ITEM 1. BUSINESS
GENERAL
Powin Corporation (“Company”, “we”, “us”) was founded in 1989 in Oregon by Joseph Lu, who developed a strategy of manufacturing a number of diverse products for leading North American retailers, with careful attention to quality and value-added service. As a contract manufacturer, the Company provides manufacturing coordination, design and logistics services for companies to outsource its manufacturing needs. Manufacturing is provided through the Company’s subsidiary, Powin Manufacturing Corporation (“Powin Manufacturing”), with a leased metal fabrication plant in Tualatin, Oregon; its 85% owned subsidiary in Mexico, with a leased metal fabrication plant in Saltillo; or through very strong relationships with factories located in The People’s Republic of China and in Taiwan.
Throughout its life-cycle, the Company has expanded into additional lines of business, all based on the values of delivering customers a high quality product and value-added service. The most notable of these lines of business are Powin Energy Corporation (“Powin Energy”), established in 2010 and Powin Industries, S.A. de C.V. (“Powin Mexico”) established in 2011.
LEGAL ENTITIES AND OPERATING SEGMENTS
During the periods presented, we operated in six business segments, each within a separate legal entity. During 2014 and 2015, several segments were renamed to more accurately reflect the nature of operations. Where applicable, the legal entities were also renamed to correspond to the segment name. Below is a table listing the legal entities presented in this report, along with the corresponding business segment names and, for the purposes of continuity, the legal entity and segment names as disclosed in our previous filings:
(a)
For the years ended December 31, 2014 and 2015, Powin Corporation was both the parent company of all subsidiaries, as well as the operating entity formerly referred to as OEM, now called contract manufacturing.
Contract manufacturing
Our contract manufacturing segment provides for the coordination and distribution of products manufactured in China. We assist in the design and handle the logistics and coordination of product manufacturing from concept to delivery. We also manage logistics, coordinating the shipment of the product to our customers or the end users. Principal products manufactured for customers during the years presented in this report include: Gun safes; outdoor cooking equipment; fitness and recreation equipment; senior citizen home safety and living assistance equipment; and trampolines.
Competition
Contract manufacturing faces competition from many fronts, most notably from Chinese manufacturers that contract directly with North American companies. Historically, there were many barriers including distance, language, cultural that made it difficult for North American companies to locate and contract with factories in China. Powin Corporation’s knowledge of Chinese business practices and deep business relationships, coupled with the Company’s attention to quality and service, gave us a significant advantage in this space. With technology reducing these barriers it is now easier than ever for North American companies to outsource manufacturing to China without the need for a “middle man.” In order to remain competitive, the Company must continue to deliver superior quality, value-added services, such as design and logistics at a competitive price.
An additional source of competition includes companies that choose not to outsource manufacturing, but rather invest in their own manufacturing capabilities.
Manufacturing
Our manufacturing segment, formerly named Quality Bending and Fabrication (“QBF”), manufactures various truck parts and components for domestic manufactures includes for Freightliner Trucks, a division of Daimler Trucks North America, the largest manufacturer of heavy-duty vehicles in North America. Daimler Trucks North America designs, builds and markets a wide range of Class 3-8 vehicles including long-haul highway tractors, heavy-duty construction and vocational trucks, mid-range trucks for distribution and service, school and transit buses, fire and emergency service apparatus, and chassis for step vans, school and shuttle buses, and motor homes. Freightliner Trucks is headquartered in Portland, Oregon, with truck manufacturing facilities located in Portland and throughout the United States and Mexico.
Manufacturing is completed at the Company’s leased facility in Tualatin, Oregon as well as arranging the outsourced manufacturing at a third-party factory in Qingdao, China.
Competition
Daimler Trucks has such a demand for parts that there are a great number of suppliers each with a relatively small percentage of the overall business. Daimler requires very high quality manufacturing, competitive pricing and personalized service. We believe that Daimler is satisfied with our quality and pricing in 2015,and is likely to award more business to Powin should we be able to improve our balance sheet. While Daimler is a significant customer to the Company, we are not a significant supplier to Daimler.
Energy
Powin Energy has developed market- leading architecture that utilizes proprietary patent-pending energy storage technology for scalable grid-level and commercial energy storage systems, Electric Vehicle (EV) charging stations, and transportation applications. Through December 31, 2015, the energy segment has focused on identifying target markets and applications and finalizing the development of products to serve those markets and applications. The Company expects increased operations from this segment in 2016 and beyond.
Competition
The international market for such energy products and services is intensely competitive and continually impacted by evolving industry standards, international and regional governmental regulations, rapid price changes and product obsolescence. Competitors in this market include many domestic and foreign companies, most of which have substantially greater financial, technical, marketing, manufacturing and other resources. We are and will continue to be at a competitive disadvantage to most of our competitors, though our patent-pending architecture provides strong round trip efficiency (RTE) with an industry competitive price in all of its energy segments.
Powin Mexico
Powin Mexico is a manufacturing segment, currently manufacturing gun safes, but also capable of manufacturing heavy truck parts. Operations began in 2014. The leased facility is 90,417 square feet and was built in 2011. As of December 31, 2015, there were 75employees working in the facility.
Warehousing (formerly Wooden):
The warehousing segment provides services in support of the Company’s other segments, as well as customers across all segments. The Company’s headquarters facility contains a 60,000 square foot full service warehouse. The warehousing segment receives, inventories and ships many products and materials for the other segments. Warehousing also offers full service warehousing for outside companies. Services include storage rental based on square feet or pallet counts; scheduling; receiving; inventory control and shipping. From January 1, 2015, this segment was merged with our contract manufacturing segment.
For the year beginning January 1, 2015, the Company has realigned its legal entity and segment structure as follows:
Going forward, Powin Corporation will continue to be the parent company for all subsidiaries and their respective business segments.
Contract Manufacturing, formerly OEM, operations was moved to a separate legal entity, Powin Contract Manufacturing Corporation, effective January 1, 2014. This legal entity was renamed Q Pacific Contract Manufacturing on December 10, 2015. This legal entity was previously named Channel Partner Program.
Powin Wooden Product Service, Inc. was renamed Powin Product and Service Corporation, effective January 1, 2014, and merged to Contract Manufacturing on January 1, 2015.
The purpose of this realignment is to ensure focus and accountability on each segment as Management executes a strategy for improved profitability in the coming year.
In December 2013, Powin Energy applied for Minority Business Enterprise status. On January 21, 2014, Powin Energy met all requirements for the certification as a bona fide Minority Business Enterprise defined by the National Minority Supplier Development Council, Inc. (NMSDC) and as adopted by the Northwest Minority Supplier Development Council.
On December 3, 2015, Powin Corporation andPowinEnergyentered into an Agreement and Plan of Merger and Liquidation (“Merger Agreement”).
The Merger is subject to approval by the shareholders of Powin Corporation and the other closing conditions of the Merger Agreement. The Merger Agreement has been approved by the board of directors of Powin Corporation and Powin Energy. The board of directors of Powin Corporation has recommended that its shareholders adopt the Merger Agreement. To that end, Powin Corporation will file an Information Statement with the Securities and Exchange Commission under Regulation 14C. The Merger will not become effective until 21 days after the definitive Information Statement has been mailed to all shareholders of Powin Corporation.
LICENSES, CONCESSIONS, ROYALTY AGREEMENTS OR LABOR CONTRACTS
Our licenses consist of the customary state, county and city licenses required in the normal course of doing business. We do not typically enter into written agreements or licenses with our customers, which is common in the industry.
GOVERNMENT APPROVAL AND REGULATION
There are no principal products or services which require government approval as all of our principal products and services comply with government regulations.
EFFECT OF EXISTING GOVERNMENTAL REGULATION ON OUR BUSINESS
The effect of existing government regulation on our business has been that we can no longer proceed with cast-iron construction products due to the government’s anti-dumping law. Additionally, government regulation will bring up trade issues that may be difficult to deal with. There were twenty-two items identified in 2008 that were targeted for increased tariffs, nineteen of which were Chinese products. Most of these were food-related products, so the effect on us was minimal.
We continue to monitor the changing governmental regulations so our business can comply with all rules and regulations.
ENVIRONMENTAL LAWS
In general, our manufacturing activities are subject to certain federal, state and local laws and regulations relating to environmental quality and pollution control. Such laws and regulations increase the costs of these activities and may prevent or delay the commencement or continuance of a given operation. Compliance with these laws and regulations has not had a material effect on our operations or financial condition to date. Specifically, we are subject to legislation regarding emissions into the environment, water discharges and storage and disposition of hazardous wastes. In addition, legislation has been enacted which requires well and facility sites to be abandoned and reclaimed to the satisfaction of state authorities. However, such laws and regulations change frequently; therefore, we are unable to predict the ultimate cost of compliance. Generally, environmental requirements do not appear to affect us any differently or to any greater or lesser extent than other companies in our industry segments.
We continue to monitor changing environmental laws to assure that our business can comply with all rules and regulations.
EMPLOYEES
As of December 31, 2015, we employ 65employees at our facilities in the United States and 75 employees at our facility in Mexico.
ITEM 1A.
ITEM 1A. RISK FACTORS
This report includes forward-looking statements about our business and results of operations that are subject to risks and uncertainties. See "Forward-Looking Statements," above. Factors that could cause or contribute to such differences include those discussed below. In addition to the risk factors discussed below, we are also subject to additional risks and uncertainties not presently known to us or that we currently deem immaterial. If any of these known or unknown risks or uncertainties actually occurs, our business could be harmed substantially.
RISKS RELATED TO OUR BUSINESS
The impact of the current economic climate and tight financing markets may impact consumer demand for our products and services.
Many of our existing and target customers are in the small and medium business sectors. If small and medium businesses experience economic hardship, it could negatively affect the overall demand for our products and services and, could cause delay and lengthen sales cycles and could cause our revenues to decline.
Although we maintain allowances for returns and doubtful accounts for estimated losses resulting from product returns and the inability of our customers to make required payments, and such losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same return on the bad debt rates we have had in the past, especially given the current economic conditions. Additionally, challenging economic conditions could have a negative impact on the results of our operations.
There may be deficiencies with our internal controls that require improvements, and we will be exposed to potential risks from legislation requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002.
While we believe that we currently have adequate internal control procedures in place, we are still exposed to potential risks from legislation requiring companies to evaluate controls under Section 404a of the Sarbanes-Oxley Act of 2002. Under the supervision and with the participation of our management, we have evaluated our internal controls system in order to allow management to report on our internal controls, as required by Section 404 of the Sarbanes-Oxley Act. We have performed the system and process evaluation and testing required in an effort to comply with the management certification requirements of Section 404. As a result, we have incurred additional expenses and a diversion of management’s time. If we are not able to meet the requirements of Section 404 in a timely manner or with adequate compliance, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC.
If we do not maintain proper disclosure controls and procedures, our ability to produce accurate and timely financial statements could be impaired which could adversely affect our business, operating results and financial condition.
While the audit of our financial statements by our independent registered public accounting firm has included a consideration of internal control over financial reporting as a basis of designing audit procedures, the accounting firm has not considered internal controls over financial reporting for the purpose of expressing an opinion with respect to the effectiveness of our internal controls over financial reporting. If such an evaluation had been performed, material weaknesses or other control deficiencies may have been identified. In addition, material weaknesses and other control deficiencies may be identified when our management performs evaluations of internal controls in the future. Ensuring that we have adequate internal financial and accounting controls and procedures that allow us to produce accurate financial statements on a timely basis is costly and time-consuming and we are required to evaluate these controls frequently.
Manufacturing internationally may create risks.
There are many risks associated with international business. These risks include, but are not limited to, language barriers, fluctuations in currency exchange rates, political and economic instability, regulatory compliance difficulties, problems enforcing agreements and greater exposure of our intellectual property to markets where a high probability of unlawful appropriation may occur. A failure to mitigate any of these potential risks could damage our business.
Product liability and product warranty risks could adversely affect our operating results.
We produce parts for commercial vehicles. Failure of our parts could give rise to product liability claims. We maintain insurance addressing the risk of product liability claims arising from bodily injury or property damage, but there can be no assurance that the insurance coverage will be adequate or will continue to be available on terms acceptable to us. We manufacture most of our parts to strict contractually-established standards and tolerances using customer manufacturing specifications. If we fail to meet the contractual requirements for a product, we may be subject to product warranty costs and claims. Product warranty costs are generally not insured.
Our quarterly operating results are difficult to predict and may fluctuate significantly from period to period in the future.
Our quarterly operating results are difficult to predict and may fluctuate significantly from period to period based on the seasonality of consumer spending and corresponding manufacturing trends in the United States and China. Furthermore, due to ever-fluctuating pricing on commodities, inputs and other raw materials and given the unpredictable economic climate, it is difficult to forecast with any amount of certainty our quarterly operating results. As a result, you may not be able to rely on period-to-period comparisons of our operating results as an indication of our future performance. Factors that are likely to cause our operating results to fluctuate, such as the seasonality of manufacturing spending, a deterioration of global economic conditions and potential changes to the regulation of the manufacturing industry in China and Mexico is discussed elsewhere in this report. Additionally, some of the products manufactured and distributed by the Company are seasonal in nature. If our revenues for a particular quarter are lower than we expect, we may be unable to reduce our operating expenses for that quarter by a corresponding amount, which would harm our operating results for that quarter relative to our operating results from other quarters.
Our future acquisitions may expose us to potential risks and have an adverse effect on our ability to manage our business.
Selective acquisitions will form a part of our strategy to further expand our business. If we are presented with appropriate opportunities, we may acquire additional businesses, services or products that are complementary to our core business. Our integration of the acquired entities into our business may not be successful and may not enable us to expand into new manufacturing platforms as successful as we expect. This would significantly affect the expected benefits of these acquisitions. Moreover, the integration of any future acquisitions will require significant attention from our management.
The diversion of our management’s attention and any difficulties encountered in any integration process could have an adverse effect on our ability to manage our business. In addition, we may face challenges trying to integrate new operations, services and personnel with our existing operations. Future acquisitions may also expose us to other potential risks, including risks associated with unforeseen or hidden liabilities, the diversion of resources from our existing businesses and technologies, our inability to generate sufficient revenue to offset the costs, expenses of acquisitions and potential loss of, or harm to, relationships with employees and manufacturing clients as a result of our integration of new businesses and new regulations. In addition, we cannot assure you that we will be able to realize the benefits we anticipate from acquiring other companies or that we will not incur costs, including those relating to intangibles or goodwill, in excess of our projected costs for these transactions. The occurrence of any of these events could have a material and adverse effect on our ability to manage our business, our financial condition and our results of operations.
There may be unknown risks inherent in our acquisitions of companies which could result in a material adverse effect on our business.
We will conduct due diligence with respect to any acquisition we undertake, but we may not be aware of all of the risks associated with any of the acquisitions. Any discovery of adverse information concerning any of these acquisitions could have a material adverse effect on our business, financial condition and results of operations. While we may be entitled to seek indemnification in certain circumstances, successfully asserting indemnification or enforcing such indemnification could be costly and time consuming or may not be successful at all.
Failure to manage our growth could strain our management, operational and other resources and we may not be able to achieve anticipated levels of growth in the new networks and media platforms we hope to operate, either of which could materially and adversely affect our business and growth potential.
We have been expanding, and plan to continue to expand, our operations in the United States, China and in Mexico. To manage our growth, we must develop and improve our existing administrative and operational systems and, our financial and management controls and further expand, train and manage our work force. As we continue this effort, we may incur substantial costs and expend substantial resources in connection with any such expansion due to, among other things, different technology standards, legal considerations and cultural differences. We may not be able to manage our current or future international operations effectively and efficiently or compete effectively in such markets. We cannot assure you that we will be able to efficiently or effectively manage the growth of our operations, recruit top talent and train our personnel. Any failure to efficiently manage our expansion may materially and adversely affect our business and future growth.
We may need additional capital and we may not be able to obtain it, which could adversely affect our liquidity and financial position.
We have relied on borrowings from individuals and companies with close ties to the Company for operating cash flows. While we believe that we will be able to continue to raise working capital from these sources for the foreseeable future, we cannot be assured that these sources of will continue to meet our working capital needs. In order to meet potential cash needs, we may be required to sell additional equity or issue debt securities. The potential sale of additional equity securities could result in additional dilution to our existing shareholders; however, the incurrence of indebtedness would result in increased debt service obligations and bind us to operating and financing covenants that would restrict our operations and liquidity.
Our 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 manufacturers; conditions of the United States and other capital markets in which we may seek to raise funds; and our future results of operations, financial condition and cash flows;.
We cannot offer any assurances that financing will be available in amounts or on terms acceptable to us, if at all. Any failure to raise additional funds on terms favorable to us could have a material adverse effect on our liquidity and financial condition.
Unauthorized use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may adversely affect our business.
We regard our trade secrets and other intellectual property as critical to our success. Unauthorized use of the intellectual property used in our business may adversely affect our business and reputation.
We have historically relied on a combination of trademark and copyright law, trade secret protection and restrictions on disclosure to protect our intellectual property rights. We enter into confidentiality and invention assignment agreements with all our employees. We cannot assure you that these confidentiality agreements will not be breached, that we will have adequate remedies for any breach, or that our proprietary technology will not otherwise become known to, or be independently developed by third parties.
We may register in China the trademarks used in our business. We cannot offer any assurances that any of our trademark applications will ultimately proceed to registration or will result in registration with scope adequate for our business. Some of our applications or registration may be successfully challenged or invalidated by others. If our trademark applications are not successful, we may have to use different marks for affected services or technologies, or enter into arrangements with any third parties who may have prior registrations, applications or rights, which might not be available on commercially reasonable terms, if at all.
In addition, policing unauthorized use of our proprietary technology, trademarks and other intellectual property is difficult and expensive, and litigation may be necessary in the future to enforce our intellectual property rights. Future litigation could result in substantial costs and diversion of our resources, and could disrupt our business, as well as have a material adverse effect on our financial condition and results of operations.
We face significant competition, and if we do not compete successfully against new and existing competitors, we may lose our market share, and our profitability may be adversely affected.
We compete with other manufacturing companies in the United States and globally. We compete for manufacturing clients primarily on the basis of price, the range of services that we offer and our brand name. Increased competition could reduce our operating margins and profitability and result in a loss of market share. Some of our existing and potential competitors may have competitive advantages such as significantly greater financial, marketing or other resources, or exclusive arrangements with desirable clients and manufacturers, and others may successfully mimic and adopt our business model. Moreover, increased competition will provide clients additional manufacturing service alternatives, which could lead to lower prices and decreased revenues, profit margins and net income. We cannot offer any assurance that we will be able to successfully compete against new or existing competitors.
Our customers could decide to deal directly with the factories and manufacturers
Our customers could decide to deal directly with the factories and manufacturers who produce their products, thus eliminating the need for our services in the process.
RISKS RELATING TO REGULATION OF OUR BUSINESS AND TO OUR STRUCTURE
We do not typically enter into written agreements with customers, as is standard in most of our lines of business, but this practice exposes us to litigation and ambiguity should a conflict or discrepancy arise.
We do not typically have written contracts with our customers. This practice is not unusual for the industry. The fact that we do not typically have written contracts with our customers is a risk because oral contracts are less easily enforced by courts of law.
Contractual arrangements we have entered into may be subject to scrutiny by the tax authorities and a finding that we owe additional taxes or are ineligible for our tax exemption, or both, could substantially increase our taxes owed, and reduce our net income and the value of your investment.
Under local law, arrangements and transactions among related parties may be subject to audit or challenge by the local tax authorities. If any of the transactions we have entered into with our distributor are found not to be on an arm’s-length basis, or to result in an unreasonable reduction in tax under local tax law, the tax authorities have the authority to disallow our tax savings, adjust the profits and losses of our respective entities and assess late payment interest and penalties. A finding by the tax authorities that we are ineligible for our tax exemptions, would substantially increase our taxes owed and reduce our net income and the value of your investment. As a result of this risk, you should evaluate our results of operations and financial condition without regard to these tax savings.
Our business operations may be affected by legislative or regulatory changes.
Changes in laws and regulations or the enactment of new laws and regulations governing placement or content of out-of-home manufacturing, our business licenses or otherwise affecting our business in China may materially and adversely affect our business prospects and results of operations. We are not certain how the local government will implement any regulation or how it may affect our ability to compete in the manufacturing industry in China. We are particularly concerned with any regulations that might give rise to possible trade issues between China and the United States, and the effects of those regulations on our business. Accordingly, we need to conduct due diligence as to any possible regulations that might arise and substantially affect our operations. Further, we need to make every effort to hedge against any government regulation which may materially alter our business model.
RISKS RELATING TO BUSINESS IN CHINA AND MEXICO
Much of our success is derived from our relationships and business dealings with manufacturing companies in China, and the majority of our products that we distribute and sell to our customers from these third party manufacturers in China, as well as the expansion of our metal manufacturing in Mexico. Accordingly, our business, financial condition, results of operations and prospects are subject to a significant extent, to economic, political and legal developments in China and Mexico.
The economic, political and social conditions, as well as governmental policies, could affect the financial markets in China and our liquidity and access to capital and our ability to operate our business.
China’s economy differs from the economies of most countries in many respects, including the amount of government involvement, level of development, growth rate, control of foreign exchange, and allocation of resources. While China’s economy has experienced significant growth over the past, growth has been uneven, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall Chinese economy, but may also have a negative effect on us. This may encourage foreign manufacturing companies with more experience, greater technological know-how and larger financial resources than we have to compete against us and limit the potential for our growth. Moreover, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.
China’s legal system embodies uncertainties which could limit the legal protections available to you and us.
China’s legal system is a civil law system based on written statutes. The overall effect of legislation over the past 26 years has significantly enhanced the protections afforded to various forms of foreign investment in China. However, these laws, regulations and legal requirements change frequently, and their interpretation and enforcement involve uncertainties. For example, we may have to resort to administrative and court proceedings to enforce the legal protection that we enjoy either by law or contract. However, since China’s administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. For example, these uncertainties may impede our ability to enforce the contracts we have entered into. In addition, such uncertainties, including the inability to enforce our contracts, could materially and adversely affect our business and operation. In addition, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries. Accordingly, we cannot predict the effect of future developments in China’s legal system, particularly with regard to the manufacturing industry, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties could limit the legal protections available to us, including our ability to enforce our agreements with our suppliers.
Properties in which we have interest in Mexico are subject to changes in governmental laws, regulations, economic conditions or shifts in political attitudes or stability in Mexico
We lease real property and have manufacturing interests that are located in Mexico. Any changes in governmental laws, regulations, economic conditions or shifts in political attitudes are beyond our control and may adversely affect our business.
Regulation of business operations in Mexico is extensive.
Regulatory requirements to which we are subject in Mexico include certain permits that require periodic or annual renewal with governmental and regulatory authorities. We are required to comply with existing permit conditions. Although we believe that we are currently in full compliance with existing permit conditions, there are no assurances that applicable governmental and regulatory authorities will renew are permits as they expire or that any pending or future permit applications will be granted or that existing permits will be revoked. In the event that the required permits are not granted or renewed in a timely manner, or in the event that governmental and regulatory authorities determine that we are not compliance with existing permits, we may be forced to suspend operations in Mexico.
Foreign currency fluctuations and inflationary pressures may have a negative impact on our financial condition and results of operations.
Our operations in China and Mexico subject us to foreign currency fluctuations and inflationary pressures which may adversely affect our financial position and results of operations. Since we report our results of operations and financial condition in U.S. dollars, fluctuations in foreign currencies relative to the U.S. dollar may impact our financial results. We do not currently have a hedging program to address foreign currency fluctuations. Any steps taken by us to address foreign currency fluctuations may not eliminate all adverse effects.
Governmental and regulatory corruption in Mexico could pose difficulties under the U.S. Foreign Corrupt Practices Act.
We are subject to the U.S. Foreign Corrupt Practices Act which, among other things, prohibits U.S. companies from engaging in bribery of foreign officials. Mexico is the third largest trading partner of the United States. However, corruption permeates all levels of government and bribery is part of conducting business in Mexico. As a result, doing business in and with Mexico raises significant concerns for U.S. companies. Recent enforcement activity involving operations in Mexico present potential challenges for developing and implementing an effective Foreign Corrupt Practices Act compliance program so as to minimize the risk of violations.
RISKS RELATED TO OUR COMMON STOCK
Our stock is a penny stock. Trading of our stock may be restricted by the Securities and Exchange Commission’s penny stock regulations which may limit a stockholder’s ability to buy and sell our stock.
Our stock is a penny stock. The Securities and Exchange Commission has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities will be covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the Securities and Exchange Commission which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.
The Financial Industry Regulatory Authority, or FINRA, has adopted sales practice requirements which may also limit a stockholder’s ability to buy and sell our stock.
In addition to the “penny stock” rules described above, FINRA has adopted rules that require, that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
Our common stock is illiquid and the price of our common stock may be negatively impacted by factors which are unrelated to our operations
Our common stock currently trades on a limited basis on the OTC Bulletin Board. Trading of our stock through the OTC Bulletin Board is frequently thin and highly volatile. There is no assurance that a sufficient market will develop in our stock, in which case it could be difficult for shareholders to sell their stock. The market price of our common stock could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of our competitors, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting our competitors or us. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on our common stock.
The concentration of stock ownership by Joseph Lu, our Chief Executive Officer, may prevent new investors from influencing significant corporate decisions.
Joseph Lu and his family hold the vast majority of our issued and outstanding common stock. As a result, these shareholders will be able exercise control over all matters requiring shareholder approval, including the election of directors, amendments to our Articles of Incorporation and approval of major corporate transactions.
We do not expect to declare any dividends in the foreseeable future.
We do not anticipate declaring any cash dividends to holders of our common stock in the foreseeable future. Consequently, investors may need to rely on the sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
There are no unresolved staff comments.
ITEM 2.
ITEM 2. PROPERTIES
Our corporate headquarters, including the corporate headquarters of Powin Energy, are located at 20550 SW 115th Ave. Tualatin, OR 97062 under a lease with Lu Pacific Properties LLC, of which Joseph Lu is the controlling member and manager. The lease rate is $35,180 per month for approximately 70,000 square feet of office and warehouse space. The lease term is through June 30, 2021. In January 2016, the Company entered into a lease amendment. The new lease rate is $18,303 per month with triple net charge at $0.15 per square foot per month for 35,048 square feet. The new lease term is through June 30, 2021.
Our subsidiaries, Q Pacific Contract Manufacturing and Q Pacific Manufacturing, are located at 10005 S.W. Herman Road, Tualatin, OR 97062. This manufacturing facility was purchased by Lu Pacific Properties LLC in November 2009. The facility, totaling 38,623 square feet, is currently leased for $15,594 per month and the lease will expire October 31, 2014. In April 2014, the Company entered into an agreement providing the option for a 5 year renewal. In September 25, 2014, the lease was renewed to expire on October 31, 2019.
On June 1, 2011, Powin Industries S.A. de C.V. entered into a ten-year lease with Lu Pacific Properties, LLC for a facility in Saltillo, Coahuila Mexico, which is used in metal manufacturing. This lease requires us to pay for all property taxes, utilities and facility maintenance and the monthly lease payments are $12,333. The lease term is through May 31, 2021.
We believe these existing facilities are adequate for the foreseeable future and we have no plans to renovate or expand them. Each of the above leases is also discussed in this Report at Item 13, Related Party Transactions.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any pending legal proceedings.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded under the symbol “PWON.OB.” Our common stock has been trading since September 30, 2010. The following table sets forth the quarterly high and low sales prices of our common stock for the last two fiscal years, as adjusted for the 1 for 10 reverse effective October 17, 2013. Such prices are inter-dealer quotations without retail mark-ups, mark-downs or commissions, and may not represent actual transactions.
Our common stock is subject to Rule 15g-9 of the Securities and Exchange Commission, known as the Penny Stock Rule which imposes requirements on broker/dealers who sell securities subject to the rule to persons other than established customers and accredited investors. For transactions covered by the rule, brokers/dealers must make a special suitability determination for purchasers of the securities and receive the purchaser's written agreement to the transaction prior to sale. The Securities and Exchange Commission also has rules that regulate broker/dealer practices in connection with transactions in "penny stocks." Penny stocks generally are equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in that security is provided by the exchange or system. The Penny Stock Rules requires a broker/dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prepared by the SEC that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker/dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker/dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer's account. The bid and offer quotations, and the broker/dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer's confirmation. These disclosure requirements have the effect of reducing the level of trading activity in the secondary market for our common stock. As a result of these rules, investors may find it difficult to sell their shares.
As of March 31, 2016, our common stock was held by 425 shareholders of record with 16,255,839 shares of common stock issued and outstanding.
See NOTE 9. CAPITAL STOCK, Part II, ITEM 8 of this report for information regarding shares issued to members of the board of directors as compensation for their services.
There were no shares issued other than to these directors and no shares were repurchased during the periods presented.
Dividend Policy
We have not paid any cash dividends on our common stock. It is anticipated that our future earnings will be retained to finance our continuing development. The payment of any future dividends will be at the discretion of our board of directors and will depend upon, among other things, future earnings, any contractual restrictions, success of business activities, regulatory and corporate law requirements and our general financial condition.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
We are a smaller reporting company as defined by Rule 229.10(f) (1) and are not required to provide the information required by this Item.
Item 7.
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 you 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.
References to “Powin,” the “Company,” “we,” “our” and “us” refer to Powin Corporation and our wholly owned and majority-owned subsidiaries, unless the context specifically states otherwise.
Basis of presentation
Effective Octorber1, 2015, the Company reorganized and renamed certain segments and changed the methodology for allocating corporate overhead costs. The below table lists legal entities and corresponding business segments as defined in the 10-K compared to those described in previous filings.
(a)
Effective January 1, 2014, the business segments formerly known as Warehousing and CPP were combined into a legal entity that was renamed Powin Product and Service Corporation. Effective January 1, 2015, the Powin Product and Service Corporation was merged into Contract Manufacturing.
Results of Operations
The following table presents the Company’s revenues by business segment, for the years ended December 31, 2015 and 2014:
Consolidated net sales for the year ended December 31, 2015, decreased approximately $282,000 or 2.5% from the same period of 2014. The decrease was substantially in the Manufacturing segment, which experienced a revenue decrease of approximately $333,000 or 6.6%and in the Energy segment, which experienced a revenue decrease of approximately $440,000 or 70.6% compared to the same period of 2014.
Manufacturing sales decreased approximately $333,000 or 7% primarily due to reduced demand from Daimler Trucks North America.
Energy sales decreased approximately $440,000 or 71% primarily due to a pause in sales of our electrical vehicle charge stations. Powin Energy has been focusing on the commercialization of its electricity storage products and expects to book orders in 2016.
Mexico sales increased approximately $141,000 or 114% as Powin Mexico begins ramping its contracted manufacturing business for local customers. We expect Powin Mexico continue to sign up more local customers and substantially increase its operating income in 2016.
Consolidated operating expenses for the year ended December 31, 2015, decreased approximately $677,000 or 8.7%, from $7.7 million in the same period of 2014 to $7.0 million.
For the year ended December 31, 2015, the Company had net loss of approximately $5.6 million or $0.28 per share, compared to net loss of approximately $5.9 million or $0.36 per share for the same period of 2014.
2016 Outlook
We expected 2016 to be a transitional year for Powin Corporation, with the traditional manufacturing segment stabilized in 2015 and poised to return to growth in 2016, and the energy segment entering commercialization stage. In addition, we have established a new strategic direction for Powin Mexico factory and aligned its cost structure with the new strategy. We believe our investment made in the past several years in Powin Energy has paved a solid foundation for us in the fast growing energy storage market, with competitive products and a growing sales pipeline. For 2016, Powin management has identified following expectations for each business segment:
(i) Powin OEM business revenue in 2015 reached expected sales goal. Huntsman is our brand product to be the growth drivers for 2016. Also we are expecting the growth of the products that Powin has exclusive manufacturing rights.
(ii) Powin manufacturing business experienced dramatic improvement in the quality and on-time-delivery for our key accounts including Daimler. We continue the efforts in seeking additional key accounts to diversify client bases.
(iii) In 2015 Powin Energy obtained strategic investment from outside investors to help advance its technology. We expect Powin Energy to enter its commercialization stage in 2016 based on our existing sales pipeline. We have established a hardware research & development center in Yangzhou China and a software development team in Taiwan. Both teams are fully ramped by the end of 2015 and executing well on their R&D roadmap. We expect several new products or functions to be released in 2016, to increase Powin Energy's competitiveness in the energy storage market.
(iv) Powin Mexico has undergone some operational and strategy changes in preparation for 2016. Our previous strategy was not as synergistic with our other divisions as we had previously hoped. We are confident in our direction for 2016, increased efficiencies, lean operations, strategic customer partnerships and new management will be the foundation for our success.
Liquidity and Capital Resources
Cash used in operating activities were $5,544,158 for the year ended December 31, 2015, compared to $2,726,462 used in operating activities for the same period in 2014. The increase of cash used in operating activities is mainly due to less increase in accrued payroll and other liabilities, more cash paid to settle accounts payable offset by less purchase of inventories and decreased net loss.
Cash used in investing activities was $304,174 and $23,778 during the year ended December 31, 2015 and 2014, respectively, as the Company acquired more properties and equipment during the year ended December 31, 2015.
Net cash provided from financing activities was $8,687,744 and $2,548,021 during the year ended December 31, 2015 and 2014, respectively. The increase is due to net proceeds received from stock issuance for Powin Energy, and proceeds from payable to related party, offset by payments to payables from related parties.
The Company issued Preferred Stock in August 2015 to settle the following notes payable:
During the year ended December 31, 2015, the Company borrowed $200,000 from related parties for operating cash flows as follows:
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 that 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.
On August 8, 2014, Powin Corporation and its wholly-owned subsidiary, Powin Energy Corporation (collectively “Powin”) and SF Suntech, Inc. (“Suntech”) signed a Share Subscription Agreement (“Subscription Agreement”) for an investment of $25,000,000 from Suntech.
Effective April 2, 2015, Powin and Suntech signed the Fourth Supplemental Agreement (“Supplement”).Under the Supplement, the First Closing Date of the Subscription Agreement was April 2, 2015 (“First Closing”) at which time Suntech made a payment to Powin in the amount of $7,450,000. That payment plus the previous payments of $3,000,000 on August 29, 2014; $2,000,000 on January 15, 2015 and $50,000 on March 2, 2015 represent a total $12,500,000 paid toward the full $25,000,000 owing under the Subscription Agreement. On April 1, 2015 and April 2, 2015, Powin Energy issued 1,765 shares and 378 shares of Powin Energy Common Stock to Suntech, respectively.
After the shares issuance, the Company owns 82.35% of Powin Energy.
The Supplement further establishes the Second Closing Date of the Subscription Agreement as May 31, 2015 (“Second Closing”) when the balance of $12,500,000 is to be paid. If that payment is made, Powin will issue to Suntech an additional 2,143 shares of Powin Energy Common Stock. In the event Suntech is unable or unwilling to pay the remaining subscription balance, Powin will be free to sell the 2,143 shares to another purchaser for the same price per share as paid by Suntech. Suntech failed to make the required payment on May 31, 2015. Accordingly, the Company has elected to terminate the Subscription Agreement, as it pertains to the remaining $12,500,000 owing thereunder.
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
We have no off-balance sheet arrangements.
Recently Adopted Accounting Pronouncements
Please see Note 1of our consolidated financial statements that describe the impact, if any, from the adoption of Recent Accounting Pronouncements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITIATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company, as defined by Rule 229.10(f) (1) and are not required to provide the information required by this Item.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company’s consolidated financial statements are stated in United States dollars and are prepared in accordance with United States generally accepted accounting principles.
It is the opinion of management that the audited consolidated financial statements for the calendar years ended December 31, 2015 and 2014 include all adjustments necessary in order to ensure that the audited consolidated financial statements are not misleading.
The following financial statements are filed as part of this annual report:
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Powin Corporation
We have audited the accompanying consolidated balance sheets of Powin Corporation (the "Company"), as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive loss, stockholders' deficit and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits include consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits include examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. Our audits also include assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements are presented assuming the Company will continue as a going concern. As more fully described in note 2 to the consolidated financial statements, the Company had net losses of $5.6 million in 2015 and $5.9 million in 2014 and cash used in operations of $5.5 million and $2.7 million, respectively. These conditions, among others, raise substantial doubt about its ability to continue as a going concern. Management’s plans to address these conditions are also set forth in note 2 to the consolidated financial statements. The accompanying consolidated financial statements do not include any adjustments which might be necessary if the Company is unable to continue as a going concern.
/s/ Anton & Chia, LLP
Newport Beach, California
April 4, 2016
POWIN CORPORATION
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements
POWIN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements
POWIN CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
The accompanying notes are an integral part of these consolidated financial statements
POWIN CORPORATION
CONSOLIDATED STATEMENT CHANGES OF STOCKHOLDERS' DEFICIT
The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements
POWIN CORPORATION
Notes to Consolidated Financial Statements
Note 1 - Description of Business and History And Summary of Significant Accounting Policies
Description of Business and History
Powin Corporation (“Company”, “we”, “us”) was founded in 1989 in Oregon by Joseph Lu, who developed a strategy of manufacturing a number of diverse products for leading North American retailers, with careful attention to quality and value-added service. As a contract manufacturer, the Company provides manufacturing coordination, design and logistics services for companies to outsource its manufacturing needs. Manufacturing is provided through the Company’s subsidiary, Powin Manufacturing Corporation (“Powin Manufacturing”), with a leased metal fabrication plant in Tualatin, Oregon; its 85% owned subsidiary in Mexico, with a leased metal fabrication plant in Saltillo; or through very strong relationships with factories located in The People’s Republic of China and in Taiwan.
Throughout its life-cycle, the Company has expanded into additional lines of business, all based on the values of delivering customers a high quality product and value-added service. For the periods presented the Company has the following subsidiaries:
The Company’s client base includes distributors in the transportation, medical, sports, camping, fitness, and packaging and furniture industries. Operations outside the United States of America are subject to risks inherent in operating under different legal systems and various political and economic environments. Among the risks are changes in existing tax laws, possible limitations on foreign investment and income repatriation, government price or foreign exchange controls, and restrictions on currency exchange.
Basis of preparation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Principles of consolidation
The accompanying consolidated financial statements include the accounts of Powin Corporation and its subsidiaries. All intercompany transactions and balances have been eliminated. Equity investments through which the Company exercises significant influence over but does not control the investee and is not the primary beneficiary of the investee’s activities are accounted for using the equity method. Investments through which the Company is not able to exercise significant influence over the investee are accounted for under the cost method.
Foreign currencies
Assets and liabilities recorded in foreign currencies are translated to U.S. dollars at the exchange rate on the balance sheet date. Revenue and expenses are translated to U.S. dollars at average rates of exchange prevailing during the year. Translation adjustments resulting from this process are recorded to other comprehensive income (“OCI”).
The reporting currency of the Company is the U.S. dollars. The Company’s Mexico subsidiary Powin Industries S.A. de C.V uses Mexican Peso as its functional currency. The results of operations and cash flows are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rates at the balance sheet dates, and equity is translated at the historical exchange rates. As a result, amounts related to assets and liabilities reported on the statements of cash flows will not necessarily agree with changes in the corresponding accounts on the balance sheets. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statements of stockholders’ equity. Translation adjustments for the years ended December 31, 2015 and 2014 were $(30,033) and $(4,034), respectively. The cumulative translation adjustment and effect of exchange rate changes on cash for the years ended December 31, 2015 and 2014were $(56,176) and $(26,143), respectively. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
Assets and liabilities were translated at 17.34 PESO and 14.72 PESO to $1.00 at December 31, 2015 and December 31, 2014, respectively. The equity accounts were stated at their historical rates. The average translation rates applied to income statements for the years ended December 31, 2015 and 2014 were 17.34 PESO and 14.72 PESO to $1.00, respectively. Cash flows are also translated at average translation rates for the period; therefore, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.
Use of estimates
The preparation of consolidated financial statements in accordance with GAAP requires the use of management’s estimates. These estimates are subjective in nature and involve judgments that affect the reported amounts of assets and liabilities, and the reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates.
We maintain allowances for accounts receivable for estimated uncollectable accounts receivable due to the inability of our customers to make required payments. We maintain impairment for inventory for estimated inventory loss. We maintain allowances for returns for estimated losses resulting from product returns. These estimates have historically been within our expectations and the provisions established.
Revenue recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, the service is performed or delivery has occurred, the price is fixed or determinable, and collectability is reasonably assured.
For product shipped directly from the Company’s warehouse or manufactured by the Company in the United States and then shipped to the customer, revenue is recognized at time of shipment as it is determined that ownership and title has passed to the customer at shipment and revenue is recognized. Amounts billed to customers for freight and shipping are classified as revenue.
Products imported from China and shipped directly to the customer may be either FOB Port of Origin or FOB Shipping Destination United States. If the product is shipped FOB Port of Origin revenue is recognized at time of delivery to the Company’s representative in China, when the proper bills-of-lading have been signed by the customer’s agent and ownership passed to the customer. For product shipped FOB Shipping Destination U.S., revenue is recognized when product is off-loaded at the United States Port of Entry and delivered to the customer, when all delivery documents have been signed by the receiving customer, and ownership has passed to the customer.
For orders placed requiring customized manufacturing, the Company requires the customer to issue its signed purchase order with documentation identifying the specifics of the product to be manufactured. Revenue is recognized on customized manufactured products upon delivery of the product. If the customer cancels the purchase order after the manufacturing process has begun, the Company invoices the customer for any manufacturing costs incurred and revenue is recognized. Orders canceled after delivery has occurred are fully invoiced to the customer and revenue is recognized, provided all other revenue recognition criteria are met.
Cost of goods sold
Cost of goods sold includes cost of inventory sold during the period, net of discounts and allowances, freight and shipping costs, warranty and rework costs, and sales tax.
Advertising
The Company expenses the cost of advertising as incurred. For the years ended December 31, 2015 and 2014, the amount charged to advertising expense was $190,593 and $43,140, respectively.
Research and development
Research and development expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs, localization costs incurred to translate software for international markets, and the amortization of purchased software code and services content. Such costs related to software development are included in research and development expense until the point that technological feasibility is reached, which for our software products, is generally shortly before the products are released to manufacturing. Once technological feasibility is reached, such costs are capitalized and amortized to cost of revenue over the estimated lives of the products.
Loss Per Share
Basic loss per share is based on the weighted-average effect of all common shares issued and outstanding, and is calculated by dividing net loss by the weighted-average shares outstanding during the year. Diluted loss per share is calculated by dividing net income by the weighted-average number of common shares used in the basic loss per share calculation plus the number of common shares that would be issued assuming exercise or conversion of all potentially dilutive common shares outstanding. The Company excludes equity instruments from the calculation of diluted earnings per share if the effect of including such instruments is antidilutive. Please refer to Note 6 for further discussion.
Comprehensive loss
Comprehensive loss is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, ASC 220, Comprehensive loss requires that all items that are required to be recognized under current accounting standards as components of comprehensive loss be reported in a financial statement that is displayed with the same prominence as other financial statements. For the years presented, the Company’s comprehensive loss includes net loss and foreign currency translation adjustments and is presented in the consolidated statements of comprehensive loss.
Cash
The Company considers all highly liquid investments with maturity of three months or less to be cash equivalents. The cash deposits in U.S. financial institutions exceed the amounts insured by the U.S. government. The standard insurance amount is $250,000 per depositor, per insured bank. Non-performance by these institutions could expose the Company to losses for amounts in excess of insured balances. At December 31, 2015 and December 31, 2014, the Company’s bank balances exceeded insurances balances by $2,634,252 and $0, respectively. At December 31, 2015 and December 31, 2014, the Company had no cash equivalents.
Accounts receivable
Accounts receivable are carried at their estimated collectible amounts. Credit is generally extended on a short-term basis; thus, accounts receivable do not bear interest. Accounts receivable are periodically evaluated for collectability based on past credit history with customers and their current financial condition. Balances outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to trade accounts receivable. Bad debt expense for the years ended December 31, 2015 and 2014 was $11,930 and $18,384, respectively.
Inventories, net
Inventories consist of parts and equipment including electronic parts and components, furniture, rubber products, plastic products and exercise equipment. Inventory is valued at the lower of cost (first-in, first-out method) or market. The Company capitalizes applicable direct and indirect costs incurred in the Company’s manufacturing operations to bring its products to a sellable state. For the years ended December 31, 2015 and 2014, the Company recorded an inventory obsolescence recovery of $203,045 and provision for inventory obsolescence of $101,745, respectively, which is included in cost of sales. The components of inventories were as follows:
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation and amortization. For financial reporting and income tax purposes, the costs of property and equipment are depreciated and amortized over the assets estimated useful lives, using principally the straight-line method for financial reporting purposes and an accelerated method for income tax purposes. Costs associated with repair and maintenance of property and equipment are expensed as incurred. Changes in circumstances, such as technological advances, changes to the Company’s business model or capital strategy could result in actual useful lives differing from the Company’s estimates. In those cases where the Company determines that the useful life of property and equipment should be shortened, the Company would depreciate the asset over its revised remaining useful life thereby increasing depreciation expense.
The Company depreciates property and equipment over the following estimated useful lives:
The Company reviews the carrying value of property, and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, no impairment expenses for property, and equipment was recorded in operating expenses during the years ended December 31, 2015 and 2014.
Intangible Assets
All of our intangible assets include websites and also patents that are subject to amortization and are amortized using the straight-line method over their estimated period of benefit, ranging from 3 to 5 years. We evaluate the recoverability of intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired.
Non-controlling interests
Non-controlling interests on the consolidated financial statements are resulted from the consolidation of Mexico, an 85% owned subsidiary from February 2011 and Powin Energy, an 82.35% owned subsidiary from April 2, 2015. Non-controlling interests on the consolidated financial statements represented the minority stockholders’ proportionate share of the net income/losses of Mexico and Powin Energy.
On August 8, 2014, Powin Corporation and its wholly-owned subsidiary, Powin Energy Corporation (collectively “Powin”) and SF Suntech, Inc. (“Suntech”) signed a Share Subscription Agreement (“Subscription Agreement”) for an investment of $12,500,000 from Suntech. On April 1, 2015 and April 2, 2015, Powin Energy issued 1,765 shares and 378 shares of Powin Energy Common Stock to Suntech, respectively. Professional expenses of $750,000 related to the issuances were deducted from the proceeds received.
After the shares issuance, the Company owns 82.35% of Powin Energy.
On January 2016, the company spent $21,560 and bought the 15% minority interest in the company’s Mexico subsidiary. The Company now owns 100% of the Mexico subsidiary.
Income taxes
Deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company calculates a provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized by identifying the temporary differences arising from the different treatment of items for tax and accounting purposes. In determining the future tax consequences of events that have been recognized in the consolidated financial statements or tax returns, judgment and interpretation of statutes is required. Additionally, the Company uses tax planning strategies as a part of its tax compliance program. Judgments and interpretation of statutes are inherent in this process.
The accounting guidance for uncertainties in income tax prescribes a comprehensive model for the financial statement recognition, measurement, presentation, and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. The Company recognizes a tax benefit from an uncertain tax position in the consolidated financial statements only when it is more likely than not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits and a consideration of the relevant taxing authority’s widely understood administrative practices and precedents.
Prior to July 8, 2008, the Company had elected under the Internal Revenue Code to be taxed as an S Corporation. In lieu of corporation income taxes, the stockholder of an S Corporation is taxed on his proportionate share of the Company’s taxable income. Due to the merger on July 8, 2008, the Company is now subject to Federal income tax.
Fair Value Measurements
The fair value accounting guidance defines fair value 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 definition is based on an exit price rather than an entry price, regardless of whether the entity plans to hold or sell the asset. This guidance also establishes a fair value hierarchy to prioritize inputs used in measuring fair value as follows:
•
Level 1: Observable inputs such as quoted prices in active markets;
•
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
•
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The carrying value of the Company’s equipment borrowing and short term line of credit borrowing at December 31, 2015 and 2014, is considered to approximate fair market value, as the interest rates of these instruments are based predominantly on variable reference rates. The carrying value of accounts receivable, trade payables and accrued liabilities approximates the fair value due to their short-term maturities.
Stock-Based Compensation
The Company measures stock-based compensation expense for all share-based awards granted to employees based on the estimated fair value of those awards at grant-date under ASC 718. The cost of restricted stock awards is determined using the fair market value of our common stock on the date of grant. The fair values of stock option awards are estimated using a Black-Scholes valuation model. The compensation costs are recognized net of any estimated forfeitures on a straight-line basis over the employee requisite service period. Forfeiture rates are estimated at grant-date based on historical experience and adjusted in subsequent periods for any differences in actual forfeitures from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications have no impact on our consolidated net earnings, financial position or cash flows.
Recently Issued Accounting Pronouncements -Not Adopted
The FASB has issued Accounting Standards Update (ASU) No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures.
Under Generally Accepted Accounting Principles (GAAP), financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. Financial reporting under this presumption is commonly referred to as the going concern basis of accounting. The going concern basis of accounting is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities.
Currently, GAAP lacks guidance about management’s responsibility to evaluate whether there is substantial doubt about the organization’s ability to continue as a going concern or to provide related footnote disclosures.
This ASU provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes.
The amendments are effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application is permitted for annual or interim reporting periods for which the financial statements have not previously been issued.
The FASB and IASB (the Boards) have issued converged standards on revenue recognition. Specifically, the Boards have issued the following documents:
·
FASB Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers: Topic 606 ; and
·
IFRS 15, Revenue from Contracts with Customers.
The issuance of these documents completes the joint effort by the Boards to improve financial reporting by creating common revenue recognition guidance for U.S. GAAP and IFRS.
ASU 2014-09 affects any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (e.g., assets within the scope of Topic 360, Property, Plant, and Equipment, and intangible assets within the scope of Topic 350, Intangibles-Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this ASU.
The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:
·
Step 1: Identify the contract(s) with a customer.
·
Step 2: Identify the performance obligations in the contract.
·
Step 3: Determine the transaction price.
·
Step 4: Allocate the transaction price to the performance obligations in the contract.
·
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
For a public entity, the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted.
Segment reporting
ASC 280, Segment Reporting, formerly known as Statement of Financial Accounting Standards No. 131, Disclosure about Segments of an Enterprise and Related Information, requires use of the “management approach” model for segment reporting. Under this model, segment reporting is consistent with the manner that the Company’s management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure or any other manner in which management disaggregates a company.
A description of our operating segments as of December 31, 2015 and December 31, 2014, follows.
Contract manufacturing (formerly OEM):
Outsourced manufacturing for North American companies, including senior citizen safety products; steel gun safes; outdoor cooking equipment; trampolines; plastic products and small electronic appliances. Contract manufacturing also offers logistic services and a qualified engineer team to support and provide in-house design.
Manufacturing (formerly QBF):
Our manufacturing segment, Powin Manufacturing formerly named Quality Bending and Fabrication (“QBF”), manufactures various truck parts and components primarily for Freightliner Trucks, a division of Daimler Trucks North America, the largest manufacturer of heavy-duty vehicles in North America. Daimler Trucks North America designs, builds and markets a wide range of Class 3-8 vehicles including long-haul highway tractors, heavy-duty construction and vocational trucks, mid-range trucks for distribution and service, school and transit buses, fire and emergency service apparatus, and chassis for step vans, school and shuttle buses, and motor homes. Freightliner Trucks is headquartered in Portland, Oregon, with truck manufacturing facilities located in Portland and throughout the United States and Mexico.
Manufacturing is completed at the Company’s leased facility in Tualatin, Oregon as well as arranging the outsourced manufacturing at a third-party factory in Qingdao, China.
Energy:
Powin Energy has developed market leading architecture that utilizes proprietary patent-pending energy storage technology for scalable grid energy storage systems, power supply units for electric vehicles, and transportation applications. Through December 31, 2014, the Energy segment has focused on identifying target markets and applications and finalizing the development of products to serve those markets and applications. In 2015, The Company has continued to develop products and marketing strategies for this operating entity.
Product & Service (formerly Channel Partner Program, Warehousing and Wooden)
The Product & Service segment contains the legacy operations of Channel Partner Program, a distribution channel for North American companies to sell their products in China as well as selling certain consumer products through U.S.-based retailers and marketplaces, including online; and Warehousing, which provides warehousing services in support of the Company’s customers across all segments. On January 1, 2015, the Product & Service segment had been incorporated into our contract manufacturing segment.
Powin Mexico:
Powin Mexico is a manufacturing segment, currently manufacturing gun safes, but also capable of manufacturing heavy truck parts. Operations began in 2013.
Note 2: Going concern
The Company sustained operating losses of $4,625,848 and $5,709,118 during the years ended December 31, 2015 and 2014. The Company has accumulated deficit of $22,060,870 as of December 31, 2015. The Company’s continuation as a going concern is dependent on its ability to generate sufficient cash flows from operations to meet its obligations and/or obtain additional financing, as may be required.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern; however, the above condition raises substantial doubt about the Company’s ability to do so. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.
In recent months, the Company has taken significant steps toward restoration of operating profits and financial stability. Cost cutting measures, including reductions to staff, have been implemented within the Contract Manufacturing and Manufacturing segments. The Mexican segment is working on getting additional sales volume with several US manufacturers and distributors of commercial safes.
Note 3: Notes and other receivables
Notes and other receivables consist of the following:
The Company has fully reserved for its Mexico VAT tax receivable as there is no expectation of collection.
On August 5, 2013, the Company lent $120,000 to Electro. On January 31, 2014 and March 19, 2014 together, Electro paid back $10,000. The principal balances as of December 31, 2015and 2014 were both $110,000. The note was originally due November 30, 2013, which was extended to due on August 31, 2015. Powin Corporation is currently negotiating for a payment plan. The note has no collateral and has accrued interest at 12% per annum. Interest income from this note receivable amounted to$13,200 and $13,297the years ended December 31, 2015 and 2014, respectively. The outstanding note receivable includes accrued interest were $125,618 December 31, 2015.
Note 4: Property and equipment, net
The components of property and equipment were as follows:
For the years ended December 31, 2015 and 2014, depreciation of property and equipment amounted $411,181 and $518,919, respectively.
Note 5: Loss per share
Basic loss per share is based on the weighted-average effect of all common shares issued and outstanding, and is calculated by dividing net loss by the weighted-average shares outstanding during the year. Diluted loss per share is calculated by dividing net income by the weighted-average number of common shares used in the basic loss per share calculation plus the number of common shares that would be issued assuming exercise or conversion of all potentially dilutive common shares outstanding. The Company excludes equity instruments from the calculation of diluted earnings per share if the effect of including such instruments is antidilutive.
The components of basic and diluted loss per share are as follows:
The Company has 10,237 and 9,102 shares of outstanding Series A preferred stock as of December 31, 2015 and 2014, respectively. These Series A share has par value of $100 and is convertible at 1 to 20 rate. The Company has 13,625,826 and no shares of outstanding August 2015 preferred stock as of December 31, 2015 and 2014, respectively. These August 2015 share has par value of $0.56 and is convertible at 1 to 1 rate.
On June 15, 2011, the Company granted awards in the form of incentive stock options to its key employees for 1,170,000 shares of common stock. There were no stock options granted in 2012. On August 6, 2013, the Company granted another 1,640,000 stock options under the same plan to all employees. The Company has 1,580,000 and 2,070,000 shares of outstanding stock options as of December 31, 2015 and 2014, respectively.
On April 15, 2013, The Company issued a Warrant to Purchase Common Stock to Global Storage Group, LLC for 70,000 shares of the Company’s common stock at an exercise price of $25.00; and a Warrant to Purchase Common Stock to Virgil L. Beast on for 30,000 shares of the Company’s common Stock at an exercise price of $25.00. The exercise period of each Warrant is 60 months from the date of issuance and may be exercised in whole or in part at any time prior to April 15, 2018. As of December 31, 2014 and 2015, all 100,000 warrants remain outstanding.
The following sets forth the number of shares of common stock underlying outstanding options, warrants, and convertible debt as of December 31, 2015 and 2014:
For the years ended December 31, 2015 and 2014, the effect of warrants, stock options and convertible preferred stock and preferred stock dividends are excluded from loss per share because their impact is considered to be anti-dilutive.
Note 6: Notes Payable and Long Term Debt
The total carrying value of notes payable and long-term debt, including current and long-term portions, was as follows:
Interest expenses related to notes payables and long-term debt amounted to $79,836 and $149,560 for the years ended December 31, 2015 and 2014, respectively.
During the year ended December 31, 2015, the Company issued preferred shares of preferred stock to settle all notes payable (Note 8).There are no gain or loss related to the conversion.
Note 7: Commitments
Operating Leases
The Company leases a facility from Lu Pacific Properties, LLC(“Lu Pacific)(Powin Pacific Properties, LLC, formerly), a company owned by the Company’s largest shareholder, Chairman of the Board and CEO, which serves as the Company’s corporate headquarters as well as the base of all operations, except Q Pacific Manufacturing and Mexico. This lease is through June 30, 2021 and requires the Company to pay for all property taxes, utilities and facility maintenance.
Effective January 1, 2016, the Company entered into a lease amendment. The Company lease 35,048 square feet of the building. The new lease term is through June 30, 2021 and all property taxes, utilities and facility maintenance were charge at $0.15 per square foot per month by Lu Pacific Properties, LLC. The monthly rental expense is $18,303.
The Company leased a facility for Powin Manufacturing, which is owned by Lu Pacific Properties, LLC, expired originally on October 31, 2014 and extended to October 31, 2019. This lease required the Company to pay for all property taxes, utilities and facility maintenance. The monthly rental expense is $15,594.
The Company’s segment Powin Mexico leases a manufacturing facility owned by Lu Pacific Properties, LLC in Saltillo Coahuila Mexico. This lease is through May 31, 2021 and requires the Company to pay for all property taxes, utilities and facility maintenance. The monthly rental expense is $12,133.
Minimum future lease payments under non-cancelable operating leases are as follows:
For the years ended December 31, 2015 and 2014, total lease expense paid for all operating rents and leases was $716,529 and $732,973, respectively. These leases are also disclosed in Note 10, related party transactions.
Note 8: Capital stock
The Company has two classes of preferred stock and one class of common stock. Preferred stock includes Series A stock which is $100 par value, Conversion rate 1 to 20 and includes 2015 August stock which is $0.56 par value, Conversion rate 1 to 1.
Preferred Stock
The preferred stock series A is convertible at a rate of one (1) preferred share to two hundred (200) shares of Powin Corporation common stock. The Company’s preferred shares have a provision that calls for dividends of 12%, declared semi-annually, and paid in preferred shares. In 2014 and 2015, we issued 1,018 and 1,135shares of preferred stock as dividends respectively, increasing preferred stock by $101,800 and $113,500 and decreasing additional paid in capital.
Common Stock
For the three months ended March 31, 2015 the Company issued 3,000 shares of common stock to six members of its Board of Directors as compensation for their services based on the fair value of the shares valued at $1.95 per share for their service. For the three months ended June 30, 2015 the Company issued 3,000 shares of common stock to six members of its Board of Directors as compensation for their services based on the fair value of the shares valued at $0.56 per share for their service. For the three months ended September 30, 2015 the Company issued 3,000 shares of common stock to six members of its Board of Directors as compensation for their services based on the fair value of the shares valued at $0.90 per share for their service. For the three months ended December 31, 2015 the Company issued 3,000 shares of common stock to six members of its Board of Directors as compensation for their services based on the fair value of the shares valued at $0.65 per share for their service.
The Company issued its August 2015 series of Preferred Stock (“Preferred Stock”) in August 2015 to satisfaction of the notes payable described in the table below. The holders of the Preferred Stock do not have a dividend preference over the Company’s common stock and have the same voting rights as the holders of common stock. The Preferred Stock is convertible into the Company’s common stock at the rate of one (1) share of Preferred Stock for one (1) share of common stock. The holders of the Preferred Stock are entitled to a liquidation preference over the holders of common stock equal to $0.56 per share. The full rights, preferences and privileges of the Preferred Stock are set forth in the Certificate of Designation which was filed in the 8K report on August 6, 2015.
In addition, on April 15, 2013, The Company issued a Warrant to Purchase Common Stock to Global Storage Group, LLC for 70,000 shares of the Company’s common stock at an exercise price of $25.00; and a Warrant to Purchase Common Stock to Virgil L. Beast on for 30,000 shares of the Company’s common Stock at an exercise price of $25.00. The exercise period of each Warrant is 60 months from the date of issuance and may be exercised in whole or in part at any time prior to April 15, 2018. As of December 31, 2014 and 2015, all 100,000 warrants remain outstanding.
Note 9: Stock options
In February 2011, the Company’s Board of Directors approved the adoption of the Powin Corporation 2011 Stock Option Plan (“the Plan”) and submitted its ratification to the shareholders at the shareholders’ meeting held June 15, 2011, where the shareholders approved the Plan.
The Company records stock-based compensation expense related to stock options and the stock incentive plan in accordance with ASC 718, “Compensation - Stock Compensation”.
On June 15, 2011, the Company granted awards in the form of incentive stock options to its key employees for 1,170,000 shares of common stock. There were no stock options granted in 2012. On August 6, 2013, the Company granted another 1,640,000 stock options under the same plan to all employees. Awards are granted with an exercise price that approximates the market price of the Company’s common stock at the date of grant. The 2013 grant included immediate vesting of 20% of the options resulting in greater expense recognized than in previous years.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model using. The following assumptions were used to determine the fair value of the options at date of original issuance on August 6, 2013:
The Company has never paid a cash dividend and does not intend to pay cash dividends in the foreseeable future, so the dividend yield used in the calculation is 0%.The expected volatility is based on the daily historical volatility of comparative companies, measured over the expected term of the option. The risk-free rate is based on the implied yield on a United States Treasury zero-coupon issue with a remaining term closest to the expected term of the option. The term of the option is the expiration as there is no ready market for employees to exercise and sell shares and to date no option has been exercised on the 2011 plan.
A summary of option activity as is presented below:
Stock option expense included in operating expense for the years ended December 31, 2015 and 2014 is $156,908 and $173,909, respectively. As of December 31, 2015 and 2014, remaining unvested stock expenses amounted to $225,017 and $384,308, respectively.
Note 10: Related party transactions
Rent From Related Parties
All of the Company’s facilities are owned by Lu Pacific Properties, LLC, an Oregon limited liability company, controlled by Joseph Lu (“Mr. Lu”), CEO and Chairman of the Board. Rent expenses were $716,529and $732,973 for the years ended December 31, 2015 and 2014, respectively. Rental rates are deemed to be and were derived by local market rates for the rents when the contracts were entered.
Sales to Related Parties
Mr. Lu’s sons, Danny Lu and Peter Lu, together own 20% of PEI MFG, LLC (“PEI”). The Company made sales to PEI in the amount of $257,360 and $626,191 for the years ended December 31, 2015 and 2014, respectively. There were no amounts payable to PEI at December 31, 2015 and December 31, 2014, respectively. Amounts due from PEI amounted to $98,303 and $104,094 at December 31, 2015 and December 31, 2014, respectively.
Notes Payable To Related Parties
On August 5, 2015, all outstanding notes payables to related parties were converted to preferred stock. (Note 8).
The total carrying value of payable to related parties, including current and long-term portions, was as follows:
Interest expenses related to payable to related parties amounted to $159,780 and $233,176 for the years ended December 31, 2015 and 2014, respectively.
Related parties transactions during the year ended December 31, 2015
Proceeds from payables to related parties include the following for the year ended December 31, 2015:
On March12, 2015, the Company issued a promissory note in the amount of $200,000 to Mr. Lu. The note is extended to be due September 30, 2016, is with no collateral, and accrues interest at 6% per annum.
Repayments to payables to related parties amounted to $516,462 and $0 during the years ended December 31, 2015 and 2014, respectively.
Proceeds during the year ended December 31, 2014
Proceeds from payables to related parties include the following for the year ended December 31, 2014:
On January 27, 2014, the Company borrowed an additional $250,000 from Danny Lu. The note was due June 30, 2014 and has accrued interest at 6% per annum. The note due date is extended to September 30, 2016, is with no collateral, and with an interest rate of 6% per annum. On August 5, 2015, all outstanding notes payables to related parties were converted to preferred stock
On February 11, 2014, the Company borrowed an additional $250,000 from Peter Lu. The note was due June 30, 2014 and has accrued interest at 6% per annum. The note due date is extended to September 30, 2016, with no collateral, and with an interest rate of 6% per annum. On August 5, 2015, all outstanding notes payables to related parties were converted to preferred stock
On February 24, 2014, the Company borrowed an additional $100,000 from Danny Lu. The note is due July 31, 2015 is with no collateral, and accrues interest at 6% per annum. The note due date is extended to September 30, 2016. On August 5, 2015, all outstanding notes payables to related parties were converted to preferred stock
On March 28, 2014, the Company borrowed an additional $100,000 from Danny Lu. The note was due June 30, 2014 and accrued interest at 6% per annum. The note due date is extended to September 30, 2016, with no collateral, and with an interest rate of 6% per annum. On August 5, 2015, all outstanding notes payables to related parties were converted to preferred stock
On March 28, 2014, the Company borrowed an additional $200,000 from Peter Lu. The note was due June 30, 2014 and accrued interest at 6% per annum. The note due date is extended to September 30, 2016, with no collateral, and with an interest rate of 6% per annum. On August 5, 2015, all outstanding notes payables to related parties were converted to preferred stock
On April 29, 2014, the Company issued a promissory note in the amount of $300,000 to Lu Pacific. The note is due July 31, 2015, is with no collateral, and accrues interest at 6% per annum. The note due date is extended to September 30, 2016. On August 5, 2015, all outstanding notes payables to related parties were converted to preferred stock
On May 14, 2014, the Company borrowed an additional $200,000 from Mr. Lu. The note was due June 30, 2014 and accrued interest at 6% per annum. The note due date is extended to September 30, 2016, with no collateral, and with an interest rate of 6% per annum. On August 5, 2015, all outstanding notes payables to related parties were converted to preferred stock
On June 11, 2014, the Company borrowed an additional $70,492 from Mr. Lu. The note was due July 15, 2014 and accrued interest at 6% per annum. The note due date is extended to September 30, 2016, is with no collateral, and with an interest rate of 6% per annum. On August 5, 2015, all outstanding notes payables to related parties were converted to preferred stock
On June 25, 2014, the Company borrowed an additional $200,000 from Mr. Lu. The note was due July 1st, 2014 and accrued interest at 5%per annum. The note due date is extended to September 30, 2016, is with no collateral, and with an interest rate of 6% per annum. On August 5, 2015, all outstanding notes payables to related parties were converted to preferred stock
On August 4, 2014, the Company issued a promissory note in the amount of $80,000 to Danny Lu. The note is due June 30, 2015, is with no collateral, and accrues interest at 6% per annum. The note due date is extended to September 30, 2016.
On August 4, 2014, the Company issued a promissory note in the amount of $80,000 to Peter Lu. The note is due June 30, 2015, is with no collateral, and accrues interest at 6% per annum. The note due date is extended to September 30, 2016. On August 5, 2015, all outstanding notes payables to related parties were converted to preferred stock
On August 15, 2014, the Company issued a promissory note in the amount of $25,000 to Danny Lu. The note is due June 30, 2015, is with no collateral, and accrues interest at 6% per annum. The note due date is extended to September 30, 2016. On August 5, 2015, all outstanding notes payables to related parties were converted to preferred stock
On August 15, 2014, the Company issued a promissory note in the amount of $25,000 to Peter Lu. The note is due June 30, 2015, is with no collateral, and accrues interest at 6% per annum. The note due date is extended to September 30, 2016. On August 5, 2015, all outstanding notes payables to related parties were converted to preferred stock
On August 29, 2014, the Company issued a promissory note in the amount of $208,475 to Lu Pacific. The note is due June 30, 2015, is with no collateral, and accrues interest at 6% per annum. The note due date is extended to September 30, 2016. On August 5, 2015, all outstanding notes payables to related parties were converted to preferred stock
On December 29, 2014, the Company issued a promissory note in the amount of $200,000 to Mr. Lu. The note is due June 30, 2015, is with no collateral, and accrues interest at 6% per annum. The note due date is extended to September 30, 2016. On August 5, 2015, all outstanding notes payables to related parties were converted to preferred stock
Lu Pacific Properties LLC of which Joseph Lu is the controlling member and Manager, owns the facilities currently used by the Company and its subsidiaries. Payments made by the Company to Lu Pacific were as follows:
Note 11: Business segment reporting
Basis for Presentation
Our operating businesses are organized based on the nature of markets and customers. Segment accounting policies are the same as described in Note 1.
Effects of transactions between related companies are eliminated and consist primarily of inter-company transactions and transfers of cash or cash equivalents from corporate to support each business segment’s payroll, inventory sourcing and overall operations when each segment has working capital requirements. Corporate overhead costs are allocated to segments based on management’s estimates of the consumption of such services by each segment.
A description of our operating segments as of December 31, 2015 and December 31, 2014, follows.
Contract manufacturing (formerly OEM):
Outsourced manufacturing for North American companies, including senior citizen safety products; steel gun safes; outdoor cooking equipment; trampolines; plastic products and small electronic appliances. Contract manufacturing also offers logistic services and a qualified engineer team to support and provide in-house design.
Manufacturing (formerly QBF):
Our manufacturing segment, Powin Manufacturing formerly named Quality Bending and Fabrication (“QBF”), manufactures various truck parts and components primarily for Freightliner Trucks, a division of Daimler Trucks North America, the largest manufacturer of heavy-duty vehicles in North America. Daimler Trucks North America designs, builds and markets a wide range of Class 3-8 vehicles including long-haul highway tractors, heavy-duty construction and vocational trucks, mid-range trucks for distribution and service, school and transit buses, fire and emergency service apparatus, and chassis for step vans, school and shuttle buses, and motor homes. Freightliner Trucks is headquartered in Portland, Oregon, with truck manufacturing facilities located in Portland and throughout the United States and Mexico.
Manufacturing is completed at the Company’s leased facility in Tualatin, Oregon as well as arranging the outsourced manufacturing at a third-party factory in Qingdao, China.
Energy:
Powin Energy has developed market leading architecture that utilizes proprietary patent-pending energy storage technology for scalable grid energy storage systems, power supply units for electric vehicles, and transportation applications. Through December 31, 2014, the Energy segment has focused on identifying target markets and applications and finalizing the development of products to serve those markets and applications. In 2015, The Company has continued to develop products and marketing strategies for this operating entity.
Product & Service (formerly Channel Partner Program, Warehousing and Wooden)
The Product & Service segment contains the legacy operations of Channel Partner Program, a distribution channel for North American companies to sell their products in China as well as selling certain consumer products through U.S.-based retailers and marketplaces, including online; and Warehousing, which provides warehousing services in support of the Company’s customers across all segments. On January 1, 2015, the Product & Service segment had been incorporated into our contract manufacturing segment.
Powin Mexico:
Powin Mexico is a manufacturing segment, currently manufacturing gun safes, but also capable of manufacturing heavy truck parts. Operations began in 2013.
Revenues and net loss before income taxes of each of the Company’s segments are as follows:
Total assets of each of the Company’s segments are as follows:
A description of our geographic segments as of December 31, 2015 and December 31, 2014, follows.
Note 12: Income taxes
The provision for income taxes consists of the following:
A reconciliation of income taxes computed at the United States federal statutory income tax rate to the provision for income taxes is as follows:
The tax effects of temporary differences that give rise to significant portions of the deferred tax asset were as follows:
Based on the Company’s current financial and operational situation, management determined that it is more likely than not that the United States federal and state deferred tax assets will not be realized through the reduction of future income tax payments. Consequently, the Company has established a full valuation allowance for its United States federal and state deferred tax assets as of December 31, 2015 and 2014.
As of December 31, 2015, the Company has approximately $12.1 million and $15.1 million of net operating loss (“NOL”) carry-forwards for federal and state income tax purposes, respectively. Expiration of the Company’s NOL carry-forwards begins in 2021. Section 382 of the Internal Revenue code of 1986 provide for an annual limitation of approximately $67,000 on the utilization of net operating loss carry-forwards as the Company underwent an ownership change in 2008, as defined in section 382. This limitation has been reflected in the United States federal and state net operating loss carry-forwards.
The Company adopted uncertain tax position in accordance with ASC 740 on January 1, 2007 and has not recognized any material increase in the liability for unrecognized income tax benefits as a result of the implementation. The Company estimates that the unrecognized tax benefit will not change within the next twelve months. The Company will continue to classify income tax penalties and interest, if any, as part of interest and other expenses in its statements of operations. The Company has incurred no interest or penalties as of December 31, 2015 and 2014.
The Company has identified United States federal and Oregon as major jurisdictions. The Company is currently open to audit under United States and state statute of limitations by the taxing authorities for 2011 through 2015.
Note 13: Minority Interest
On August 8, 2014, Powin Corporation and its wholly-owned subsidiary, Powin Energy Corporation (collectively “Powin”) and SF Suntech, Inc. (“Suntech”) signed a Share Subscription Agreement (“Subscription Agreement”) for an investment of $25,000,000 from Suntech. Suntech is a third party.
Effective April 2, 2015, Powin and Suntech signed the Fourth Supplemental Agreement (“Supplement”).Under the Supplement, the First Closing Date of the Subscription Agreement was April 2, 2015 (“First Closing”) at which time Suntech made a payment to Powin in the amount of $7,450,000. That payment plus the previous payments of $3,000,000 on August 29, 2014; $2,000,000 on January 15, 2015 and $50,000 on March 2, 2015 represent a total $12,500,000 paid toward the full $25,000,000 owing under the Subscription Agreement. On April 1, 2015 and April 2, 2015, Powin Energy issued 1,765 shares and 378 shares of Powin Energy Common Stock to Suntech, respectively for $12,500,000 received. Professional expenses of $750,000 were recorded as deduction of the cash received.
Per ASC 810-10-45-22, Powin Corporation’s ownership interest in Powin Energy has changed as Powin Corporation sold 2,143 shares (approximately 17.65% of outstanding shares after the sales of 2,143 shares) of Powin Energy’s common shares to Suntech. After this transaction, Powin Corporation's ownership interest in Powin Energy is 82.35%. Since, Powin Corporation retained its controlling financial interest in Powin Energy after the shares issuance for cash to Suntech; the sale of the subsidiary shares was accounted for as an equity transaction in accordance with ASC 810-10-45-23. Specifically, the proceeds received from the sale $12,500,000 offset by professional expenses of $750,000 are reflected as an increase to additional paid in capital and the net asset value associated with this sold interest $1,552,272 was reclassified from additional paid in capital to noncontrolling interests.
The Supplement further established the Second Closing Date of the Subscription Agreement as May 31, 2015 (“Second Closing”) when the balance of $12,500,000 was to be paid. If that payment was made, Powin would issue to Suntech an additional 2,143 shares of Powin Energy Common Stock. In the event Suntech was unable or unwilling to pay the remaining subscription balance, Powin would be free to sell the 2,143 shares to another purchaser for the same price per share as paid by Suntech. Suntech failed to make the required payment on May 31, 2015. Accordingly, the Company elected to terminate the Subscription Agreement, as it pertained to the remaining $12,500,000 owing thereunder.
Note 14: Subsequent events
On December 1, 2015, Powin Corporation and its subsidiary, Powin Energy Corporation (“Powin Energy”), entered into an Agreement and Plan of Merger and Liquidation (“Merger Agreement”).
The Merger is subject to approval by the shareholders of Powin Corp. and the other closing conditions of the Merger Agreement. The Merger Agreement has been approved by the board of directors of Powin Corp. and Powin Energy. Powin Corp.’s board of directors has recommended that its shareholders adopt the Merger Agreement. To that end, Powin Corp. will file an Information Statement with the Securities and Exchange Commission under Regulation 14C. The Merger will not become effective until 21 days after the Information Statement has been mailed to all shareholders of Powin Corp.
On January 2016, the company paid $21,560 and bought the 15% interest in the company’s Mexico subsidiary. The Company now owns 100% of the Mexico subsidiary.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
Our management, with the participation of our principal executive and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (“Exchange Act”) as of the end of the period covered by this report. Based on that evaluation, our principal executive and principal financial officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Internal Control over Financial Reporting .
Management’s Annual Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) for the Company. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. Because of its inherent limitations, internal control over financial reporting may not prevent nor detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.
Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2015. In making its assessment of internal control over financial reporting, management used the criteria established in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. This assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of those controls. Based on the results of this assessment, management has concluded that our internal controls over financial reporting were effective as of December 31, 2015 due to a material weakness. A material weakness is a deficiency, or combination of deficiencies, in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
Management's assessment was not subject to attestation by the Company's independent registered public accounting firm and as such, no attestation was performed pursuant to SEC Final Rule Release Nos. 33-8934; 34-58028 that permit the Company to provide only management's assessment report for the year ended December 31, 2015 and 2014.
Changes in Internal Control over Financial Reporting.
There has been no change in our internal control over financial reporting that occurred in our fiscal year ended December 31, 2015 that has materially adversely affected, or is reasonably likely to materially adversely affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers, Promoters and Control Persons
All directors of our directors and officers hold office until the next annual meeting of our shareholders and until such director’s successor is elected and has been qualified, or until such director’s earlier death, resignation or removal. The following table sets forth the names, positions and ages of our executive officers and directors. Our board of directors elects officers and their terms of office are at the discretion of our board of directors.
Business Experience
The following is a brief account of the education and business experience during at least the past five years of our directors and executive officers, indicating their principal occupations during that period, and the name and principal business of the organizations in which such occupation and employment were carried out.
Joseph Lu, 62, received a degree in Chinese Culture from the University of Taipei in Taiwan. He also received a B.A. degree in Chemical Science. Mr. Lu formed Powin Corporation in 1990 and has served as its President since inception. Prior to founding Powin, Mr. Lu served as the General Manager of the ShunnFeng Ind. Co., Ltd. in Taiwan. From 1980 to 1986 Mr. Lu was employed as an Environmental Engineer for the Sinotech Engineering Consultant Co. in Taiwan. From 1979 to 1980, Mr. Lu was a quality control inspector for the ShunnFeng Ind. Co. Ltd. in Taiwan. Additionally, from 1988 to 1996, Mr. Lu was the President of the Euro Belt Factory Ltd. in Taiwan. From 1995 to 2006, Mr. Lu was the President of the Qingdao Triple Master Fitness Co., a company that manufactured fitness equipment. In 2000, Mr. Lu began serving as president of the Qingdao Wei Long Co. Ltd., a company that manufactures outdoor camping cookware.
Jingshuang Jeanne Liu, 56, has been with the Company since 1996 and served as the President of the company until December 19, 2013.Ms. Liu now serves as President, Supply Chain and remains a Director. Prior to her employment at the Company, Ms. Liu was the Officer Manager at the Northwest China Council from 1994 to 1996. She received her Bachelor of Science degree in Geography from Beijing Normal University in 1982. Subsequently, she received her Master of Science in Geography from the University of Idaho in 1989 and her Master of Business Administration from the University of Idaho in 1991.
Danny Lu, 26, was appointed to the Board of Directors effective September 20, 2013. Mr. Lu is the Managing Director and Marketing Manager of Powin Corporation. Mr. Lu was the co-founder of Two Hype Feet where he was in charge of promotion and social media. He also has served as warehouse manager at Skywalker Trampolines. Mr. Lu earned a degree in International Business Studies from the University of Oregon. Mr. Lu is the son of Joseph Lu, the Chief Executive Officer and Chairman of the Board of the Company.
Jim Osterman, 78, was appointed to the Board of Directors effective November 6, 2013. Mr. Osterman is currently the President of JSO Ventures, LLC, Oregon City, Oregon which is a real estate investment and management consulting firm. Previously, Mr. Osterman was Chairman and CEO of Blount International, Inc. from 2002 to 2010. He was President of the Outdoor Power Group of Blount from 1986 to 2002; Senior Vice President of Marketing, Manufacturing and Engineering from 1979 to 1986; and Director of European Operations from 1968 to 1979. Mr. Osterman lived in Europe for twelve years in that position. Mr. Osterman joined the Board of Directors of Cascade Corporation in 1994 and served as Chairman of the Board from 2002 to 2013.
Mr. Osterman attended Western Oregon University and the Harvard Business School Program for Management Development. Mr. Osterman has fifty years of worldwide international business experience beginning with Omark Industries, Inc. in 1959.
George Gabriel, 69, was appointed as director effective as of September 5, 2012. Through 2012, Mr. George Gabriel served as the Chief Financial Officer of Oregon Resources Corporation, Inc. Mr. Gabriel served at Electrolux AB. He has broad experience as a Financial Manager and Controller for various entities including manufacturing, distribution and natural resources. He has founded a successful building products distribution company and participated in the startup and financing of mineral exploration and natural resource development companies. He has held staff positions with Arthur Andersen in Portland and with Moss Adams, LLP in Vancouver, WA. Mr. Gabriel is an active Certified Public Accountant.
M. Todd Singh, 47, was appointed to the Board of Directors effective June 2, 2014. Mr. Singh is currently the founder, President and CEO of Renovatio Intl, Inc, a provider of private equity and strategic consulting, and Board Member for WestStar Provider Solutions, a Medical business provider, since 2012. Previously, Mr. Singh was President of Decal, Inc from 2005 to 2007, Vice President of Operations of The Nautilus Group from 2004 to 2005, Chief Operations Officer of Direct Division of Nautilus Group from 2002 to 2004, Co-founder/Operations of DRY, Inc from 1999 to 2002, President and Founder of Visorgear, Inc from 1994 to 1999. Mr. Singh is a proven senior executive with start-up and publicly traded NYSE company experience and offers unique blend of managerial and operational expertise. Mr. Singh has 20 years of successful experience as an entrepreneur/Inventor/Innovator beginning with VisorGear ®.
Mr. Singh graduated from Portland State University with a dual major of Computer Science and International Business and possesses Eddy Current Operator/Data Analyst Certification level I to III, among others.
Family Relationships
Two relatives of Joseph Lu are employed by the Company. Danny Lu, Joseph Lu’s son, is employed by the Company as Vice President, Procurement and serves on the Board of Directors. Eric Lu, Joseph Lu’s brother, was employed by the Company as the IT manager during 2014 and first quarter of 2015.Effective April 2015, Eric Lu resigned from the IT manager position and hired by the company as the independent contractor.
Involvement in Certain Legal Proceedings
Our directors, executive officers and control persons have not been involved in any of the following events during the past five years;
any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
being found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated
Section 16(a) Beneficial Ownership Compliance
Section 16(a) of the Securities Exchange Act requires our executive officers and directors, and persons who own more than 10% of our common stock, to file reports regarding ownership of, and transactions in, our securities with the Securities and Exchange Commission and to provide us with copies of those filings. Based solely on our review of the copies of such forms received by us, or written representations from certain reporting persons, we believe that during fiscal year ended December 31, 2015, all filing requirements applicable to our officers, directors and greater than 10% percent beneficial owners were complied with.
Code of Ethics
We adopted a Code of Business Conduct and Ethics that applies to, among other persons, our company’s president (being our principal executive officer, principal financial officer and principal accounting officer), as well as persons performing similar functions. As adopted, our Code of Business Conduct and Ethics sets forth written standards that are designed to deter wrongdoing and to promote;
1.
honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
2.
full, fair, accurate, timely, and understandable disclosure in reports and documents that we file with, or submit to, the Securities and Exchange Commission and in other public communications made by us;
3.
compliance with applicable governmental laws, rules and regulations;
4.
the prompt internal reporting of violations of the Code of Business Conduct and Ethics to an appropriate person or persons identified in the Code of Business Conduct and Ethics; and
5.
accountability for adherence to the Code of Business Conduct and Ethics
Our Code of Business Conduct and Ethics requires, among other things, that all of our company’s personnel shall be accorded full access to our president with respect to any matter which may arise relating to the Code of Business Conduct and Ethics. Further, all of our company’s personnel are to be accorded full access to our company’s board of directors if any such matter involves an alleged breach of the Code of Business Conduct and Ethics by our president.
In addition, our Code of Business Conduct and Ethics emphasizes that all employees, and particularly managers and/or supervisors, have a responsibility for maintaining financial integrity within our company, consistent with generally accepted accounting principles, and federal, provincial and state securities laws. Any employee who becomes aware of any incidents involving financial or accounting manipulation or other irregularities, whether by witnessing the incident or being told of it, must report it to his or her immediate supervisor or to our company’s president. If the incident involves an alleged breach of the Code of Business Conduct and Ethics by the president, the incident must be reported to any member of our board of directors. Any failure to report such inappropriate or irregular conduct of others is to be treated as a severe disciplinary matter. It is against our company policy to retaliate against any individual who reports in good faith the violation or potential violation of our company’s Code of Business Conduct and Ethics.
Our Code of Business Conduct and Ethics was filed as an exhibit with our Registration Statement on Form S-1 filed with the Securities and Exchange Commission on July 31, 2009. We will provide a copy of the Code of Business Conduct and Ethics to any person without charge, upon request. Requests can be sent to the Company address listed above.
Nomination Process
As of December 31, 2015, we did not affect any material changes to the procedures by which shareholders may recommend nominees to the board of directors. We do not have any defined policy or procedure requirements for shareholders to submit recommendations or nominations for directors. The board of directors believes that, given the current stage of our development, a specific nominating policy would be premature and of little assistance until our operations develop to a more advanced level. We do not currently have any specific or minimum criteria for the election of nominees to the board of directors and there is no specific process or procedure for evaluating such nominees. The board of directors assesses all candidates, whether submitted by management or shareholders, and makes recommendations for election or appointment.
A shareholder who wishes to communicate with the board of directors may do so by directing a written request addressed to our Chief Executive Officer or the Chief Financial Officer at the address appearing on the face page of this report.
Committees of the Board
All proceedings of the board of directors were conducted by resolutions consented to in writing by all the directors and filed with the minutes of the proceedings of the directors. Such resolutions consented to in writing by the directors entitled to vote on that resolution at a meeting of the directors are, according to the Nevada Business Corporation Act and our Bylaws as valid and effective as if they had been passed at a meeting of the directors duly called and held.
At the present time, we have an Audit Committee and a Compensation Committee. Our director, George Gabriel, serves on the Audit Committee and our director, Jim Osterman, serves on the Compensation Committee. We currently do not have a nominating committee or committees performing similar functions nor do we have a written nominating, compensation charter. The board of directors does not believe that it is necessary to have such committees because it believes that the functions of such committees can be adequately performed by the board of directors.
Audit Committee Financial Expert
Our Director, George Gabriel, qualifies as our “audit committee financial expert” as defined in Item 407(d) (5) (ii) of Regulation S-B.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation
The following describes the compensation paid to our principal executive officer and each of our two most highly compensated executive officers who were serving as executive officers at the end of the year ended December 31, 2015 who we will collectively refer to as the named executive officers of our company for the years ended December 31, 2015 and 2014, are set out in the following summary compensation table, except that no disclosure is provided for any named executive officer, other than our principal executive officer, whose total compensation does not exceed $100,000 for the respective fiscal year:
Option awards represent the grant date fair value of options granted
Stock awards represent the market value of common stock issued to members of the board of directors as compensation for their services. For the years ended December 31, 2015 and 2014, 500 shares were paid quarterly to each director. Directors are entitled to reimbursement for reasonable travel and other out-of-pocket expenses incurred in connection with attendance at meetings of our board of directors. Our board of directors may award special remuneration to any director undertaking any special services on our behalf other than services ordinarily required of a director.
Compensation of Directors
Members of the Board of Directors are compensated at the rate of 500 shares of our common stock per fiscal quarter. We may elect to issue additional stock options to such persons from time to time.
Pension, Retirement or Similar Benefit Plans
There are no arrangements or plans in which the Company provides pension, retirement or similar benefits for directors or executive officers. We have no material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers, except that stock options may be granted at the discretion of the board of directors or a committee thereof.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 2015, certain information with respect to the beneficial ownership of our common stock by each stockholder known by us to be the beneficial owner of more than 5% of our common stock and by each of our current directors and executive officers. Each person has sole voting and investment power with respect to the shares of common stock. Beneficial ownership consists of a direct interest in the shares of common stock.
(a) These shares are held by Joseph Lu and Mei Yi Lu as Co-Trustees of the Joseph Lu Trust dated August 17, 2007, as amended
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS,
AND DIRECTOR INDEPENDENCE
Except as described below, no director, executive officer, principal shareholder holding at least 5% of our common shares, or any family member thereof, had any material interest, direct or indirect, in any transaction, or proposed transaction, during the years ended December 31, 2015 in which the amount involved in the transaction exceeded $120,000.
Lu Pacific Properties LLC of which Joseph Lu is the controlling member and Manager, owns the facilities currently used by the Company and its subsidiaries. Payments made by the Company to Lu Pacific were as follows:
On January 27, 2014, the Company borrowed an additional $250,000 from Danny Lu. The note was due June 30, 2014 and accrued interest at 6% per annum. Danny Lu is the son of Mr. Lu. The note due date is extended to June 30, 2015, with an interest rate of 6% per annum.
On February 11, 2014, the Company borrowed an additional $250,000 from Peter Lu. The note was due June30, 2014 and accrued interest at 6% per annum. Peter Lu is the son of Mr. Lu. The note due date is extended to June 30, 2015, with an interest rate of 6% per annum.
On February 24, 2014, the Company borrowed an additional $100,000 from Danny Lu. The note is due July 31, 2015 and accrues interest at 6% per annum.
On March 28, 2014, the Company borrowed an additional $100,000 from Danny Lu. The note was due June30, 2014 and accrued interest at 6% per annum. The note due date is extended to June 30, 2015, with an interest rate of 6% per annum.
On March 28, 2014, the Company borrowed an additional $200,000 from Peter Lu. The note was due June 30, 2014 and accrued interest at 6% per annum. The note due date is extended to June 30, 2015, with an interest rate of 6% per annum.
On April 29, 2014, the Company issued a promissory note in the amount of $300,000 to Lu Pacific. The note is due July 31, 2015 and accrues interest at 6% per annum.
On May 15, 2014, the Company borrowed an additional $200,000 from Mr. Lu. The note was due June 30, 2014 and accrued interest at 6% per annum. The note due date is extended to June 30, 2015, with an interest rate of 6% per annum.
On June 11, 2014, the Company borrowed an additional $70,492 from Mr. Lu. The note was due July 15, 2014 and accrued interest at 6% per annum. The note due date is extended to June 30, 2015, with an interest rate of 6% per annum.
On June 25, 2014, the Company borrowed an additional $200,000 from Mr. Lu. The note was due July 1st, 2014 and accrued interest at 5% per annum. The note due date is extended to June 30, 2015, with an interest rate of 6% per annum.
On August 4, 2014, the Company issued a promissory note in the amount of $80,000 to Danny Lu. The note is due June 30, 2015, is with no collateral, and accrues interest at 6%per annum.
On August 4, 2014, the Company issued a promissory note in the amount of $80,000 to Peter Lu. The note is due June 30, 2015, is with no collateral, and accrues interest at 6% per annum.
On August 15, 2014, the Company issued a promissory note in the amount of $25,000 to Danny Lu. The note is due June 30, 2015, is with no collateral, and accrues interest at 6% per annum.
On August 15, 2014, the Company issued a promissory note in the amount of $25,000 to Peter Lu. The note is due June 30, 2015, is with no collateral, and accrues interest at 6% per annum.
On August 29, 2014, the Company issued a promissory note in the amount of $208,475 to Lu Pacific. The note is due June 30, 2015 and accrues interest at 6% per annum.
On December 29, 2014, the Company issued a promissory note in the amount of $200,000 to Mr. Lu. The note is due June 30, 2015, is with no collateral, and accrues interest at 6% per annum.
The above promissory notes and accrued interest were paid off on August 2015.
Corporate Governance
Our directors are Joseph Lu, Jingshuang (Jeanne) Liu, Danny Lu, Jim Osterman, Michael Todd Singh and George Gabriel. The Board of Directors has established an Audit Committee and a Compensation Committee. At present time, the Board of Directors does not have a nominating committee. The entire Board of Directors serves as the Nominating Committee.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table represents a summary of fees billed to the Company from its principal independent accountants for professional services rendered for the years ended December 31, 2015 and 2014.
Audit Fees
Audit fees expensed for Anton & Chia, LLP, for professional services rendered in respect to the audit of our annual financial statements included in our annual report on Form 10-K for the years ended December 31, 2015 and 2014 were $79,560 and $79,560, respectively.
Audit Related Fees
For the years ended December 31, 2015 and 2014, the aggregate fees expenses in respect to the assurance and related services relating to the performance of the audit of our financial statements which are not reported under the caption “Audit Fees” above, was $5,831 and $10,370, respectively.
Tax Fees
None.
All Other Fees
None.
Our audit committee has adopted a policy governing the pre-approval of all services, audit and non-audit, to be provided to our company by our independent auditors. Under the policy, the audit committee has pre-approved the provision by our independent auditors of specific audit, audit related, tax and other non-audit services as being consistent with auditor independence. Requests or applications to provide services that require the specific pre-approval of the board of directors must be submitted to the board of directors by the independent auditors, and the independent auditors must advise the board of directors as to whether, in the independent auditor’s view, the request or application is consistent with the Securities and Exchange Commission’s rules on auditor independence.
The board of directors has considered the nature and amount of the fees billed by Anton & Chia, LLP and believes that the provision of the services for activities unrelated to the audit is compatible with maintaining the independence of Anton & Chia, LLP.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Included with this Report is an audited balance sheet as of the years ended December 31, 2015 and 2014 and audited statements of income, cash flows and changes in stockholders’ equity for the years ended December 31, 2015 and 2014.
All of the above listed exhibits with the exception of exhibits , 31.1, 31.2 and 32, which are filed herewith, were filed with our Form S-1 Registration Statement, as amended and our previous reports in form 10-K and are collectively incorporated herein by reference.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
POWIN CORPORATION
Dated: April 4, 2016
By: /s/ Joseph Lu
Joseph Lu
Chief Executive Officer and Interim Chief Financial Officer
(Principal Executive Officer and Principal Financial Officer)