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PWON > SEC Filings for PWON > Form 10-K on 15-Apr-2014All Recent SEC Filings

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Form 10-K for POWIN CORP


15-Apr-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis ("MD&A") in intended to help the reader understand the results of operations and financial condition of Powin Corporation as well as the factors that could affect our future financial condition and results of operation. This discussion and analysis should be read in conjunction with our consolidated financial statements and the notes thereto included in Part II ITEM 8 of this Form 10-K.

OVERVIEW

By all measures, 2013 was a challenging year for Powin Corporation. We lost several of our most significant customers in the Contract Manufacturing segment resulting in significantly reduced revenues and an operating loss in that segment and we were unable to grow the Energy and Mexico segments as quickly as expected.

RESULTS OF OPERATIONS

Revenues by segment were as follows:

Year ended December, 31       2013             2012
Revenue
Contract manufacturing    $ 12,397,954     $ 35,426,341
Manufacturing                4,584,849        5,797,094
Energy                         205,210          193,959
Mexico                         137,449           84,284
CPP                            348,237          485,218
Warehousing                    198,384          319,468
Consolidated              $ 17,872,083     $ 42,306,364

Contract manufacturing revenues were down $23.0M or 65.0% in 2013 as compared to 2012. The primary reason for this decline was the loss of the segment's three largest customers, including a previously disclosed related-party. These long-time customers each began sourcing their manufacturing directly from factories in China to reduce costs.

Revenues for the manufacturing segment were down $1.2M or 20.9% for the year. The segment has one customer, Freightliner, which makes up a significant portion of the revenues. Freightliner sources parts from many manufacturers and shops for price, quality and service. Powin is very competitive on price and quality, but we lost some of our business with Freightliner in 2013 because of service issues. These issues are being remediated and the relationship is improving. As a result, we expect modest growth in manufacturing in 2014.

All other segments are minor and taken as a whole were essentially flat year over year. We expect to grow the Energy and Mexico segments in the coming years; while essentially phasing out the CPP and Warehousing segments.


Gross margin overall was down $2.3M or 65.2% in 2013 compared to 2012. Gross margin percentage decreased from 8.3% to 6.8% mainly as a result of decreased revenue compared with fixed overhead costs.

Operating expenses were $6.3M for the year ended December 31, 2013 down from $6.8M for the same period of 2012. The composition of those expenses, however, are significantly different from year-to-year. In terms of category of expense, employee-related costs increased approximately $623,000 or 21.3%, primarily as a result of the addition of key management personnel and outside consultants, as well as a stock option grant made August to all employees and providing for the immediate vesting of 20% of the total grant. This resulted in immediate expense recognition of 20% of the intrinsic value of the grants of approximately $113,000. Additionally, payroll taxes and benefits increased by approximately $105,000, related to the additional management personnel. Furthermore, salary expense was reduced in the segments with declining revenue, Contract manufacturing and Manufacturing, and increased in the segments that hold the greatest opportunity for future growth, specifically Energy and Mexico.

Professional fees were $1.2M in 2013, an increase of about $168,000 or 15.6% from 2012. While the company has been very focused on reducing spend, we also recognized the need to bring in experienced consultants to assist in refining and executing of strategic initiatives and to improve our finance processes and reporting.

Collectively, the remaining categories of operating expenses were down approximately $795,000 or 27.9% from $2.8M in 2012 to $2.1M in 2013. Reductions were driven from discretionary areas such as office expenses, advertising and research & development. Bad debt expense was also lower in 2013 as a result of lower sales.

Net loss by segment was as follows:

Year ended December, 31            2013             2012
Net loss before income taxes
Contract manufacturing         $   (348,147 )   $    (85,447 )
Manufacturing                      (641,347 )     (1,042,608 )
Energy                           (3,270,590 )     (1,345,522 )
Mexico                           (1,195,821 )     (1,106,981 )
CPP                                (280,962 )       (469,894 )
Warehousing                         (52,638 )       (148,698 )
Consolidated                   $ (5,789,505 )   $ (4,199,150 )

As noted above, Contract manufacturing and Manufacturing experienced declining revenues in 2013 as compared to 2012, but also took steps to decrease costs to keep the operating losses in those segments to a minimum. Conversely, the Company invested is the Energy and Mexico segments, resulting in continued losses in the case of Mexico and increased losses in the case of Energy. Both of these segments expect to see meaningful increases in revenue and decreases in operating losses in 2014.

2014 OUTLOOK

The past two years have presented many challenges and opportunities for the Company. A significant industry shift in contract manufacturing resulted in customers now having direct access to offshore manufacturing which has caused lower margins and decreased revenue. Ahead of that decline, the Company invested in manufacturing capabilities in North America, specifically Mexico, to remain competitive. Additionally, the Company has made significant investments in energy storage technology in order to develop a new line of business in a growing industry. For 2014, Management has four key initiatives, all centered on a theme of intense focus.

Contract manufacturing experienced declining revenue sequentially each quarter during the year ended December 31, 2013 as a result of a few large customers moving to a direct relationship with offshore factories. Revenues for this segment for the fourth quarter were down sequentially as compared to the third quarter. Management does not expect further declines in revenue in 2014, but rather modest growth sequentially each quarter as a result of producing high quality products and delivering highly personalized service for a small number of key account relationships.

The Manufacturing segment experienced a moderate decline for the year ended December 31, 2013, but ended the year with sequential growth from the third quarter to the fourth quarter. Management has taken steps to improve the relationship with the segment's primary customer, Daimler Freightliner, and expects a modest increase in revenues in this segment in 2014.

The Energy segment has been primarily focused on research and development, including testing, for the past two years and is beginning to take orders for commercially viable products. During the development phase, the Company had a long list of potential products and services that could utilize its' technology. Towards the end of 2013 the Company identified a small number of high value products that have the greatest chance to drive significant revenues in the future. For 2014, the Company will maintain focus on these products, namely, grid-level and commercial energy storage solutions and Electronic Vehicle charging stations. Though this is a developing industry and sales forecasts are uncertain, the market indicates an increase in this category; therefore we anticipate an increase in revenue in 2014, although we do not expect this segment to produce a meaningful amount of revenue to the Company overall until at least 2015.


The Company's Mexico factory began commercial production near the end of 2013. As a result, revenues were not meaningful to the Company overall. For 2014, the facility will focus on manufacturing high-quality safes at competitive prices. Management believes that the Mexico factory can produce safes at, or exceeding, the quality level of those manufactured in China for a lower price, while also reducing time to market. Management expects a modest increase in revenues from this segment, but does not expect revenues from this segment to be significant to the Company overall.

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, 2013, cash used in operating activities was $2.94 million compared to $2.54 million in 2012. Cash used for investing activities was $318,325 for the year ended December 31, 2013, down from $786,123 in 2012. Cash provided by financing activities during the year ended December 31, 2013 was $3.00 million compared to cash provided of $1.66 million in 2012.

At December 31, 2012, we had $1.60 million outstanding on an operating line-of-credit with Key Bank with maximum borrowings available of $2.00 million and a maturity date of May 15, 2013. In March 2013, the Company borrowed $2.00 million from Joseph Lu, CEO, and $2.00 million from 3U HK Trading Co. ("3U"). These borrowings allowed the Company to pay off the line of credit with Key Bank, alleviating any covenant concerns and provided operating cash flow. In October 2013, Mr. Lu loaned the Company an additional $500,000 and in December 2013 3U loaned the company an additional $270,000.

Subsequent to December 31, 2013, the Company has borrowed an additional $900,000 to sustain operations as summarized in the table below:

Date of borrowing Lender   Due Date      Interest rate  Amount

January 27, 2014  Danny Lu June 30, 2014      6%        250,000
February 11, 2014 Peter Lu June 30, 2014      6%        250,000
February 24, 2014 Danny Lu July 31, 2015      6%        100,000

March 28, 2014 Peter Lu June 30, 2014 6% 200,000 March 28, 2014 Danny Lu June 30, 2014 6% 100,000

The Company has a five-year equipment line-of-credit facility with Key Bank, 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 $275,000 and $375,000 at December 31, 2013 and 2012, respectively.

On December 18, 2012, the Company entered into a four-year loan with Sterling Bank in the amount of $163,000 with a maturity date of January 1, 2017. The loan is secured by all inventory, receivables and equipment. The interest rate is fixed at 3.25%. The balance outstanding on this loan was $102,327 and $163,000 at December 31, 2013 and December 31, 2012, 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 906 shares of our preferred stock in 2013, resulting in an increase in preferred stock of $90,600 and reduction of additional paid in capital for the same amount. In 2012, we issued 798 shares of preferred stock, increasing preferred stock by $79,800 and decreasing additional paid in capital. 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 does not believe the current cash and cash flow from operations will be sufficient to meet anticipated cash needs, including cash for working capital and capital expenditures in the foreseeable future. The Company will likely require additional cash resources which will require the Company to sell 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.


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 United States 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.

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 circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report.

OFF BALANCE SHEET ARRANGEMENTS

The Company has no off-balance sheet arrangements.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

Please see Note 2 of our consolidated financial statements that describe the impact, if any, from the adoption of Recent Accounting Pronouncements.

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