ITEM 1. BUSINESS
GENERAL
Powin Energy Corporation (“Company”, “we”, “us”) is a leading designer and developer of safe and scalable energy storage solutions for utilities, microgrid, and EV fast-charging stations. The Company was founded in 1989 in Oregon and until 2016, operated as a contract manufacturer selling diverse products for leading North American retailers. In 2016, the Company sold off its contract manufacturing businesses, and on October 6, 2016, completed a merger between Powin Corporation and its subsidiary Powin Energy Corporation, with the surviving entity Powin Corporation changing its name to Powin Energy Corporation. The Company is focused on the rapidly growing advanced energy storage industry, supported by its patented Battery Pack Operating System (bp-OS).
Competition
The international market for such energy products and services is intensely competitive and continually impacted by evolving industry standards, international and regional governmental regulations, rapid price changes and product obsolescence. Competitors in this market include many domestic and foreign companies, most of which have substantially greater financial, technical, marketing, manufacturing and other resources. We are and will continue to be at a competitive disadvantage to most of our competitors, though patented architecture provides strong round trip efficiency (RTE) with an industry competitive price in all of its energy segments.
LEGAL ENTITIES AND OPERATING SEGMENTS
During the periods presented, we operated in six business segments, each within a separate legal entity. During 2015 and 2016, several segments were renamed to more accurately reflect the nature of operations. Where applicable, the legal entities were also renamed to correspond to the segment name. Below is a table listing the legal entities presented in this report, along with the corresponding business segment names and, for the purposes of continuity, the legal entity and segment names as disclosed in our previous filings:
In 2015 and 2016, the Company realigned its legal entity and segment structure as follows:
During 2016, the Company divested of all of its business segments, excluding its energy segment. Going forward, Powin Energy Corporation will continue to be the parent company for all subsidiaries.
In December 2013, the Company applied for Minority Business Enterprise status. On January 21, 2014, the Company met all requirements for the certification as a bona fide Minority Business Enterprise defined by the National Minority Supplier Development Council, Inc. (NMSDC) and as adopted by the Northwest Minority Supplier Development Council.
On December 3, 2015, Powin Corporation and Powin Energy entered into an Agreement and Plan of Merger and Liquidation (“Merger Agreement”). The Merger was completed on October 6, 2016.
LICENSES, CONCESSIONS, ROYALTY AGREEMENTS OR LABOR CONTRACTS
Our licenses consist of the customary state, county and city licenses required in the normal course of doing business. We do not typically enter into written agreements or licenses with our customers, which is common in the industry.
GOVERNMENT APPROVAL AND REGULATION
There are no principal products or services which require government approval as all of our principal products and services comply with government regulations.
EFFECT OF EXISTING GOVERNMENTAL REGULATION ON OUR BUSINESS
We continue to monitor the changing governmental regulations so our business can comply with all rules and regulations.
ENVIRONMENTAL LAWS
We continue to monitor changing environmental laws to assure that our business can comply with all rules and regulations.
EMPLOYEES
As of December 31, 2016, we employed 21employees at our facilities in the United States.
ITEM 1A.
ITEM 1A. RISK FACTORS
This report includes forward-looking statements about our business and results of operations that are subject to risks and uncertainties. See "Forward-Looking Statements," above. Factors that could cause or contribute to such differences include those discussed below. In addition to the risk factors discussed below, we are also subject to additional risks and uncertainties not presently known to us or that we currently deem immaterial. If any of these known or unknown risks or uncertainties actually occurs, our business could be harmed substantially.
RISKS RELATED TO OUR BUSINESS
The impact of the economic climate affecting our customers and tight financing markets may impact demand for our products and services.
Many of our existing and target customers are in the utility and power generation business sector. If these businesses experience economic hardship, it could negatively affect the overall demand for our products and services and, could cause delay and lengthen sales cycles and could cause our revenues to decline. Challenging economic conditions could have a negative impact on the results of our operations.
We may need additional capital and we may not be able to obtain it, which could adversely affect our liquidity and financial position.
We have relied on borrowings from individuals and companies with close ties to the Company for operating cash flows. While we believe that we will be able to continue to raise working capital from these and other sources for the foreseeable future, we cannot be assured that these sources of will continue to meet our working capital needs. In order to meet potential cash needs, we may be required to sell additional equity or issue debt securities. The potential sale of additional equity securities could result in additional dilution to our existing shareholders; however, the incurrence of indebtedness would result in increased debt service obligations and bind us to operating and financing covenants that would restrict our operations and liquidity.
Our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties, including: investors’ perception of, and demand for, securities of alternative manufacturers; conditions of the United States and other capital markets in which we may seek to raise funds; and our future results of operations, financial condition and cash flows.
We cannot offer any assurances that financing will be available in amounts or on terms acceptable to us, if at all. Any failure to raise additional funds on terms favorable to us could have a material adverse effect on our liquidity and financial condition.
There may be deficiencies with our internal controls that require improvements, and we will be exposed to potential risks from legislation requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002.
While we believe that we currently have adequate internal control procedures in place, we are still exposed to potential risks from legislation requiring companies to evaluate controls under Section 404a of the Sarbanes-Oxley Act of 2002. Under the supervision and with the participation of our management, we have evaluated our internal controls system in order to allow management to report on our internal controls, as required by Section 404 of the Sarbanes-Oxley Act. We have performed the system and process evaluation and testing required in an effort to comply with the management certification requirements of Section 404. As a result, we have incurred additional expenses and a diversion of management’s time. If we are not able to meet the requirements of Section 404 in a timely manner or with adequate compliance, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC.
If we do not maintain proper disclosure controls and procedures, our ability to produce accurate and timely financial statements could be impaired which could adversely affect our business, operating results and financial condition.
While the audit of our financial statements by our independent registered public accounting firm has included a consideration of internal control over financial reporting as a basis of designing audit procedures, the accounting firm has not considered internal controls over financial reporting for the purpose of expressing an opinion with respect to the effectiveness of our internal controls over financial reporting. If such an evaluation had been performed, material weaknesses or other control deficiencies may have been identified. In addition, material weaknesses and other control deficiencies may be identified when our management performs evaluations of internal controls in the future. Ensuring that we have adequate internal financial and accounting controls and procedures that allow us to produce accurate financial statements on a timely basis is costly and time-consuming and we are required to evaluate these controls frequently.
Manufacturing internationally may create risks.
There are many risks associated with international business. These risks include, but are not limited to, language barriers, fluctuations in currency exchange rates, political and economic instability, regulatory compliance difficulties, problems enforcing agreements and greater exposure of our intellectual property to markets where a high probability of unlawful appropriation may occur. A failure to mitigate any of these potential risks could damage our business.
Product liability and product warranty risks could adversely affect our operating results.
We produce parts for commercial vehicles. Failure of our parts could give rise to product liability claims. We maintain insurance addressing the risk of product liability claims arising from bodily injury or property damage, but there can be no assurance that the insurance coverage will be adequate or will continue to be available on terms acceptable to us. We manufacture most of our parts to strict contractually-established standards and tolerances using customer manufacturing specifications. If we fail to meet the contractual requirements for a product, we may be subject to product warranty costs and claims. Product warranty costs are generally not insured.
Our quarterly operating results are difficult to predict and may fluctuate significantly from period to period in the future.
Our quarterly operating results are difficult to predict and may fluctuate significantly from period to period based on the seasonality of consumer spending and corresponding manufacturing trends in the United States and China. Furthermore, due to ever-fluctuating pricing on commodities, inputs and other raw materials and given the unpredictable economic climate, it is difficult to forecast with any amount of certainty our quarterly operating results. As a result, you may not be able to rely on period-to-period comparisons of our operating results as an indication of our future performance. Factors that are likely to cause our operating results to fluctuate, such as the seasonality of manufacturing spending, a deterioration of global economic conditions and potential changes to the regulation of the manufacturing industry in China is discussed elsewhere in this report. Additionally, some of the products manufactured and distributed by the Company are seasonal in nature. If our revenues for a particular quarter are lower than we expect, we may be unable to reduce our operating expenses for that quarter by a corresponding amount, which would harm our operating results for that quarter relative to our operating results from other quarters.
Our future acquisitions may expose us to potential risks and have an adverse effect on our ability to manage our business.
Selective acquisitions will form a part of our strategy to further expand our business. If we are presented with appropriate opportunities, we may acquire additional businesses, services or products that are complementary to our core business. Our integration of the acquired entities into our business may not be successful and may not enable us to expand into new manufacturing platforms as successful as we expect. This would significantly affect the expected benefits of these acquisitions. Moreover, the integration of any future acquisitions will require significant attention from our management.
The diversion of our management’s attention and any difficulties encountered in any integration process could have an adverse effect on our ability to manage our business. In addition, we may face challenges trying to integrate new operations, services and personnel with our existing operations. Future acquisitions may also expose us to other potential risks, including risks associated with unforeseen or hidden liabilities, the diversion of resources from our existing businesses and technologies, our inability to generate sufficient revenue to offset the costs, expenses of acquisitions and potential loss of, or harm to, relationships with employees and manufacturing clients as a result of our integration of new businesses and new regulations. In addition, we cannot assure you that we will be able to realize the benefits we anticipate from acquiring other companies or that we will not incur costs, including those relating to intangibles or goodwill, in excess of our projected costs for these transactions. The occurrence of any of these events could have a material and adverse effect on our ability to manage our business, our financial condition and our results of operations.
There may be unknown risks inherent in our acquisitions of companies which could result in a material adverse effect on our business.
We will conduct due diligence with respect to any acquisition we undertake, but we may not be aware of all of the risks associated with any of the acquisitions. Any discovery of adverse information concerning any of these acquisitions could have a material adverse effect on our business, financial condition and results of operations. While we may be entitled to seek indemnification in certain circumstances, successfully asserting indemnification or enforcing such indemnification could be costly and time consuming or may not be successful at all.
Failure to manage our growth could strain our management, operational and other resources and we may not be able to achieve anticipated levels of growth in the new networks and media platforms we hope to operate, either of which could materially and adversely affect our business and growth potential.
We plan to expand, our operations in the United States, Canada, China and other countries. To manage our growth, we must develop and improve our existing administrative and operational systems and, our financial and management controls and further expand, train and manage our work force. As we continue this effort, we may incur substantial costs and expend substantial resources in connection with any such expansion due to, among other things, different technology standards, legal considerations and cultural differences. We may not be able to manage our current or future international operations effectively and efficiently or compete effectively in such markets. We cannot assure you that we will be able to efficiently or effectively manage the growth of our operations, recruit top talent and train our personnel. Any failure to efficiently manage our expansion may materially and adversely affect our business and future growth.
Unauthorized use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may adversely affect our business.
We regard our trade secrets and other intellectual property as critical to our success. Unauthorized use of the intellectual property used in our business may adversely affect our business and reputation.
We have historically relied on a combination of trademark and copyright law, trade secret protection and restrictions on disclosure to protect our intellectual property rights. We enter into confidentiality and invention assignment agreements with all our employees. We cannot assure you that these confidentiality agreements will not be breached, that we will have adequate remedies for any breach, or that our proprietary technology will not otherwise become known to, or be independently developed by third parties.
We may register in China the trademarks used in our business. We cannot offer any assurances that any of our trademark applications will ultimately proceed to registration or will result in registration with scope adequate for our business. Some of our applications or registration may be successfully challenged or invalidated by others. If our trademark applications are not successful, we may have to use different marks for affected services or technologies, or enter into arrangements with any third parties who may have prior registrations, applications or rights, which might not be available on commercially reasonable terms, if at all.
In addition, policing unauthorized use of our proprietary technology, trademarks and other intellectual property is difficult and expensive, and litigation may be necessary in the future to enforce our intellectual property rights. Future litigation could result in substantial costs and diversion of our resources, and could disrupt our business, as well as have a material adverse effect on our financial condition and results of operations.
We face significant competition, and if we do not compete successfully against new and existing competitors, we may lose our market share, and our profitability may be adversely affected.
We compete with other energy storage companies in the United States and globally. We compete for customers primarily on the basis of price, the range of services that we offer and our brand name. Increased competition could reduce our operating margins and profitability and result in a loss of market share. Some of our existing and potential competitors may have competitive advantages such as significantly greater financial, marketing or other resources, or exclusive arrangements with desirable clients and manufacturers, and others may successfully mimic and adopt our business model. Moreover, increased competition will provide clients additional manufacturing service alternatives, which could lead to lower prices and decreased revenues, profit margins and net income. We cannot offer any assurance that we will be able to successfully compete against new or existing competitors.
Our customers could decide to deal directly with the factories and manufacturers
Our customers could decide to deal directly with the factories and manufacturers who produce their products, thus eliminating the need for our services in the process.
RISKS RELATING TO REGULATION OF OUR BUSINESS AND TO OUR STRUCTURE
Contractual arrangements we have entered into may be subject to scrutiny by the tax authorities and a finding that we owe additional taxes or are ineligible for our tax exemption, or both, could substantially increase our taxes owed, and reduce our net income and the value of your investment.
Under local law, arrangements and transactions among related parties may be subject to audit or challenge by the local tax authorities. If any of the transactions we have entered into with our distributor are found not to be on an arm’s-length basis, or to result in an unreasonable reduction in tax under local tax law, the tax authorities have the authority to disallow our tax savings, adjust the profits and losses of our respective entities and assess late payment interest and penalties. A finding by the tax authorities that we are ineligible for our tax exemptions, would substantially increase our taxes owed and reduce our net income and the value of your investment. As a result of this risk, you should evaluate our results of operations and financial condition without regard to these tax savings.
Our business operations may be affected by legislative or regulatory changes.
Changes in laws and regulations or the enactment of new laws and regulations governing placement or content of out-of-home manufacturing, our business licenses or otherwise affecting our business in China may materially and adversely affect our business prospects and results of operations. We are not certain how the local government will implement any regulation or how it may affect our ability to compete in the manufacturing industry in China. We are particularly concerned with any regulations that might give rise to possible trade issues between China and the United States, and the effects of those regulations on our business. Accordingly, we need to conduct due diligence as to any possible regulations that might arise and substantially affect our operations. Further, we need to make every effort to hedge against any government regulation which may materially alter our business model.
RISKS RELATING TO BUSINESS IN CHINA
Much of our success is derived from our relationships and business dealings with manufacturing companies in China, and a significant portion of our final product is derived from manufacturers in China. Accordingly, our business, financial condition, results of operations and prospects are subject to a significant extent, to economic, political and legal developments in China.
The economic, political and social conditions, as well as governmental policies, could affect the financial markets in China and our liquidity and access to capital and our ability to operate our business.
China’s economy differs from the economies of most countries in many respects, including the amount of government involvement, level of development, growth rate, control of foreign exchange, and allocation of resources. While China’s economy has experienced significant growth over the past, growth has been uneven, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall Chinese economy, but may also have a negative effect on us. This may encourage foreign manufacturing companies with more experience, greater technological know-how and larger financial resources than we have to compete against us and limit the potential for our growth. Moreover, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.
China’s legal system embodies uncertainties which could limit the legal protections available to you and us.
China’s legal system is a civil law system based on written statutes. The overall effect of legislation over the past 26 years has significantly enhanced the protections afforded to various forms of foreign investment in China. However, these laws, regulations and legal requirements change frequently, and their interpretation and enforcement involve uncertainties. For example, we may have to resort to administrative and court proceedings to enforce the legal protection that we enjoy either by law or contract. However, since China’s administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. For example, these uncertainties may impede our ability to enforce the contracts we have entered into. In addition, such uncertainties, including the inability to enforce our contracts, could materially and adversely affect our business and operation. In addition, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries. Accordingly, we cannot predict the effect of future developments in China’s legal system, particularly with regard to the manufacturing industry, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties could limit the legal protections available to us, including our ability to enforce our agreements with our suppliers.
Foreign currency fluctuations and inflationary pressures may have a negative impact on our financial condition and results of operations.
Our operations in China subject us to foreign currency fluctuations and inflationary pressures which may adversely affect our financial position and results of operations. Since we report our results of operations and financial condition in U.S. dollars, fluctuations in foreign currencies relative to the U.S. dollar may impact our financial results. We do not currently have a hedging program to address foreign currency fluctuations. Any steps taken by us to address foreign currency fluctuations may not eliminate all adverse effects.
RISKS RELATED TO OUR COMMON STOCK
Our stock is a penny stock. Trading of our stock may be restricted by the Securities and Exchange Commission’s penny stock regulations which may limit a stockholder’s ability to buy and sell our stock.
Our stock is a penny stock. The Securities and Exchange Commission has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities will be covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the Securities and Exchange Commission which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.
The Financial Industry Regulatory Authority, or FINRA, has adopted sales practice requirements which may also limit a stockholder’s ability to buy and sell our stock.
In addition to the “penny stock” rules described above, FINRA has adopted rules that require, that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
Our common stock is illiquid and the price of our common stock may be negatively impacted by factors which are unrelated to our operations
Our common stock currently trades on a limited basis on the OTC Bulletin Board. Trading of our stock through the OTC Bulletin Board is frequently thin and highly volatile. There is no assurance that a sufficient market will develop in our stock, in which case it could be difficult for shareholders to sell their stock. The market price of our common stock could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of our competitors, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting our competitors or us. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on our common stock.
The concentration of stock ownership by Joseph Lu, our Chief Executive Officer, may prevent new investors from influencing significant corporate decisions.
Joseph Lu and his family hold the vast majority of our issued and outstanding common stock. As a result, these shareholders will be able exercise control over all matters requiring shareholder approval, including the election of directors, amendments to our Articles of Incorporation and approval of major corporate transactions.
We do not expect to declare any dividends in the foreseeable future.
We do not anticipate declaring any cash dividends to holders of our common stock in the foreseeable future. Consequently, investors may need to rely on the sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
There are no unresolved staff comments.
ITEM 2.
ITEM 2. PROPERTIES
Our corporate headquarters are located at 20550 SW 115th Ave. Tualatin, OR 97062 under a lease with Lu Pacific Properties LLC, of which Joseph Lu, our CEO, is the controlling member and manager. The lease rate is $17,706.50 per month for approximately 28, 275 square feet of office and warehouse space, with a triple net charge at $0.15 per square foot per month.
We believe our existing facility is adequate for the foreseeable future and we have no plans to renovate or expand it. The above lease is also discussed in this Report at Item 13, Related Party Transactions.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any pending legal proceedings.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded under the symbol “PWON.OB.” Our common stock has been trading since September 30, 2010. The following table sets forth the quarterly high and low sales prices of our common stock for the last two fiscal years, as adjusted for the 1 for 10 reverse effective October 17, 2013. Such prices are inter-dealer quotations without retail mark-ups, mark-downs or commissions, and may not represent actual transactions.
Our common stock is subject to Rule 15g-9 of the Securities and Exchange Commission, known as the Penny Stock Rule which imposes requirements on broker/dealers who sell securities subject to the rule to persons other than established customers and accredited investors. For transactions covered by the rule, brokers/dealers must make a special suitability determination for purchasers of the securities and receive the purchaser's written agreement to the transaction prior to sale. The Securities and Exchange Commission also has rules that regulate broker/dealer practices in connection with transactions in "penny stocks." Penny stocks generally are equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in that security is provided by the exchange or system. The Penny Stock Rules requires a broker/dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prepared by the SEC that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker/dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker/dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer's account. The bid and offer quotations, and the broker/dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer's confirmation. These disclosure requirements have the effect of reducing the level of trading activity in the secondary market for our common stock. As a result of these rules, investors may find it difficult to sell their shares.
As of March 31, 2017, our common stock was held by 431 shareholders of record with 37,096,415shares of common stock issued and outstanding.
See NOTE 9. CAPITAL STOCK, Part II, ITEM 8 of this report for information regarding shares issued to members of the board of directors as compensation for their services.
There were no shares issued other than to these directors and no shares were repurchased during the periods presented.
Dividend Policy
We have not paid any cash dividends on our common stock. It is anticipated that our future earnings will be retained to finance our continuing development. The payment of any future dividends will be at the discretion of our board of directors and will depend upon, among other things, future earnings, any contractual restrictions, success of business activities, regulatory and corporate law requirements and our general financial condition.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
We are a smaller reporting company as defined by Rule 229.10(f) (1) and are not required to provide the information required by this Item.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following Management’s Discussion and Analysis (“MD&A”) in intended to help you understand the results of operations and financial condition of Powin Energy Corporation, as well as the factors that could affect our future financial condition and results of operation. This discussion and analysis should be read in conjunction with our financial statements and the notes thereto included in Part II ITEM 8 of this Form 10-K.
References to “Powin,” the “Company,” “we,” “our” and “us” refer to Powin Corporation and its wholly owned and majority-owned subsidiaries, unless the context specifically states otherwise.
Basis of presentation
Effective October1, 2016, the Company reorganized and renamed certain segments and changed the methodology for allocating corporate overhead costs. The below table lists legal entities and corresponding business segments as defined in the 10-K compared to those described in previous filings.
Discontinued operations
Effective October 3, 2016, the Company entered into a Stock Purchase Agreement with Powin Industries, SA de CV (“Powin Mexico”) and Rolland Holding Company, LLC (“Rolland”) pursuant to which Company sold to Rolland 99 shares of the Series A Common Stock and the 167,452 shares of the Series B Common Stock of Powin Mexico which represents 99% of the Series A Common Stock and 100% of the Series B Common Stock (collectively the “Shares”) of Powin Mexico. The closing date of the Agreement was October 4, 2016 (“Closing”).
Effective October 18, 2016, the Company entered into a Stock Purchase Agreement with Weiping Cai (“Cai”) pursuant to which the Company sold to Cai all of the issued and outstanding shares of Common Stock (“Shares”) of Q Pacific Corporation, the Company’s wholly-owned subsidiary, which wholly-owns and operates Q Pacific Contract Manufacturing and Q Pacific Manufacturing Corporation, the Company’s second tier subsidiaries, collectively referred to as (“QPM”). In addition to the sale of the Shares, the Company also transferred and assigned to Cai the Company’s right, title and interest in and to the “Huntsman” tradename held by Q Pacific Contract Manufacturing Corporation.
The Company’s results of operations related to Powin Mexico and Q Pacific Corporation which wholly-owns and operates Q Pacific Contract Manufacturing and Q Pacific Manufacturing Corporation have been reclassified to discontinued operations on a retrospective basis for all periods presented.
Balances for Powin Mexico and Q Pacific Corporation as of December 31, 2016 and December 31, 2015 are as follows:
The operating results of Powin Mexico and Q Pacific Corporation for the years ending December 31, 2016 and 2015 classified as discontinued operations are summarized below:
The operating results of Powin Mexico for the years ending December 31, 2016 and 2015 classified as discontinued operations are summarized below:
The operating results of Powin Q Pacific Corporation for the years ending December 31, 2016 and 2015 classified as discontinued operations are summarized below:
Results of Continuing Operations
The following table presents the Company’s revenues for its remaining business segment Powin Energy, for the years ended December 31, 2016 and 2015:
Net sales for the year ended December 31, 2016, increased approximately $154,000 or 84.0% from the same period of 2015due to Powin Energy liquidated its slow moving inventory item, solar panel in 2016.
The following table presents the Company’s operating expenses for its remaining business segment Powin Energy, for the years ended December 31, 2016 and 2015:
Operating expenses for the year ended December 31, 2016, decreased approximately $37,000 or 0.9%, from $4.27 million in the same period of 2015 to $4.24 million. Decrease is primarily due to shift from product research and development on prior year to production on current year.
The following table presents the Company’s net loss for its remaining business segment Powin Energy, for the years ended December 31, 2016 and 2015:
For the year ended December 31, 2016, the Company had net loss of approximately $5.48 million or $0.22 per share, compared to net loss of approximately $4.35 million or $0.21 per share for the same period of 2015.
Discontinued Operations
Net sales from discontinued operations for the year ended December 31, 2016, decreased approximately $3,702,000 or 34.2% from the same period of 2015. The decrease is due to reduce demand from Daimler Truck North America.
Operating expenses from discontinued operations for the year ended December 31, 2016, increased approximately $71,000 or 2.6%, from $2.76 million in the same period of 2015 to $2.83 million. Increase is primarily due to write off of net intercompany AP and AR balance carried over several prior years.
For the year ended December 31, 2016, net loss from discontinued operations were approximately $1.72 million or $0.08 per share, compared to net loss of approximately $1.24 million or $0.08 per share for the same period of 2015.
2017 Outlook
In 2017, Powin Energy Corporation will turn full focus to the emerging, high growth energy storage market.
Industry experts project the energy market to grow an average of 60% per year over the next five years. During the same five-year period, the Company forecasts securing 4% - 7% of the contracts in that market. The conservative contract acquisition rate will allow the Company to grow at a manageable rate and achieve profitability. The Company will also continue to pursue strategic investment which will allow for more aggressive growth in future years.
Liquidity and Capital Resources
Cash used in operating activities was approximately $2,918,101 for the year ended December 31, 2016, compared to $5,825,750 used in operating activities for the same period in 2015. The decrease of cash used in operating activities is mainly due to more increase of accounts payable, and more increase in notesand other receivables, offset by more increase in net loss, more increase in prepaid expenses and deposits, more purchase of inventories.
Cash used in investing activities was approximately $3,671,299 for the year ended December 31, 2016, compared to $304,174 used in investing activities for the same period in 2015, as the Company purchased morepropertyand equipment during the year ended December 31, 2016.
Cash provided by financing activities were approximately $4,116,917 for the year ended December 31, 2016, compared to $8,687,744 provided by financing activities for the same period in 2015. The decrease of cash provided from financing activities is due to net proceeds received from stock issuance for Energy in 2015.
The Company issued Preferred Stock in August 2015 to settle the following notes payable:
In August 2016, 13,625,826 shares of August 2015 preferred stock had converted into common stock.
During the year ended December 31, 2016, the Company borrowed $2,900,100 from related parties for operating cash flows as follows:
The Company’s management does not believe the current cash and cash flow from operations will be sufficient to meet anticipated cash needs, including cash for working capital and capital expenditures in the foreseeable future. The Company will likely require additional cash resources that will require the Company to sell additional equity securities or debt securities. The sale of convertible debt securities or additional equity securities could result in additional dilution to the company’s stockholders. The incurrence of additional indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations and liquidity.
The Company’s ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties including: investors’ perception of, and demand for, securities of alternative manufacturing companies; conditions of the United States and other capital markets in which we may seek to raise funds; and future results of operations, financial condition and cash flow. Therefore, the Company’s management cannot assure that financing will be available in amounts or on terms acceptable to the Company, if at all. Any failure by the Company’s management to raise additional funds on terms favorable to the Company could have a material adverse effect on the Company’s liquidity and financial condition.
On August 8, 2014, Powin Corporation and its then wholly-owned subsidiary, Powin Energy Corporation (collectively “Powin”) and SF Suntech, Inc. (“Suntech”) signed a Share Subscription Agreement (“Subscription Agreement”) for an investment of $25,000,000 from Suntech.
Effective April 2, 2015, Powin and Suntech signed the Fourth Supplemental Agreement (“Supplement”). Under the Supplement, the First Closing Date of the Subscription Agreement was April 2, 2015 (“First Closing”) at which time Suntech made a payment to Powin in the amount of $7,450,000. That payment plus the previous payments of $3,000,000 on August 29, 2014; $2,000,000 on January 15, 2015 and $50,000 on March 2, 2015 represent a total $12,500,000 paid toward the full $25,000,000 owing under the Subscription Agreement. On April 1, 2015 and April 2, 2015, Powin Energy issued 1,765 shares and 378 shares of Powin Energy Common Stock to Suntech, respectively.
After the shares issuance, the Company owned 82.35% of Powin Energy.
The Supplement further established the Second Closing Date of the Subscription Agreement as May 31, 2015 (“Second Closing”) when the balance of $12,500,000 is to be paid. If that payment is made, Powin will issue to Suntech an additional 2,143 shares of Powin Energy Common Stock. In the event Suntech is unable or unwilling to pay the remaining subscription balance, Powin will be free to sell the 2,143 shares to another purchaser for the same price per share as paid by Suntech. Suntech failed to make the required payment on May 31, 2015. Accordingly, the Company has elected to terminate the Subscription Agreement, as it pertains to the remaining $12,500,000 owing thereunder.
On January 2016, the Company paid $15,747 and bought the 15% interest in the company’s Mexico subsidiary. The Company now owns 100% of the Mexico subsidiary. As of the purchase date, the non-controlling interest of Mexico amounted to $625,750. The difference of purchase price and balance of non-controlling interest is booked as additional paid in capital.
Effective October 3, 2016, the Company entered into a Stock Purchase Agreement with Powin Industries, SA de CV (“Powin Mexico”) and Rolland Holding Company, LLC (“Rolland”)pursuant to which Company sold to Rolland ninety-nine (99) shares of the Series A Common Stock and one hundred sixty-seven thousand four hundred fifty-two (167,452) shares of the Series B Common Stock of Powin Mexico which represents 99% of the Series A Common Stock and 100% of the Series B Common Stock (collectively the “Shares”) of Powin Mexico. The closing date of the Agreement was October 4, 2016 (“Closing”).The purchase price for the Shares was $999,000.00. At Closing, Rolland made a cash payment of $99,000.00 and delivered to the Company (i) its promissory note in the principal amount $100,000.00 bearing interest at 4% per annum with principal and interest payable in twelve (12) equal monthly installments (“Short Term Note”); and (ii) its promissory note in the principal amount of $800,000.00 bearing interest at 5% per annum with principal and interest payable in ninety-six (96) equal monthly installments (“Long Term Note”). The interest rate on the Long-Term Note will be renegotiated if and when the Prime Rate for the U.S reaches 5%. In addition, Powin Mexico delivered to the Company a non-interest bearing promissory note in the amount of $125,000.00 (“Powin Mexico Note”) which calls for four (4) equal monthly installments of $31,250.00 on each of December 31, 2017, December 31, 2018, December 31, 2019 and December 31, 2020. The Powin Mexico Note represents a compromised amount representing the difference between the amount of the Powin Mexico accounts receivable and the amount of the Powin Mexico accounts payable owing to the Company. The Purchase Agreement contains customary warranties and representation. Amounts due under the Short Term Note, the Long Term Note and the Powin Mexico Note, respectively, may be accelerated upon a failure to pay amounts due thereunder when due, unless waived or cured. As a consequence of the Purchase Agreement, Powin Mexico ceased being a subsidiary of the Company..
Effective October 18, 2016, the Company entered into a Stock Purchase Agreement with WeipingCai (“Cai”) pursuant to which the Company sold to Cai all of the issued and outstanding shares of Common Stock (“Shares”) of Q Pacific Corporation, the Company’s wholly-owned subsidiary, which wholly-owns and operates Q Pacific Contract Manufacturing and Q Pacific Manufacturing Corporation, the Company’s second tier subsidiaries, collectively referred to as (“QPM”). In addition to the sale of the Shares, the Company also transferred and assigned to Cai the Company’s right, title and interest in and to the “Huntsman” tradename held by Q Pacific Contract Manufacturing Corporation.
On October 6, 2016, the merger between Powin Corporation and Powin Energy Corporation became effective, pursuant to a First Amended and Restated Agreement and Plan of Merger and Liquidation dated, (the "Merger Agreement"). Powin Corporation is the surviving entity with a name change to Powin Energy Corporation and will continue to be traded under the stock symbol PWON.
Critical Accounting Policies
Our significant accounting policies are summarized in Note 1 of our financial statements. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report.
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Recently Adopted Accounting Pronouncements
Please see Note 1of our financial statements that describe the impact, if any, from the adoption of Recent Accounting Pronouncements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITIATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company, as defined by Rule 229.10(f) (1) and are not required to provide the information required by this Item.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company’s financial statements are stated in United States dollars and are prepared in accordance with United States generally accepted accounting principles.
It is the opinion of management that the audited financial statements for the calendar years ended December 31, 2016 and 2015 include all adjustments necessary in order to ensure that the audited financial statements are not misleading.
The following financial statements are filed as part of this annual report:
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Powin Energy Corporation
We have audited the accompanying consolidated balance sheets of Powin Energy Corporation (the "Company"), as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive loss, stockholders' deficit and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits include consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits include examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. Our audits also include assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2016 and 2015, and the consolidated results of this operations and this cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements are presented assuming the Company will continue as a going concern. As more fully described in Note 2 to the consolidated financial statements, the Company had net losses of $7.2 million in 2016 and cash used in operations of $5.6 million. These conditions, among others, raise substantial doubt about its ability to continue as a going concern. Management’s plans to address these conditions are also set forth in Note 2 to the consolidated financial statements. The accompanying consolidated financial statements do not include any adjustments which might be necessary if the Company is unable to continue as a going concern.
/s/ Anton & Chia, LLP
Newport Beach, California
March 31, 2017
POWIN ENERGY CORPORATION
BALANCE SHEETS
The accompanying notes are an integral part of these financial statements.
POWIN ENERGY CORPORATION
STATEMENTS OF OPERATIONS
(audited)
The accompanying notes are an integral part of these financial statements.
POWIN ENERGY CORPORATION
STATEMENTS OF COMPREHENSIVE LOSS
(audited)
The accompanying notes are an integral part of these financial statements.
POWIN ENERGY CORPORATION
STATEMENTS OF STOCKHOLDERS' DEFICIT
POWIN ENERGY CORPORATION
STATEMENTS OF CASH FLOWS
(audited)
The accompanying notes are an integral part of these financial statements.
POWIN ENERGY CORPORATION
Notes to Financial Statements
Note 1 - Description of Business and History And Summary of Significant Accounting Policies
Description of Business and History
Powin Energy Corporation (“Company”, “we”, “us”) is a leading designer and developer of safe and scalable energy storage solutions for utilities, microgrid, and EV fast-charging stations. The Company was founded in 1989 in Oregon and until 2016, operated as a contract manufacturer, selling diverse products for leading North American retailers. In 2016, the Company sold off its contract manufacturing businesses, and on October 6, 2016, completed a merger between Powin Corporation and Powin Energy Corporation, with the surviving entity being Powin Energy Corporation. The Company is focused on the rapidly growing advanced energy storage industry, supported by its patented Battery Pack Operating System (bp-OS).
For the periods presented the Company has the following subsidiaries:
The Company’s client base included distributors in the transportation, medical, sports, camping, fitness, and packaging and furniture industries. Operations outside the United States of America are subject to risks inherent in operating under different legal systems and various political and economic environments. Among the risks are changes in existing tax laws, possible limitations on foreign investment and income repatriation, government price or foreign exchange controls, and restrictions on currency exchange.
Effective October 3, 2016(see Note13), the Company entered into a Stock Purchase Agreement with Powin Industries, SA de CV (“Powin Mexico”) and Rolland Holding Company, LLC (“Rolland”)pursuant to which Company sold to Rolland 99 shares of the Series A Common Stock and the 167,452 shares of the Series B Common Stock of Powin Mexico which represents 99% of the Series A Common Stock and 100% of the Series B Common Stock (collectively the “Shares”) of Powin Mexico. The closing date of the Agreement was October 4, 2016 (“Closing”).The purchase price for the Shares was $999,000. At Closing, Rolland made a cash payment of $99,000 and delivered to the Company (i) its promissory note in the principal amount $100,000 bearing interest at 4% per annum with principal and interest payable in twelve (12) equal monthly installments (“Short Term Note”); and (ii) its promissory note in the principal amount of $800,000 bearing interest at 5% per annum with principal and interest payable in ninety-six (96) equal monthly installments (“Long Term Note”). The interest rate on the Long-Term Note will be renegotiated if and when the Prime Rate for the U.S reaches 5%. In addition, Powin Mexico delivered to the Company a non-interest bearing promissory note in the amount of $125,000 (“Powin Mexico Note”) which calls for four (4) equal monthly installments of $31,250 on each of December 31, 2017, December 31, 2018, December 31, 2019 and December 31, 2020. The Powin Mexico Note represents a compromised amount representing the difference between the amount of the Powin Mexico accounts receivable and the amount of the Powin Mexico accounts payable owing to the Company. The Purchase Agreement contains customary warranties and representation. Amounts due under the Short-Term Note, the Long Term Note and the Powin Mexico Note, respectively, may be accelerated upon a failure to pay amounts due thereunder when due, unless waived or cured. As a consequence of the Purchase Agreement, Powin Mexico ceased being a subsidiary of Powin Corporation.
Effective October 18, 2016, the Company entered into a Stock Purchase Agreement with Weiping Cai (“Cai”) pursuant to which the Company sold to Cai all of the issued and outstanding shares of Common Stock (“Shares”) of Q Pacific Corporation, the Company’s wholly-owned subsidiary, which wholly-owns and operates Q Pacific Contract Manufacturing and Q Pacific Manufacturing Corporation, the Company’s second tier subsidiaries, collectively referred to as (“QPM”). In addition to the sale of the Shares, the Company also transferred and assigned to Cai all of the Company’s right, title and interest in and to the “Huntsman” tradename held by Q Pacific Contract Manufacturing Corporation.The purchase price for the Shares was a cash payment of $200,000 plus (i) thirty-five (35%) of the annual EBITDA of QPM for the fiscal years ended 2017, 2018 and 2019; and (ii) thirty-give (35%) of pre-tax income for the fiscal year in which QPM is liquidated, provided that such liquidation commences prior to December 31, 2019.Under the Purchase Agreement, the Company accepted assignment of the lease between Q Pacific Contracting Manufacturing Corporation and Lu Pacific Properties, LLC dated January 1, 2015 for premises occupied by Q Pacific Contracting Manufacturing Corporation at the Company’s corporate offices at 20550 SW 115th Ave., Tualatin, OR 97062. In addition, the Company agreed to assume obligations under promissory notes owing to Joseph Lu and Lu Pacific Properties, LLC, respectively, totaling $265,000.00.
Basis of preparation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Principles of consolidation
The accompanying financial statements include the accounts of Powin Energy Corporation. All intercompany transactions and balances have been eliminated. Equity investments through which the Company exercises significant influence over but does not control the investee and is not the primary beneficiary of the investee’s activities are accounted for using the equity method. Investments through which the Company is not able to exercise significant influence over the investee are accounted for under the cost method.
Foreign currencies
Assets and liabilities recorded in foreign currencies are translated to U.S. dollars at the exchange rate on the balance sheet date. Revenue and expenses are translated to U.S. dollars at average rates of exchange prevailing during the year. Translation adjustments resulting from this process are recorded to other comprehensive income (“OCI”).
The reporting currency of the Company is the U.S. dollars. The results of operations and cash flows conducted in foreign currency are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rates at the balance sheet dates, and equity is translated at the historical exchange rates. As a result, amounts related to assets and liabilities reported on the statements of cash flows will not necessarily agree with changes in the corresponding accounts on the balance sheets. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statements of stockholders’ equity. Translation adjustments for the years ended December 31, 2016 and 2015 were $(35,695) and $(30,033), respectively. The cumulative translation adjustment and effect of exchange rate changes on cash, which was recorded as accumulated other comprehensive loss on the balance sheet, as of December 31, 2016 and 2015 were $0 and $(56,176), respectively. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
Use of estimates
The preparation of financial statements in accordance with GAAP requires the use of management’s estimates. These estimates are subjective in nature and involve judgments that affect the reported amounts of assets and liabilities, and the reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates.
We maintain allowances for accounts receivable for estimated uncollectable accounts receivable due to the inability of our customers to make required payments. We maintain impairment for inventory for estimated inventory loss. We maintain allowances for returns for estimated losses resulting from product returns. These estimates have historically been within our expectations and the provisions established.
Revenue recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, the service is performed or delivery has occurred, the price is fixed or determinable, and collectability is reasonably assured.
For product shipped directly from the Company’s warehouse or manufactured by the Company in the United States and then shipped to the customer, revenue is recognized at time of shipment as it is determined that ownership and title has passed to the customer at shipment and revenue is recognized. Amounts billed to customers for freight and shipping are classified as revenue.
Products imported from China and shipped directly to the customer may be either FOB Port of Origin or FOB Shipping Destination United States. If the product is shipped FOB Port of Origin revenue is recognized at time of delivery to the Company’s representative in China, when the proper bills-of-lading have been signed by the customer’s agent and ownership passed to the customer. For product shipped FOB Shipping Destination U.S., revenue is recognized when product is off-loaded at the United States Port of Entry and delivered to the customer, when all delivery documents have been signed by the receiving customer, and ownership has passed to the customer.
For orders placed requiring customized manufacturing, the Company requires the customer to issue its signed purchase order with documentation identifying the specifics of the product to be manufactured. Revenue is recognized on customized manufactured products upon delivery of the product. If the customer cancels the purchase order after the manufacturing process has begun, the Company invoices the customer for any manufacturing costs incurred and revenue is recognized. Orders canceled after delivery has occurred are fully invoiced to the customer and revenue is recognized, provided all other revenue recognition criteria are met.
Cost of goods sold
Cost of goods sold includes cost of inventory sold during the period, net of discounts and allowances, freight and shipping costs, warranty and rework costs, and sales tax.
Advertising
The Company expenses the cost of advertising as incurred. For the years ended December 31, 2016 and 2015, the amount charged to advertising expense was $49,382 and $163,936, respectively.
Research and development
Research and development expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs, localization costs incurred to translate software for international markets, and the amortization of purchased software code and services content. Such costs related to software development are included in research and development expense until the point that technological feasibility is reached, which for our software products, is generally shortly before the products are released to manufacturing. Once technological feasibility is reached, such costs are capitalized and amortized to cost of revenue over the estimated lives of the products.
Loss Per Share
Basic loss per share is based on the weighted-average effect of all common shares issued and outstanding, and is calculated by dividing net loss by the weighted-average shares outstanding during the year. Diluted loss per share is calculated by dividing net income by the weighted-average number of common shares used in the basic loss per share calculation plus the number of common shares that would be issued assuming exercise or conversion of all potentially dilutive common shares outstanding. The Company excludes equity instruments from the calculation of diluted earnings per share if the effect of including such instruments is antidilutive. Please refer to Note 6 for further discussion.
Comprehensive loss
Comprehensive loss is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, ASC 220, Comprehensive loss requires that all items that are required to be recognized under current accounting standards as components of comprehensive loss be reported in a financial statement that is displayed with the same prominence as other financial statements. For the years presented, the Company’s comprehensive loss includes net loss and foreign currency translation adjustments and is presented in the consolidated statements of comprehensive loss.
Cash
The Company considers all highly liquid investments with maturity of years or less to be cash equivalents. The cash deposits in U.S. financial institutions exceed the amounts insured by the U.S. government. The standard insurance amount is $250,000 per depositor, per insured bank. Non-performance by these institutions could expose the Company to losses for amounts in excess of insured balances. At December 31, 2016 and 2015, the Company’s bank balances exceeded insurances balances by $53,643 and $2,583,046, respectively. At December 31, 2016 and 2015, the Company had no cash equivalents.
Accounts receivable
Accounts receivable are carried at their estimated collectible amounts. Credit is generally extended on a short-term basis; thus, accounts receivable do not bear interest. Accounts receivable are periodically evaluated for collectability based on past credit history with customers and their current financial condition. Balances outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to trade accounts receivable.
Inventories, net
Inventories consist of parts and equipment including electronic parts and components. Inventory is valued at the lower of cost (first-in, first-out method) or market. The Company capitalizes applicable direct and indirect costs incurred in the Company’s manufacturing operations to bring its products to a sellable state. For the years ended December 31, 2016 and 2015, the Company recorded an inventory obsolescence recovery of $28,393 and provision for inventory obsolescence of $45,054, respectively, which is included in cost of sales. The components of inventories were as follows:
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation and amortization. For financial reporting and income tax purposes, the costs of property and equipment are depreciated and amortized over the assets estimated useful lives, using principally the straight-line method for financial reporting purposes and an accelerated method for income tax purposes. Costs associated with repair and maintenance of property and equipment are expensed as incurred. Changes in circumstances, such as technological advances, changes to the Company’s business model or capital strategy could result in actual useful lives differing from the Company’s estimates. In those cases where the Company determines that the useful life of property and equipment should be shortened, the Company would depreciate the asset over its revised remaining useful life thereby increasing depreciation expense.
The Company depreciates property and equipment over the following estimated useful lives:
The Company reviews the carrying value of property, and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, no impairment expenses for property, and equipment was recorded in operating expenses during the years ended December 31, 2016 and 2015.
Intangible Assets
All of our intangible assets include websites and also patents that are subject to amortization and are amortized using the straight-line method over their estimated period of benefit, ranging from 3 to 5 years. We evaluate the recoverability of intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicates the asset may be impaired.
Non-controlling interests
On August 8, 2014, the Company and its then wholly-owned subsidiary, Powin Energy Corporation (collectively “Powin”) and SF Suntech, Inc. (“Suntech”) signed a Share Subscription Agreement (“Subscription Agreement”) for an investment of $12,500,000 from Suntech. On April 1, 2015 and April 2, 2015, Powin Energy issued 1,765 shares and 378 shares of Powin Energy Common Stock to Suntech, respectively. Professional expenses of $750,000 related to the issuances were deducted from the proceeds received. After the shares issuance, the Company owns 82.35% of Powin Energy. On October 6, 2016, the merger between Powin Corporation and Powin Energy Corporation became effective, pursuant to a First Amended and Restated Agreement and Plan of Merger and Liquidation dated, (the "Merger Agreement"). Powin Corporation is the surviving entity with a name change to Powin Energy Corporation and will continue to be traded under the stock symbol PWON.
Non-controlling interests on the financial statements as of December 31, 2015 includes minority interest of Mexico, an 85% owned subsidiary from February 2011 to January 2016. On January 2016, the company spent $15,747 and bought the 15% minority interest in the company’s Mexico subsidiary.
Effective October 3, 2016(see Note13), the Company entered into a Stock Purchase Agreement with Powin Industries, SA de CV (“Powin Mexico”) and Rolland Holding Company, LLC (“Rolland”)pursuant to which Company sold to Rolland 99 shares of the Series A Common Stock and the 167,452 shares of the Series B Common Stock of Powin Mexico which represents 99% of the Series A Common Stock and 100% of the Series B Common Stock (collectively the “Shares”) of Powin Mexico. The closing date of the Agreement was October 4, 2016 (“Closing”).
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.
Fair Value Measurements
The fair value accounting guidance defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The definition is based on an exit price rather than an entry price, regardless of whether the entity plans to hold or sell the asset. This guidance also establishes a fair value hierarchy to prioritize inputs used in measuring fair value as follows:
•
Level 1: Observable inputs such as quoted prices in active markets;
•
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
•
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The carrying value of the Company’s equipment borrowing and short term line of credit borrowing at December 31, 2016 and 2015, is considered to approximate fair market value, as the interest rates of these instruments are based predominantly on variable reference rates. The carrying value of accounts receivable, trade payables and accrued liabilities approximates the fair value due to their short-term maturities.
Stock-Based Compensation
The Company measures stock-based compensation expense for all share-based awards granted to employees based on the estimated fair value of those awards at grant-date under ASC 718. The cost of restricted stock awards is determined using the fair market value of our common stock on the date of grant. The fair values of stock option awards are estimated using a Black-Scholes valuation model. The compensation costs are recognized net of any estimated forfeitures on a straight-line basis over the employee requisite service period. Forfeiture rates are estimated at grant-date based on historical experience and adjusted in subsequent periods for any differences in actual forfeitures from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications have no impact on our consolidated net earnings, financial position or cash flows.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which amends the existing accounting standards for revenue recognition. The new guidance provides a new model to determine when and over what period revenue is recognized. Under this new model, revenue is recognized as goods or services are delivered in an amount that reflects the consideration we expect to collect. In March 2016, the FASB issued an ASU, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the principal versus agent guidance in the new revenue recognition standard. In April 2016, the FASB issued another ASU, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, which clarifies the guidance on accounting for licenses of intellectual property and identifying performance obligations in the new revenue recognition standard. In May 2016, the FASB issued another ASU, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedient, which clarifies the transition, collectability, noncash consideration and the presentation of sales and other similar taxes in the new revenue recognition standard. The guidance is effective for fiscal years beginning after December 15, 2017; early adoption is permitted for periods beginning after December 15, 2016. The new standard is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. We have not yet selected a transition method and are evaluating the impact of adopting this guidance.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 requires management to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern and, if so, provide certain footnote disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016, including interim reporting periods thereafter. We adopted ASU 2014-15 as of December 31, 2016, and have provided related disclosures in note 2 of our financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU is effective for reporting periods beginning after December 15, 2018 and early adoption is permitted. The ASU will require lessees to report most leases as assets and liabilities on the balance sheet, while lessor accounting will remain substantially unchanged. The ASU requires a modified retrospective transition approach for existing leases, whereby the new rules will be applied to the earliest year presented. We are currently evaluating the potential impact of adopting the ASU on our financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 will become effective for us beginning with the first quarter of 2017. The adoption of this guidance is not expected to have a material impact on our financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (Topic 230). The ASU addresses the following eight specific cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. We are currently evaluating the potential impact of adopting the ASU on our financial statements.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory, which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. ASU 2016-06 will be effective for the Company in its first quarter of 2019. The Company does not expect that the adoption of this guidance will have a material impact on its financial statements.
In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control. The amendments affect reporting entities that are required to evaluate whether they should consolidate a variable interest entity in certain situations involving entities under common control. Specifically, the amendments change the evaluation of whether a reporting entity is the primary beneficiary of a variable interest entity by changing how a reporting entity that is a single decision maker of a variable interest entity treats indirect interests in the entity held through related parties that are under common control with the reporting entity. The amendments are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect that the adoption of this guidance will have a material impact on its financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this ASU clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Basically these amendments provide a screen to determine when a set is not a business. If the screen is not met, the amendments in this ASU first, require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and second, remove the evaluation of whether a market participant could replace missing elements. These amendments take effect for public businesses for fiscal years beginning after December 15, 2017 and interim periods within those periods, and all other entities should apply these amendments for fiscal years beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.The Company does not expect that the adoption of this guidance will have a material impact on its financial statements.
Segment reporting
ASC 280, Segment Reporting, formerly known as Statement of Financial Accounting Standards No. 131, Disclosure about Segments of an Enterprise and Related Information, requires use of the “management approach” model for segment reporting. Under this model, segment reporting is consistent with the manner that the Company’s management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure or any other manner in which management disaggregates a company.
A description of our operating segments as of December 31, 2015, follows.
Contract manufacturing (formerly OEM):
Outsourced manufacturing for North American companies, including senior citizen safety products; steel gun safes; outdoor cooking equipment; trampolines; plastic products and small electronic appliances. Contract manufacturing also offers logistic services and a qualified engineer team to support and provide in-house design.
Manufacturing (formerly QBF):
Our manufacturing segment, Powin Manufacturing formerly named Quality Bending and Fabrication (“QBF”), manufactures various truck parts and components primarily for Freightliner Trucks, a division of Daimler Trucks North America, the largest manufacturer of heavy-duty vehicles in North America. Daimler Trucks North America designs, builds and markets a wide range of Class 3-8 vehicles including long-haul highway tractors, heavy-duty construction and vocational trucks, mid-range trucks for distribution and service, school and transit buses, fire and emergency service apparatus, and chassis for step vans, school and shuttle buses, and motor homes. Freightliner Trucks is headquartered in Portland, Oregon, with truck manufacturing facilities located in Portland and throughout the United States and Mexico.
Manufacturing is completed at the Company’s leased facility in Tualatin, Oregon as well as arranging the outsourced manufacturing at a third-party factory in Qingdao, China.
Energy:
Powin Energy has developed market leading architecture that utilizes proprietary patented energy storage technology for scalable grid energy storage systems, power supply units for electric vehicles, and transportation applications. Through December 31, 2015, the Energy segment has focused on identifying target markets and applications and finalizing the development of products to serve those markets and applications. In 2016, the Company continued to develop products and marketing strategies for this operating entity.
Product & Service (formerly Channel Partner Program, Warehousing and Wooden)
The Product & Service segment contains the legacy operations of Channel Partner Program, a distribution channel for North American companies to sell their products in China as well as selling certain consumer products through U.S.-based retailers and marketplaces, including online; and Warehousing, which provides warehousing services in support of the Company’s customers across all segments. On January 1, 2015, the Product & Service segment had been incorporated into our contract manufacturing segment.
Powin Mexico:
Powin Mexico is a manufacturing segment, currently manufacturing gun safes, but also capable of manufacturing heavy truck parts. Operations began in 2013.
As of December 31, 2016, there is only one segment Powin Energy.
Note 2: Going concern
The Company sustained net loss attributable to Powin Corporation of $6,671,705 and $4,625,848 during the years ended December 31, 2016 and 2015. The Company has accumulated deficit of $28,732,576 as of December 31, 2016. The Company’s continuation as a going concern is dependent on its ability to generate sufficient cash flows from operations to meet its obligations and/or obtain additional financing, as may be required.
The accompanying condensed 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 financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.
As discussed in Part 1, Item 1: Business, during 2016 the company sold its contract manufacturing businesses and completed a merger between Powin Corporation and Powin Energy Corporation. The surviving entity from the merger is Powin Energy Corporation, and this entity, our Company, is focused on the rapidly growing advanced energy storage industry. Management has assessed the Company’s ability to continue as a going concern as of the balance sheet date, and up to and including the financial statement issuance date. The assessment of a company’s ability to meet its obligations is inherently judgmental. Without additional funding, the company maynot have sufficient available cash to meet its obligations coming due in the ordinary course of business within one year of the financial statement issuance date. However, the Company has historically been able to successfully secure funding to meet its obligations as they become due. The following conditions were considered in management’s evaluation of going concern:
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In 2016, the Company completed significant research and development effort resulting in a patented, commercially viable Battery Pack Operating System (bp-OS).
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In early 2017, the Company completed the installation of a 2-megawatt / 8-megawatt-hour Battery Energy Storage System with the Southern California Edison utility.
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Management is actively in discussions with several parties regarding various forms of funding, which if successful, would mitigate any going concern risks within one year from the date of issuance of its financial statements for the year ended December 31, 2016.
Note 3: Notes and other receivables
Notes and other receivables consist of the following:
Note 4: Property and equipment, net
The components of property and equipment were as follows:
* SCE project asset is a project under construction in Irvine, CA.The Company capitalized the production cost because design and development preproduction costs related to Long-Term supply arrangements should be capitalized.
For the years ended December 31, 2016 and 2015, depreciation of property and equipment amounted $32,503 and $24,732, respectively.
Note 5: Loss per share
Basic loss per share is based on the weighted-average effect of all common shares issued and outstanding, and is calculated by dividing net loss by the weighted-average shares outstanding during the year. Diluted loss per share is calculated by dividing net income by the weighted-average number of common shares used in the basic loss per share calculation plus the number of common shares that would be issued assuming exercise or conversion of all potentially dilutive common shares outstanding. The Company excludes equity instruments from the calculation of diluted earnings per share if the effect of including such instruments is antidilutive.
The components of basic and diluted loss per share are as follows:
The Company has 11,509 and 10,237 shares of outstanding Series A preferred stock as of December 31, 2016 and 2015, respectively. These Series A share has par value of $100 and is convertible at 1 to 20 rate. The Company has 0 and 13,625,826 shares of outstanding August 2015 preferred stock as of December 31, 2016 and 2015, respectively. These August 2015 share has par value of $0.56 and is convertible at 1 to 1 rate. In August 2016, 13,625,826 shares of August 2015 preferred stock had converted into common stock.
On June 15, 2011, the Company granted awards in the form of incentive stock options to its key employees for 117,000 shares of common stock. There were no stock options granted in 2012. On August 6, 2013, the Company granted another 164,000 stock options under the same plan to all employees. The Company has 102,000 and 158,000 shares of outstanding stock options as of December 31, 2016 and 2015, respectively.
On April 15, 2013, The Company issued a Warrant to Purchase Common Stock to Global Storage Group, LLC for 70,000 shares of the Company’s common stock at an exercise price of $25.00; and a Warrant to Purchase Common Stock to Virgil L. Beast on for 30,000 shares of the Company’s common Stock at an exercise price of $25.00. The exercise period of each Warrant is 60 months from the date of issuance and may be exercised in whole or in part at any time prior to April 15, 2018. As of December 31, 2016 and 2015, all 100,000 warrants remain outstanding.
The following sets forth the number of shares of common stock underlying if all outstanding options, warrants, and convertible debt were converted as of December 31, 2016 and 2015:
For the years ended December 31, 2016 and 2015, the effect of warrants, stock options and convertible preferred stock and preferred stock dividends are excluded from loss per share because their impact is considered to be anti-dilutive.
Note 6: Notes Payable
The total carrying value of notes payable was as follows:
Interest expenses related to notes payables and long-term debt amounted to $44,234 and $79,836 for the years ended December 31, 2016 and 2015, respectively.
On July 5, 2016, the Company’s subsidiary, Powin Energy Corporation issued an unsecured promissory note in the amount of $1,484,118 to 3U (HK) Trading Co. Limited. The note is due on or before July 4, 2017 and accrues interest at 6% per annum.
During the year ended December 31, 2015, the Company issued its preferred stock designed as “August 2015 Preferred Stock”, in satisfaction of certain notes payable (Note 8).There was no gain or loss related to the issuance of the preferred stock.
Note 7: Commitments
Operating Leases
The Company leases a facility from Lu Pacific Properties, LLC (“Lu Pacific”, formerly, Powin Pacific Properties, LLC, a company owned by Joseph Lu, the Company’s largest shareholder, Chairman of the Board and CEO) which serves as the Company’s corporate headquarters as well as the base of all operations. This lease is through June 30, 2021 and requires the Company to pay for all property taxes, utilities and facility maintenance.
Effective January 1, 2017, the Company entered into a lease amendment. The Company’s subsidiary, Powin Energy leased 28,275 square feet of the building. The lease term is through June 30, 2021 and all property taxes, utilities and facility maintenance were charge at $0.15 per square foot per month by Lu Pacific Properties, LLC. The monthly rental expense is $17,706.50.
The Company leases a facility from 3U Millikan, LLC, a company owned by Xilong Zhu, the Company’s Board of Director. This lease is commencing October 10, 2016 and endingJanuary 9, 2027 and requires the Company to pay for all property taxes, utilities and facility maintenance.The monthly base rental expense is $17,550, commencing January 1, 2017 and ending January 9, 2027.
Minimum future lease payments under non-cancelable operating leases are as follows:
For the years ended December 31, 2016 and 2015, total lease expense paid for all operating rents and leases was $282,722 and $281,440, respectively. These leases are also disclosed in Note 10, related party transactions.
Note 8: Capital stock
The Company has two classes of preferred stock and one class of common stock. The Series A Preferred Stock has a $100 face value per share with a conversion rate of one (1) share of Preferred Stock for twenty (20) shares of Common Stock. The 2015 August Preferred Stock carries a par value of $0.56 per shares and is convertible into Common Stock at the rate of 1for1.
Preferred Stock
The Series A Preferred Stock is convertible at a rate of one (1) preferred share to twenty (20) shares of Powin Corporation common stock. The Series A Preferred Stock calls for dividends of 12%, declared semi-annually, and paid in additional Series A Preferred Stock. In 2016 and 2015, we issued 1,272 and 1,135 shares of Series A Preferred Stock as dividends respectively, increasing the Series A Preferred Stock by $127,200 and $113,500 and decreasing additional paid in capital. As of December 31, 2016 and 2015, there are 11,509 and 10,237 shares of Series A Preferred Stock outstanding, respectively.
The Company issued its August 2015 Preferred Stock (“Preferred Stock”) in August 2015 in satisfaction of the notes payable described in the table below. The holders of the Preferred Stock do not have a dividend preference over the Company’s common stock and have the same voting rights as the holders of common stock. The Preferred Stock is convertible into the Company’s common stock at the rate of one (1) share of Preferred Stock for one (1) share of common stock. The holders of the Preferred Stock are entitled to a liquidation preference over the holders of common stock equal to $0.56 per share. The full rights, preferences and privileges of the Preferred Stock are set forth in the Certificate of Designation which was filed in the 8K report on August 6, 2015. In August 2016, 13,625,826 shares of August 2015 preferred stock had converted into common stock.
Common Stock
For the three months ended March 31, 2015 the Company issued 3,000 shares of common stock to six members of its Board of Directors as compensation for their services based on the fair value of the shares valued at $1.95 per share for their service. The value of these shares is $5,850. For the three months ended June 30, 2015 the Company issued 3,000 shares of common stock to six members of its Board of Directors as compensation for their services based on the fair value of the shares valued at $0.56 per share for their service. The value of these shares is $1,680. For the three months ended September 30, 2015 the Company issued 3,000 shares of common stock to six members of its Board of Directors as compensation for their services based on the fair value of the shares valued at $0.90 per share for their service. The value of these shares is $2,700. For the three months ended December 31, 2015 the Company issued 3,000 shares of common stock to six members of its Board of Directors as compensation for their services based on the fair value of the shares valued at $0.65 per share for their service. The value of these shares is $1,980.
For the three months ended June 30, 2016 the Company issued 6,000 shares of common stock to the six members of its Board of Directors as compensation for their services based on the fair value of the shares valued at $0.30 per share.
On September 6, 2016, the Company issued 89,961 shares to Quidnick Energy Development, LLC as compensation for consulting services valued at $0.30 per share.
On October 17, 2016, the Company issued 176,369 shares to an employee for compensation expense valued at $0.141 per share.
On October 20, 2016, the Company issued 177,251 shares to an employee for compensation expense valued at $0.141 per share.
In addition, on April 15, 2013, the Company issued a Warrant to Purchase Common Stock to Global Storage Group, LLC for 70,000 shares of the Company’s common stock at an exercise price of $25.00; and a Warrant to Purchase Common Stock to Virgil L. Beaston for 30,000 shares of the Company’s common Stock at an exercise price of $25.00. The exercise period of each Warrant is 60 months from the date of issuance and may be exercised in whole or in part at any time prior to April 15, 2018. As of December 31, 2016 and 2015, all 100,000 warrants remain outstanding.
Note 9: Stock options
In February 2011, the Company’s Board of Directors approved the adoption of the Powin Energy Corporation 2011 Stock Option Plan (“the Plan”) and submitted its ratification to the shareholders at the shareholders’ meeting held June 15, 2011, where the shareholders approved the Plan.
The Company records stock-based compensation expense related to stock options and the stock incentive plan in accordance with ASC 718, “Compensation - Stock Compensation”.
On June 15, 2011, the Company granted awards in the form of incentive stock options to its key employees for 1,170,000 shares of common stock. There were no stock options granted in 2012. On August 6, 2013, the Company granted another 1,640,000 stock options under the same plan to all employees. Awards are granted with an exercise price that approximates the market price of the Company’s common stock at the date of grant. The 2013 grant included immediate vesting of 20% of the options resulting in greater expense recognized than in previous years.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model using. The following assumptions were used to determine the fair value of the options at date of original issuance on August 6, 2013:
The Company has never paid a cash dividend and does not intend to pay cash dividends in the foreseeable future, so the dividend yield used in the calculation is 0%.The expected volatility is based on the daily historical volatility of comparative companies, measured over the expected term of the option. The risk-free rate is based on the implied yield on a United States Treasury zero-coupon issue with a remaining term closest to the expected term of the option. The term of the option is the expiration as there is no ready market for employees to exercise and sell shares and to date no option has been exercised on the 2011 plan.
A summary of option activity as is presented below:
Stock option expense included in operating expense for the years ended December 31, 2016 and 2015 is $88,130 and $156,908, respectively. As of December 31, 2016 and 2015, remaining unvested stock expenses amounted to $46,126 and $225,017, respectively.
Note 10: Related party transactions
Rent From Related Parties
All of the Company’s facilities are owned by Lu Pacific Properties, LLC (“Lu Pacific”), an Oregon limited liability company, controlled by Joseph Lu (“Mr. Lu”), CEO and Chairman of the Board. Rent expenses were $282,722 and $281,440 for the years ended December 31, 2016 and 2015, 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 facilities in Irvine owned by 3U Millikan, LLC, an California limited liability company, controlled by Xilong Zhu (“Mr. Zhu”), Director of the Board. Rent expenses were $0 and $0 for the years ended December 31, 2016 and 2015, respectively. Rental rates are deemed to be and were derived by local market rates for the rents when the contracts were entered.
Accounts payable to a related party
Accounts payable to a related party amounted to $2,447,347 and $0 as of December 31, 2016 and December 31, 2015, respectively. Accounts payable to a related party is accounts payable to a vendor of which our company’s CEO is a significant shareholder.
Loans From Related Parties
On October 18, 2016 the Company secured two loans from Lu Pacific. The principal amount is $150,000 and the interest rate is 6%, due on May 31, 2017. As of December 31, 2016, interest accrued on the loans was $1,825. Interest expense amounted to $1,825 for the year ended December 31, 2016.
On October 27, 2016 the Company secured a loan from Lu Pacific. The principal amount is $2,000,000, and the interest rate is 7%, due on October 31, 2018. As of December 31, 2016, accrued interest is $13,648. Interest expense amounted to $25,315 for the year ended December 31, 2016.
On October 18, 2016, the Company secured a loan from Joseph Lu, CEO and Chairman of the Company. The principal amount is $115,000 and the interest rate is 6%, due on January 31, 2017. As of December 31, 2016, and accrued interest is $1,399. Interest expense amounted to $1,399 for the year ended December 31, 2016.
On December 30, 2016, the Company borrowed loan from Joseph Lu, CEO and Chairman of the Company. The principal is $600,000, interest rate is 6%, due on June 30, 2017. As of December 31, 2016, and accrued interest is $99. Interest expense amounted to $99 for the year ended December 31, 2016.
On October 14, 2016, the Company borrowed loan from Xilong Zhu, a director of the Company. The principal is $35,100, interest rate is 0%, due on March 1, 2017. As of December 31, 2016, and accrued interest is $0. Interest expense amounted to $0 for the year ended December 31, 2016. The loan was paid off on March 6, 2017.
Sales to Related Parties
The Company made sales to Lu Pacific in the amount of $260,446 and $0 for the years ended December 31, 2016 and 2015, respectively. No amounts were due to the Company from Lu Pacific at December 31, 2016 and December 31, 2015, respectively.
Purchase from Related Parties
Mr. Lu’s son, Danny Lu, owns 49% of Yangzhou Finway Energy Tech Co. since May 2016. The Company made purchase from Yangzhou Finway Energy Tech Co. in the amount of $3,694,031 and $0for the years ended December 31, 2016 and 2015, respectively. Amounts due to Yangzhou Finway Energy Tech Co. amounted to $2,447,347 and $43,156 at December 31, 2016 and 2015, respectively.
The Company made purchases from Quailhurst Vineyard Estates, an Oregon company, controlled by Joseph Lu in the amount of $8,529 and $0 for the years ended December 31, 2016 and 2015, respectively. Amounts due to Quailhurst Vineyard Estates amounted to $3,332 and $0 at December 31, 2016 and 2015, respectively.
Note 11: Business segment reporting
Basis for Presentation
Our operating businesses are organized based on the nature of markets and customers. Segment accounting policies are the same as described in Note 1.
Effects of transactions between related companies are eliminated and consist primarily of inter-company transactions and transfers of cash or cash equivalents from corporate to support each business segment’s payroll, inventory sourcing and overall operations when each segment has working capital requirements. Corporate overhead costs are allocated to segments based on management’s estimates of the consumption of such services by each segment.
A description of our operating segments as of December 31, 2016 and2015, follows.
Contract manufacturing (formerly OEM):
Outsourced manufacturing for North American companies, including senior citizen safety products; steel gun safes; outdoor cooking equipment; trampolines; plastic products and small electronic appliances. Contract manufacturing also offers logistic services and a qualified engineer team to support and provide in-house design.
Manufacturing (formerly QBF):
Our manufacturing segment, Powin Manufacturing formerly named Quality Bending and Fabrication (“QBF”), manufactures various truck parts and components primarily for Freightliner Trucks, a division of Daimler Trucks North America, the largest manufacturer of heavy-duty vehicles in North America. Daimler Trucks North America designs, builds and markets a wide range of Class 3-8 vehicles including long-haul highway tractors, heavy-duty construction and vocational trucks, mid-range trucks for distribution and service, school and transit buses, fire and emergency service apparatus, and chassis for step vans, school and shuttle buses, and motor homes. Freightliner Trucks is headquartered in Portland, Oregon, with truck manufacturing facilities located in Portland and throughout the United States and Mexico.
Manufacturing is completed at the Company’s leased facility in Tualatin, Oregon as well as arranging the outsourced manufacturing at a third-party factory in Qingdao, China.
Energy:
Powin Energy has developed market leading architecture that utilizes proprietary patented energy storage technology for scalable grid energy storage systems, power supply units for electric vehicles, and transportation applications. Through December 31, 2014, the Energy segment has focused on identifying target markets and applications and finalizing the development of products to serve those markets and applications. In 2016, the Company continued to develop products and marketing strategies for this operating entity.
Product & Service (formerly Channel Partner Program, Warehousing and Wooden)
The Product & Service segment contains the legacy operations of Channel Partner Program, a distribution channel for North American companies to sell their products in China as well as selling certain consumer products through U.S.-based retailers and marketplaces, including online; and Warehousing, which provides warehousing services in support of the Company’s customers across all segments. On January 1, 2015, the Product & Service segment had been incorporated into our contract manufacturing segment.
Powin Mexico:
Powin Mexico is a manufacturing segment, currently manufacturing gun safes, but also capable of manufacturing heavy truck parts. Operations began in 2013.
Effective October 3, 2016(see Note13&14), the Company entered into a Stock Purchase Agreement with Powin Industries, SA de CV (“Powin Mexico”) and Rolland Holding Company, LLC (“Rolland”)pursuant to which Company sold to Rolland 99 shares of the Series A Common Stock and the 167,452 shares of the Series B Common Stock of Powin Mexico which represents 99% of the Series A Common Stock and 100% of the Series B Common Stock (collectively the “Shares”) of Powin Mexico. The closing date of the Agreement was October 4, 2016 (“Closing”).The purchase price for the Shares was $999,000. At Closing, Rolland made a cash payment of $99,000 and delivered to the Company (i) its promissory note in the principal amount $100,000 bearing interest at 4% per annum with principal and interest payable in twelve (12) equal monthly installments (“Short Term Note”); and (ii) its promissory note in the principal amount of $800,000 bearing interest at 5% per annum with principal and interest payable in ninety-six (96) equal monthly installments (“Long Term Note”). The interest rate on the Long Term Note will be renegotiated if and when the Prime Rate for the U.S reaches 5%.In addition, Powin Mexico delivered to the Company a non-interest bearing promissory note in the amount of $125,000 (“Powin Mexico Note”) which calls for four (4) equal monthly installments of $31,250 on each of December 31, 2017, December 31, 2018, December 31, 2019 and December 31, 2020. The Powin Mexico Note represents a compromised amount representing the difference between the amount of the Powin Mexico accounts receivable and the amount of the Powin Mexico accounts payable owing to the Company. The Purchase Agreement contains customary warranties and representation. Amounts due under the Short Term Note, the Long Term Note and the Powin Mexico Note, respectively, may be accelerated upon a failure to pay amounts due thereunder when due, unless waived or cured. As a consequence of the Purchase Agreement, Powin Mexico ceased being a subsidiary of Powin Corporation.
Effective October 18, 2016(see Note13&14), the Company entered into a Stock Purchase Agreement with Weiping Cai (“Cai”) pursuant to which the Company sold to Cai all of the issued and outstanding shares of Common Stock (“Shares”) of Q Pacific Corporation, the Company’s wholly-owned subsidiary, which wholly-owns and operates Q Pacific Contract Manufacturing and Q Pacific Manufacturing Corporation, the Company’s second tier subsidiaries, collectively referred to as (“QPM”). In addition to the sale of the Shares, the Company also transferred and assigned to Cai all of the Company’s right, title and interest in and to the “Huntsman” tradename held by Q Pacific Contract Manufacturing Corporation.
Revenues and net loss before income taxes of each of the Company’s segments are as follows:
Note 12: Non-Controlling Interest
On August 8, 2014, Powin Corporation and its wholly-owned subsidiary, Powin Energy Corporation (collectively “Powin”) and SF Suntech, Inc. (“Suntech”) signed a Share Subscription Agreement (“Subscription Agreement”) for an investment of $25,000,000 from Suntech. Suntech is a third party.
Effective April 2, 2015, Powin and Suntech signed the Fourth Supplemental Agreement (“Supplement”).Under the Supplement, the First Closing Date of the Subscription Agreement was April 2, 2015 (“First Closing”) at which time Suntech made a payment to Powin in the amount of $7,450,000. That payment plus the previous payments of $3,000,000 on August 29, 2014; $2,000,000 on January 15, 2015 and $50,000 on March 2, 2015 represent a total $12,500,000 paid toward the full $25,000,000 owing under the Subscription Agreement. On April 1, 2015 and April 2, 2015, Powin Energy issued 1,765 shares and 378 shares of Powin Energy Common Stock to Suntech, respectively for $12,500,000 received. Professional expenses of $750,000 were recorded as deduction of the cash received.
Per ASC 810-10-45-22, Powin Corporation’s ownership interest in Powin Energy has changed as Powin Corporation sold 2,143 shares (approximately 17.65% of outstanding shares after the sales of 2,143 shares) of Powin Energy’s common shares to Suntech. After this transaction, Powin Corporation's ownership interest in Powin Energy is 82.35%. Since, Powin Corporation retained its controlling financial interest in Powin Energy after the shares issuance for cash to Suntech; the sale of the subsidiary shares was accounted for as an equity transaction in accordance with ASC 810-10-45-23. Specifically, the proceeds received from the sale $12,500,000 offset by professional expenses of $750,000 are reflected as an increase to additional paid in capital and the net asset value associated with this sold interest $1,552,272 was reclassified from additional paid in capital to no controlling interests.
The Supplement further established the Second Closing Date of the Subscription Agreement as May 31, 2015 (“Second Closing”) when the balance of $12,500,000 was to be paid. If that payment was made, Powin would issue to Suntech an additional 2,143 shares of Powin Energy Common Stock. In the event Suntech was unable or unwilling to pay the remaining subscription balance, Powin would be free to sell the 2,143 shares to another purchaser for the same price per share as paid by Suntech. Suntech failed to make the required payment on May 31, 2015. Accordingly, the Company elected to terminate the Subscription Agreement, as it pertained to the remaining $12,500,000 owing thereunder.
On January 2016, the company paid $15,747 and bought the 15% interest in the company’s Mexico subsidiary. The Company now owns 100% of the Mexico subsidiary. As of the purchase date, the non-controlling interest of Mexico amounted to $802,577. The difference of purchase price and balance of non-controlling interest is booked as additional paid in capital.
Note 13: Discontinued Operations
Effective October 3, 2016, the Company entered into a Stock Purchase Agreement with Powin Industries, SA de CV (“Powin Mexico”) and Rolland Holding Company, LLC (“Rolland”) pursuant to which the Company sold to Rolland 99 shares of the Series A Common Stock and the 167,452 shares of the Series B Common Stock of Powin Mexico which represents 99% of the Series A Common Stock and 100% of the Series B Common Stock (collectively the “Shares”) of Powin Mexico. The closing date of the Agreement was October 4, 2016 (“Closing”).The purchase price for the Shares was $999,000. At Closing, Rolland made a cash payment of $99,000 and delivered to the Company (i) its promissory note in the principal amount $100,000 bearing interest at 4% per annum with principal and interest payable in twelve (12) equal monthly installments (“Short Term Note”); and (ii) its promissory note in the principal amount of $800,000 bearing interest at 5% per annum with principal and interest payable in ninety-six (96) equal monthly installments (“Long Term Note”). The interest rate on the Long Term Note will be renegotiated if and when the Prime Rate for the U.S reaches 5%. In addition, Powin Mexico delivered to the Company a non-interest bearing promissory note in the amount of $125,000 (“Powin Mexico Note”) which calls for four (4) equal monthly installments of $31,250 on each of December 31, 2017, December 31, 2018, December 31, 2019 and December 31, 2020. The Powin Mexico Note represents a compromised amount representing the difference between the amount of the Powin Mexico accounts receivable and the amount of the Powin Mexico accounts payable owing to the Company. The Purchase Agreement contains customary warranties and representation. Amounts due under the Short Term Note, the Long Term Note and the Powin Mexico Note, respectively, may be accelerated upon a failure to pay amounts due thereunder when due, unless waived or cured. As a consequence of the Purchase Agreement, Powin Mexico ceased being a subsidiary of Powin Corporation.
Effective October 18, 2016, the Company entered into a Stock Purchase Agreement with WeipingCai (“Cai”) pursuant to which the Company sold to Cai all of the issued and outstanding shares of Common Stock (“Shares”) of Q Pacific Corporation, the Company’s wholly-owned subsidiary, which wholly-owns and operates Q Pacific Contract Manufacturing and Q Pacific Manufacturing Corporation, the Company’s second tier subsidiaries, collectively referred to as (“QPM”). In addition to the sale of the Shares, the Company also transferred and assigned to Cai the Company’s right, title and interest in and to the “Huntsman” tradename held by Q Pacific Contract Manufacturing Corporation.
The Company’s results of operations related to Powin Mexico and Q Pacific Corporation which wholly-owns and operates Q Pacific Contract Manufacturing and Q Pacific Manufacturing Corporation have been reclassified as discontinued operations on a retrospective basis for all periods presented.
Balances for Powin Mexico and Q Pacific Corporation as of December 31, 2016 and 2015 are as follows:
The operating results of Powin Mexico and Q Pacific Corporation for the years ending December 31, 2016 and 2015 classified as discontinued operations are summarized below:
On October 6, 2016, the merger between Powin Corporation and Powin Energy Corporation became effective, pursuant to a First Amended and Restated Agreement and Plan of Merger and Liquidation dated, (the "Merger Agreement"). Powin Corporation is the surviving entity with a name change to Powin Energy Corporation and will continue to be traded under the stock symbol PWON.
The Company has booked $1,719,906 loss from disposal of discontinued operations.
Note 14: Income taxes
The provision for income taxes consists of the following:
A reconciliation of income taxes computed at the United States federal statutory income tax rate to the provision for income taxes is as follows:
The tax effects of temporary differences that give rise to significant portions of the deferred tax asset were as follows:
Based on the Company’s current financial and operational situation, management determined that it is more likely than not that the United States federal and state deferred tax assets will not be realized through the reduction of future income tax payments. Consequently, the Company has established a full valuation allowance for its United States federal and state deferred tax assets as of December 31, 2016.
As of December 31, 2016, the Company has approximately $16.9 million and $20 million of net operating loss (“NOL”) carry-forwards for federal and state income tax purposes, respectively. Expiration of the Company’s NOL carry-forwards begins in 2021. Section 382 of the Internal Revenue code of 1986 provide for an annual limitation of approximately $67,000 on the utilization of net operating loss carry-forwards as the Company underwent an ownership change in 2008, as defined in section 382. This limitation has been reflected in the United States federal and state net operating loss carry-forwards.
The Company adopted uncertain tax position in accordance with ASC 740 on January 1, 2007 and has not recognized any material increase in the liability for unrecognized income tax benefits as a result of the implementation. The Company estimates that the unrecognized tax benefit will not change within the next twelve months. The Company will continue to classify income tax penalties and interest, if any, as part of interest and other expenses in its statements of operations. The Company has incurred no interest or penalties as of December 31, 2016 and 2015.
The Company has identified United States federal and Oregon as major jurisdictions. The Company is currently open to audit under United States and state statute of limitations by the taxing authorities for 2013 through 2016.
Note 15: Subsequent events
On January26, 2017, the Company borrowed $1,100,000 loan payable from Lu Pacific. The loan has interest rate of 7.0% and is due on January 26, 2019. If the Company fails to cure a Payment Default or fails to make payment upon Maturity as requested by Holder, Holder, at its discretion, is entitled to take ownership of and sole possessory interest in Company’s Intellectual Property.
On March 16, 2017, the Company borrowed $2,000,000 loan payable from Wolf Creek Capital, LLC. The loan has interest rate of 6.0% and is due on March 16,2019.
On March 21, 2017, the board of directors of the company authorized the issuance of one share of the company’s Common Stock in exchange for each share of Series A stock. All Series A Preferred Stock was cancelled.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
Our management, with the participation of our principal executive and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (“Exchange Act”) as of the end of the period covered by this report. Based on that evaluation, our principal executive and principal financial officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Internal Control over Financial Reporting.
Management’s Annual Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) for the Company. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. Because of its inherent limitations, internal control over financial reporting may not prevent nor detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.
Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2016. In making its assessment of internal control over financial reporting, management used the criteria established in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. This assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of those controls. Based on the results of this assessment, management has concluded that our internal controls over financial reporting were effective as of December 31, 2016.
Management's assessment was not subject to attestation by the Company's independent registered public accounting firm and as such, no attestation was performed pursuant to SEC Final Rule Release Nos. 33-8934; 34-58028 that permit the Company to provide only management's assessment report for the year ended December 31, 2016 and 2015.
Changes in Internal Control over Financial Reporting.
There has been no change in our internal control over financial reporting that occurred in our fiscal year ended December 31, 2016 that has materially adversely affected, or is reasonably likely to materially adversely affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers, Promoters and Control Persons
All directors of our directors and officers hold office until the next annual meeting of our shareholders and until such director’s successor is elected and has been qualified, or until such director’s earlier death, resignation or removal. The following table sets forth the names, positions and ages of our executive officers and directors. Our board of directors elects officers and their terms of office are at the discretion of our board of directors.
Business Experience
The following is a brief account of the education and business experience during at least the past five years of our directors and executive officers, indicating their principal occupations during that period, and the name and principal business of the organizations in which such occupation and employment were carried out.
Joseph Lu formed Powin Corporation in 1990 and has served as its President since inception. Effective March 12, 2012, Joseph Lu was appointed as interim Chief Financial Officer until such time as the Company hires a permanent Chief Financial Officer. Mr. Lu also resigned as President of the Company but will continue as Chief Executive Officer. Prior to founding Powin, Mr. Lu served as the General Manager of the Shunn Feng Ind. Co., Ltd. in Taiwan. From 1980 to 1986, Mr. Lu was employed as an Environmental Engineer for the Sinotech Engineering Consultant Co. in Taiwan. From 1979 to 1980, Mr. Lu was a quality control inspector for the Shunn Feng. Ind. Co. Ltd. in Taiwan. Additionally, from 1988 to 1996, Mr. Lu was the President of the Euro Belt Factory Ltd. in Taiwan. From 1995 to 2006, Mr. Lu was the President of the Qingdao Triple Master Fitness Co., a company that manufactured fitness equipment. In 2000, Mr. Lu began serving as president of the Qingdao Wei Long Co. Ltd., a company that manufactures outdoor camping cookware. Mr. Lu received a degree in Chinese Culture from the University of Taipei in Taiwan. He also received a B.A. degree in Chemical Science.
Geoffrey L. Brown has over ten years of commercial and technical experience in the wind, solar and energy storage industry. He has been involved in renewable and energy storage sales efforts to utility and industrial customers across North America. From 2015 to January 2016, he was the Director of Business Development of Microgrid development for NRG Renew, Inc. From 2013 to 2014, he served as the Director of Business Development for energy storage system sales for Beacon Power, LLC. Mr. Brown was Director of Renewable Energy Business Development for Element Power Us, LLC in Portland, OR from 2009 to 2013. Mr. Brown holds a BS in Biological and Environment Engineering from Cornell University School of Engineering.
Virgil Beaston has been the Chief Technology Officer for Powin Energy Corporation since 2011. Mr. Beaston is an engineer and a patent attorney focusing on the design and manufacture of scalable energy storage systems. In 2008, Mr. Beaston resigned from a large US intellectual property law firm and co-founded a start-up company to design and manufacture energy storage products. Shortly thereafter, he moved to Shenzhen, China to establish a small factory that designed and produced energy storage products.
Jim Osterman was appointed to the Board of Directors on November 6, 2013. Mr. Osterman is currently the President of JSO Ventures, LLC, Oregon City, Oregon which is a real estate investment and management consulting firm. Previously, Mr. Osterman was Chairman and CEO of Blount International, Inc. from 2002 to 2010. He was President of the Outdoor Power Group of Blount from 1986 to 2002; Senior Vice President of Marketing, Manufacturing and Engineering from 1979 to 1986; and Director of European Operations from 1968 to 1979. Mr. Osterman lived in Europe for twelve years in that position. Mr. Osterman joined the Board of Directors of Cascade Corporation in 1994 and served as Chairman of the Board from 2002 to 2013.Mr. Osterman attended Western Oregon University and the Harvard Business School Program for Management Development. Mr. Osterman has fifty years of worldwide international business experience beginning with Omark Industries, Inc. in 1959. Mr. Osterman serves as the Company’s Compensation Committee.
David Hogg serves as the President of Europe at Shunfeng International Clean Energy Limited, formerly known as Shunfeng Photovoltaic International (Limited). Mr. Hogg served as the Chief Operating Officer of Suntech Holdings Co. Ltd since August 2015. He was the founder of CSG Solar AG (Germany) and served as its Chief Executive Officer since 2004. Mr. Hogg served as the Head of Suntech Europe for Suntech Power Holdings Co. Ltd from November 2009 to August 2010. Thereafter, Mr. Hogg was Head of Europe Operations at Suntech Group Europe Ltd. and as Chief Executive Officer at Innotech Solar until June 2013. Mr. Hogg received a BS Degree in Mechanical Engineering from the University of New South Wales (Sydney) in 1982.
Xin Luo has been the Chief Executive Officer of Shunfeng International Clean Energy Limited, formerly known as Shunfeng Photovoltaic International (Limited), since January 1, 2015. Mr. Luo served as the Chief Executive Officer of Wuxi Suntech Power Co. Ltd. from February -December 2014. From 2000- 2006, he served as the General Manager of Thomson Consumer Electronics Inc. and as Global Head of Strategic Sourcing and General Manager of Nortek Inc. from 2006 to 2010. Mr. Luo obtained an MBA in Supply Chain Management and International Marketing from Michigan State University in 2000 and a BS Degree in Economics from Hangzhou College of Commerce in 1988.
Xilong Zhu, also known as Logan Zhu, is the founder of MD Barnmaster Factory and serves as President of Triple Master Group Corporation in Qingdao, China since July 1994. Mr. Zhu joined Shandong Machinery and Equipment Import and Export Group Corporation in 1988 and served as Manager of the Import and Export Department from 1990 to 1994. Mr. Zhu holds an MBA from Tsinghua University and BS in Science from the Department of Automotive Engineering of Tsinghua University.
Family Relationships
Two relatives of Joseph Lu are employed by the Company. Danny Lu, Joseph Lu’s son, is employed by the Company as Vice President, Procurement and serves on the Board of Directors. Eric Lu, Joseph Lu’s brother, was employed by the Company as the IT manager during 2014 and first quarter of 2015.Effective April 2015, Eric Lu resigned from the IT manager position and hired by the company as the independent contractor.
Involvement in Certain Legal Proceedings
Our directors, executive officers and control persons have not been involved in any of the following events during the past five years;
any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
being found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated
Section 16(a) Beneficial Ownership Compliance
Section 16(a) of the Securities Exchange Act requires our executive officers and directors, and persons who own more than 10% of our common stock, to file reports regarding ownership of, and transactions in, our securities with the Securities and Exchange Commission and to provide us with copies of those filings. Based solely on our review of the copies of such forms received by us, or written representations from certain reporting persons, we believe that during fiscal year ended December 31, 2016, all filing requirements applicable to our officers, directors and greater than 10% percent beneficial owners were complied with.
Code of Ethics
We adopted a Code of Business Conduct and Ethics that applies to, among other persons, our company’s president (being our principal executive officer, principal financial officer and principal accounting officer), as well as persons performing similar functions. As adopted, our Code of Business Conduct and Ethics sets forth written standards that are designed to deter wrongdoing and to promote;
1.
honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
2.
full, fair, accurate, timely, and understandable disclosure in reports and documents that we file with, or submit to, the Securities and Exchange Commission and in other public communications made by us;
3.
compliance with applicable governmental laws, rules and regulations;
4.
the prompt internal reporting of violations of the Code of Business Conduct and Ethics to an appropriate person or persons identified in the Code of Business Conduct and Ethics; and
5.
accountability for adherence to the Code of Business Conduct and Ethics
Our Code of Business Conduct and Ethics requires, among other things, that all of our company’s personnel shall be accorded full access to our president with respect to any matter which may arise relating to the Code of Business Conduct and Ethics. Further, all of our company’s personnel are to be accorded full access to our company’s board of directors if any such matter involves an alleged breach of the Code of Business Conduct and Ethics by our president.
In addition, our Code of Business Conduct and Ethics emphasizes that all employees, and particularly managers and/or supervisors, have a responsibility for maintaining financial integrity within our company, consistent with generally accepted accounting principles, and federal, provincial and state securities laws. Any employee who becomes aware of any incidents involving financial or accounting manipulation or other irregularities, whether by witnessing the incident or being told of it, must report it to his or her immediate supervisor or to our company’s president. If the incident involves an alleged breach of the Code of Business Conduct and Ethics by the president, the incident must be reported to any member of our board of directors. Any failure to report such inappropriate or irregular conduct of others is to be treated as a severe disciplinary matter. It is against our company policy to retaliate against any individual who reports in good faith the violation or potential violation of our company’s Code of Business Conduct and Ethics.
Our Code of Business Conduct and Ethics was filed as an exhibit with our Registration Statement on Form S-1 filed with the Securities and Exchange Commission on July 31, 2009. We will provide a copy of the Code of Business Conduct and Ethics to any person without charge, upon request. Requests can be sent to the Company address listed above.
Nomination Process
As of December 31, 2016, we did not affect any material changes to the procedures by which shareholders may recommend nominees to the board of directors. We do not have any defined policy or procedure requirements for shareholders to submit recommendations or nominations for directors. The board of directors believes that, given the current stage of our development, a specific nominating policy would be premature and of little assistance until our operations develop to a more advanced level. We do not currently have any specific or minimum criteria for the election of nominees to the board of directors and there is no specific process or procedure for evaluating such nominees. The board of directors assesses all candidates, whether submitted by management or shareholders, and makes recommendations for election or appointment.
A shareholder who wishes to communicate with the board of directors may do so by directing a written request addressed to our Chief Executive Officer or the Chief Financial Officer at the address appearing on the face page of this report.
Committees of the Board
All proceedings of the board of directors were conducted by resolutions consented to in writing by all the directors and filed with the minutes of the proceedings of the directors. Such resolutions consented to in writing by the directors entitled to vote on that resolution at a meeting of the directors are, according to the Nevada Business Corporation Act and our Bylaws as valid and effective as if they had been passed at a meeting of the directors duly called and held.
At the present time, we have an Audit Committee and a Compensation Committee. Our director, George Gabriel, serves on the Audit Committee and our director, Jim Osterman, serves on the Compensation Committee. We currently do not have a nominating committee or committees performing similar functions nor do we have a written nominating, compensation charter. The board of directors does not believe that it is necessary to have such committees because it believes that the functions of such committees can be adequately performed by the board of directors.
Audit Committee Financial Expert
Our Director, George Gabriel, qualifies as our “audit committee financial expert” as defined in Item 407(d) (5) (ii) of Regulation S-B.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation
The following describes the compensation paid to our principal executive officer and each of our two most highly compensated executive officers who were serving as executive officers at the end of the year ended December 31, 2016 who we will collectively refer to as the named executive officers of our company for the years ended December 31, 2016 and 2015, are set out in the following summary compensation table, except that no disclosure is provided for any named executive officer, other than our principal executive officer, whose total compensation does not exceed $100,000 for the respective fiscal year:
Option awards represent the grant date fair value of options granted
Stock awards represent the market value of common stock issued to members of the board of directors as compensation for their services. For the years ended December 31, 2016 and 2015, shares were paid to each director as follow. Directors are entitled to reimbursement for reasonable travel and other out-of-pocket expenses incurred in connection with attendance at meetings of our board of directors. Our board of directors may award special remuneration to any director undertaking any special services on our behalf other than services ordinarily required of a director.
Pension, Retirement or Similar Benefit Plans
There are no arrangements or plans in which the Company provides pension, retirement or similar benefits for directors or executive officers. We have no material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers, except that stock options may be granted at the discretion of the board of directors or a committee thereof.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 2016, certain information with respect to the beneficial ownership of our common stock by each stockholder known by us to be the beneficial owner of more than 5% of our common stock and by each of our current directors and executive officers. Each person has sole voting and investment power with respect to the shares of common stock. Beneficial ownership consists of a direct interest in the shares of common stock.
(a) These shares are held by Joseph Lu and Mei Yi Lu as Co-Trustees of the Joseph Lu Trust dated August 17, 2007, as amended
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS,
AND DIRECTOR INDEPENDENCE
Except as described below, no director, executive officer, principal shareholder holding at least 5% of our common shares, or any family member thereof, had any material interest, direct or indirect, in any transaction, or proposed transaction, during the years ended December 31, 2016 in which the amount involved in the transaction exceeded $120,000.
Lu Pacific Properties LLC of which Joseph Lu is the controlling member and Manager, owns the facilities currently used by the Company and its subsidiaries. Payments made by the Company to Lu Pacific were as follows:
Corporate Governance
Our directors are Joseph Lu, Geoffrey Brown, Virgil Beaston, Jim Osterman, David Hogg, Xin Lu and Xilong Zhu. Jim Osterman, David Hogg, Xin Lu and Xilong Zhu are considered independent directors. Neither of the foregoing are officers or employees of the Company or any of its subsidiaries. Since OTC Markets does not have rule governing director independence,, the Company makes its determination on director independence based on the definition of “independence” in rules of the New York Stock Exchange and the American Stock Exchange. The Board of Directors has established a Compensation Committee. At present time, the Board of Directors does not have a nominating committee. The entire Board of Directors serves as the Nominating Committee.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table represents a summary of fees billed to the Company from its principal independent accountants for professional services rendered for the years ended December 31, 2016 and 2015.
Audit Fees
Audit fees expensed for Anton & Chia, LLP, for professional services rendered in respect to the audit of our annual financial statements included in our annual report on Form 10-K for the years ended December 31, 2016 and 2015 were $63,440and $79,560, respectively.
Audit Related Fees
For the years ended December 31, 2016 and 2015, the aggregate fees expenses in respect to the assurance and related services relating to the performance of the audit of our financial statements which are not reported under the caption “Audit Fees” above, was $6,605and $5,831, respectively.
Tax Fees
None.
All Other Fees
None.
Our audit committee has adopted a policy governing the pre-approval of all services, audit and non-audit, to be provided to our company by our independent auditors. Under the policy, the audit committee has pre-approved the provision by our independent auditors of specific audit, audit related, tax and other non-audit services as being consistent with auditor independence. Requests or applications to provide services that require the specific pre-approval of the board of directors must be submitted to the board of directors by the independent auditors, and the independent auditors must advise the board of directors as to whether, in the independent auditor’s view, the request or application is consistent with the Securities and Exchange Commission’s rules on auditor independence.
The board of directors has considered the nature and amount of the fees billed by Anton & Chia, LLP and believes that the provision of the services for activities unrelated to the audit is compatible with maintaining the independence of Anton & Chia, LLP.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Included with this Report is an audited balance sheet as of the years ended December 31, 2016 and 2015 and audited statements of income, cash flows and changes in stockholders’ equity for the years ended December 31, 2016 and 2015.
All of the above listed exhibits with the exception of Exhibits , 31.1, 31.2 and 32, which are filed herewith, were filed with our Form S-1 Registration Statement, as amended, our previous reports on Forms 10-K; 10-Q and 8-K and our 14C Information Statement filed September 8, 2016 with respect to Exhibit 2.2 and are collectively incorporated herein by reference.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
POWIN ENERGY CORPORATION
Dated: March 31, 2017
By: /s/ Joseph Lu
Joseph Lu
Chief Executive Officer
By: /s/ Craig Eastwood
Craig Eastwood
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on behalf of the registrant by the following persons comprising the majority of the directors and in the capacities and on the dates indicated.
Name
Position
Date
/s/ Joseph Lu
Director
March 31, 2017
/s/ Geoffrey L. Brown
Director
March 31 ,2017
/s/ Virgil Beaston
Director
March 31, 2017
/s/ Jim Osterman
Director
March 31, 2017