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EX-31.1 - EXHIBIT 31.1 - POWIN CORPex31_1.htm
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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: September 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 November 15, 2012, there were 162,227,538 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 Loss(unaudited)
5
 
Condensed Consolidated Statements of Cash Flows(unaudited)
6
 
Notes to Condensed Consolidated Financial Statements(unaudited)
7
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
16
 
Note Regarding Forward Looking Statements
16
 
Overview
16
 
Critical Accounting Policies
17
 
Results of Operations
17
 
Liquidity and Capital Resources
19
 
Off-Balance Sheet Arrangements
20
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
20
     
Item 4.
Controls and Procedures.
20
     
     
     
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.
21
     
Item 6.
Exhibits.
22

 
 

 

PART I.       FINANCIAL INFORMATION

Item 1.  Financial Statements.

POWIN CORPORATION
Condensed Consolidated Balance Sheets
             
   
Sep 30, 2012
   
Dec 31, 2011
 
   
(Unaudited)
       
ASSETS
           
Current Assets
           
    Cash
  $ 2,100,582     $ 2,875,298  
    Accounts receivable, net
    5,164,280       5,582,530  
    Other receivables
    522,859       383,411  
    Inventory
    2,928,064       3,048,863  
    Prepaid expenses
    269,385       449,978  
    Deposits
    66,974       60,019  
    Deferred tax asset current portion
    177,308       177,308  
Total current assets
    11,229,452       12,577,407  
Intangible assets
    27,530       12,491  
Property and equipment, net
    2,157,306       1,960,047  
Deferred tax asset non-current portion
    257,440       257,440  
TOTAL ASSETS
  $ 13,671,728     $ 14,807,385  
LIABILITIES and STOCKHOLDERS' EQUITY
               
Current Liabilities
               
    Accounts payable
  $ 5,602,301     $ 6,239,758  
    Line-of-credit borrowing
    800,000       -  
    Accrued payroll and other liabilities
    521,018       301,162  
    Notes payable-current portion
    100,000       100,000  
Total current liabilities
    7,023,319       6,640,920  
Long-Term Liabilities
               
   Notes payable-less current portion
    300,000       375,000  
Total liabilities
    7,323,319       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
    162,228       162,173  
    Additional paid-in capital
    9,894,803       9,007,595  
    Accumulated other comprehensive loss
    (28,421 )     (30,500 )
    Accumulated deficit
    (4,202,421 )     (1,925,007 )
    Minority interest in subsidiaries
    (154,580 )     (60,796 )
Total stockholders' equity
    6,348,409       7,791,465  
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY
  $ 13,671,728     $ 14,807,385  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
3

 
 
POWIN CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
 
   
Three-months ended
   
Nine-months ended
 
   
Sept 30, 2012
   
Sept 30, 2011
   
Sept 30, 2012
   
Sept 30, 2011
 
                         
Sales- net
  $ 9,370,114     $ 10,367,793     $ 36,178,524     $ 34,050,914  
Cost of sales
    8,759,425       9,296,089       33,807,058       29,960,283  
    Gross profit
    610,689       1,071,704       2,371,466       4,090,631  
Operating expenses
    2,009,140       1,503,924       4,738,698       4,356,998  
    Operating loss
    (1,398,451 )     (432,220 )     (2,367,232 )     (266,367 )
Other income (expense) non-operating
                               
    Other income
    -       42,330       38,533       76,988  
    Interest – net
    (10,024 )     -       (17,955 )     656  
    Loss on sale of assets
    (6,825 )     -       (6,825 )     (30,529 )
    Other expense
    25,734       (60,746 )     -       (114,229 )
Total other expense non-operating
    8,885       (18,416 )     13,753       (67,114 )
Loss before income taxes
    (1,389,566 )     (450,636 )     (2,353,479 )     (333,481 )
Income taxe expense (benefit)
    -       (37,670 )     -       -  
Net loss
    (1,389,566 )     (412,966 )     (2,353,479 )     (333,481 )
Net loss attributable to non-controlling interest in subsidiary
    (32,741 )     (20,707 )     (76,065 )     (42,569 )
Net loss attributable to Powin Corporation
    (1,356,825 )     (392,259 )     (2,277,414 )     (290,912 )
Earnings per share
                               
    Basic
  $ (0.01 )   $ (0.00 )   $ (0.01 )   $ (0.00 )
   Diluted
  $ (0.01 )   $ (0.00 )   $ (0.01 )   $ (0.00 )
Weighted average shares
                               
    Basic
    162,192,611       162,122,546       162,192,611       162,066,661  
    Diluted
    174,577,969       174,300,219       174,577,969       174,300,219  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
4

 
 
POWIN CORPORATION
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
 
   
Three-months ended
   
Nine-months ended
 
   
Sept 30, 2012
   
Sept 30, 2011
   
Sept 30, 2012
   
Sept 30, 2011
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
Net loss
  $ (1,389,566 )   $ (412,966 )   $ (2,353,479 )   $ (333,481 )
Other Comprehensive income (loss)
                               
    Foreign currency translation adjustment
    (13,805 )     57,659       2,449       (26,756 )
                                 
Comprehensive loss
    (1,403,371 )     (355,307 )     (2,351,030 )     (360,237 )
Comprehensive loss attributable to non-controlling
interest in subsidiary
    (97,200 )     (20,707 )     (75,695 )     (42,569 )
Comprehensive loss attributable to Powin Corporation
  $ (1,306,171 )   $ (334,600 )   $ (2,275,335 )   $ (317,668 )
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
 
 
 
 
 
5

 
 
POWIN CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
   
Nine-months ended
   
Nine-months ended
 
   
Sept 30, 2012
   
Sept 30, 2011
 
CASH FLOWS USED IN OPERATING ACTIVITIES
           
Net (loss) income
  $ (2,353,479 )   $ (333,481 )
Adjustments to reconcile net income to net cash provided by (used) in operating
activities
               
    Net loss attributable to non-controlling interest in subsidiary
    (76,065 )     -  
    Depreciation
    365,631       202,368  
    Shares issued for services
    -       43,250  
    Deposits written-off
    -       -  
    Loss on disposal of equipment
    6,825       -  
    Reserve for slow moving and obsolete Inventory
    88,000       -  
    Share based compensation
    841,559       69,784  
    Stock option compensation
    84,504       51,127  
  Provision for doubtful accounts receivable
    -       37,667  
  Provision for income tax
    -       -  
Changes in operating assets
               
    Decrease in trade accounts receivable
    418,250       373,062  
    Increase in other receivables
    (139,448 )     (352,127 )
    (Increase) decrease in inventories
    32,799       (2,181,530 )
    (Increase) decrease in prepaid expenses
    180,593       (88,840 )
    (Increase) decrease in deposits
    (6,955 )     305,217  
Changes in operating liabilities
               
    Increase (decrease) in trade accounts payable
    (637,457 )     1,208,677  
    Increase in accrued payroll and other liabilities
    219,856       142,340  
    Increase in deferred tax asset
    -       -  
Net cash provided by operating activities
    (975,387 )     (522,486 )
CASH FLOWS USED IN INVESTING ACTIVITIES
               
    Acquisition of intangible assets
    (20,407 )     (315 )
    Purchases of equipment
    (480,421 )     (374,745 )
    Proceeds from joint venture partner
    -       25,500  
Net cash flows used in investing activities
    (500,828 )     (349,560 )
CASH FLOWS FROM FINANCING ACTIVITIES
               
    Net payments under line-of-credit
    800,000       -  
    Net proceeds from long-term borrowing
    -       500,000  
    Net re-payment towards long-term barrowing
    (75,000 )     -  
Net cash flows provided by financing activities
    725,000       500,000  
Impact of foreign exchange translation on cash
    (23,501 )     (26,756 )
Net decrease in cash
    (774,716 )     (398,802 )
Cash at beginning of period
    2,875,298       3,356,460  
Cash at end of period
  $ 2,100,582     $ 2,957,658  
SUPPLEMENTAL DISCLOURSE OF CASH FLOW INFORMATION
               
Interest paid
  $ 17,955     $ -  
Income tax paid
  $ 12,866     $ 250,000  
 
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 nine-month period ended September 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 nine months ended September 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 a main customer in its QBF segment while simultaneously reducing expenses through reducing labor hours.   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 September 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.

Accounts Receivable

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 and 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 nine months ended September 30, 2012 and 2011. The Company has an allowance for doubtful accounts of $63,577 and $63,577 as of September 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.
 
   
Sept 30, 2012
   
Dec 31, 2011
 
Raw Materials
  $ 280,007     $ 356,371  
Work in Progress
    41,291       66,823  
Finished Goods
    2,847,970       2,778,873  
Reserve for slow moving and obsolete inventory
    (241,204 )     (153,204 )
    $ 2,928,064     $ 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 and Amortization expense. Depreciation and Amortization expense for the quarters ended September 30, 2012 and 2011 was $166,247 and $60,872, respectively. Depreciation and Amortization expense for the nine-month period ended September 30, 2012 and 2011 was $365,631 and $202,368, 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.

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 September 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 September 30, 2012 and 2011, the amount charged to advertising expense was $21,619 and $28,878, respectively. Advertising expense for the nine-month period ended September 30, 2012 and 2011 was $50,951 and $105,705, 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 September 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 September 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 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 September 30, 2012 and December 31, 2011, the cumulative translation adjustment was $28,421 and $30,500, 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 September 30, 2012 and 2011, the foreign currency translation adjustment to other comprehensive income was $(13,805) and $57,659, respectively. For the nine-month period ended September 30, 2012 and 2011, the foreign currency translation adjustment to other comprehensive income was $2,449 and $(26,756), 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.
 
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 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 nine months ended September 30, 2012 and 2011, sales to the Company’s three largest customers accounted for 70% and 68% of net sales, respectively. No other customers accounted for more than ten percent of total net sales for the nine months ended September 30, 2012 and 2011. As of September 30, 2012 and December 31, 2011, a total amount of $3,344,721 and $3,740,295 was owed by these customers, respectively.
 
For the period ended September 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 nine months ended September 30, 2012 and 2011, the Company purchased 57% and 73% of its inventory from three suppliers, respectively. As of September 30, 2012 and December 31, 2011, the Company owed these vendors in a total amount of $3,341,958 and $5,741,382, respectively.

Note 4:  Line of Credit

At September 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 September 30, 2012.  The Company’s line-of-credit outstanding balances as of September 30, 2012 and December 31, 2011 was $800,000 and zero, respectively. The Company borrowed from the line to pay 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.

 
11

 
 
Note 4:  Line of Credit (Continued)

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 senior liabilities to capital ratio of 2.50 to 1.00 tested at the end of each quarter; operating cash flow to fixed charge ratio of not less than 1.25 to 1.00 tested at the end of each year.  As of December 31, 2011, the Company was in compliance with all covenants. However, based on the operating results through nine months ended September 30, 2012, the Company might not in compliance with the fixed charge ratio at the end of 2012 fiscal year.

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 September 30, 2012 and December 31, 2011, the Company’s equipment note payable balance was $400,000 and $475,000, respectively.  The Company has no covenants with 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 September 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 share-based compensation expense included in general and administrative expense for the three-month periods ended September 30, 2012 and 2011 was $820,959 and $16,604 respectively. The stock-based compensation expense included in general and administrative expense for the nine-month periods ended September 30, 2012 and 2011 was $841,559 and $69,784 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.

The following assumptions were used to determine the fair value of the options at date of issuance:
 
   
Nine-months
Sept 30, 2012
   
Twelve-months
Dec 31, 2011
 
Dividend yield
    -       -  
Expected volatility
    86.8%       86.8%  
Risk-free interest rate
    1.6%       1.6%  
Term in years
    6.9       6.9  
Forfeiture rate
    10.3%       6.8%  

 
12

 
 
Note 5:  Stock Options (Continued)

A summary of option activity as of September 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       -  
  Option forfeited or expired
    (120,000 )     1.02       6.92       -  
Outstanding at Dec 31, 2011
    1,050,000     $ 1.02       6.42     $ -  
  Options granted for the quarter ended Sept 30, 2012
    -       -       -       -  
  Options exercised
    -       -       -       -  
  Options forfeited or expired
    (250,000 )     1.02       5.67       -  
Outstanding at Sept 30, 2012
    800,000     $ 1.02       5.67     $ -  
                                 
Exercisable at Sept 30, 2012
    -     $ -       -     $ -  

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

During the quarter ended September 30, 2012, the Company modified its Series A warrants by reducing the exercise price on September 8, 2012, from $2.00 to $0.45 which was the exchange quoted stock price on the date of the modification. The Company accounted for this re-pricing modification by measuring the difference between the fair value of the modified awards and the fair value of the original awards on the modification date. The incremental compensation cost as a result of this modification was $815,709 which the Company recognized on the date of modification as these warrants were effectively already vested as the service requirement for these warrants had been previously satisfied.  These warrants were initially issued in connection with a reverse merger transaction on July 8, 2008 and therefore, the service requirement for the Series A warrants were satisfied upon the consummation of the reverse merger transaction.

The fair value of these modified warrants was calculated using the Black Scholes valuation model with the following inputs:
 
   
Before
   
After
 
Date
 
September 5, 2012
   
September 5, 2012
 
Stock Price
  $ 0.45     $ 0.45  
Exercise Price
  $ 2.00     $ 0.45  
Expected Life (YRS)
 
6 months
   
6 months
 
Risk Free Rate
    0.14 %     0.14 %
Volatility
    203 %     203 %
Rate of Dividends:
    -       -  
 

Note 6:  Capital Stock

In September 2012, the Company issued 15,000 shares of Common Stock to its Board of Directors for their services on the board at $0.35 per share recognizing an expense of $5,250 which is reflected in Stockholders’ Equity and Additional Paid in Capital.  Each director received 5,000 shares of Common Stock for an aggregate of 15,000 shares of Common Stock issued.

In June 2012, the Company granted 20,000 common shares to its Board of Directors for their services on the board, with an expense of $11,800 to the Company.

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.
 
 
13

 
 
Note 6:  Capital Stock (Continued)

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.

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 expenses for the nine months ended September 30, 2012 and 2011 was $566,163 and $305,863, 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 Interim CFO, owns 45% in Logan Outdoor Products, LLC.  The Company has earned sales to Logan Outdoor Products in the amount of $3,769,406 and $4,124,096 during the three months ended September 30, 2012 and 2011, respectively. The Company has earned sales to Logan Outdoor Products in the amount of $13,450,679 and $13,905,858 during the nine months ended September 30, 2012 and 2011, respectively. The accounts receivable due from Logan Outdoor Products as of
September 30, 2012 and December 31, 2011 was $1,892,680 and $2,206,400, 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 Interim CFO, also owns 50% in CoSource USA, LLC.  The Company has earned sales to CoSource USA in the amount of $13,181 and $7,073 during the three months ended September 30, 2012 and 2011, respectively. The Company has earned sales to CoSource USA in the amount of $46,237 and $19,078 during the nine months ended September 30, 2012 and 2011, respectively. The accounts receivable due from CoSource USA was $74,896 and $71,040 at September 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 September 30, 2012 are as follows:
 
Year
Lease Payment
 
2012(3 months remaining)
$ 188,721  
2013
  754,884  
2014
  723,696  
2015
  567,756  
2016
  567,756  
Thereafter
  2,577,949  
Total
$ 5,380,762  

 
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.
 
 
14

 

Note 8:  Contingencies (Continued)
 
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.

On May 24, 2012, Powin Energy filed its Answers contesting the claims made by Global Storage Group LLC (“GSG”). On May 25, 2012, Defendant, Virgil Beaston, filed his Answer, Counter claims and Third party Complaint impleading GSG principles Sam Leven and Harvey Weiss. The parties are conducting document discovery, scheduling depositions and awaiting responsive pleading from Messrs. Leven and Weiss. A trial date is expected to be set in March, 2013.

Note 9:  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.
 
A description of our operating segments as of September 30, 2012 and December 31, 2011, can be found below.

Powin OEM:

All products are sold in North America and include steel gun safes; outdoor cooking equipment; including dutch camping ovens and frying skillets; fitness equipment, including treadmills, exercise bikes, weightlifting benches, dumbbell racks, trampolines; plastic products, pontoon boats; and small electronic appliances.

QBF:

All products are sold in North America and include truck, auto parts, pumps and valves, machinery parts, pulleys and flywheels, pedestals and frames, cylinders and pistons, cranks and crank cases, series cast iron made classical vee-pulleys and taper bushed, vee-pulleys, sprockets and gears, timing wheels, flat belt wheels and roller wheels, cast iron flywheels (dynamic balanced or static balanced), cast iron  hand made wheels, bearing blocks, flexible couplings, brake rotors & drums, tie rods and rail wheels, ductile iron cranks, cast iron crank cases, cast iron cylinders and cylinder hubs.  QBF also provides services for welding, precise machining, forming and stamping, cutting, and bending.

Powin Wooden (Powin DC):

All services are provided in North America and include warehousing services in support of the Company’s OEM customers and, warehousing support of the Company’s other segments.

Maco:

All products are sold in North America and include bed frames, chests and night stands made of solid alder and pine woods.  Effective January 1, 2012, the business of Maco was merged into CPP, another one of the Company’s wholly-owned subsidiaries. All assets, liabilities, and equity interests were transferred to CPP. CPP initially recognized the assets and liabilities transferred at their then carrying amounts as of the date of transfer.
 
 
15

 

Note 9:  Business Segment Reporting (Continued)
 
CPP:

All services will be offered to manufactures and retailers in North America to open channels to sell their products in the China markets.

PRER (Energy):

All products are sold in North America and include a complete turnkey line of clean technology and renewable energy products such as LED lighting and fixtures, wind turbines, solar panels and lithium batteries for storage and backup.

GLADIATOR:

All products are sold in North America and include fitness equipment such as weight benches, treadmills and exercise bikes.

Powin Industries SA de CV:

All products will be sold in Mexico and North America and include truck, auto parts, pump and valves, machinery parts, pulleys and flywheels, pedestal and frames, cylinder and pistons, crank and crank case, series cast iron made classical vee-pulley and taper bushed, vee-pulleys sprocket and gears, timing wheel, flat belt wheel and roller wheels, cast iron flywheel (dynamic balanced or static balanced), cast iron made hand wheels bearing block, flexible couplings, brake rotors & drums, tie rod and rail wheels, ductile iron cranks, cast iron crank case, cast iron cylinders, cylinder hub.  This segment will also provide services for welding, precise machining, forming and stamping, cutting, and bending.

Realforce-Powin Joint Venture Company:

All products are sold in North America and include renewable energy products such as solar panels and lithium batteries for storage and backup.  Effective January 1, 2012, the joint venture RealForce-Powin, entered into between POWIN Corporation and Shandong RealForce Enterprises Co., Ltd. in May 2011, was merged by POWIN Corporation. The Company maintained effective control due to contractual agreements and that the Company’s POWIN Energy segment was purchasing most of its energy products through the joint venture from Shandong RealForce Enterprises Co., Ltd.  In January 2012, the Company’s Board of Directors authorized the merge as it was determined that the joint venture was unnecessary given that Shandong RealForce Enterprises Co., Ltd., would sell directly to POWIN Energy.

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 distribute throughout the U.S. In addition, the Company owns an 85% interest in a manufacturing joint venture in Mexico. The Company’s customer base includes distributors in the transportation, medical, sports, camping, fitness, packaging and furniture industries.
 
 
16

 
 
Overview (Continued)

In addition to providing manufacturing coordination and distribution support for original equipment manufacturers, the Company sells its own proprietary products through its CPP and Powin Energy subsidiaries. Powin Energy is working to develop and commercialize energy storage systems based on lithium battery technology for the transportation, utility and commercial building markets.
 
Critical Accounting Policies

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


Results of Operations

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

For the three-months ended September 30, 2012

   
OEM
   
QBF
   
Mexico
   
Wooden
   
CPP
   
PRER
   
Consolidated
 
Sales
  $ 7,842,868     $ 1,228,952     $ 9,163     $ 68,100     $ 148,285     $ 72,746     $ 9,370,114  
Cost of Sales
    7,247,564       1,154,076       205,693       -       136,868       15,224       8,759,425  
Gross Profit
    595,304       74,876       (196,530 )     68,100       11,417       57,522       610,689  
Operating Expense
    1,221,594       178,549       20,164       111,472       155,393       321,968       2,009,140  
Other Income (Expense)
    14,835       (4,371 )     (1,579 )     -       -       -       8,885  
Income (Loss) before Income Tax
  $ (611,455 )   $ (108,044 )   $ (218,273 )   $ (43,372 )   $ (143,976 )   $ (264,446 )   $ (1,389,566 )
Income Tax on Consolidated Income
                                                    -  
Consolidated Net Income
                                                  $ (1,389,566 )
Net loss attributable to non-controlling interest in subsidiary
                                                    (32,741 )
Net income attributable to Powin Corporation
                                                  $ (1,356,825 )



For the three-months ended September 30, 2011

   
OEM
   
QBF
   
Mexico
   
Wooden
   
CPP
   
PRER
   
Consolidated
 
Sales
  $ 8,801,556     $ 1,436,206     $ -     $ 48,353     $ 66,171     $ 15,507     $ 10,367,793  
Cost of Sales
    7,639,047       1,583,386       -       -       59,220       14,436       9,296,089  
Gross Profit
    1,162,509       (147,180 )     -       48,353       6,951       1,071       1,071,704  
Operating Expense
    865,123       87,226       126,077       91,367       185,818       148,313       1,503,924  
Other Income (Expense)
    (31,364 )     40,413       (28,991 )     -       4,994       -       (18,416 )
Income (Loss) before Income Tax
  $ 266,022     $ (193,993 )   $ (155,068 )   $ (43,014 )   $ (173,873 )   $ (147,242 )   $ (450,636 )
Income Tax on Consolidated Income
                                                    (37,670 )
Consolidated Net Income
                                                  $ (412,966 )
Net loss attributable to non-controlling interest in subsidiary
                                                    (20,707 )
Net income attributable to Powin Corporation
                                                  $ (392,259 )

 
17

 
 
Results of Operations (Continued)
For the nine-months ended September 30, 2012
 
   
OEM
   
QBF
   
Mexico
   
Wooden
   
CPP
   
PRER
   
Consolidated
 
Sales
  $ 30,695,972     $ 4,579,641     $ 64,399     $ 247,656     $ 447,889     $ 142,967     $ 36,178,524  
Cost of sales
    28,144,386       4,709,355       492,144       -       388,534       72,639       33,807,058  
Gross profit
    2,551,586       (129,714 )     (427,745 )     247,656       59,355       70,328       2,371,466  
Operating expense
    2,682,509       505,624       76,379       326,142       396,693       751,351       4,738,698  
Other income (expense)
    (13,815 )     30,546       (2,978 )     -       -       -       13,753  
Income (loss) before income tax
  $ (144,738 )   $ (604,792 )   $ (507,102 )   $ (78,486 )   $ (337,338 )   $ (681,023 )   $ (2,353,479 )
Consolidated net income
                                                  $ (2,353,479 )
Net loss attributable to non-controlling interest in subsidiary
                                                    (76,065 )
Net income attributable to Powin Corporation
                                                  $ (2,277,414 )
 


For the nine-months ended September 30, 2011

   
OEM
   
QBF
   
Mexico
   
Wooden
   
CPP
   
PRER
   
Consolidated
 
Sales
  $ 29,536,278     $ 3,929,571     $ -     $ 253,926     $ 236,992     $ 94,147     $ 34,050,914  
Cost of sales
    25,599,397       4,108,096       -       -       188,006       64,784       29,960,283  
Gross profit
    3,936,881       (178,525 )     -       253,926       48,986       29,363       4,090,631  
Operating expense
    2,432,751       501,953       271,826       272,732       497,790       379,946       4,356,998  
Other income (expense)
    (78,990 )     41,074       (28,991 )     (5,201 )     4,994       -       (67,114 )
Income (loss) before income tax
  $ 1,425,140     $ (639,404 )   $ (300,817 )   $ (24,007 )   $ (443,810 )   $ (350,583 )   $ (333,481 )
Consolidated net income
                                                  $ (333,481 )
Net Loss attributable to non-controlling interest in subsidiary
                                                    (42,569 )
Net income attributable to Powin Corporation
                                                  $ (290,912 )

Consolidated net revenues for the three-month period ended September 30, 2012 decreased approximately $998 thousand, or 9.6%, compared to same period in 2011. Consolidated net revenues for the nine-month period ended September 30, 2012 increased approximately $2.1 million, or 6.2% compared to the same period in 2011.

The Company’s OEM net revenues for the three-month period ended September 30, 2012 decreased approximately $959 thousand, or 10.9%, compared to the same period in 2011. For the nine months ended September 30, 2012, OEM net revenues increased approximately $1.2 million, or 3.9% compared to the same period in 2011. OEM saw one of its primary customers decrease its purchases over the quarter as well as for the fiscal year, which was only partially offset by the addition of new customers.

QBF net revenues for the three-month period ended September 30, 2012 decreased approximately $207 thousand, or 14.4%. QBF experienced a sales decrease from its major customer for the quarter, but sales are forecast to partially rebound in the upcoming quarter.  For the nine-month period ended September 30, 2012, QBF net revenues increased approximately $650 thousand, or 16.5%.

Revenue decreases from OEM and QBF were partially offset by increases in net revenues at the Company’s Mexico, Wooden, CPP and Powin Energy subsidiaries of approximately $9 thousand, $20 thousand $82 thousand and $57 thousand, respectively for the three-month period ended September 30, 2012 compared to the same period in 2011. For the nine months ended September 30, 2012 revenues at the Company’s Mexico, CPP and Powin Energy subsidiaries increased by approximately $64 thousand, $211 thousand and $48 thousand, respectively, compared to the same period in 2011. Revenue from Wooden did not vary significantly from 2011.

The cost of product revenue as a percentage of net revenue was 93.5% for the three-month period ended September 30, 2012, compared to 89.7% in the prior period and was 93.4% for the nine month period ended September 30, 2012 compared to 87.9% in the same period of 2011. The increase in cost of sales is primarily attributed to increased price pressure from customers and increased manufacturing and shipping costs from China, and startup costs in the Company’s Mexico operations.

 
18

 

Results of Operations (Continued)

Consolidated gross profits for the three-month period ended September 30, 2012 decreased approximately $461 thousand compared to same period in 2011, but as a percent of net revenues gross profit was 6.5%. Consolidated gross profits for the nine-month period ended September 30, 2012 decreased approximately $1.7 million compared to same period in 2011, but as a percent of net revenues gross profit was 6.6%. 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 three-month period ended September 30, 2012, increased 34% or approximately $505 thousand 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 September 30.

For the three-months ended September 30
 
   
2012
   
2011
   
Change
   
% Change
 
Salaries & Related
  $ 516,439     $ 912,259     $ (395,820 )     -43.4%  
Advertising
    21,619       28,878       (7,259 )     -25.1%  
Professional Services
    254,641       263,019       (8,378 )     -3.2%  
All Other
    1,216,441       299,768       916,673       305.8%  
   TOTAL
  $ 2,009,140     $ 1,503,924     $ 505,216       33.6%  
 

Consolidated operating expenses for the nine-months ended September 30, 2012, increased 9% or approximately $382 thousand  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 nine-month period ended September 30, 2012.

For the nine-months ended September 30
 
   
2012
   
2011
   
Change
   
% Change
 
Salaries & Related
  $ 2,147,119     $ 2,490,820     $ (343,701 )     -13.8%  
Advertising
    50,951       105,705       (54,754 )     -51.8%  
Professional Services
    759,448       834,645       (75,197 )     -9.0%  
All Other
    1,781,180       925,828       855,352       92.4%  
   TOTAL
  $ 4,738,698     $ 4,356,998     $ 381,700       8.8%  
 

Liquidity and Capital Resources

For the nine-month period ended September 30, 2012, cash used by operating activities was $975 thousand compared to $522 thousand used during the same period in 2011. Cash used in investing activities was $501 thousand in the nine-month period ended September 30, 2012, to replace manufacturing equipment and develop new products, compared to $350 thousand used in investing activities in the same period of 2011, to replace equipment. Cash used in financing activities was $725 thousand in the nine-month period ended September 30, 2012.

The ratio of current assets to current liabilities was 1.60 at September 30, 2012, compared to 1.89 at December 31, 2011.  Quick liquidity (current assets minus inventories divided by current liabilities) was 1.11 at September 30, 2012 compared to 1.33 at December 31, 2011.  At September 30, 2012, the Company had working capital of $4.2 million compared to working capital of $5.9 million at December 31, 2011. Average day’s sales outstanding on trade accounts receivable at September 30, 2012, was 41 days compared to average days sales outstanding of 42 days at December 31, 2011.

 
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Liquidity and Capital Resources (Continued)

As discussed above, the Company at September 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 September 30, 2012.  The outstanding balances at September 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 senior liabilities to capital ratio of 2.50 to 1.00 tested at the end of each quarter; and operating cash flow to fixed charge ratio of not less than 1.25 to 1.00 tested at the end of each year.

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 nine-months ended September 30, 2012, We had no off-balance sheet arrangements.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

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

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.

 
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Item 4.  Controls and Procedures. (Continued)

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. We believe there is no basis for the allegations and we intend to defend against the action. On May 24th 2012, Powin Energy filed its answers contesting the claims made by Global Storage Group LLC (“GSG”). On May 25th, 2012, Defendant, Virgil Beaston, filed his Answer, Counterclaims and Third party Complaint impleading GSG principles Sam Leven and Harvey Weiss. The parties are conducting document discovery, scheduling depositions and awaiting responsive pleading from Messrs. Leven and Weiss. A trial date is expected to be set in March, 2013.
 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.
Equity Compensation Plan Information

In September 2012, we issued a total of 15,000 shares of Common Stock to our directors for their services on the Board of Director. Each director received 5,000 shares of Common Stock.

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 nine-month period ended September 30, 2012.

Item 3.  Defaults Upon Senior Securities.

None

Item 4.  [REMOVED AND RESERVED]

Item 5.  Other Information.

None

 
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Item 6.  Exhibits.

31.1
Certification of the Chief Executive Officer  Pursuant to 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant  Section  302 of the Sarbanes-Oxley Act of 2002
 
312
Certification of the  Principal Financial Officer Pursuant to 13a-14 and 15d-14 of the Securities Exchange Act of 1934, , as adopted pursuant  Section  302 of the Sarbanes-Oxley Act of 2002
 
32.1
Certification of the Chief Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
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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.
 
 
November 15, 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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