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EX-31.2 - EXHIBIT 31.2 - POWIN ENERGY CORPex31_2.htm
EX-31.1 - EXHIBIT 31.1 - POWIN ENERGY CORPex31_1.htm
EX-32.1 - EXHIBIT 32.1 - POWIN ENERGY CORPex32_1.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2012

OR

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

For the transition period from _________ to _________

Commission File Number: 000-54015

POWIN CORPORATION
(Exact name of registrant as specified in its charter)

NEVADA
 
87-0455378
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification Number)

20550 SW 115th Ave
Tualatin, OR 97062
(Address of principal executive offices)

T: (503) 598-6659
(Issuer’s telephone number)

(Former name, former address and former fiscal year, if changed since last report) N/A

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or smaller reporting company.  See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one)  Large accelerated filer o  Accelerated filer o  Non-accelerated filer o  Smaller reporting company x

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  As of August 14, 2012, there were 162,212,538 shares of Common Stock, $0.001 par value, outstanding and 6,768 shares of Preferred Stock, $100 par value, outstanding.
 


 
 

 
 
POWIN CORPORATION
Index

PART I.     FINANCIAL INFORMATION
 
 
Item 1.
Financial Statements.
 
  3
 
Condensed Consolidated Balance Sheets(unaudited)
 
  3
 
Condensed Consolidated Statements of Operations(Unaudited)
 
  4
 
Condensed Consolidated Statements of Comprehensive Income (Loss)(Unaudited)
 
  5
 
Condensed Consolidated Statements of Cash Flows(Unaudited)
 
  6
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
  7
       
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
15
 
Note Regarding Forward Looking Statements
 
15
 
Overview
 
15
 
Critical Accounting Policies
 
15
 
Results of Operations
 
16
 
Liquidity and Capital Resources
 
20
 
Off-Balance Sheet Arrangements
 
20
       
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
 
20
       
Item 4.
Controls and Procedures.
 
21
       
       
       
PART II.  OTHER INFORMATION
       
Item 1.  .
Legal Proceedings
 
21
       
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
 
21
       
Item 3.
Defaults Upon Senior Securities.
 
21
       
Item 4.
[REMOVED AND RESERVED]
 
21
       
Item 5.  
Other Information
 
22
       
Item 6.
Exhibits.
 
22

 
2

 

PART I.        FINANCIAL INFORMATION

Item 1.   Financial Statements.

POWIN CORPORATION
Condensed Consolidated Balance Sheets
   
Jun 30, 2012
   
Dec 31, 2011
 
   
(Unaudited)
       
ASSETS
           
Current Assets
           
    Cash
  $ 1,601,092     $ 2,875,298  
    Trade accounts receivable, net
    7,741,841       5,582,530  
    Other receivables
    464,880       383,411  
    Inventory
    2,739,905       3,048,863  
    Prepaid expenses
    463,666       449,978  
    Deposits
    68,612       60,019  
    Deferred tax asset current portion
    177,308       177,308  
Total current assets
    13,257,304       12,577,407  
Intangible assets
    28,175       12,491  
Property and equipment, net
    2,225,316       1,960,047  
Deferred tax asset non-current portion
    257,440       257,440  
TOTAL ASSETS
  $ 15,768,235     $ 14,807,385  
LIABILITIES and STOCKHOLDERS' EQUITY
               
Current Liabilities
               
    Trade accounts payable
  $ 7,112,053     $ 6,239,758  
    Line-of-Credit
    800,000       -  
    Accrued payroll and other accrued liabilities
    581,737       301,162  
    Notes payable-current portion
    100,000       100,000  
Total current liabilities
    8,593,790       6,640,920  
Long-Term Liabilities
               
   Notes payable-less current portion
    325,000       375,000  
Total liabilities
    8,918,790       7,015,920  
Stockholders' equity
               
    Preferred stock, $100 par value, 25,000,000 shares authorized; 6,768
and 6,380 shares issued and outstanding, respectively
    676,800       638,000  
    Common stock, $0.001 par value, 575,000,000 shares authorized;
162,212,538 and 162,172,879 shares issued and outstanding, respectively
    162,213       162,173  
    Additional paid-in capital
    9,050,459       9,007,595  
    Accumulated other comprehensive loss
    (59,665 )     (30,500 )
    Accumulated deficit
    (2,853,007 )     (1,925,007 )
    Minority interest in subsidiaries
    (127,355 )     (60,796 )
Total stockholders' equity
    6,849,445       7,791,465  
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY
  $ 15,768,235     $ 14,807,385  

The accompanying notes are an integral part of these condensed consolidated financial statements.

 
3

 
 
POWIN CORPORATION
Condensed Consolidated Statements of Operations

   
Three-months ended
Jun 30, 2012
   
Three-months ended
Jun 30, 2011
   
Six-months ended
Jun 30, 2012
   
Six-months ended
Jun 30, 2011
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
Sales revenue- net
  $ 13,515,205     $ 12,731,692     $ 26,808,410     $ 23,683,121  
Cost of sales
    12,653,017       11,250,004       25,047,633       20,664,194  
    Gross profit
    862,188       1,481,688       1,760,777       3,018,927  
Operating expenses
    1,488,736       1,342,042       2,729,558       2,853,074  
    Operating (loss) income
    (626,548 )     139,646       (968,781 )     165,853  
Other income (expense) non-operating
                               
    Other income
    6,975       19,683       38,533       34,658  
    Interest – net
    (4,332 )     648       (7,931 )     656  
    Loss on sales of assets
    -       (30,529 )     -       (30,529 )
    Other expense
    (10,667 )     (43,985 )     (25,734 )     (53,483 )
Total other income (expense) non-operating
    (8,024 )     (54,183 )     4,868       (48,698 )
(Loss) income before income taxes
    (634,572 )     85,463       (963,913 )     117,155  
Income taxes
    -       30,470       -       37,670  
Net (loss) income
    (634,572 )     54,993       (963,913 )     79,485  
Net loss attributable to non-controlling interest in subsidiary
    (21,819 )     (15,023 )     (43,324 )     (21,862 )
Net (loss) income attributable to Powin Corporation
    (612,753 )     70,016       (920,589 )     101,347  
Earnings per share
                               
    Basic
  $ (0.00 )   $ 0.00     $ (0.01 )   $ 0.00  
    Diluted
  $ (0.00 )   $ 0.00     $ (0.01 )   $ 0.00  
Weighted average shares
                               
    Basic
    162,192,538       162,038,255       162,182,538       162,038,255  
    Diluted
    162,192,538       174,271,813       162,182,538       174,271,813  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

 
4

 

POWIN CORPORATION
Condensed Consolidated Statements of Comprehensive Income (Loss)

   
Three-months
ended Jun 30, 2012
   
Three-months
ended Jun 30, 2011
   
Six-months ended
Jun 30, 2012
   
Six-months ended
Jun 30, 2011
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
Net (loss) income
  $ (634,572 )   $ 54,993     $ (963,913 )   $ 79,485  
Other Comprehensive loss
                               
    Foreign currency translation adjustment
    (55,948 )     (84,428 )     (34,311 )     (84,415 )
                                 
Comprehensive loss
    (690,520 )     (29,435 )     (998,224 )     (4,930 )
Comprehensive loss attributable to non-controlling interest in subsidiary
    (30,211 )     (15,023 )     (48,470 )     (21,862 )
Comprehensive (loss) income attributable to Powin Corporation
  $ (660,309 )   $ (14,412 )   $ (949,754 )   $ 16,932  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
 
 

 
 
5

 

POWIN CORPORATION
Condensed Consolidated Statements of Cash Flows

    Six-months ended     Six-months ended  
   
Jun 30, 2012
   
Jun 30, 2011
 
   
(Unaudited)
   
(Unaudited)
 
CASH FLOWS USED IN OPERATING ACTIVITIES
           
Net (loss) income
  $ (920,589 )   $ 101,347  
Adjustments to reconcile net income (loss) to net cash used in operating activities
               
    Net loss attributable to non-controlling interest in subsidiary
    (43,324 )     (21,862 )
    Depreciation and amortization
    199,384       141,496  
    Shares issued for services
    61,104       43,250  
    Reserve for slow moving and obsolete Inventory
    88,000       -  
    Share based compensation
    20,600       53,180  
Changes in operating assets
               
    Increase in trade accounts receivable
    (2,159,311 )     (2,236,672 )
    Increase in other receivables
    (81,469 )     (175,543 )
    Decrease (Increase) in inventories
    220,958       (550,705 )
    Increase in prepaid expenses
    (13,688 )     (117,369 )
    Increase in deposits
    (8,593 )     (30,155 )
    Increase (decrease) in accrued payroll and other liabilities
    280,575       (106,208 )
    Increase in trade accounts payable
    872,295       2,298,352  
Net cash used in operating activities
    (1,484,058 )     (600,889 )
CASH FLOWS USED IN INVESTING ACTIVITIES
               
Acquisition of intangible assets
    (24,485 )     (315 )
Purchases of equipment
    (455,855 )     (286,993 )
Net cash flows used in investing activities
    (480,340 )     (287,308 )
CASH FLOWS FROM FINANCING ACTIVITIES
               
Borrowings under line-of-credit
    800,000       -  
Payments to equipment line-of-credit
    (50,000 )     -  
Net cash flows provided by financing activities
    750,000       -  
Impact of foreign exchange translation on cash
    (59,808 )     (84,415 )
Net decrease in cash
    (1,274,206 )     (972,612 )
Cash at beginning of period
    2,875,298       3,356,460  
Cash at end of period
  $ 1,601,092     $ 2,383,848  
SUPPLEMENTAL DISCLOURSE OF CASH FLOW INFORMATION
               
Interest paid
  $ 7,931     $ 4,189  
Income tax paid
  $ 12,500     $ 175,000  

The accompanying notes are an integral part of these condensed consolidated financial statements.

 
6

 
POWIN CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements

Note 1 – Description of Business and Summary of Significant Accounting Policies
 
The Company was originally named Powin Corporation (“Powin” or the “Company”) and was formed as an Oregon corporation on November 15, 1990 by Joseph Lu, a Chinese-American.  Since its incorporation, Powin has grown into a large original equipment manufacturer (“OEM”) utilizing six plants on two continents.  Powin provides manufacturing coordination and distribution support for companies throughout the United States (“U.S.”).  More than 2,000 products and parts are supplied by Powin on a regular basis.

Basis of Preparation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information and with the instructions to Form 10-Q.  Accordingly, they do not include all of the information required by GAAP for complete annual financial statement presentation.

In the opinion of management, all adjustments (consisting only of normal and recurring adjustments) necessary for a fair presentation of the results of operations have been included in the accompanying unaudited condensed consolidated financial statements.  Operating results for the six-month period ended June 30, 2012, are not necessarily indicative of the results to be expected for other interim periods or for the full year then ended December 31, 2012.  These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities Exchange Commission.

Principles of Consolidation
 
The accompanying unaudited condensed consolidated financial statements include the accounts of Powin Corporation and its wholly-owned subsidiaries, Quality Bending and Fabrication, LLC (“QBF”), Powin Wooden Product Service, Inc.,(“Wooden”) Channel Partner Program (“CPP”), Powin Renewable Energy Resources, Inc. (“ Powin Energy”)), and majority owned (85%) joint venture, Powin Industries  SA de CV (“Mexico”). 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.
 
Going Concern
 
The Company sustained operating losses during the three and six months ended June 30, 2012.  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 obtaining additional financing from its shareholders or other sources, as may be required.
 
The accompanying unaudited condensed 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 unaudited condensed 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 classifications of liabilities that may result should the Company be unable to continue as a going concern.
 
Management is endeavoring to increase revenue generating operations. The Company is currently seeking to adjust the sales pricing with one of the main customer  by QBF  that would help generate more revenue, while simultaneously cutting expenses through reducing labor hours, and tightening inventory control.  While priority is on generating cash from operations through the sale of the Company’s products, management is also seeking to raise additional working capital through debt financing.
 
 
 
7

 
 
Note 1 – Description of Business and Summary of Significant Accounting Policies (Continued)

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Cash and Cash Equivalents

For purposes of the condensed consolidated statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.  At June 30, 2012 and December 31, 2011, respectively, the Company had no cash equivalents.

The Company places its cash with high credit quality financial institutions but retains a certain amount of exposure as cash is held primarily with two financial institutions and deposits are only insured up to the Federal Deposit Insurance Corporation limit of $250,000. The Company maintains its cash in bank accounts, which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk.

Trade Accounts Receivable

Trade accounts receivable are carried at their estimated collectible amounts. Trade credit is generally extended on a short-term basis; thus, trade accounts receivable do not bear interest.  Trade 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. The Company did not incur any bad debt expense for the three and six month ended June 30, 2012 and 2011.  The Company has an allowance for doubtful accounts of $63,577 and $63,577 as of June 30, 2012 and December 31, 2011.

Inventory

Inventory consists 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.  The following table represents the Company’s inventories at each of the indicated balance sheet dates.

   
June 30, 2012
   
Dec 31, 2011
 
   
(Unaudited)
       
Raw materials
  $ 313,875     $ 356,371  
Work in progress
    10,916       66,823  
Finished goods
    2,656,318       2,778,873  
Reserve for slow moving and obsolete inventory
    (241,204 )     (153,204 )
    $ 2,739,905     $ 3,048,863  

 
Property and Equipment

Property and equipment are carried at cost less accumulated depreciation. For financial reporting and income tax purposes, the costs of property and equipment are depreciated 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
 
 
 
8

 
 
Note 1: Description of Business and Summary of Significant Accounting Policies (Continued)

 
its revised remaining useful life thereby increasing depreciation expense. Depreciation expense for the quarters ended June 30, 2012 and 2011 was $78,839 and $48,774, respectively. Depreciation expense for the six-month period ended June 30, 2012 and 2011 were $190,582 and $101,962, respectively.
 
Intangible Assets

Identifiable intangible assets with finite lives are amortized over their estimated useful lives. They are generally amortized based on the associated projected cash flows in order to match the amortization pattern to the pattern in which the economic benefits of the assets are expected to be consumed. They are reviewed for impairment if indicators of potential impairment exist. Capitalized patent costs represent legal fees associated with filing and maintaining a patent application for the Company’s U-Cube product.  The Company accounts for its patents in accordance with ASC 350-30 and ASC 360.  The Company amortizes the capitalized patent costs on a straight-line basis over an estimated useful life of 5 years. Amortization expense for the quarters ended June 30, 2012 and 2011 was $4,723 and $0, respectively.

Impairment of Long-Lived and Intangible Assets

The Company periodically reviews the carrying amounts of its property, equipment and intangible assets to determine whether current events or circumstances indicate that such carrying amounts may not be recoverable.  If the carrying amount of the asset is greater than the expected undiscounted cash flows to be generated by such asset, an impairment adjustment is to be recognized.  Such adjustment is measured by the amount that the carrying value of such assets exceeds their fair value.  The Company generally measures fair value by considering sale prices for similar assets or by discounting estimated future cash flows using an appropriate discount rate.  Considerable management judgment is necessary to estimate the fair value of assets; accordingly, actual results could vary significantly from such estimates.  Assets to be disposed of are carried at the lower of their financial statement carrying amount or fair value less costs to sell.  The Company determined that its long-lived assets as of June 30, 2012 and December 31, 2011 were not impaired.

Revenue Recognition

The Company will recognize revenue on arrangements in accordance with FASB ASC No. 605, “Revenue Recognition”.  In all cases, revenue is recognized only when the price is fixed and determinable, persuasive evidence of an arrangement exists, the service is performed and collectability of the resulting receivable is reasonably assured.

Most of the Company’s products are imported from China and shipped directly to the customer either FOB Port of Origin or FOB Shipping Destination U.S.  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 U.S. 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 product shipped directly to the Company’s warehouse or manufactured by the Company in the U.S. then shipped to the customer, revenue is recognized at time of shipment as it is determined that ownership has passed to the customer at shipment and revenue is recognized. The Company considers the terms of each arrangement to determine the appropriate accounting treatment.  Amounts billed to customers for freight and shipping is classified as revenue.

For orders placed by a customer needing 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 product at completion and shipment 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 shipments are fully invoiced to the customer and revenue is recognized.

Cost of Goods Sold

Cost of goods sold includes cost of inventory sold during the period, net of purchase discounts and allowances, and includes freight in costs, warranty and rework costs.

 
 
9

 

Note 1 – Description of Business and Summary of Significant Accounting Policies (Continued)

Advertising

The Company expenses the cost of advertising as incurred.  For the quarters ended June 30, 2012 and 2011, the amount charged to advertising expense was $13,440 and $23,565, respectively. Advertising expense for the six-month period ended June 30, 2012 and 2011 were $29,332 and $76,827, respectively.

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 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 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.

Earnings (Loss) Per Common Share

Basic earnings (loss) per share is computed by dividing earnings (loss) available to common stockholders by the weighted average number of common shares outstanding (including shares reserved for issuance) during the period.  Diluted earnings per share is calculated by dividing net income attributable to common stockholders by the weighted average number of shares of common stock outstanding and all dilutive potential common shares that were outstanding during the period.

As of June 30, 2012 and December 31, 2011, there were 11,031,758 and 11,031,758 warrants outstanding and 6,768 and 6,380 convertible preferred shares, respectively (convertible to 1,353,600 and 1,201,800 Common Shares). The equity instruments were not included in the computation of loss per share as of June 30, 2012 because the inclusion would have been anti-dilutive.

Foreign Currency Translation

In February 2011, the company entered into a joint venture establishing a new company in Mexico under which we will hold an 85% majority interest.  All transactions are translated into U.S. dollars for financial reporting purposes.  Balance Sheet accounts are translated at the end-of-month or historical rates while income and expenses are translated at the average of the beginning of the month rate and the end of the month rate.  Translation gains or losses related to net assets are shown as a separate component of shareholders’ equity as accumulated other comprehensive income.  At June 30, 2012 and December 31, 2011, the cumulative translation adjustment was $(59,665) and $(30,501), respectively.  Gains and losses resulting from realized foreign currency transactions (transactions denominated in a currency other than the entities’ functional currency) are included in other comprehensive income.  For the three months ended June 30, 2012 and 2011, the foreign currency translation adjustment to other comprehensive income was $(47,556) and $84,428, respectively. For the six-month period ended June 30, 2012 and 2011, the foreign currency translation adjustment to other comprehensive income was $(29,165) and $84,415, respectively.

 
 
10

 
 
Note 2:  Recently Issued Accounting Pronouncements
 
Accounting standards promulgated by the FASB change periodically. Changes in such standards may have an impact on the Company’s future financial statements. The following are a summary of recent adopted accounting developments.
 
Note 2:  Recently Issued Accounting Pronouncements (Continued)

In May 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2011-04, “Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS” (“ASU 2011-04”).  ASU 2011-04 redefines many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS.  ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs.  This new guidance is effective for the Company beginning in the first quarter of 2012. The adoption of this standard did not materially impact the Company’s consolidated financial statement footnote disclosures.
 
In June 2011, the FASB issued new guidance on the presentation of comprehensive income. The new guidance allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in stockholders’ equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income from that of current accounting guidance. This new guidance is effective for years and interim periods beginning after December 15, 2011. The Company’s adoption of this accounting guidance did not have a material impact on its financial statements and related disclosures.
 
In December 2011, the FASB issued Accounting Standards Update ("ASU") No. 2011-12, Topic 220 - Comprehensive Income ("ASU 2011-12"), which indefinitely deferred certain provisions of ASU 2011-05, including the requirement to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. This amendment is effective for both annual and interim financial statements beginning after December 15, 2011. The Company's adoption of ASU 2011-12 did not have a material impact on its financial statements and related disclosures.

In July, 2012, the FASB issued guidance on testing for indefinite-lived intangible assets for impairment. The new guidance provides an entity to simplify the testing for a drop in value of intangible assets such as trademarks, patents, and distribution rights. The amended standard reduces the cost of accounting for indefinite-lived intangible assets, especially in cases where the likelihood of impairment is low. The changes permit businesses and other organizations to first use subjective criteria to determine if an intangible asset has lost value. The amendments to U.S. GAAP will be effective for fiscal years starting after September 15, 2012. Early adoption is permitted. We do not expect a material impact on our consolidated financial statements.

Note 3:  Customer and Supplier Concentration of Credit Risk

A significant portion of the Company’s revenue is derived from a small number of customers. For the six months ended June 30, 2012 and 2011, sales to the Company’s three largest customers accounted for 68% and 80% of net sales, respectively. No other customers accounted for more than ten percent of total net sales for the six months ended June 30, 2012 and 2011. As of June 30, 2012 and December 31, 2011, a total amount of $5,272,874 and $3,740,295 was owed by these customers, respectively.
 
For the three months ended June 30, 2012 and 2011, the Company purchased its products from a small number of vendors. If any of these vendors were to experience delays, capacity constraints or quality control problems, product shipments to the Company’s customers could be delayed, or the Company’s customers could consequently elect to cancel the underlying product purchase order, which would negatively impact the Company's revenue. For the six months ended June 30, 2012 and 2011, the Company purchased 55% and 64% of its inventory from three suppliers, respectively. As of June 30, 2012 and December 31, 2011, the Company owed these vendors in a total amount of $6,140,692 and $5,741,382, respectively.

 
 
11

 
 
Note 4:  Bank Loans

At June 30, 2012 the Company had a short-term line-of-credit with a bank with maximum borrowings available of $2,000,000 with a maturity date of May 15, 2013.  Interest on the line-of-credit is indexed to the prime rate less three-fourth point and was 2.50% at June 30, 2012.  The Company’s line-of-credit outstanding balances as of June 30, 2012 and December 31, 2011 was $800,000 and zero, respectively. The Company incurred significant expenses during the quarter mainly revolving around new product development within Powin Energy as well as funding the operating expenses for the new Powin Mexico factory.

The Company’s line-of-credit is subject to negative and standard financial covenants.  The negative covenants restrict the Company from incurring any indebtedness and liens except for trade debt incurred in the normal course of doing business; such as, borrow money including capital leases; sell, mortgage, assign, pledge, lease, grant security interest in, or encumber any of the Company’s assets or accounts; engage in any business substantially different than in which the Company is currently engaged; loan, invest or advance money or assets to any other person, enterprise or entity.  Other standard financial covenants consist of; current ratio of 1.25 to 1.00 tested at the end of each quarter; total liabilities to capital ratio of 2.50 to 1.00 tested at the end of each year; operating cash flow to fixed charge ratio of not less than 1.25 to 1.00 tested at the end of each year.  As of June 30, 2012 and December 31, 2011, the Company was in compliance with all covenants.

In June 2011, the Company entered into a five-year equipment note payable  with the same bank that holds the Company’s operating line-of-credit facility, with maximum borrowings available of $500,000 and a maturity date of June 21, 2016.  The interest rate on this equipment note payable is fixed at 3.05%.  The proceeds of this equipment note payable will be used to upgrade old outdated equipment and to add new state-of-the-art metal manufacturing equipment to the Company’s QBF and Mexico  operations.  At June 30, 2012 and December 31, 2011, the Company’s equipment note payable balance was $425,000 and $475,000, respectively.  The Company has no covenants in respect to this equipment note payable, however it is secured by equipment purchased using this facility.

Note 5:  Stock Options

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 up to 1,170,000 shares of common stock.  In the three-month period ended June 30, 2012, three employees left the Company electing not to exercise their vested options and 60,000 incentive stock options were forfeited.  Awards are generally granted with an exercise price that approximates the market price of the Company’s common stock at the date of grant.

The stock-based compensation expense included in general and administrative expense for the six-month periods ended June 30, 2012 and 2011 was $61,104 and $5,396, respectively.  ASC 718. “Compensation-Stock Compensation” requires that only the compensation expense expected to vest be recognized.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the following table.  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 U.S. Treasury zero-coupon issue with a remaining term closest to the expected term of the option.

The dividend yield reflects that the Company has not paid any cash dividends since inception and does not intend to pay any cash dividends in the foreseeable future.

 
 
12

 


Note 5:  Stock Options (Continued)

The following assumptions were used to determine the fair value of the options at date of issuance:

   
Six-months June 30, 2012
 
Dividend yield
    0  
Expected volatility
    86.8 %
Risk-free interest rate
    1.6 %
Term in years
    5.92  
Forfeiture rate
    15.4 %


A summary of option activity as of June 30, 2012, and changes during the period then ended is presented below:  

   
Options
   
Weighted
Average
Exercise Price
   
Average
Remaining
Contractual Life
(Years)
   
Aggregate
Intrinsic Value
 
                         
Option granted June 15, 2011
    1,170,000     $ 1.02       6.92     $ -  
  Options forfeited or expired
    (80,000 )   $ -       -     $ -  
Outstanding at Dec 31, 2011
    1,090,000     $ 1.02       6.42     $ -  
  Options granted for the quarter ended June 30, 2012
    -     $ -       -     $ -  
  Options exercised
    -     $ -       -     $ -  
  Options forfeited or expired
    (100,000 )   $ -       -     $ -  
Outstanding at June 30, 2012
    990,000     $ 1.02       5.92     $ -  
Exercisable at June 30, 2012
    -     $ -       -     $ -  
                                 

There were no options exercised during the three and six month period ended June 30, 2012.

Note 6:  Capital Stock

In June 2012, the Company issued 20,000 shares of Common Stock to its Board of Directors for their services on the board at $0.59 per share booking an expense of $11,800 which is reflected in Stockholders’ Equity as an increase of Common Stock of $20 (par at $0.001 times shared issued of 20,000), and Additional Paid in Capital of $11,780.  Each director received 5,000 shares of Common Stock for an aggregate of 20,000 shares of Common Stock issued.

In March 2012, the Company granted 20,000 common shares to its Board of Directors for their services on the board, with an expense of $8,800 to the Company.

In April 2011, the Company issued 25,000 shares of Common stock to compensate a consulting firm for its work, with an expense of $9,500 to the Company.

In June 2011, the Company issued 21,667 Common shares to its Board of Directors for their services on the board, with an expense of $38,784 to the Company.

In June 2011, the Company declared preferred stock dividends.  The Company accrued a total of 349 dividends in preferred shares and booked $34,900 increase in Preferred stock.  The dividends were issued in July 2011.

 
 
13

 
 
Note 7:  Related Party Transactions

The facility rented by  QBF  is owned by the Company’s two major shareholders and their real estate company Powin Pacific Properties LLC. On June 1, 2011, the Company entered into a 122 month lease and moved all the other operating segments into the one facility. Rent paid for the 6 months ended June 30, 2012 and 2011 was $304,644 and $117,142, respectively. Rental rates are deemed to be and were derived by local market rates for the rents when the contracts were entered.
 
The Company’s CEO and President, owns 45% in Logan Outdoor Products, LLC.  The Company has made sales to Logan Outdoor Products in the amount of $4,540,899 and $4,663,051 during the three months ended June 30, 2012 and 2011, respectively. The accounts receivable due from Logan Outdoor Products was $3,308,499 and $3,832,845 at June 30, 2012 and 2011, respectively.  The Company has determined its pricing based on the negotiated exchange amounts that reflect market prices for the products sold to Logan Outdoor Products.

The Company’s CEO and President, also owns 50% in CoSource USA, LLC.  The Company has made sales to CoSource USA in the amount of zero and $69 during the three months ended June 30, 2012 and 2011, respectively. The accounts receivable due from CoSource USA was $41,150 and $47,788 at June 30, 2012 and 2011, respectively.  The Company has determined its pricing based on the negotiated exchange amounts that reflect market prices for the products sold to CoSource USA.

Minimum future lease payments under non-cancelable operating leases having remaining terms in excess of one year as of June 30, 2012 are as follows:
 
Year
 
Lease Payment
 
2012 (6 months remaining)
  $ 377,442  
2013
    754,884  
2014
    723,696  
2015
    567,756  
2016
    567,756  
Thereafter
    2,577,949  
Total
  $ 5,569,483  
         

 
Note 8:  Contingencies
 
During the ordinary course of business, the Company encounters various legal claims which, in the opinion of management, will not materially affect the Company’s financial position, results of operations or cash flows.
 
Powin  Energy  has been named as a defendant in Global Storage Group, LLC v. Virgil L. Beaston and Powin Renewable Energy Resources, Inc., Case No. 1202-1712 in the Circuit Court of the State of Oregon for the County of Multnomah on February 8, 2012. The complaint alleges, as to Powin  Energy, the misappropriation of trade secrets and intentional interference with existing or prospective economic relationship arising from the alleged breach by the co-defendant Virgil L. Beaston of the Operating Agreement of Global Storage Group, LLC. Mr. Beaston is an employee of Powin  Energy. Damages are sought in the amount of $30 million with a prayer for injunctive relief and leave to seek punitive damages. The Company and Powin Energy believe there is no basis for the allegations and intends to defend against the action.

 
 
14

 

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Note Regarding Forward Looking Statements

This information should be read in conjunction with the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2011 as filed with the Securities and Exchange Commission on April 10, 2012, and the unaudited condensed interim consolidated financial statements and notes thereto included in this Quarterly Report.

References to “Powin,” the “Company,” “we,” “our” and “us” refer to Powin Corporation and its wholly owned and majority-owned subsidiaries, unless the context otherwise specifically defines.

Overview

Powin Corporation has relationships with various manufacturers in China and Taiwan that manufacture a variety of products for the Company’s U.S. customers which they sell and distributed throughout the U.S.  The Company’s customer base includes distributors in the transportation, medical, sports, camping, fitness, packaging and furniture industries.

Critical Accounting Policies

Our significant accounting policies are summarized in Note 1 of our unaudited condensed consolidated financial statements.
 
 
 
 
 
 
 
15

 
 
Results of Operations

The following tables set forth key components of the Company’s results of operations (unaudited), for the three and six-month periods ended June 30, 2012 and 2011, in dollars of sales revenue and its key segments of revenue.

For the three-months ended June 30, 2012

 
OEM
 
QBF
 
Mexico
 
Wooden
 
CPP
 
PRER
 
Consolidated
 
                             
Sales
$ 11,286,968   $ 1,858,391   $ 23,624   $ 101,168   $ 200,094   $ 44,960   $ 13,515,205  
Cost of Sales
  10,336,477     1,958,007     145,503     -     175,198     37,832     12,653,017  
Gross Profit
  950,491     (99,616 )   (121,879 )   101,168     24,896     7,128     862,188  
Operating Expense
  658,366     290,602     22,953     114,294     141,574     260,947     1,488,736  
Other Income (Expense)
  (16,251 )   8,859     (632 )   -     -     -     (8,024 )
Income (loss) before Income Tax
$ 275,874   $ (381,359 ) $ (145,464 ) $ (13,126 ) $ (116,678 ) $ (253,819 ) $ (634,572 )
Income tax on consolidated income
                                      -  
Consolidated net loss
                                    $ (634,572 )
Net loss attributable to non-controlling interest in subsidiary
                                $ (21,819 )
Net loss attributable to Powin Corporation
                                      (612,753 )




For the three-months ended June 30, 2011

 
OEM
 
QBF
 
Mexico
 
Wooden
 
CPP
 
PRER
 
Consolidated
 
                             
Sales
$ 11,539,065   $ 1,005,298   $ -   $ 100,085   $ 84,884   $ 2,360   $ 12,731,692  
Cost of Sales
  10,051,265     1,131,608     -     -     65,521     1,610     11,250,004  
Gross Profit
  1,487,800     (126,310 )   -     100,085     19,363     750     1,481,688  
Operating Expense
  780,996     83,133     100,159     90,191     174,896     112,667     1,342,043  
Other Income (Expense)
  (38,137 )   (10,884 )   -     (5,201 )   39     -     (54,183 )
Income (Loss) before Income Tax
$ 668,667   $ (220,327 ) $ (100,159 ) $ 4,693   $ (155,494 ) $ (111,917 ) $ 85,462  
Income Tax on Consolidated Income
                                      30,470  
Consolidated Net Income
                                    $ 54,992  
Net Loss attributable to non-controlling interest in subsidiary
                                $ (15,023 )
Net incom Attributable to Powin Corporation
                                      70,016  

 
 
16

 
 
Results of Operations (Continued)

For the six-months ended June 30, 2012

 
OEM
 
QBF
 
Mexico
 
Wooden
 
CPP
 
PRER
 
Consolidated
 
                             
Sales
$ 22,853,104   $ 3,350,689   $ 55,236   $ 179,556   $ 299,604   $ 70,221   $ 26,808,410  
Cost of sales
  20,896,822     3,555,279     286,451     -     251,666     57,415     25,047,633  
Gross profit
  1,956,282     (204,590 )   (231,215 )   179,556     47,938     12,806     1,760,777  
Operating expense
  1,460,915     327,075     56,215     214,670     241,300     429,383     2,729,558  
Other income (expense)
  (28,650 )   34,917     (1,399 )   -     -     -     4,868  
Income (loss) before income tax
$ 466,717   $ (496,748 ) $ (288,829 ) $ (35,114 ) $ (193,362 ) $ (416,577 ) $ (963,913 )
Income tax on consolidated income
                                      -  
Consolidated net loss
                                      (963,913 )
Net loss attributable to non-controlling interest in subsidiary
                                  (43,324 )
Net loss attributable to Powin Corporation
                                    $ (920,589 )



For the six-months ended June 30, 2011

 
OEM
 
QBF
 
Mexico
 
Wooden
 
CPP
 
PRER
 
Consolidated
 
                             
Sales
$ 20,734,722   $ 2,493,365   $ -   $ 205,573   $ 170,821   $ 78,640   $ 23,683,121  
Cost of sales
  17,960,350     2,524,710     -     -     128,786     50,348     20,664,194  
Gross profit
  2,774,372     (31,345 )   -     205,573     42,035     28,292     3,018,927  
Operating expense
  1,567,628     414,727     145,749     181,365     311,972     231,633     2,853,074  
Other income (expense)
  (47,626 )   661     -     (5,201 )   3,468     -     (48,698 )
Income (loss) before income tax
$ 1,159,118   $ (445,411 ) $ (145,749 ) $ 19,007   $ (266,469 ) $ (203,341 ) $ 117,155  
Income tax on consolidated income
                                      37,670  
Consolidated net income
                                    $ 79,485  
Net Loss attributable to non-controlling interest in subsidiary
                                $ (21,862 )
Net income Attributable to Powin Corporation
                                      101,347  

 
 
17

 
 
Results of Operations (Continued)

Consolidated net revenues for the three-month period ended June 30, 2012, were up 6% or approximately $784 thousand dollars from the same period of 2011.  The Company’s OEM  net revenues decreased 2% or approximately $252 thousand dollars,  QBF  net revenues increased 85% or approximately $853 thousand dollars, the Company’s Mexico operations began generating revenues in the first quarter, and continued into the second quarter with $24 thousand dollars reported,   Wooden  net revenues increased 1% or approximately $1 thousand dollars,  CPP net revenues increased 136% or approximately $115 thousand dollars, the Energy segment net revenues increased 1805% or $43 thousand dollars.

 OEM  sales stayed event over the second quarter of 2012 and 2011. The slight decrease is due to the continuing impact on its margins due to increased manufacturing costs in China and cost of shipping freights. OEM has managed to obtain new customers during the quarters well as develop several new products for the optical industry

 QBF  sales increase is due to greater demands from it major customer and a new customer in support of the Company’s Energy segment.

Wooden sales saw a slight increase, but management expects sales to rebound more dramatically as the Company’s OEM  sales continue to rebound.

 CPP  increased sales revenue, which has proven the current sales marketing program has been effective. The reduction in operating expense year over year has been a result of internal consolidation and streamlined process. Like OEM, CPP is seeing an impact on its margin due to increased manufacturing costs in China. Management is hopeful to continue to reduce operating costs and is optimistic with the launch of several new products in the near term.

 Powin Energy secured initial purchase orders from highly recognized brand name customers in the first quarter for lighting and battery products, which continued into the second quarter as well:
 
 
·
Powin Energy fulfilled two purchase orders for cylindrical, rechargeable batteries from a global battery company in the first quarter. The customer is still testing our batteries and ramping up sales efforts. Management is hopeful for additional orders in the coming quarters.
 
·
Powin Energy continued with orders of a lighting specification for a large grocery chain that is performing retrofits in the jewelry section of their stores throughout the second quarter.  Management is optimistic with sales projections of the next quarter exceeding existing inventory. We are fulfilling the initial order and expect continuing orders in Q2 and beyond.
 
Other significant milestones for Powin Energy during Q2:
 
 
·
Powin Energy has been selected to participate in the Pacific Northwest Smart Grid Demonstration, a DOE funded event that will bring enormous attention to Powin Energy.  We will be exposed to many prospective customers and stakeholders as we demonstrate the benefits of our energy storage product to the utility sector. We have now finalized the energy storage system and will be installing for this demonstration in the upcoming quarter.
 
·
Powin Energy initiated the integration of a fully mobile grid scale energy storage system that will be tested and evaluated by several utility companies and Pacific Northwest National Laboratory. The product is projected for completion in the upcoming quarter.
 
·
Powin Energy launched a line of LED light fixtures for various applications.
 
·
Powin Energy announced a partnership with Oregon Tech, whereby Powin donated testing equipment to their laboratory. In return, Powin Energy will have access to their facility and will draw upon the expertise of the staff members and students through the form of internships and research papers.
 
·
Powin Energy announced a co-branding relationship with Ideal Power Converters for grid scale energy storage sector.
 
·
Powin Energy launched a web-based monthly e-newsletter that circulates to over 1,800 interested parties.

 
 
18

 

Results of Operations (Continued)

Consolidated cost of sales are up 12.5% or approximately $1.4 million dollars for the three-month period ended June 30, 2012, when compared with the same period in 2011.  As a percent of net revenue, consolidated cost of sales was 93.6% for the three-month period ended June 30, 2012, compared to 88.4% for the same period in 2011.
Consolidated gross profits decreased $619 thousand dollars. Gross profit was 6.4% for the three-month period ended June 30, 2012, compared to 11.6% for the same period in 2011.  The decrease in gross profit is attributed to continued inefficiencies in the Company’s QBF and Mexico  operations and,  OEM  gained  new customers but with lower margins. Powin Energy is also attributable to the decrease in gross profits due to the enhanced developmental costs for new products.

Consolidated operating expenses for the three-month period ended June 30, 2012, increased 11% or approximately $147 thousand dollars from the same period in 2011. The following table is reflective of the changes in operating expenses in dollars and percentage of change for the three-month period ended June 30.
For the three-months ended June 30

   
2012
   
2011
   
Change
   
% Change
 
   
(Unaudited)
   
(Unaudited)
             
Salaries & Related
  $ 824,167     $ 821,207     $ 2,960       0.4 %
Advertising
    13,440       23,565       (10,125 )     -43.0 %
Professional Services
    271,736       253,638       18,098       7.1 %
All Other
    379,393       243,632       135,761       55.7 %
   TOTAL
  $ 1,488,736     $ 1,342,042     $ 146,694       10.9 %

Consolidated net revenues for the six-month period ended June 30, 2012 were up 13.2% or approximately $3.1 million dollars. The Company’s OEM  net revenues increased 10.2% or approximately $2.1 million dollars,  QBF  net revenues increased 34.4% or approximately $858 thousand dollars, the Company’s Mexico operations began generating revenues in the first quarter, which continued into the second quarter for a total for the six-months ended June 30, 2012 of approximately $55 thousand dollars reported,  Wooden  net revenues decreased 12.7% or approximately $26 thousand dollars,  CPP st net revenues increased 75.5% or approximately $129 thousand dollars, Powin Energy  net revenues decreased 11% or approximately $9 thousand dollars.

Consolidated cost of sales are up by 21.2% or approximately $4.4 million dollars for the six-month period ended June 30, 2012, when compared with the same period in 2011. As a percent of net revenue, consolidated cost of sales was 93.4% for the six-month period ended June 30, 2012, compared to 87.3% for the same period in 2012.

Consolidated gross profits decreased $1.3 million dollars, but as a percent of net revenues gross profit was 6.6% for the six-month period ended June 30, 2012, compared to 12.7% for the same period in 2011. The decrease in gross profit is attributed to the inefficiencies mentioned above as well as the increased costs in the development of new products for Powin Energy.

Consolidated operating expenses for the six-months ended June 30, 2012, decreased 4.3% or approximately $124 thousand dollars from the same period in 2011.

The following table is reflective of the changes in operation expenses in dollars and percentage of change for the six-month period ended June 30, 2012.
 
For the six-months ended June 30

   
2012
   
2011
   
Change
   
% Change
 
   
(Unaudited)
   
(Unaudited)
             
Salaries & Related
  $ 1,630,680     $ 1,578,561     $ 52,119       3.3 %
Advertising
    29,332       76,827       (47,495 )     -61.8 %
Professional Services
    504,807       571,626       (66,819 )     -11.7 %
All Other
    564,739       626,060       (61,321 )     -9.8 %
   TOTAL
  $ 2,729,558     $ 2,853,074     $ (123,516 )     -4.3 %

 
 
19

 

Liquidity and Capital Resources

For the six-month period ended June 30, 2012, cash used by operating activities was $1.48 million dollars compared to $601 thousand dollars used during the same period in 2011.  Cash used in investing activities was $480 thousand dollars in the six-month period ended June 30, 2012, to replace manufacturing equipment and develop new products, compared to $287 thousand dollars used in investing activities in the same period of 2011, to replace equipment. Cash used in financing activities was $750 thousand dollars in the six-month period ended June 30, 2012, to pay down the Company’s existing notes payable. The Company did not require and did not use cash from financing activities in the same period of 2011.

The ratio of current assets to current liabilities was 1.54 at June 30, 2012, compared to 1.89 at December 31, 2011.  Quick liquidity (current assets minus inventories divided by current liabilities) was 1.22 at June 30, 2012 compared to 1.33 at December 31, 2011.  At June 30, 2012, the Company had working capital of $4.66 million dollars compared to working capital of $6.5 million dollars at December 31, 2011.  Average day’s sales outstanding on trade accounts receivable at June 30, 2012, was 45 days compared to average days sales outstanding of 42 days at December 31, 2011.

As discussed above, the Company at June 30, 2012 had a line-of-credit with a bank with maximum borrowing capacity of $2,000,000.  The maturity date for the Company’s line-of-credit is May 15, 2013.  The line-of-credit is secured by all receivables, inventory and equipment and, like the previous lines of credit, the new facility is not personally guaranteed by the Company’s majority stockholder or any shareholder.  Interest is the prime rate less three-fourth percent, which currently was 2.50% as of June 30, 2012.  The outstanding balances at June 30, 2012 and December 31, 2011 were $800,000 and zero, respectively.

The Company’s line-of-credit is subject to negative and standard financial covenants.  The negative covenants restrict the Company from incurring any indebtedness and liens except for trade debt incurred in the normal course of doing business such as: borrow money including capital leases; sell, mortgage, assign, pledge, lease, grant security interest in, or encumber any of the Company’s assets or accounts; engage in any business substantially different than what the Company is currently engaged; and, loan, invest or advance money or assets to any other person, enterprise or entity.  Other standard financial covenants consist of; current ratio of 1.25 to 1.00 tested at the end of each quarter; total liabilities to capital ratio of 2.50 to 1.00 tested at the end of each year; and operating cash flow to fixed charge ratio of not less than 1.25 to 1.00 tested at the end of each year.  At June 30, 2012 and December 31, 2011 the Company was in compliance with all covenants.

The Company’s management believes the current cash and cash flow from operations, including its line-of-credit, will be sufficient to meet anticipated cash needs, including cash for working capital and capital expenditures in the foreseeable future.  However, the Company may require additional cash resources due to changing business conditions or to take advantage of other future developments, which may require the Company to seek additional cash by selling additional equity securities or debt securities.  The sale of convertible debt securities or additional equity securities could result in additional dilution to the company’s stockholders.  The incurrence of additional indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations and liquidity.

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 media companies; conditions of the U.S. and other capital markets in which we may seek to raise funds; and future results of operations, financial condition and cash flow.  Therefore, the Company’s management cannot assure that financing will be available in amounts or on terms acceptable to the Company, if at all.  Any failure by the Company’s management to raise additional funds on terms favorable to the Company could have a material adverse effect on the Company’s liquidity and financial condition.

Off-Balance Sheet Arrangements.

As of and for the six-months ended June 30, 2012, the Company had no off-balance sheet arrangements.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

The Company is a smaller reporting company, as defined by Rule 229.10(f)(1) and is not required to provide the information required by this Item.

 
 
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Item 4.  Controls and Procedures.
 
Evaluation of Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our principal executive and principal financial officers, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”).  Based on that evaluation, our principal executive and financial officers concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings.

In February 2012, Our subsidiary, Powin Renewable Energy Resources, Inc. , an Oregon corporation (“Powin Energy”) has been named as a defendant in Global Storage Group, LLC v. Virgil L. Beaston and Powin Renewable Energy Resources, Inc., Case No. 1202-1712 in the Circuit Court of the State of Oregon for the County of Multnomah (February 8, 2012).  The complaint alleges, as to Powin Energy, the misappropriation of trade secrets and intentional interference with existing or prospective economic relationship arising from the alleged breach by the co-defendant Virgil L. Beaston of the Operating Agreement of Global Storage Group, LLC. Mr. Beaston is an employee of Powin Energy. Damages are sought in the amount of $30 million with a prayer for injunctive relief and leave to seek punitive damages. Powin Energy, and its’ codefendant, Virgil Beaston, have filed answers to the plaintiff’s complaint. We believe there is no basis for the allegations and we intend to defend against the action.
 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

Equity Compensation Plan Information

In June 2012, the Company issued 20,000 shares of Common Stock to its Board of Directors for their services on the board at $0.59 per share booking an expense of $11,800 which is reflected in Stockholders’ Equity as an increase of Common Stock of $20 (par at $0.001 times shared issued of 20,000), and Additional Paid in Capital of $11,780.  Each director received 5,000 shares of Common Stock for an aggregate of 20,000 shares of Common Stock issued.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

We did not purchase any of our shares of Common Stock or other securities during the six-month period ended June 30, 2012.

Item 3.  Defaults Upon Senior Securities.

None

Item 4.  [REMOVED AND RESERVED]


 
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Item 5.  Other Information.

None

Item 6.  Exhibits.

31.1
Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2
Certification of the Chief Executive Officer and Principal Executive Officer Pursuant to 13a-14 and 15d-14 of the Securities Exchange Act of 1934.

32.1
Certification of the Chief Financial Officer and Principal Financial Officer Pursuant to 13a-14 and 15d-14 of the Securities Exchange Act of 1934.
 
 
 

 
 
 
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SIGNATURES

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


August 14, 2012

  By /s/ Joseph Lu  
 
Joseph Lu
 
Chief Executive Officer
 
and Interim Chief Financial Office
 
(Principal Executive Officer and Principal Financial Officer)
   
   
   
  By /s/ Jingshuang Liu  
 
Jingshuang Liu
 
President and Director
 
 
 
 
 
 
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