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PWON > SEC Filings for PWON > Form 10-K on 16-Apr-2013All Recent SEC Filings

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Form 10-K for POWIN CORP


16-Apr-2013

Annual Report


ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)

Plan of Operation

The following is a discussion and analysis of the Company's operations for the three-months and twelve-months ended December 31, 2012, and the factors that could affect our future financial condition and plan of operation.

This discussion and analysis should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this annual report. Our consolidated financial statements are prepared in accordance with United States generally accepted accounting principles. All references to dollar amounts in this section are in United States dollars unless expressly stated otherwise. Please see our "Note on Forward Looking Statements" and "Risk Factors" for a list of our risk factors.

Results of Operations

Fourth quarter ended December 31, 2012

The following table set forth the Company's results of operations for each of the four quarters ended March 31, June 30, September 30, and December 31, 2012, respectively, in dollars and percent of sales revenue.

For the quarters ended 2012 (in Thousands)

                             Mar. 31,      % Sales       Jun. 30,      % Sales      Sept. 30,      % Sales       Dec. 31,      % Sales        TOTAL        % Sales

Sale Net                    $ 13,293.2        100.0 %   $ 13,515.2        100.0 %   $  9,370.1        100.0 %   $  6,127.8        100.0 %   $ 42,306.4        100.0 %

Cost of Sales                 12,263.5         92.3 %     12,519.0         92.6 %      8,569.9         91.5 %      5,456.5         89.0 %     38,809.0         91.7 %

Gross Profit                   1,029.7          7.7 %        996.2          7.4 %        800.2          8.5 %        671.3         11.0 %      3,497.3          8.3 %

Operating Expenses             1,371.9         10.3 %      1,622.7         12.0 %      2,198.7         23.5 %      1,653.7         27.0 %      6,846.9         16.2 %

Operating Loss                  (342.2 )       -2.6 %       (626.5 )       -4.6 %     (1,398.5 )      -14.9 %       (982.4 )      -16.0 %     (3,349.6 )       -7.9 %

Other Income/(Expense)            12.9          0.1 %         (8.0 )       -0.1 %          8.9          0.1 %       (863.3 )      -14.1 %       (849.6 )       -2.0 %

Loss Before  Income Taxes       (329.3 )       -2.5 %       (634.6 )       -4.7 %     (1,389.6 )      -14.8 %     (1,845.7 )      -30.1 %     (4,199.2 )       -9.9 %

Income Tax                           -          0.0 %          0.0          0.0 %          0.0          0.0 %         88.2          1.4 %         88.2          0.2 %

Net Loss                    $   (329.3 )       -2.5 %   $   (634.6 )       -4.7 %   $ (1,389.6 )      -14.8 %   $ (1,933.8 )      -31.6 %   $ (4,287.3 )      -10.1 %


The Company's 2012 fourth quarter sales, generally our weakest fiscal quarter for sales, was unfavorable from previous year's fourth quarter results primarily due to the three primary revenue producing subsidiaries, OEM, QBF and Powin Energy, earning lower revenues in the quarter. Net sales declined by approximately $5.9 million or 49.1% as compared to the same quarter of 2011. This was due to the loss of several large customers as they ordered from other suppliers based in China. The QBF subsidiary is continuing to grow its Freightliner program and the Powin Energy subsidiary is picking up momentum and recognition throughout the renewable energy markets. Management is working to reduce expenses and accelerate growth in its Mexico and Energy business subsidiaries and is optimistic that both these subsidiaries will contribute significantly more revenues in 2013. However, as the Company's management has continued optimism for its renewable energy, QBF, and Mexico subsidiary's continued growth, it cannot assure that the OEM subsidiary will continue to rebound from the low sales the Company experienced in 2012.

Cost of sales for the fourth quarter of 2012 was approximately $5.2 million or 48.8% lower as compared to the same quarter of 2011. This change is also attributed to the decreased activity in revenues as indicated earlier. Also, as a percent of sales, cost of sales were 89% as compared to 88.6% for the same quarter in 2011. The slight increase in cost of sales can be contributed to low volume and activity in the fourth quarter for the OEM sector, as well as price increases from our China suppliers. Management believes the margins in the energy subsidiary will continue to grow as sales improve, absorbing some of the costs this subsidiary has experienced in start-up.

Operating expenses increased in the fourth quarter 2012 by $787,000 or 90.8% from the same quarter of 2011, primarily due to a significant increase in bad debt expense. Approximately $319,000 is due to one of the subsidiary's customers defaulting. A law suit has been filed against the customer and the Company is uncertain of the result of the recovery, if at all. The Company also experienced an increase in research and development in the Powin Energy subsidiary, which impacted overall operating expenses for the quarter. The large increase in Salaries and Related is due to additional employees hired throughout the subsidiaries. As mentioned in the 8-K filings, Powin OEM and Powin Energy were able to attain a couple key employees. Management believes these employees will contribute significantly the Company and help Powin grow for years to come. The Mexico facility was also responsible for hiring several employees to help meet the requirements for production from a potential customer. The following table is reflective of the changes in operating expenses in dollars and percent of change for the three-months ended December 31, 2012 and 2011, respectively.

                           2012           2011         Change        % Change
Salaries & Related      $   624,834     $ 278,905     $ 345,929          124.0 %
Advertising                  16,515        40,100       (23,585 )        -58.8 %
Professional Services       314,815       231,327        83,488           36.1 %
All Other                   697,486       316,440       381,046          120.4 %
  TOTAL                 $ 1,653,650     $ 866,772     $ 786,878           90.8 %


The following tables set forth key components of the Company's results of operations for the three and twelve-months ended December 31, 2012 and 2011, in dollars of sales revenue and by key subsidiaries.

                                   Quarter Ended                                                         Year Ended
                          Dec 31, 2012      Dec 31, 2011        $ Change        % Change       Dec 31, 2012      Dec 31, 2011        $ Change        % Change
Sales
 OEM                          4,730,369         9,605,803       (4,875,434 )         -50.8 %      35,426,341        39,142,081       (3,715,740 )         -9.5 %
 QBF                          1,217,453         1,670,036         (452,583 )         -27.1 %       5,797,094         5,599,607          197,487            3.5 %
 Mexico                          19,885                 -           19,885           100.0 %          84,284                 -           84,284          100.0 %
 Powin DC                        71,812           136,431          (64,619 )         -47.4 %         319,468           390,357          (70,889 )        -18.2 %
 CPP                             37,329            72,170          (34,841 )         -48.3 %         485,218           309,162          176,056           56.9 %
 Powin Energy                    50,992           543,217         (492,225 )         -90.6 %         193,959           637,364         (443,405 )        -69.6 %
Total sales                   6,127,840        12,027,657       (5,899,817 )         -49.1 %      42,306,364        46,078,571       (3,772,207 )         -8.2 %
Cost of sales
 OEM                          4,031,903         8,375,430       (4,343,527 )         -51.9 %      32,176,289        33,974,827       (1,798,538 )         -5.3 %
 QBF                          1,199,081         1,655,188         (456,107 )         -27.6 %       5,908,436         5,763,284          145,152            2.5 %
 Mexico                         114,384                 -          114,384           100.0 %         151,942                 -          151,942          100.0 %
 Powin DC                             -                 -                -             0.0 %               -                 -                -            0.0 %
 CPP                             36,338           133,230          (96,892 )         -72.7 %         424,872           321,236          103,636           32.3 %
 Powin Energy                    74,840           495,948         (421,108 )         -84.9 %         147,479           560,732         (413,253 )        -73.7 %
Total cost of sales           5,456,546        10,659,796       (5,203,250 )         -48.8 %      38,809,018        40,620,079       (1,811,061 )         -4.5 %
Gross profit                    671,294         1,367,861         (696,567 )         -50.9 %       3,497,346         5,458,492       (1,961,146 )        -35.9 %
Operating expense
 OEM                           (219,976 )         133,515         (353,491 )        -264.8 %       2,462,532         2,566,266         (103,734 )         -4.0 %
 QBF                            468,411           113,129          355,282           314.1 %         974,036           615,082          358,954           58.4 %
 Mexico                         486,935           140,128          346,807           247.5 %       1,017,900           411,954          605,946          147.1 %
 Powin DC                       142,024           122,878           19,146            15.6 %         468,166           395,610           72,556           18.3 %
 CPP                            135,605           184,652          (49,047 )         -26.6 %         532,298           682,442         (150,144 )        -22.0 %
 Powin Energy                   640,651           172,470          468,181           271.5 %       1,392,002           552,416          839,586          152.0 %
Total Operating Expense       1,653,650           866,772          786,878            90.8 %       6,846,934         5,223,770        1,623,164           31.1 %
Other expense                  (863,315 )         (67,511 )       (795,804 )        1178.8 %        (849,562 )        (134,625 )       (714,937 )        531.1 %
Pre-tax loss                 (1,845,671 )         433,578       (2,279,249 )        -525.7 %      (4,199,150 )         100,097       (4,299,247 )      -4295.1 %
Income tax                       88,167           104,482          (16,315 )         -15.6 %          88,167           104,482          (16,315 )        -15.6 %
Consolidated net loss        (1,933,838 )         329,096       (2,262,934 )        -687.6 %      (4,287,317 )          (4,385 )     (4,282,932 )      97672.3 %
Net loss attributable
to non-controlling
interest                        (89,982 )         (38,344 )        (51,638 )         134.7 %        (166,047 )         (80,913 )        (85,134 )        105.2 %
Net loss attributable
to  Powin Corporation        (1,843,856 )         367,440       (2,211,296 )        -601.8 %      (4,121,270 )          76,528       (4,197,798 )      -5485.3 %

Consolidated net revenues for the year ended December 31, 2012, decreased approximately $3.8 million or 8.2% from the same period of 2011, was primarily due to the loss of large customers who began sourcing from new vendors in China. This was caused by price increases charged by vendors selling to Powin, which made Powin less competitive and thereby eroded the OEM distribution business. The QBF subsidiary net revenues increased approximately $197,000 or 3.5%, as this subsidiary continues to see increased activity from its Freightliner program and will see continued growth in 2013. The Company's Powin Energy subsidiary, as reported above, in the fourth quarter of 2012 began to show sales activity. It is now being recognized in the renewable energy markets and continued growth opportunities are discussed further under Year 2013 Outlook below. The Powin DC subsidiary net revenues are down approximately $71 thousand dollars or 18.2%. The decrease in revenue is primarily due to the OEM subsidiary sales being down. Effective January 1, 2012, the business of Maco was merged into CPP, another one of the Company's wholly-owned subsidiaries. As a result CPP shows an increase of approximately $176 thousand dollars over the same period last year. The Company's Mexico subsidiary is still in its start-up phase and generated minimal or no revenues for the year.

Consolidated cost of sales, decreased approximately $1.81 million or 4.5% for the year ended December 31, 2012, when compared with the same period of 2011, which would be expected due to the decrease in consolidated net revenues, as reported above. As a percent of sales, cost of sales are 91.7% for the year ended December 31, 2012, compared to 88.2% for the same period in 2011. The increase comes primarily from the QBF and Mexico subsidiaries due to its manufacturing inefficiencies and recording a charge of approximately $88 thousand for obsolete inventories. The Company's management is aggressively reviewing all costing methods and procedures to correct these subsidiaries gross margins.


Consolidated gross margins declined from approximately $5.4 million (11.8% of sales) in 2011 to approximately $3.5 million (8.3% of sales) in 2012. Gross profits declined in each of the primary business segments. In addition to the declines in sales, the biggest contributor to the decline in gross profits was price increases from manufacturers and material suppliers in Asia. The decline in the U.S. dollar since 2010 relative to Asian currencies resulted in price increases from the Company's Asian suppliers. The Company did not pass these price increases along to its largest customers and therefore absorbed the costs internally. Gross profits for Mexico and Powin Energy subsidiaries, combined, declined to negative $21,000 for the year ended December 31st, 2012 from positive $77,000 in 2011. This decrease is primarily due to high manufacturing startup costs in Mexico. Management is confident that the costs will be reduced as volume increases at the Mexico facility.

Consolidated operating expenses for the year ended December 31, 2012, increased approximately $1.62 million dollars or 31.1%, from $5.2 million in 2011 to $6.8 million. The change is primarily due to an increase of $839.6 and $605.9 thousand dollars in Powin Energy and Mexico's operating expenses, partially offset by a decrease of $103.7 and $150.1 thousand dollars of operating expenses from our OEM and CPP subsidiaries, respectively. Powin Energy experienced a large increase in research and development expenses causing operating expenses to increase by approximately $680 thousand. As mentioned above, management recorded additional bad debt reserves of $319 thousand due to default of a certain customer during the fourth quarter.

The increase for 2012 was primarily due to non-cash shareholder compensation expense related to the re-pricing of the Company's stock warrants. The Company lowered the exercise price of it's a warrants in 2012 from $2 to $0.45 resulting in a charge to stock based compensation of $816,000. The warrants subsequently expire on June 30, 2013.

The following table is reflective of the changes in operating expenses in dollars and percent of change for the year ended December 31, 2012 and 2011, respectively.

                           2012            2011           Change         % Change
Salaries & Related      $ 2,920,391     $ 2,769,725     $   150,666            5.4 %
Advertising                  67,466         145,805         (78,339 )        -53.7 %
Professional Services     1,074,263       1,065,972           8,291            0.8 %
All Other                 2,784,814       1,242,268       1,542,546          124.2 %
  TOTAL                 $ 6,846,934     $ 5,223,770     $ 1,623,164           31.1 %

For the year ended December 31, 2012, the Company had net loss of approximately $4.29 million, had negative cash flows provided by operations of approximately $2.54 million, compared to net loss of approximately $4 thousand and positive cash flows from operations of approximately $245 thousand for the same period of 2011. The net loss increased due primarily to lower sales and gross profits, high research and development expenses, a significant increase in bad debt expense and compensation expenses related to the re-pricing of the Company's A warrants.

Liquidity and Capital Resources

The Company has financed its operations over the years principally through cash generated from operations and liquidity from available borrowings. For the year ended December 31, 2012, cash used in operating activities was approximately $2.54 million versus approximately $245 thousand cash provided by operating activities for fiscal year 2011. Cash used for investing activities was approximately $786 thousand during the year ended December 31, 2012, to replace and add office and manufacturing equipment, compared to approximately $1.2 million used in the same period of 2011. Cash provided from financing activities during the year ended December 31, 2012, including net repayments back to the Company's bank line-of-credit facility was $1.66 million, compared to cash provided in 2011, net of borrowings of $475 thousand.

The ratio of current assets to current liabilities is 1.50 at December 31, 2012 compared to 1.89 at December 31, 2011. Quick liquidity (current assets less inventory divided by current liabilities) was 1.00 at December 31, 2012 compared to 1.33 at December 31, 2011. At December 31, 2012, the Company had working capital of approximately $2.52 million compared with working capital at December 31, 2011 of approximately $5.9 million. Trade accounts receivables at December 31, 2012 had 36 days average collection period compared to 45 days at December 31, 2011.

At December 31, 2012, we had a short-term operating line-of-credit with a bank with maximum borrowings available of $2 million, with a maturity date of May 15, 2013. The bank line-of-credit is not personally guaranteed by any board member or stockholder but is secured by all receivables, inventory and equipment. Further, the interest rate on the bank line-of-credit is indexed to the prime rate less three-fourths of one percent point and was 2.50% at December 31, 2012. The Company's operating line-of-credit outstanding balances as of December 31, 2012 and December 31, 2011 were $1.6 million and zero, respectively. During the year ended December 31, 2012, we partially utilized the bank line-of-credit to reduce our accounts payable balance to $2.3 million at December 31, 2012 from $6.2 million at the same time last year. Also, management focused on optimizing inventory balances throughout the year. A reduction in our inventory levels at year end was also a contributing factor in a decrease in our accounts payable balance. In March, 2013 the Company entered in a related party note with the CEO, Joseph Lu, in the amount of $2 million. This allowed Powin to pay off the existing $1.6 million bank line-of-credit in full.


Our operating bank line-of-credit is subject to negative and standard financial covenants. The negative covenants restrict us from incurring any indebtedness and liens except for trade debt incurred in the normal course of doing business; such as, borrow money including capital leases; sell, mortgage, assign, pledge, lease, grant security interest in, or encumber any of our assets or accounts; engage in any business substantially different than in which we are currently engaged; loan, invest or advance money or assets to any other person, enterprise or entity. Other standard financial covenants consist of: current ratio of 1.25 to 1.00 tested at the end of each quarter; total liabilities to capital ratio of 2.50 to 1.00 tested at the end of each year; operating cash flow to fixed charge ratio of not less than 1.25 to 1.00 tested at the end of each year. As of December 31, 2012 we were not in compliance with all covenant requirements.

We have a five-year equipment line-of-credit facility with the same bank that holds the Company's operating line-of-credit facility, with maximum borrowings available of $500,000, with a maturity date of June 21, 2016. The interest rate on this equipment line-of-credit is fixed at 3.05% and there are no covenants requirements. The proceeds of this equipment line-of-credit were used to upgrade old outdated equipment and added new state-of-the-art metal manufacturing equipment to our QBF and Mexico subsidiaries. Our equipment line-of-credit balance was $375,000 and $475,000 at December 31, 2012 and 2011, respectively.

On December 18, 2012, the Company signed a new loan with Sterling Bank for four-year $163,000 with a maturity date of 1-1-2017 and the loan is not personally guaranteed by any board member or stockholder but is secured by all inventory, receivables and equipment. Further, the interest is calculated using interest rate of 3.25%. The Company outstanding loan balance as of December 31, 2012 and December 31, 2011 was $163,000 and $0 respectively.

The Company's preferred shares have a provision that calls for dividends of 12%, declared semi-annually, and paid in preferred shares. As a result of the dividend provision, we issued 798 shares of our preferred stock during 2012 resulting in an increase in preferred stock of $79,800 and reduction of additional paid in capital for the same amount. As of the date of this report, there is no plan to issue additional shares of preferred stock. The Company's common shares have a provision that allows dividends to be paid in cash at the discretion of the board of directors; however, the Company's board of directors has never declared a dividend on common stock and there is no assurance that future dividends will be declared on the Company's common stock.

The Company's management believes the current cash and cash flow from operations, including its line-of-credit, will be sufficient to meet anticipated cash needs, including cash for working capital and capital expenditures in the foreseeable future. However, the Company may require additional cash resources due to changing business conditions or to take advantage of other future developments, which may require the Company to seek additional cash by selling additional equity securities or debt securities. The sale of convertible debt securities or additional equity securities could result in additional dilution to the company's stockholders. The incurrence of additional indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations and liquidity. On March 15, 2013, the Company entered a new $2 million promissory note with 3U, a supplier of Powin, with a maturity date of June 30, 2015. The interest rate on the line-of-credit is fixed at 6% and there are no covenant requirements.

The Company's ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties including: investors' perception of, and demand for, securities of alternative manufacturing companies; conditions of the U.S. and other capital markets in which we may seek to raise funds; and future results of operations, financial condition and cash flow. Therefore, the Company's management cannot assure that financing will be available in amounts or on terms acceptable to the Company, if at all. Any failure by the Company's management to raise additional funds on terms favorable to the Company could have a material adverse effect on the Company's liquidity and financial condition.

Year 2013 Outlook

The Company's year ends on December 31st of each calendar year. For 2013, Management believes the Company's OEM and Energy subsidiary's will continue to acquire and develop new opportunities for further product offerings to new customers as the sales and marketing program developed in 2012 for OEM is helping the subsidiary gain market share of new products. Additionally, management is optimistic that products in the Powin Energy subsidiary will be able to hit the market in 2013, generating revenues.

Further, the two wholly owned subsidiaries, Channel Partner Program, Inc. (CPP) and POWIN Renewable Energy Resources, Inc. (PRER), are each showing strong potential for additional sales.

Our CPP subsidiary (Powin Channel Partner Program) CPP is a dual-facing operation. It works with U.S. manufacturers to introduce and distribute their products via e-commerce channels into China's vast, and fast-growing consumer marketplace, by providing, logistics, promotion and marketing solutions. More recently, management has turned focus on the domestic marketplace. CPP now manages, sells and promotes online sales for Powin approved products through U.S. online web stores, retailers and marketplaces. Items sold online include but are not limited to furniture, LED lighting, and consumer based battery storage products. Management is confident that the e-commerce efforts will be able to increase sales this year by providing new technologies for a more reasonable cost than comparable competitors' products.


Powin Energy continued to gain momentum in second half of 2012. Management is optimistic that Powin Energy will be able to bring products they have in the pipeline to the market in 2013 and contribute significant revenues. Other significant battery and energy storage milestone for Powin Energy include:

1) Powin Energy's containerized battery storage system has been completed and delivered to the Bonneville Power Administration located in Vancouver, WA. The system is currently undergoing qualification testing. Once the unit has passed initial inspection it will be deployed to Energy Northwest's Nine Canyon Wind Facility for additional testing followed by visits to another BPA service area in the Pacific NW and the final phase of assessment at a Pacific Northwest National Laboratory facility. This is a two year joint effort involving several high profile government institutions, the end result will be a rigorously tested, spec proven, modular energy storage system that can be employed by utility companies to meet the growing need for renewable energy storage.

2) Powin Energy has recently completed a substantial sales order for a hybrid conversion kit system that targets public transit companies, waste management services and school districts. The product offers an alternative, economical solution to purchasing new fleets of vehicles by retrofitting used vessels that provide an estimated 15-20% increase in fuel savings.

3) Powin Energy is quoting several significantly sized energy storage projects for reputable wind developers and is deepening its relationship with these wind developers by providing technical data and analysis.

4) Powin Energy is putting together a product line focusing on consumer goods for everyday use incorporating portable solar and battery products, energy efficient lighting, etc. The products will be offered on several major online retailers including Amazon, ATG, Costco, and Bellacor, as well as Powin Energy's personal online sales platform.

Critical Accounting Policies

Our significant accounting policies are summarized in Note 1 of our consolidated financial statements. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and . . .

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