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.
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.
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 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 $63,577 as of September 30, 2012 and December 31, 2011.
Inventory consists of parts and equipment including electronic parts and components, furniture, rubber products, plastic products and exercise equipment. Inventory is valued at the lower of cost (first-in, first-out method) or market. The Company capitalizes applicable direct and indirect costs incurred in the Company's manufacturing operations to bring its products to a sellable state. The following table represents the Company's inventories at each of the indicated balance sheet dates.
| || || |
Sept 30, 2012
| || || |
Dec 31, 2011
| ||$ ||280,007 || || ||$ ||356,371 || |
Work in Progress
| || ||41,291 || || || ||66,823 || |
| || ||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
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.
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.
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.
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.
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.