the purchase price to identifiable tangible and intangible assets and liabilities.  Assets acquired and liabilities assumed were recorded at their estimated fair values.  Intangible assets consist of a non-compete agreement, license agreement, and trade secrets.

Amortization is recorded for intangible assets with determinable lives. Intangible assets are amortized using the straight line method over the three year estimated useful lives of the respective assets.

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 each year 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 determined that it has two reporting units – ZBB Energy Storage and Power Electronics Systems, and Tier Electronics Power Conversion Systems.

Testing for the impairment of goodwill involves a two-step process. The first step of the impairment test requires the comparing of a reporting units 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.  Based on this method, the Company determined fair value as evidenced by market capitalization, and concluded that there was no need for an impairment charge as of December 31, 2011 and June 30, 2011.

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.  Management has determined that there were $0 and $219,213 long-lived assets impaired as of December 31, 2011 and June 30, 2011, respectively (see Note 6).

Warranty Obligations

The Company typically warrants its products for twelve months after installation or eighteen months after date of shipment, whichever first occurs. Warranty obligations are 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.

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.

During the year ended June 30, 2010, battery stack manufacturing issues were discovered as a result of an internal test failure.  As a result, the Company has implemented several manufacturing process changes to eliminate the potential for future failures and has adjusted its warranty obligations accordingly.  We will adjust our warranty rates in future periods as these processes are implemented and tested.

As of December 31, 2011 and June 30, 2011, included in the Company’s accrued expenses were $122,803 and $413,203, respectively, related to warranty obligations.  Such amounts are included in accrued expenses in the accompanying consolidated balance sheets.

The following is a summary of accrued warranty activity:

	Six Months and Year Ended
	December 31, 2011			June 30, 2011
Beginning balance	$	413,203		$	520,000
Accruals for warranties during the period		—			176,662
Settlements during the perioid		(50,400	)		(283,459	)
Adjustments relating to preexisting warranties		(240,000	)		—
Ending balance	$	122,803		$	413,203

Revenue Recognition

Revenues are recognized when persuasive evidence of a contractual arrangement exits, 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.

For sales arrangements containing multiple elements (products or services), revenue relating to undelivered elements is deferred at the estimated fair value until delivery of the deferred elements. 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. If the arrangement does not meet all criteria above, the entire amount of the transaction is deferred until all elements are delivered. Revenue from time and materials based service arrangements is recognized as the service is performed.

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.

The Company charges shipping and handling fees when products are shipped or delivered to a customer, and includes such amounts in net revenues. The Company reports its revenues net of estimated returns and allowances.

Revenues from government funded research and development contracts are recognized proportionally as costs are incurred and compared to the estimated total research and development costs for each contract. In many cases, the Company is reimbursed only a portion of the costs incurred or to be incurred on the contract. Government funded research and development contracts are generally multi-year, cost-reimbursement and/or cost-share type contracts. The Company is reimbursed for reasonable and allocable costs up to the reimbursement limits set by the contract.

Total revenues of $440,921 and $2,078,778 were recognized for the three and six months ended December 31, 2011, respectively, and were comprised of one significant customer (81% of total revenues).    Total revenues of $234,681 were recognized for both the three and six months ended December 31, 2010, and were comprised of two significant customers (100% of total revenues). The Company had one significant customer with an outstanding accounts receivable balance of $226,702 (82% of accounts receivable) and $171,622 (100% of accounts receivable) at December 31, 2011 and June 30, 2011, respectively.

Engineering and Development Revenues

On April 8, 2011, the Company entered into a Collaboration Agreement (the “Collaboration Agreement”) with Honam Petrochemical Corporation (“Honam”), a division of LOTTE Petrochemical, pursuant to which the Company agreed with Honam to collaborate on the further technical development of the Company’s third generation Zinc Bromide flow battery module (the “Version 3 Battery Module”).  Pursuant to the Collaboration Agreement, Honam is required to pay us a total of $3,000,000 dollars as follows:  (1) $1,000,000 within 10 days following the execution of the Collaboration Agreement (subsequently received on April 9, 2011); (2) $500,000 by June 30, 2011 (subsequently received on June 30, 2011); (3) $1,200,000 by October 10, 2011 (subsequently received on October 10, 2011) and (4) $300,000 within 10 days after a single V3 Battery Module test station  is set up at Honam’s research and development center.  The Company has recognized $2,300,000 as revenue as of December 31, 2011 based on performance milestones achieved and deferred the balance of $400,000 of the $1,000,000 upfront payment which is being recognized as certain activities are performed by the Company over the estimated 15 month performance period.  The unamortized balance of deferred revenue will be recognized over the estimated remaining performance period (6 months).  Pursuant to the Collaboration Agreement, the parties are required to negotiate a license agreement under which upon the completion of the collaboration project and the receipt by the Company of all payments due under the Collaboration Agreement, the Company shall grant to Honam: (1) a fully paid-up, exclusive and royalty-free license to sell and manufacture the Version 3 Battery Module in Korea and (2) non-exclusive rights to sell the Version 3 Battery Module in Japan, Thailand, Taiwan, Malaysia, Vietnam and Singapore.  In connection with such non-exclusive rights, Honam will be required to pay a royalty to the Company.

Included in engineering and development revenues were $200,000 and $1,600,000 respectively, for the three and six months ended December 31, 2011 related to the Collaboration Agreement.  Engineering and development costs related to the collaboration agreement totaled $0 and $481,107 for the three and six months ended December 31, 2011.  The financial statements for the three and six months ended December 31, 2010 did not include engineering and development revenue and costs related to the Collaboration Agreement.

On June 29, 2007, ZBB Technologies Ltd (“ZBB Technologies”), an Australian subsidiary of the Company, and the Commonwealth of Australia (the “Commonwealth”) represented by and acting through the Department of Environment and Water Resources (the “Department”), entered into an agreement for project funding under the Advanced Electricity Storage Technologies (“AEST”) program (the “AEST agreement”) whereby the Department agreed to provide funding to ZBB Technologies for the development of an energy storage system to be used to demonstrate the storage and supply of renewable energy generated from photovoltaic solar panels and wind turbines already operational at the Commonwealth Scientific and Industrial Research Organization’s (“CSIRO”) Newcastle Energy Centre in New South Wales, Australia.

The AEST agreement provided for a three year term under which the Commonwealth provided $2.6 million in project funding over several periods, totaling $1.35 million in year one, $1.01 million in year two and $0.24 million in year three, as certain development progress “milestones” were met by ZBB Technologies to the satisfaction of the Commonwealth.

The Company owns any assets, including battery storage systems, acquired with the funding from the contract.  The Company granted the government of Australia a free, non-exclusive license to intellectual property created in the project for their own internal use.

The Company fulfilled its obligations under the AEST agreement and received a final payment of $184,939 in December 2010 which was recognized as engineering and development revenues during the three months ended December 31, 2010.

As of December 31, 2011 and June 30, 2011, the Company had no unbilled amounts from engineering and development contracts. The Company received $437,408 and $971,949 in customer payments from engineering and development contract revenue,  representing deposits in advance of performance of the allowable work, as of December 31, 2011 and June 30, 2011, respectively.

Advanced Engineering and Development Expenses

The Company expenses advanced engineering and development costs as incurred. These costs consist primarily of labor, overhead, and materials to build prototype units, materials for testing, develop manufacturing processes and 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 consolidated statements of operations as a “cost of engineering and development revenues.”

Stock-Based Compensation

The Company measures all “Share-Based Payments", including grants of stock options, restricted shares and restricted stock units, to be recognized in its consolidated statement of operations based on their fair values on the grant date, 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 recognition of 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 primarily with restricted stock units (“RSUs”) rather than cash.  The RSUs were classified as liability awards as of June 30, 2010 because the RSUs were to be paid in cash upon vesting. On November 10, 2010, the June 30, 2010 RSUs were converted to stock based RSUs and were credited to additional paid-in capital. The grant date fair value of the restricted stock unit awards was determined using the closing stock price of the Company’s common stock on the day prior to the date of the grant, with the compensation expense amortized over the vesting period of restricted stock unit awards, net of estimated forfeitures.

The Company only recognizes expense to its statements of operations 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 Note 10.

Income Taxes

The Company records deferred income taxes in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 740, “Accounting for Income Taxes.” This ASC 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. The Company establishes a valuation allowance when necessary to reduce deferred income tax assets to the amount expected to be realized.  There were no net deferred income tax assets recorded as of December 31, 2011 and June 30, 2011.

The Company applies a more-likely-than-not recognition threshold for all tax uncertainties as required under 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, 2008 through June 30, 2011 and the Company’s Wisconsin and Australian income tax returns for the years ended June 30, 2007 through June 30, 2011 are subject to examination by taxing authorities.

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 accumulated in Accumulated Other Comprehensive Loss as a separate component of Equity in the consolidated balance sheets. No gain or loss on translation is included in the net loss.

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.  For the six months ended December 31, 2011 and December 31, 2010 there were 7,711,897 and 5,547,719 of underlying options, restricted stock units and warrants that are excluded, respectively.

Concentrations of Credit Risk and Fair Value

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable.

The Company maintains significant cash deposits primarily with three financial institutions, which at times may exceed insured limits. The Company has not previously experienced any losses on such deposits. Additionally, the Company performs periodic evaluations of the relative credit rating of these institutions as part of its investment strategy.

Concentrations of credit risk with respect to accounts receivable are limited due to accelerated payment terms in current customer contracts and creditworthiness of the current customer base.

The carrying amounts of cash and cash equivalents, accounts receivable, other current assets, accounts payable and accrued expenses approximate fair value due to the short-term nature of these instruments. The carrying value of bank loans and notes payable approximate fair value based on their terms which reflect market conditions existing as of December 31, 2011 and June 30, 2011.

Comprehensive income (loss)

The Company reports its comprehensive income (loss) in accordance with the FASB ASC topic 220 “Comprehensive Income”, which requires presentation of the components of comprehensive earnings. Comprehensive income (loss) consists of net income (loss) for the period plus or minus any net currency translation adjustments applicable for three and six months ended December 31, 2011 and December 31, 2010 is presented as follows:

	Three months ended December 31,						Six months ended December 31,
	2011			2010			2011			2010
Net loss	$	(2,767,540	)	$	(1,838,274	)	$	(4,442,988	)	$	(3,872,575	)
Net translation adjustment		10,297			(4,229	)		(12,209	)		(23,668	)
Comprehensive loss	$	(2,757,243	)	$	(1,842,503	)	$	(4,455,197	)	$	(3,896,243	)

Use of Estimates

The preparation of financial statements in conformity with U.S. 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 consolidated financial statements include those related to:

●   the timing of revenue recognition;

●   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 goodwill and other intangible assets;

●   contract costs and reserves;

●   warranty obligations;

●   income tax valuation allowances;

●   stock-based compensation; and

●   fair values of assets acquired and liabilities assumed in a business combination.

Reclassifications

Certain amounts previously reported have been reclassified to conform to the current presentation.

Recent Accounting Pronouncements

In September 2011, the FASB issued an update to ASC 350, Intangibles — Goodwill and Other. This ASU amends the guidance in ASC 350-20 on testing for goodwill impairment. The revised guidance allows entities testing for goodwill impairment to have the option of performing a qualitative assessment before calculating the fair value of the reporting unit. The ASU does not change how goodwill is calculated or assigned to reporting units, nor does it revise the requirement to test annually for impairment. The ASU is limited to goodwill and does not amend the annual requirement for testing other indefinite-lived intangible assets for impairment. The ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We will adopt this ASU for our 2012 goodwill impairment testing. We do not expect this ASU to have a material impact, if any, on our consolidated condensed financial statements.

In June 2011, the Financial Accounting Standards Board (FASB) issued new accounting guidance related to the presentation of comprehensive income that eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Under this guidance, an entity can elect to present items of net income and other comprehensive income in one continuous statement or two consecutive statements. This guidance is effective for us beginning July 1, 2012. We do not believe the adoption of this guidance will have a material effect on our consolidated financial statements and related disclosures.

In May 2011, the FASB issued updated accounting guidance related to fair value measurements and disclosures that result in common fair value measurements and disclosures between U.S. GAAP and International Financial Reporting Standards. This guidance includes amendments that clarify the application of existing fair value measurements and disclosures, in addition to other amendments that change principles or requirements for fair value measurements or disclosures. This guidance is effective for us beginning January 1, 2012. We do not believe the adoption of this guidance will have a material effect on our consolidated financial statements and related disclosures.

XML

Condensed Consolidated Balance Sheets (Parenthetical) (USD $)	Dec. 31, 2011	Jun. 30, 2011
Statement of Financial Position [Abstract]
Preferred stock, par value	$ 0.01	$ 0.01
Preferred stock, face value	10,000	10,000
Preferred stock, authorized shares	10,000,000	10,000,000
Preferred stock, issued shares	575.1280	355.4678
Preferred stock, liquidation preference	$ 6,133,947	$ 3,715,470
Treasury stock, shares	13,833	13,833
Common stock, par value	$ 0.01	$ 0.01
Common stock, Authorized	150,000,000	150,000,000
Common stock, Issued	36,623,476	29,912,415

XML

NON RELATED PARTY WARRANTS

6 Months Ended

Dec. 31, 2011

Notes to Financial Statements

NON RELATED PARTY WARRANTS

NOTE 11 - NON RELATED PARTY WARRANTS

At December 31, 2011 there were outstanding warrants to purchase 40,000 common shares issued by the Company to an equipment supplier in January 2011 exercisable at $0.56 per share and which expire in January 2014.  The fair value of the warrants was $11,834 and is included in the cost of the equipment.

At December 31, 2011 there were outstanding warrants to purchase 1,121,875 common shares acquired by certain purchasers of Company shares in March 2010 exercisable at $1.04 per share and which expire in September 2015.

At December 31, 2011 there were outstanding warrants to purchase 358,333 common shares acquired by certain purchasers of Company shares in August 2009 exercisable at $1.33 per share and which expire in August 2015.

At December 31, 2011 there were outstanding warrants to purchase 50,000 shares acquired by Empire Financial Group, Ltd. as part of the underwriting compensation in connection with our United States public offering which are exercisable at $7.20 per share and which expire in June 2012.

At December 31, 2011 there are warrants to purchase 48,950 shares issued and outstanding to Strategic Growth International in connection with capital raising activities in 2007, with an expiration date of June 2012 and with an exercise price of $7.20.

Warrants to purchase 120,023 common shares acquired by Empire Financial Group, Ltd. in 2006 exercisable at $3.23 per share expired during September 2011.

The table below summarizes non-related party warrant balances:

	Number of Warrants			Weighted-Average Exercise Price Per Share
Balance at July 1, 2010		1,846,031		$	1.76
Warrants granted		3,067,797			1.24
Warrants expired		—			—
Warrants exercised		(3,027,797	)		(1.25	)
Balance at June 30, 2011		1,886,031			1.73
Warrants granted (See Note 12)		4,132,553			0.53
Warrants expired		(266,873	)		(3.56	)
Warrants exercised (See Note 12)		(4,132,553	)		(0.55	)
Balance at December 31, 2011		1,619,158		$	1.47

XML

Document and Entity Information (USD $)	6 Months Ended
	Dec. 31, 2011	Feb. 09, 2012
Document And Entity Information
Entity Registrant Name	ZBB ENERGY CORP
Entity Central Index Key	0001140310
Document Type	10-Q
Document Period End Date	Dec. 31, 2011
Amendment Flag	false
Current Fiscal Year End Date	--06-30
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Public Float		$ 21,268,046
Entity Common Stock, Shares Outstanding		41,055,079
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2012

XML

EQUITY

6 Months Ended

Dec. 31, 2011

Notes to Financial Statements

EQUITY

NOTE 12 – EQUITY

On August 30, 2010, the Company entered into an amended and restated securities purchase agreement (“Socius Agreement”) with Socius CG II, Ltd. (“Socius”). Pursuant to the Socius Agreement the Company has the right over a term of two years, subject to certain conditions, to require Socius to purchase up to $10 million of redeemable subordinated debentures and/or shares of redeemable Series A preferred stock in one or more tranches.  The debentures bear interest at an annual rate of 10% and the shares of Series A preferred stock accumulate dividends at the same rate.  Both the debentures and the shares of Series A preferred stock are redeemable at the Company’s election at any time after the one year anniversary of issuance.  Neither the debentures nor the Series A preferred shares are convertible into common stock.

On November 10, 2010, the Company’s Board of Directors approved a certificate of designation of preferences, rights and limitations to authorize shares of Series A preferred stock in accordance with the terms of the Socius Agreement.  Upon the authorization of Series A preferred stock and in accordance with the terms of the Socius Agreement, the $517,168 of outstanding debentures issued by the Company to Socius CG II, Ltd. on September 2, 2010, and $7,510 of accrued interest were exchanged into 52.468 shares of Series A preferred stock.  In addition, in accordance with the Socius Agreement, any future tranches under the Socius Agreement will involve shares of Series A preferred stock instead of debentures.

Under the Socius Agreement, in connection with each tranche Socius is obligated to purchase that number of shares of our common stock equal in value to 135% of the amount of the tranche at a per share price equal to the closing bid price of the common stock on the trading day preceding our delivery of the tranche notice.  Socius may pay for the shares it purchases at its option, in cash or a collateralized promissory note.  Any such promissory note will bear interest at 2.0% per year and is collateralized by securities owned by Socius with a fair market value equal to the principal amount of the promissory note. The entire principal balance and interest on the promissory note is due and payable on the later of the fourth anniversary of the date of the promissory note or when we have redeemed all the Series A preferred stock issued by us to Socius under the Socius Agreement, and may be applied by us toward the redemption of the shares of Series A preferred stock held by Socius.

Our ability to submit a tranche notice is subject to certain conditions including that: (1) a registration statement covering our sale of shares of common stock to Socius in connection with the tranche is effective and (2) the issuance of such shares would not result in Socius and its affiliates beneficially owning more than 9.99% of our common stock.

Under the terms of the Socius Agreement, the Company was obligated to pay Socius a commitment fee in the form of shares of common stock or cash, at the option of the Company, in the amount of $500,000 if it is paid in cash and $588,235 if it is paid in shares of common stock. Payment of the commitment fee occurred 50% at the closing of the first tranche and 50% at the closing of the second tranche.

On September 2, 2010 the Company delivered the first tranche notice under the Socius Agreement pursuant to which on September 20, 2010 Socius purchased $517,168 of debentures.  In connection with this tranche, (1) Socius purchased 1,163,629 shares of common stock for a total purchase price of $698,177 and at a per share purchase price of $0.60 and (2) the Company issued to Socius 490,196 shares of common stock in payment of the commitment fee payable in connection with the tranche. As consideration for the common stock it purchased, Socius issued a collateralized promissory note maturing, the later of September 2, 2014 or when the Series A preferred shares are redeemed by the Company.  Management expects to redeem the Series A preferred stock on September 20, 2014.  The promissory note was recorded at a discount of $183,922 determined by discounting the promissory note at a rate of 10%.  The promissory note is included in the stockholders equity section of the Company’s condensed consolidated balance sheets because the promissory note was received in exchange for the issuance of common stock.

On November 12, 2010 the Company delivered the second tranche notice under the Socius Agreement pursuant to which on November 29, 2010 Socius purchased $490,000 of Series A preferred stock.  In connection with this tranche, (1) Socius purchased 906,165 shares of common stock for a total purchase price of $661,500 and at a per share purchase price of $0.73 and (2) the Company issued to Socius 402,901 shares of common stock in payment of the commitment fee payable in connection with the tranche. As consideration for the common stock it purchased, Socius issued a collateralized promissory note maturing, the later of November 12, 2014 or when the Series A preferred shares are redeemed by the Company.  Management expects to redeem the Preferred Shares on November 29, 2014.  The promissory note was recorded at a discount of $173,872 determined by discounting the promissory note at a rate of 10%.  The promissory note is included in the stockholders equity section of the Company’s condensed consolidated balance sheets because the promissory note was received in exchange for the issuance of common stock.

On January 12, 2011 the Company delivered the third tranche notice under the Socius Agreement pursuant to which on January 27, 2011 Socius purchased from the Company $2,020,000 of Series A preferred stock.  In connection with the tranche, (1) Socius purchased 1,934,042 shares of common stock for a total purchase price of $2,727,000 and at a per share purchase price of $1.41. As consideration for the Common Stock Socius purchased, Socius issued a collateralized promissory note maturing, the later of January 12, 2015 or when the Series A preferred shares are redeemed by the Company.  Management expects to redeem the Preferred Shares on January 17, 2015. The promissory note was recorded at a discount of $716,777 determined by discounting the promissory note at a rate of 10%.  The promissory note is included in the stockholders equity section of the Company’s condensed consolidated balance sheets because the promissory note was received in exchange for the issuance of common stock.

On March 16, 2011 the Company delivered the fourth tranche notice under the Socius Agreement pursuant to which on March 31, 2011 Socius purchased from the Company $520,000 of Series A preferred stock.  In connection with the tranche, (1) Socius purchased 557,142 shares of common stock for a total purchase price of $702,000 and at a per share purchase price of $1.26. As consideration for the Common Stock Socius purchased, Socius issued a collateralized promissory note maturing, the later of March 16, 2015 or when the Series A preferred shares are redeemed by the Company.  Management expects to redeem the Preferred Shares on March 31, 2015. The promissory note was recorded at a discount of $184,461determined by discounting the promissory note at a rate of 10%.  The promissory note is included in the stockholders equity section of the Company’s condensed consolidated balance sheets because the promissory note was received in exchange for the issuance of common stock.

On September 8, 2011 the Company delivered the fifth and sixth tranche notices under the Socius Agreement pursuant to which on September  30, 2011 Socius purchased from the Company $1,447,240 of Series A preferred stock.  In connection with the tranches, Socius purchased 2,621,359 shares of common stock for a total purchase price of $1,953,775 and at an average per share purchase price of $0.75. As consideration for the Common Stock Socius purchased, Socius issued a collateralized promissory notes maturing, the later of September 8, 2015 or when the Series A preferred shares are redeemed by the Company.  Management expects to redeem the Preferred Shares on September 30, 2015. The promissory notes were recorded at a discount of $512,815 determined by discounting the promissory notes at a rate of 10%.  The promissory notes are included in the stockholders equity section of the Company’s condensed consolidated balance sheets because the promissory notes were received in exchange for the issuance of common stock.

On November 16, 2011 the Company delivered the seventh tranche notice under the Socius Agreement pursuant to which on December 2, 2011 Socius purchased from the Company $750,000 of Series A preferred stock.  In connection with the tranche, (1) Socius purchased 1,511,194 shares of common stock for a total purchase price of $1,012,500 and at a per share purchase price of $0.67. As consideration for the Common Stock Socius purchased, Socius issued a collateralized promissory note maturing, the later of November 16, 2015 or when the Series A preferred shares are redeemed by the Company.  Management expects to redeem the Preferred Shares on November 30, 2015. The promissory note was recorded at a discount of $266,130 determined by discounting the promissory note at a rate of 10%.  The promissory note is included in the stockholders equity section of the Company’s condensed consolidated balance sheets because the promissory note was received in exchange for the issuance of common stock.

The Company’s accounting for the 2% notes receivable – common stock is to accrue interest on the discounted notes receivable at 10% as a credit to additional paid in capital.  The Company’s accounting for the Series A preferred stock is to accrete dividends at 10% as a charge to additional paid in capital.

In the event of liquidation, dissolution or winding up (whether voluntary or involuntary) of the Company, the holders of shares of Series A preferred stock shall be entitled to be paid the full amount payable on such shares upon the liquidation, dissolution or winding up of the corporation fixed by the Board of Directors with respect to such shares, if any, before any amount shall be paid to the holders of the Common Stock.  The liquidation preference of the outstanding Series A preferred stock was $6,133,947 and $3,715,470 as of December 31, 2011 and June 30, 2011, respectively.  Redemption or liquidation may be paid by application of the Socius notes receivable.

On October 12, 2010, the Company entered into Stock Purchase Agreements with certain investors providing for the sale of a total of 3,329,467 shares of the Company’s common stock for an aggregate purchase price of $1,435,000 at a price per share of $0.431.  The closing took place on October 15, 2010.  The net proceeds to the Company after deducting $60,000 of offering costs, were $1,375,000.

On December 29, 2010 and January 3, 2011 the Company entered into Stock Purchase Agreements with certain investors providing for the issuance of a total of 2,103,532 shares of the Company’s common stock for an aggregate purchase price of $2,000,000 at a weighted average price per share of $0.95.  The closing took place on January 12, 2011.  The net proceeds to the Company, after deducting $57,000 of offering costs, were $1,943,000.

On June 14 and 15, 2011 we entered into Stock Purchase Agreements with certain investors providing for the issuance of a total of 3,049,463 shares of the Company’s common stock for an aggregate purchase price of $2,527,000 at a weighted average price per share of $0.83.  The closing took place on June 17, 2011.  The net proceeds to the Company, after deducting $153,000 of offering costs, were $2,374,000.

On December 13, 2011, the Company entered into Stock Purchase Agreements with a strategic investor previously known to the Company and certain Company officers and directors providing for the sale of a total of 1,167,340 shares of common stock for an aggregate purchase price of $875,505 at a price per share equal to $0.75 which was the closing price of the Company’s common stock on December 12, 2011.  On December 14, 2011, the Company entered into Stock Purchase Agreements with certain investors providing for the sale of a total of 1,425,000 shares of the Company’s common stock for an aggregate purchase price of $1,011,893 at a price per share of $0.7101 which was the closing price of the Company’s common stock on December 13, 2011.  The closing for both transactions took place on December 16, 2011.  The net proceeds to the Company after deducting $65,978 of offering costs were $1,821,420.

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Condensed Consolidated Statements of Operations (Unaudited) (USD $)	3 Months Ended		6 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2011	Dec. 31, 2010
Revenues
Product sales	$ 240,921	$ 49,742	$ 467,028	$ 49,742
Engineering and development	200,000	184,939	1,611,750	184,939
Total Revenues	440,921	234,681	2,078,778	234,681
Costs and Expenses
Cost of product sales	187,620	79,058	344,291	79,058
Cost of engineering and development	0	0	481,107	0
Advanced engineering and development	1,186,352	586,582	1,885,735	1,425,855
Selling, general, and administrative	1,421,690	1,278,261	3,099,687	2,356,989
Depreciation and amortization	410,595	85,178	729,776	171,261
Total Costs and Expenses	3,206,257	2,029,079	6,540,596	4,033,163
Loss from Operations	(2,765,336)	(1,794,398)	(4,461,818)	(3,798,482)
Other Income (Expense)
Equity in loss of investee company	(58,710)	0	(58,710)	0
Interest income	3,279	2,420	9,968	4,210
Interest expense	(58,823)	(46,869)	(118,491)	(78,876)
Other income	250	573	4,263	573
Total Other Income (Expense)	(114,004)	(43,876)	(162,970)	(74,093)
Loss before provision (benefit) for Income Taxes	(2,879,340)	(1,838,274)	(4,624,788)	(3,872,575)
Provision (benefit) for Income Taxes	(111,800)	0	(181,800)	0
Net Loss	(2,767,540)	(1,838,274)	(4,442,988)	(3,872,575)
Net loss attributable to noncontrolling interest	37,230	0	37,230	0
Net Loss Attributable to ZBB Energy Corporation	$ (2,730,310)	$ (1,838,274)	$ (4,405,758)	$ (3,872,575)
Net Loss per share - Basic and diluted	$ (0.08)	$ (0.09)	$ (0.14)	$ (0.22)
Weighted average shares-basic and diluted:
Basic	33,681,776	20,196,322	32,089,356	17,803,353
Diluted	33,681,776	20,196,322	32,089,356	17,803,353

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PROPERTY, PLANT & EQUIPMENT

6 Months Ended

Dec. 31, 2011

Notes to Financial Statements

PROPERTY, PLANT & EQUIPMENT

NOTE 6– PROPERTY, PLANT & EQUIPMENT

Property, plant, and equipment are comprised of the following as of December 31, 2011 and June 30, 2011:

	December 31, 2011			June 30, 2011
Land	$	217,000		$	217,000
Building and improvements		3,334,131			2,559,266
Manufacturing equipment		4,336,065			2,901,912
Office equipment		302,499			217,074
Construction in process		150,623			1,215,400
Total, at cost		8,340,318			7,110,652
Less, accumulated depreciation		(2,614,907	)		(2,343,781	)
Property, Plant & Equipment, Net	$	5,725,411		$	4,766,871

During the year ended June 30, 2011, manufacturing equipment previously used in production and development activities were identified as impaired or had reached the end of their respective useful lives due to changing product and manufacturing technologies.  Upon write-down the manufacturing equipment and accumulated depreciation accounts were adjusted accordingly and $219,213 was charged to operations during the years ended June 30, 2011.  The adjustments were reported as impairment and other equipment charges.  For the three and six months ended December 31, 2011 the Company has not identified any equipment as impaired or having reached the end of its respective life.

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INVENTORIES

6 Months Ended

Dec. 31, 2011

Notes to Financial Statements

INVENTORIES

NOTE 5 - INVENTORIES

Inventories are comprised of the following as of December 31, 2011 and June 30, 2011:

	December 31, 2011		June 30, 2011
Raw materials	$	1,737,214	$	1,146,720
Work in progress		1,000,269		439,130
Total	$	2,737,483	$	1,585,850

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SUBSEQUENT EVENTS

6 Months Ended

Dec. 31, 2011

Notes to Financial Statements

SUBSEQUENT EVENTS

NOTE 17 — SUBSEQUENT EVENTS

On January 31, 2012 and February 1, 2012 we entered into Stock Purchase Agreements with certain investors including certain members of the Company’s Board of Directors and management providing for the issuance of a total of 4,431,603 shares of the Company’s common stock for an aggregate purchase price of $3,165,000 at a weighted average price per share of $0.71.  The closing took place on February 7, 2012.  The net proceeds to the Company, after deducting approximately $270,000 of offering costs, were $2,895,000.

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COMMITMENTS

6 Months Ended

Dec. 31, 2011

Notes to Financial Statements

COMMITMENTS

NOTE 13 – COMMITMENTS

Leasing Activities

The Company leases its Australian research and development facility from a non-related Australian company under the terms of a lease that expired October 31, 2011.  The rental rate was $75,596 per annum (A$72,431) and was subject to an annual CPI adjustment. Rent expense was $23,017 and $43,210 for the three months and six months ended December 31, 2011, respectively, and $18,763 and $39,355 for the three and six months ended December 31, 2010, respectively.  The Company renewed the lease on its Australian research and development facility through October 31, 2016 at rental rate of $95,855 per annum (A$95,000) subject to an annual CPI adjustment.  The Company also leases a building from an officer of its subsidiary, Tier Electronics LLC, who is also a shareholder and director, under a lease agreement expiring December 31, 2014.  The first year rental is $84,000 per annum and is subject to an annual CPI adjustment.  The rent expense for the three  and six months ended December 31, 2011 was $21,000 and $42,000, respectively.  The Company is required to pay real estate taxes and other occupancy costs related to the facility.  The future payments required under the terms of the leases for fiscal periods subsequent to December 31, 2011are as follows:

2012	$	91,642
2013		183,285
2014		141,285
2015		99,285
	$	515,497

Employment Contracts

The Company has entered into employment contracts with executives and management personnel. The contracts provide for salaries, bonuses and stock option grants, along with other employee benefits. The employment contracts generally have no set term and can be terminated by either party. There is a provision for payments of nine months to eighteen months of annual salary as severance if we terminate a contract without cause, along with the acceleration of certain unvested stock option grants.

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BANK LOANS AND NOTES PAYABLE

6 Months Ended

Dec. 31, 2011

Notes to Financial Statements

BANK LOANS AND NOTES PAYABLE

NOTE 9 – BANK LOANS AND NOTES PAYABLE

The Company's debt consisted of the following as of December 31, 2011 and June 30, 2011:

	December 31, 2011		June 30, 2011
Bank loans and notes payable-current	$	909,560	$	779,088
Bank loans and notes payable-long term		3,654,717		3,937,056
Total	$	4,564,277	$	4,716,144

On January 21, 2011 the Company entered into a promissory note for $1,350,000 with TE Holdings Group, LLC in connection with the acquisition of the net assets of Tier Electronics LLC.  The promissory note is in the principal amount of $1,350,000 and bears interest at eight percent.  The principal balance of the note is payable in three equal installments of $450,000 on the first, second and third anniversaries of the promissory note.  Accrued interest is payable monthly. If the federal capital gains tax rate exceeds 15% and or the State of Wisconsin capital gains tax rate exceeds 5.425% at any time prior to the payment in full of the unpaid principal balance and accrued interest on the promissory note, then the principal amount of the promissory note (retroactive to January 21, 2011) shall be increased by an amount equal to the product of (a) the aggregate amount of federal and state capital gain realized by the Seller or Seller’s sole member, as applicable, in connection with the acquisition, multiplied by (b) the difference between (i) the combined federal and State of Wisconsin capital gains tax rate as of the date of calculation, minus (ii) the combined federal and State of Wisconsin capital gains tax rate of 20.425% as of January 21, 2011.  Any adjustment to the principal amount of the promissory note shall be effected by increasing the amount of the last payment due under the promissory note without affecting the next regularly scheduled payment(s) under the promissory note.  The loan was amended in January 2012.  The initial payment of $450,000 to be made on January 21, 2012 will be made in three equal installments of $150,000 on February 21, March 21 and April 7, 2012.  Interest will accrue and be paid monthly on the unpaid balance in accordance with the original agreement.  The outstanding principal balance was $1,350,000 at December 31, 2011 and June 30, 2011.

On April 7, 2010 the Company entered into a loan agreement for $1,300,000 with the Wisconsin Department of Commerce.  Payments of principal and interest under this loan are deferred until May 31, 2012.  The interest rate is 2%.  Payments of $22,800 per month are required starting June 1, 2012 with a final payment due on May 1, 2017.  Borrowings were not received until July 2010.  The loan is collateralized by the equipment purchased with the loan proceeds and substantially all assets of the Company not otherwise collateralized.  The Company is required to maintain and increase a specified number of employees, and the interest rate is increased in certain cases for failure to meet this requirement.  The outstanding principal balance was $1,300,000 at December 31, 2011 and June 30, 2011 respectively.

On July 1, 2009 the Company entered into a loan agreement to finance new production equipment.  The $156,000 bank note was collateralized by specific equipment, interest at 5.99%.  The note with a balance of $107,155 as of June 30, 2010 was paid off during June 2011.

On May 14, 2008 the Company entered into two loan agreements to refinance its building and land in Menomonee Falls, Wisconsin:

The first loan requires a fixed monthly payment of principal and interest at a rate of .25% below the prime rate, subject to a floor of 5% as of June 30, 2011 and 2010 with any principal balance due at maturity on June 1, 2018 and collateralized by the building and land.  The outstanding principal balance was $741,816 and $763,338 at December 31, 2011 and June 30, 2011, respectively.

The second loan is a secured promissory note guaranteed by the U.S. Small Business Administration, requiring monthly payments of principal and interest at a rate of 5.5% until May 1, 2028.   The outstanding principal balance was $779,729 and $794,074 at December 31, 2011 and June 30, 2011, respectively.  The loan is collateralized by a mortgage on the building and land.

On November 28, 2008 the Company entered into a loan agreement with a bank.  The note is collateralized by specific equipment, requiring monthly payments of $21,000 of principal and interest; rate equal to the prime rate subject to a floor of 4.25%; maturity date of July 1, 2012. The outstanding principal balance was $392,731 and $508,733 at December 31, 2011 and June 30, 2011, respectively.

An equipment loan with a balance of $48,900 as of June 30, 2010 was paid in full in November 2010.

Maximum aggregate annual principal payments for fiscal periods subsequent to December 31, 2011 are as follows:

2012	$	626,570
2013		1,021,838
2014		815,883
2015		346,466
2016		356,327
2017 and thereafter		1,397,193
	$	4,564,277

The loan agreements with the bank require the Company to meet certain operating ratios.  The Company was not in compliance with such covenants as of December 31, 2011, for which a waiver was obtained from the bank on June 27, 2011 which waived the covenants through June 29, 2012.

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INTANGIBLE ASSETS

6 Months Ended

Dec. 31, 2011

Notes to Financial Statements

INTANGIBLE ASSETS

NOTE 7– INTANGIBLE ASSETS

Intangible assets are comprised of the following as of December 31, 2011 and June 30, 2011:

	December 31, 2011			June 30, 2011
Non-compete agreement	$	310,888		$	300,000
License agreement		288,087			278,000
Trade secrets		1,599,122			1,543,922
Total, at cost		2,198,097			2,121,922
Less, accumulated amortization		(689,978	)		(310,415	)
Intangible Assets, Net	$	1,508,119		$	1,811,507
Estimated amortization expense for fiscal periods subsequent to December 31, 2011 are as follows:
2012	$	363,475
2013		732,699
2014		411,945
	$	1,508,119

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GOODWILL

6 Months Ended

Dec. 31, 2011

Notes to Financial Statements

GOODWILL

NOTE 8 – GOODWILL

The Company acquired ZBB Technologies, Inc., a wholly-owned subsidiary, through a series of transactions in March 1996.  The goodwill amount of $1.134 million, the difference between the price paid for ZBB Technologies, Inc. and the net assets of the acquisition, amortized through fiscal 2002, resulted in the net goodwill amount of $803,079 as of December 31, 2011 and June 30, 2011.

The Company accounts for goodwill in accordance with FASB ASC topic 350-20, “Intangibles - Goodwill and Other - Goodwill” under which goodwill and other intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests. The implied fair value of goodwill is the amount determined by deducting the estimated fair value of all tangible and identifiable intangible net assets of the reporting unit to which goodwill has been allocated from the estimated fair value of the reporting unit. If the recorded value of goodwill exceeds its implied value, an impairment charge is recorded for the excess.

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EMPLOYEE/DIRECTOR EQUITY INCENTIVE PLANS

6 Months Ended

Dec. 31, 2011

Notes to Financial Statements

EMPLOYEE/DIRECTOR EQUITY INCENTIVE PLANS

NOTE 10 – EMPLOYEE/DIRECTOR EQUITY INCENTIVE PLANS

During the six months ended December 31, 2011 and 2010, the Company’s results of operations include compensation expense for stock options granted and restricted shares vested under its equity incentive plans. The amount recognized in the financial statements related to stock-based compensation was $644,640 and $310,788, based on the amortized grant date fair value of options during the six months ended December 31, 2011 and 2010, respectively.

At the annual meeting of shareholders held on November 10, 2010, the Company’s shareholders approved the Company’s 2010 Omnibus Long-Term Incentive Plan (the “Omnibus Plan”). The Omnibus Plan authorizes the board of directors or a committee thereof, to grant the following types of equity awards under the Omnibus Plan:  Incentive Stock Options (“ISOs”), Non-qualified Stock Options (“NSOs”), Stock Appreciation Rights (“SARs”), Restricted Stock, Restricted Stock Units (“RSUs”), cash- or stock-based Performance awards (as defined in the Omnibus Plan) and other stock-based awards. Four million shares of common stock are reserved for issuance under the Omnibus Plan.  In connection with the adoption of the Omnibus Plan the Company’s Board of Directors froze the Company’s other stock option plans and no further grants may be made under those plans.

On November 10, 2010, (1) a total of 511,143 RSUs were granted to the Company’s directors in payment of directors fees through November 2011 pursuant to the Company’s Director Compensation Policy, (2) a total of 574,242 RSUs previously issued to the Company’s directors pursuant to this policy and which provided for cash settlement were converted to stock settled RSUs, and (3) 315,000 RSUs were granted in total to a consultant and to the Company’s President and CEO.  On November 9, 2011, an additional 548,051 RSUs were granted to the Company’s directors in payment of directors fees through November 2012.

During the six months ended December 31, 2011 options to purchase 654,500 shares were granted to employees exercisable at prices from $0.59 to $1.16 and exercisable at various dates through December 2019.  As of December 31, 2011, an additional 991,064 shares are available to be issued under the Omnibus Plan.

On January 21, 2011, the Compensation Committee of the Company’s Board of Directors awarded inducement options to purchase a total of 750,000 shares of the Company’s common stock at an exercise price of $1.15 to certain members of management of Tier Electronics LLC.  The options vest as follows: (1) 420,000 will vest in three equal annual installments beginning on December 31, 2011 based on achievement of certain revenue targets, (2) 330,000 vest in three equal annual installments beginning on the one-year anniversary of the grant date.  At December 31, 2011, 140,000 of the 420,000 shares vested and 110,000 of the 330,000 shares vested on January 21, 2012.

During March 2011, the expiration date of 75,000 options held by a former director of the Company was extended from March 31, 2011 to April 30, 2011, and the expiration date of 125,000 options was extended from March 31, 2011 to December 31, 2011.  The Company recorded an expense of $45,676 in connection with these extensions.  At December 31, 2011, the remaining 125,000 options expired.

During 2007 the Company established the 2007 Equity Incentive Plan (the “2007 Plan”) that authorized the Board of Directors or a committee thereof to grant options to purchase up to a maximum of 1,500,000 shares to employees and directors of the Company.  No options were issued under the 2007 Plan during the six months ended December 31, 2011.  During the year ended June 30, 2011, 74,500 options were granted to employees at exercise prices from $0.46 to $0.64 and expiration dates from August 2018 to October 2018 and 150,189 options were forfeited.  As of December 31, 2011, there were no options available to be issued under the 2007 Plan.

During 2005, the Company established an Employee Stock Option Scheme (the “2005 Plan”) that authorized the board of directors or a committee thereof to grant options to employees and directors of the Company. The maximum number of options available to be granted in aggregate at any time under the 2005 Plan was the number equivalent to 5% of the total number of issued shares of the Company including all shares in underlying options under the Company’s stock option and incentive plans. No options were issued under the 2005 Plan during the six months ended December 31, 2011 and 2010.  At December 31, 2011, options to purchase 50,000 shares with an exercise price of $3.82 and an expiration date of June 20, 2012 were outstanding.  As of December 31, 2011, there were no options available to be issued under the 2005 Plan.

In 2002 the Company established the 2002 Stock Option Plan (the “SOP”) whereby a stock option committee was given the discretion to grant up to 579,107 options to purchase shares to key employees of the Company.  No options were issued under the 2002 Plan during the six months ended December 31, 2011 and 2010.  During the year ended June 30, 2011 there were 100,000 options forfeited.   At December 31, 2011 there were 375,000 options outstanding with exercise prices from $0.49 to $3.59 and exercise dates up to June 2018.  As of December 31, 2011, there were no options available to be issued under the SOP.

The Compensation Committee of the Company’s Board of Directors awarded two inducement option grants covering a total of 500,000 shares to the Company’s new President and CEO in January 2010.  The first grant is an option to purchase 400,000 shares of common stock with the following vesting terms: one third of the shares vested on January 7, 2011 and the balance vest in 24 monthly installments beginning on January 31, 2011 and ending on December 31, 2012.  The second grant is an option to purchase 100,000 shares of common stock which  vested in two equal installments on June 30, 2010 and December 31, 2010, respectively, based on the satisfaction of certain performance targets for the six-month periods then ended.  Both options have an exercise price of $1.33 per share which was equal to the closing price of the Company’s common stock on January 7, 2010 and are not exercisable as to any portion of the option after the fifth anniversary of the date on which that portion vests.  The options are subject to other terms and conditions specified in the related option agreements.

The Compensation Committee of the Company’s Board of Directors awarded two inducement option grants covering a total of 500,000 shares to the Company’s new Executive Vice President – Operations in November 2011, with an exercise price of $0.79 per share, which was the closing price of the Company’s common stock on the NYSE Amex on the date of his appointment.  100,000 of these options will vest based on the achievement of certain performance targets.  The remaining 400,000 of these options will vest over three years with the first one-third vesting on November 9, 2012 and the remaining two-thirds vesting in 24 equal monthly installments beginning in December 2012.

In aggregate for all plans, at December 31, 2011, the Company has a total of 4,144,303 options outstanding, 1,948,436 RSUs outstanding, and 991,064 shares available for future grant under the Omnibus Plan.

Information with respect to stock option activity under the employee and director plans is as follows:

	Number of Options			Weighted-Average Exercise Price Per Share
Balance at July 1, 2010		2,316,992		$	1.92
Options granted		1,230,500			1.02
Options forfeited		(150,189	)		2.51
Options exercised		(75,000	)		1.09
Balance at June 30, 2011		3,322,303			1.55
Options granted		1,154,500			0.84
Options forfeited		(332,500	)		1.08
Balance at December 31, 2011		4,144,303		$	1.39

The following table summarizes information relating to the stock options outstanding at December 31, 2011:

	Outstanding			Exercisable
Range of Exercise Prices	Number of Options	Average Remaining Contractual Life (in years)	Weighted Average Exercise Price	Number of Options	Weighted Average Exercise Price
$0.46 to $1.69	3,619,303	6.8	$                           1.06	1,131,748	$                 1.22
$3.59 to $3.82	525,000	3.1	$                           3.61	525,000	$                 3.61
Balance at December 31, 2011	4,144,303	6.4	$                           1.39	1,656,748	$                 1.98

During the six months ended December 31, 2011 options to purchase 654,500 shares were granted to employees  exercisable at prices from $0.59 to $1.16 per share based on various service and performance based vesting terms from July 2011 through December 2014 and exercisable at various dates through December 2019. During the six months ended December 31, 2010 options to purchase 294,500 shares were granted to employees exercisable at prices from $0.46 to $0.64 per share based on various service and performance based vesting terms from August 2010 through November 2013 and exercisable at various dates through December 2018.

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 six months ended December 31, using the Black-Scholes option-pricing model:

	2012		2011
Expected life of option (years)		2.5		2.5
Risk-free interest rate		.24 - .55%		.52-.685%
Assumed volatility		104 - 107%		62-114%
Expected dividend rate		0		0
Expected forfeiture rate		5.3 - 6.8%		0

Time-vested and performance-based stock awards, including stock options, restricted stock and restricted stock units, are accounted for at fair value at date of grant.  Compensation expense is recognized over the requisite service and performance periods.

A summary of the status of unvested employee stock options as of December 31, 2011 and June 30, 2011 and changes during the six months and year ended, is presented below:

	Number of  Options			Weighted-Average Grant Date Fair Value Per Share
Balance at July 1, 2010		987,500		$	0.77
Granted		1,230,500			0.58
Vested		(476,526	)		0.49
Forfeited		(6,250	)		0.29
Balance at June 30, 2011		1,735,224			0.62
Granted		1,154,500			0.84
Vested		(194,669	)		1.06
Forfeited		(332,500	)		1.08
Balance at December 31, 2011		2,362,555		$	0.99

Total fair value of options granted in the six months ended December 31, 2011 and 2010 was $576,618 and $107,689, respectively.  At December 31, 2011 there was $725,691 in unrecognized compensation cost related to unvested stock options, which is expected to be recognized over the next 3 years.

During the fourth quarter of fiscal 2010 the Company agreed to compensate its directors with restricted stock units (“RSUs”) rather than cash.  As a result included in accrued compensation and benefits at June 30, 2010 was $182,500 related to these awards. The RSUs were classified as liability awards because the RSUs were expected to be paid in cash upon vesting. These RSUs were converted to 574,242 stock settled RSUs in November 2010 and $182,500 was transferred from accrued compensation and benefits to additional paid-in capital.  The cash settled RSUs that were converted to stock settled RSUs were 100% vested upon conversion.  There were also $212,450 in directors’ fees expense and $7,000 in consulting fees expense settled with RSUs for the six months ended December 31, 2011.   As of December 31, 2011 there were 661,037 unvested RSUs outstanding which will vest through May 6, 2014.  At December 31, 2011 there was $577,498 in unrecognized compensation cost related to unvested RSUs, which is expected to be recognized through May 6, 2014.  Vested RSUs are payable six months after the holder’s separation from service with the Company.

The table below summarizes the status of restricted stock unit balances:

	Number of Restricted Stock Units		Weighted-Average Valuation Price Per Unit
Conversion of cash settled RSUs		574,242	$	0.55
RSUs granted		826,143		0.80
RSUs forfeited		—		—
Balance at June 30, 2011		1,400,385		0.70
RSUs granted		548,051		0.77
RSUs forfeited		—		—
Balance at December 31, 2011		1,948,436	$	0.72

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INCOME TAXES

6 Months Ended

Dec. 31, 2011

Notes to Financial Statements

INCOME TAXES

NOTE 15— INCOME TAXES

The provision (benefit) for income taxes consists of the following:

	Six months ended December 31,
	2011			2010
Current	$	(181,800	)	$	—
Deferred		—			—
Provision (benefit) for income taxes	$	(181,800	)	$	—

The Company accounts for income taxes using an asset and liability approach which generally requires the recognition of deferred income tax assets and liabilities based on the expected future income tax consequences of events that have previously been recognized in the Company’s financial statements or tax returns. 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 December 31, 2011 and 2010.

During the three and six months ended December 31, 2011, the Company recorded a $181,800 credit (benefit) for income taxes which represents a pro rata portion of an estimate of a refundable research and development tax credit we expect to receive from the government of Australia for the fiscal year ending June 30, 2012 based on the qualified expenditures the Company incurred during the three and six months ended December 31, 2011. The Company recorded an estimated income tax refund receivable of $164,640 for the year ended June 30, 2011 for the estimated refund related to qualified expenditures during the year ended June 30, 2011, related to a refundable Australian research and development tax credit for the year ended June 30, 2011.  The Company recognized a refund of $415,315 for expenditures incurred during the year ended June 30, 2010 for a refund claim filed in March 2011.  The Company became aware of the refund opportunity in March 2011and as a result had not provided for a benefit during the six month period ended December 31, 2010.  The Company has provided a valuation allowance against all deferred income tax assets as it is more likely than not that its deferred income tax assets are not currently realizable due to the net operating losses incurred by the Company since its inception.

The Company’s combined effective income tax rate differed from the U.S. federal statutory income rate as follows:

	Six months ended December 31,
	2011			2010
Income tax benefit computed at the U.S. federal statutory rate		-34	%		-34	%
Australia research and development credit		-4			0
Change in valuation allowance		34			34
Total		-4	%		0	%

Significant components of the Company’s net deferred income tax assets as of December 31, 2011 and June 30, 2011 were as follows:

	December 31, 2011			June 30, 2011
Federal net operating loss carryforwards		14,920,208		$	13,481,428
Federal - other		3,128			221,795
Wisconsin net operating loss carryforwards		1,762,387			1,544,877
Australia net operating loss carryforwards		1,485,393			1,560,010
Deferred income tax asset valuation allowance		(17,989,775	)		(16,808,110	)
Total deferred income tax assets	$	—		$	—

The Company has U.S. federal net operating loss carryforwards of approximately $44 million as of December 31, 2011, that expire at various dates between June 30, 2015 and 2032.  The Company also has $600,000 in other federal deferred tax assets comprised of charitable contributions carryforwards and intangible amortization.  The Company has U.S. federal research and development tax credit carryforwards of approximately $48,000 as of December 31, 2011 that expire at various dates through June 30, 2030.  As of December 31, 2011, the Company has approximately $34 million of Wisconsin net operating loss carryforwards that expire at various dates between June 30, 2013 and 2027.  As of December 31, 2011, the Company also has approximately $4 million of Australian net operating loss carryforwards available to reduce future taxable income of its Australian subsidiaries with an indefinite carryforward period.

A reconciliation of the beginning and ending balance of unrecognized income tax benefits is as follows:

	Six Months Ended December 31, 2011			Year Ended June 30, 2011
Beginning balance	$	219,500		$	—
Additions based on tax positions related to the current period		—			219,500
Additions for tax positions of prior years		—			—
Reductions for tax positions of prior years		—			—
Settlements		—			—
Lapses of statutes of limitations		—			—
Effect of foreign currency translation		(10,480	)
Ending balance	$	209,020		$	219,500

The unrecognized income tax benefits relate to the credit the Company claimed during fiscal 2011 related to a refundable Australian research and development tax credit for qualified expenditures incurred during fiscal year 2010.  If recognized, it would favorably affect the effective income tax rate.  The amount is included in accrued expenses in the accompanying condensed consolidated balance sheets.

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Condensed Consolidated Statements of Shareholders Equity (USD $)	Preferred Stock	Common Stock	Additional Paid-In Capital	NotesReceivableCommonStockMember	Treasury Stock	Accumulated Deficit	Accumulated Other Comprehensive (Loss)	Noncontrolling Interest	Comprehensive Loss
Beginning Balance Amount at Jun. 30, 2010		$ 149,155	$ 49,770,987		$ (11,136)	$ (46,894,677)	$ (1,563,052)
Beginning Balance Shares at Jun. 30, 2010		14,915,389
Net loss						(8,449,006)			(8,449,006)
Net translation adjustment							(9,700)		(9,700)
Total Comprehensive Loss									(8,458,706)
Issuance of common stock, net of costs and underwriting fees, Shares		13,123,929
Issuance of common stock, net of costs and underwriting fees,Amount		131,239	9,137,291	(3,529,644)
Stock-based compensation			866,512
Issuance of commitment fee shares,Shares		893,097
Issuance of commitment fee shares,Amount		8,930	579,306
Issuance of common stock for acquisition of net assets of TierElectronics,Shares		800,000
Issuance of common stock for acquisition of net assets of TierElectronics,Amount		8,000	912,000
Equity issuance costs,Shares		180,000
Equity issuance costs,Amount		1,800	(833,840)
Conversion of debenture notes payable to preferred stock,Shares	52.4678
Conversion of debenture notes payable to preferred stock,Amount	524,678
Issuance of preferred stock, net of issuance costs,Shares	303.0000
Issuance of preferred stock, net of issuance costs,Amount	3,030,000
Conversion of cash settled RSU's to stock settled RSU's			315,833
Interest on notes receivable - common stock			178,155	(178,155)
Accretion of dividends on preferred stock	160,792		(160,792)
Issuance of warrants			11,834
Ending Balance Amount at Jun. 30, 2011	3,715,470	299,124	60,777,286	(3,707,799)	(11,136)	(55,343,683)	(1,572,752)		(8,458,706)
Ending Balance Shares at Jun. 30, 2011	355.4678	29,912,415
Net loss						(4,405,758)		(37,230)	(4,442,988)
Net translation adjustment							(12,209)		(12,209)
Total Comprehensive Loss									(4,455,197)
Stock-based compensation			644,640
Issuance of preferred stock, net of issuance costs,Shares	219.6602	6,711,061
Issuance of preferred stock, net of issuance costs,Amount	2,197,240	60,200	3,837,594	(2,187,330)
Interest on notes receivable - common stock			229,761	(229,761)
Accretion of dividends on preferred stock	221,237		(221,237)
Issuance of subsidiary shares to noncontrolling interest								1,546,062
Ending Balance Amount at Dec. 31, 2011	$ 6,133,947	$ 359,324	$ 65,268,044	$ (6,124,890)	$ (11,136)	$ (59,749,441)	$ (1,584,961)	$ 1,508,832
Ending Balance Shares at Dec. 31, 2011	575.128	36,623,476

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GOING CONCERN

6 Months Ended

Dec. 31, 2011

Notes to Financial Statements

GOING CONCERN

NOTE 4 - GOING CONCERN

The consolidated financial statements as of December 31, 2011 and for the six months then ended have been prepared on the basis of a going concern which contemplates that the Company will be able to realize assets and discharge liabilities in the normal course of business. Accordingly, they do not give effect to adjustments that would be necessary should the Company be required to liquidate its assets. The Company incurred a net loss of $4,405,758 for the six months ended December 31, 2011 and as of December 31, 2011 has an accumulated deficit of $59,749,441 and total ZBB Energy Corporation equity of $4,290,887.  The ability of the Company to meet its total liabilities of $8,859,719 and to continue as a going concern is dependent upon the availability of future funding and achieving profitability.  The accompanying financial statements do not include any adjustments that might result from the outcome of these uncertainties.

The Company believes, with the financing sources in place and with other potential financing sources, that it will be able to raise the capital necessary to fund operations through at least June 30, 2012.  The Company’s sources of additional capital in the year ending June 30, 2012 include the raising of additional capital pursuant to an agreement with Socius CG II, Ltd. (“Socius”), as described in Note 12. As of December 31, 2011, there was approximately $4.2 million of availability under this facility.  However, this facility places certain restrictions on our ability to draw on it.  For example, our ability to submit a tranche notice under the Socius Agreement is subject to certain conditions including that: (1) a registration statement covering our sale of shares of common stock to Socius in connection with the tranche is effective and (2) the issuance of such shares would not result in Socius and its affiliates beneficially owning more than 9.99% of our common stock.  These limitations have been carefully considered by the Company and notwithstanding such limitations management has successfully utilized this facility and believes it will continue to be able to do so.  As described in Note 12, during the three months ended December 31, 2011, the Company delivered a tranche notice to Socius pursuant to which Socius purchased $750,000 of Series A preferred stock.  However, there can be no assurances that unforeseen circumstances will not jeopardize the Company’s ability to draw on this and other potential financing sources.

Accordingly, the Company is currently exploring various alternatives including debt and equity financing vehicles, strategic partnerships, and/or government programs that may be available to the Company, as well as trying to generate additional sales and increase margins.  As described in Note 1, in April 2011, the Company entered into a Collaboration Agreement with Honam Petrochemical Corporation (“Honam”), a division of LOTTE Petrochemical, pursuant to which during the nine months ended December 31, 2011 Honam paid the Company a total of $2.7 million.  Pursuant to the Collaboration Agreement Honam is required to pay an additional $300,000 within 10 days after a V3 single stack test station is set up at Honam’s research and development center.

As described in Note 12, in the six months ended December 31, 2011 the Company raised approximately $1.8 million through the sale of shares of Company common stock to certain investors. As described in Note 17, the Company raised approximately $2,895,000 through the sale of shares of Company stock to certain investors in February 2012.  However, the Company has 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 obtain additional funding and improve its operations, the Company’s financial condition and results of operations may be materially adversely affected and the Company may not be able to continue operations.

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RETIREMENT PLANS

6 Months Ended

Dec. 31, 2011

Notes to Financial Statements

RETIREMENT PLANS

NOTE 14 - RETIREMENT PLANS

All Australian based employees are entitled to varying degrees of benefits on retirement, disability, or death.  The Company contributes to an accumulation fund on behalf of the employees under an award which is legally enforceable.  For U.S. employees, the Company has a 401(k) plan.  All active participants are 100% vested immediately.  Expenses under these plans were $27,324 and $42,780 for the three and six months ended December 31, 2011, respectively.  Expenses under these plans were $12,548 and $22,404 for the three and six months ended December 31, 2010, respectively.