FORM 10-Q

For the quarterly period ended:  September 30, 2017

OR

For the transition period from _________ to _________

Commission File Number:  000-54015

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or, an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company”, in Rule 12b-2 of the Exchange Act.

 

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

POWIN ENERGY CORPORATION

Index

PART I.        FINANCIAL INFORMATION

 

 

PART I.       FINANCIAL INFORMATION

Item 1. Condensed Financial Statements.

POWIN ENERGY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

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

 

 

POWIN ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

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

 

 

POWIN ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

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

 

 

Powin Energy Corporation (“Powin”, “Company”, “we”, “us”) is a leading designer and developer of safe and scalable battery energy storage solutions for utility-scale, commercial and industrial, and microgrid applications. We are incorporated in the State of Nevada, and were founded in 1989 in Oregon. Until 2016, the Company 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. We are focused on the rapidly growing advanced energy storage industry, and deploying our Stack140 modular battery system which features our patented bp-OS software controls.

The company’s wholly owned subsidiaries include PPA Grand Johanna LLC (‘PPA”), Don Lee Bess 1, LLC, Powin SB1, LLC, , and Powin Canad B. C. Ltd. The purpose of these entities is to hold energy storage assets.

The consolidated condensed financial statements include the accounts of Powin and its wholly-owned subsidiaries. Intercompany balances and transactions between consolidated entities have been eliminated.

The preparation of consolidated financial statements in accordance with GAAP requires the use of management’s estimates. These estimates are subjective in nature and involve judgments that affect the reported amounts of assets and liabilities, and the reported amounts of revenues and expenses during the periods presented. Estimates are used for, but not limited to, inventory valuation, warranties, depreciable lives of property and equipment, inputs used to value stock-based compensation including volatility, lives of stock option awards and forfeiture rates, income taxes, and contingencies. Actual results could differ from those estimates.

 

 

The accompanying unaudited condensed consolidated balance sheet as of September 30, 2017, the condensed consolidated statements of operations and condensed consolidated statements of comprehensive loss for the three and nine months ended September 30, 2017 and 2016 of cash flows for the nine months ended September 30, 2017 and 2016, and other information disclosed in the related notes are unaudited. The consolidated balance sheet as of December 31, 2016, was derived from our audited consolidated financial statements at that date. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in our Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission. The accompanying interim condensed consolidated financial statements and related disclosures have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments necessary for a fair statement of the results of operations for the periods presented. The condensed consolidated results of operations for any interim period are not necessarily indicative of the results to be expected for the full year or any other future year or interim period.

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.

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 and have provided related disclosures in note 3 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 became 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.

 

 

We recognize revenue for products and services when: (i) persuasive evidence of an arrangement exists, (ii) the service is performed or delivery has occurred, (iii) the price is fixed or determinable, and (iv) collectability is reasonably assured.

For our energy storage assets that have been commissioned and placed in service, we recognize revenue when amounts under the contract with the customer are due and payable.

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 assembled in 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, revenue is recognized when product is delivered to the customer, when all delivery documents have been signed by the receiving customer, and ownership has passed to the customer. 

As of September 30, 2017, our accounts receivable was derived primarily from two customers.

Cost of goods sold includes cost of products and services sold during the period, net of discounts and allowances, freight and shipping costs, warranty and rework costs, and sales tax.

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, and software translation costs for international markets.

Our basic and diluted net loss per share is calculated by dividing net loss by the weighted-average shares of common stock outstanding for the period. Potentially dilutive shares, which are based on the number of shares underlying outstanding stock options and warrants as well as our convertible senior notes, are not included when their effect is anti-dilutive.

As of September 30, 2017, we had $2,576,410 in principal sources of liquidity available in cash. Sources of cash are predominantly from proceeds from financing activities. Additional sources of cash were also derived from revenues from owned and installed energy assets operating under Power Purchase Agreements.

 

 

Where necessary, we evaluate alternatives to pursue liquidity options to fund ongoing operations and capital intensive initiatives. Should prevailing economic, financial, business or other factors adversely affect our ability to meet our operating cash requirements, we could be required to obtain funding through traditional or alternative sources of financing. We cannot be certain that additional funds would be available to us on favorable terms when required, or at all.

Inventories consist of containers with partially or fully completed energy storage components, including batteries, inverters and battery management hardware and software. 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. As of September 30, 2017 and December 31, 2016, the components of inventories were as follows:

The Company reviews the carrying value of inventory 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 inventory is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, $851,206 and $0 impairment expenses for inventories were recorded in cost of sales during the nine months ended September 30, 2017 and 2016, respectively. $0 and $0 impairment expenses for inventories were recorded in cost of sales during the three months ended September 30, 2017 and 2016, respectively.

 

 

Notes receivables

Notes receivables consist of the following:

 

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 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 nine months ended September 30, 2017 and 2016.

 

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. Based on this assessment, no impairment expenses for intangible assets were recorded in operating expenses during the three and nine months ended September 30, 2017 and 2016. Intangible assets amounted $202,091 and $175,297 as of September 30, 2017 and December 31, 2016, respectively. Amortization expenses amounted to $2,041 and $10,970 for the nine months ended September 30, 2017 and 2016, respectively. Amortization expenses amounted to $0 and $6,329 for the three months ended September 30, 2017 and 2016, respectively.

 

 

Deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company calculates a provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized by identifying the temporary differences arising from the different treatment of items for tax and accounting purposes. In determining the future tax consequences of events that have been recognized in the consolidated financial statements or tax returns, judgment and interpretation of statutes is required. Additionally, the Company uses tax planning strategies as a part of its tax compliance program. Judgments and interpretation of statutes are inherent in this process.

The accounting guidance for uncertainties in income tax prescribes a comprehensive model for the financial statement recognition, measurement, presentation, and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. The Company recognizes a tax benefit from an uncertain tax position in the consolidated financial statements only when it is more likely than not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits and a consideration of the relevant taxing authority’s widely understood administrative practices and precedents.

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 September 30, 2017 and December 31, 2016, 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 sustained a net loss $1,672,762 and $1,808,955 during the three months ended September 30, 2017 and 2016. The Company sustained a net loss $5,344,790 and $4,195,861 during the nine months ended September 30, 2017 and 2016. The Company has accumulated deficit of $34,077,366 and $28,732,576 as of September 30, 2017 and December 31, 2016, respectively. Working capital amounted to $(20,427,239) and $(3,439,234) as of September 30, 2017 and December 31, 2016, respectively. The Company also has notes payable to unrelated parties due within 12 months amounting $6,195,368 and $1,528,352 as of September 30, 2017 and December 31, 2016, respectively. 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.

The assessment of a company’s ability to meet its obligations is inherently judgmental. Without additional funding, the company may not 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:

·

In early 2017, the Company completed the installation of a 2-megawatt / 9-megawatt-hour Battery Energy Storage System with the Southern California Edison utility, and recorded revenues of $259,738 for the nine months ended September 30, 2017 associated with this installation.

*

In June 2017, the Company successfully raised $5,150,000 in short and long-term debt financing. Details of these financing activities are discussed in notes 6 and 10 of these financial statements.

*

In September 2017, a subsidiary of the Company successfully raised $4,446,213 in long-term debt financing. Details of this financing activity is discussed in notes 6 and 10 of these financial statements.

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern; however, the above condition raises substantial doubt about the Company’s ability to do so. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.

 

 

The components of property and equipment were as follows: 

 

  

Our basic and diluted net loss per share is calculated by dividing net loss by the weighted-average shares of common stock outstanding for the period. Potentially dilutive shares, which are based on the number of shares underlying outstanding stock options and warrants as well as our convertible senior notes, are not included when their effect is anti-dilutive.

The Company had 11,509 shares of outstanding Series A preferred stock as of December 31, 2016. 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 shares of Series A Preferred Stock were cancelled.

The Company has 350,729 shares and 102,000 shares of outstanding stock options as of September 30, 2017 and December 31, 2016, 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. 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 September 30, 2017 and December 31, 2016, 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 September 30, 2017 and December 31, 2016:

 

For the three and nine months ended September 30, 2017 and 2016, 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.

The total carrying value of notes payable and long-term debt, including current and long-term portions, was as follows:

 

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 September 30, 2021 and requires the Company to pay for all property taxes, utilities and facility maintenance.

For the three months ended September 30, 2017 and 2016, total lease expense paid for all operating rents and leases was $130,481 and $70,681, respectively. For the nine months ended September 30, 2017 and 2016, total lease expense paid for all operating rents and leases was $354,092 and $141,362, respectively. These leases are also disclosed in Note 10, related party transactions.

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 shares of Series A Preferred Stock were cancelled.

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 September 30, 2017 and December 31, 2016, all 100,000 warrants remain outstanding.

 

Ratification of the plan is scheduled for the shareholders’ meeting on August 17^th, 2017. As of the date of this filing, no awards have been granted under this plan. In June 2017, the Company’s Board of Directors approved the adoption of the Powin Energy Corporation 2017 Stock Option Plan (“The 2017Plan”).

In February 2011, the Company’s Board of Directors approved the adoption of the Powin Corporation 2011 Stock Option Plan (“the Plan”) and submitted its ratification to the shareholders at the shareholders’ meeting held June 15, 2011, where the shareholders approved the Plan.

The Company records stock-based compensation expense related to stock options and the stock incentive plan in accordance with ASC 718, “Compensation – Stock Compensation”.

On June 15, 2011, the Company granted awards in the form of incentive stock options to its key employees for 1,170,000 shares of common stock.  There were no stock options granted in 2012. On August 6, 2013, the Company granted another 1,640,000 stock options under the same plan to all employees. Awards are granted with an exercise price that approximates the market price of the Company’s common stock at the date of grant. The 2013 grant included immediate vesting of 20% of the options resulting in greater expense recognized than in previous years.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model using. The following assumptions were used to determine the fair value of the options at date of original issuance on August 6, 2013:

The Company has never paid a cash dividend and does not intend to pay cash dividends in the foreseeable future, so the dividend yield used in the calculation is 0%. The expected volatility is based on the daily historical volatility of comparative companies, measured over the expected term of the option.  The risk-free rate is based on the implied yield on a United States Treasury zero-coupon issue with a remaining term closest to the expected term of the option. The term of the option is the expiration as there is no ready market for employees to exercise and sell shares and to date no option has been exercised on the 2011 plan.

On February 21, 2017, the Company granted awards in the form of incentive stock options to an employee for 248,729 shares of common stock.  There were no stock options granted between 2013 and 2016. The stock options are granted with an exercise price of $1.18 that approximates the market price of the Company’s common stock at the date of grant. The stock options included immediate vesting of one third 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 February 21, 2017:

Stock option expense included in operating expense for the three months ended September 30, 2017 and 2016 is $108,894 and $34,436, respectively. Stock option expense included in operating expense for the nine months ended September 30, 2017 and 2016 is $132,454 and $55,060, respectively. As of September 30, 2017 and December 31, 2016, remaining unvested stock expenses amounted to $163,905 and $46,126, respectively.

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 $130,481 and $70,681 for the three months ended September 30, 2017 and 2016, respectively. Rent expenses were $354,092 and $141,362 for the nine months ended September 30, 2017 and 2016, 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, California are owned by 3U Millikan, LLC, a California limited liability company, controlled by Xilong Zhu, a director of the Company. Rent expenses were $52,650 and $0 for the three months ended September 30, 2017 and 2016, respectively. Rent expenses were $157,950 and $0 for the nine months ended September 30, 2017 and 2016, 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 amounted to $1,495,407 and $2,447,348 as of September 30, 2017 and December 31, 2016, respectively. Accounts payable to a related party is accounts payable to a vendor of which our Company’s VP of Sales is a significant shareholder.

 

 

 

 

Interest expenses related to loans from related parties amounted to $179,634 and $40 for the three months ended September 30, 2017 and 2016, respectively. Interest expenses related to loans from related parties amounted to $309,884 and $171 for the nine months ended September 30, 2017 and 2016, respectively.

Mr. Lu’s son, Danny Lu, owns 49% of Yangzhou Finway Energy Tech Co. since May 2016. The Company made purchases from Yangzhou Finway Energy Tech Co. in the amount of $74,965 and $171,417 for the nine months ended September 30, 2017 and 2016, respectively. Amounts due to Yangzhou Finway Energy Tech Co. amounted to $1,495,407 and $2,447,347 at September 30, 2017 and December 31, 2016, respectively.

The Company made purchases from Quailhurst Vineyard Estates, an Oregon company, controlled by Joseph Lu in the amount of $3,177 and $8,529 for the nine months ended September 30, 2017 and 2016, respectively. Amounts due to Quailhurst Vineyard Estates amounted to $0 and $3,332 at September 30, 2017 and December 31, 2016, respectively.

Incorporated in the State of Nevada, Powin Energy Corporation is a leading designer and developer of safe and scalable battery energy storage solutions for utility-scale, commercial and industrial, and microgrid applications. We are focused on the rapidly growing advanced energy storage industry, and our Stack140 modular battery system features our patented Battery Pack Operating System (bp-OS) that provides critical insight into system functions and lifespan.

 

Our primary source of revenues are from sales of our Stack140 modular battery system and from Power-Purchase Agreements from energy storage assets placed in-service.

 

Management Opportunities, Challenges and Risks

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, Powin Energy forecasts securing 4% to 7% of the contracts in that market.  The conservative contract acquisition rate allows Powin Energy to grow at a manageable rate and achieve profitability.  Management continues to pursue strategic investments that will allow for more aggressive growth in future years.

Our significant accounting policies are summarized in Note 2 of our consolidated financial statements.  While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical.  Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates.  Actual results may differ from those estimates.  Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report.

Revenues

Revenue for the three months ended September 30, 2017, increased $93,036 or 785.3% from $11,847 in the same period of 2016 to $104,883. All of this increase was revenue from the deployment of an energy storage asset in Southern California which was placed in service in January 2017.

Cost of Sales and Gross Profit (Loss)

Cost of sales for the three months ended September 30, 2017, increased $53,441 or 362.9%, from $14,726 in the same period of 2016 to $68,167. The increase is in line with increased revenue.

Gross profit for the three months ended September 30, 2017, increased $39,595 or 1,375.3%, from gross loss of $2,879 in the same period of 2016 to gross profit of $36,716 due the reasons stated above. 

Research and Development Expenses

Research & Development expense for the three months ended September 30, 2017, increased $94,945 or 100.0%, from $0 in the same period of 2016 to $94,945. 

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended September 30, 2017, increased $435,661 or 44.0%, from $989,206 in the same period of 2016 to $1,424,867.  Increase is primarily due to increased staffing costs as the company prepares for future growth. Accrued interest for new promissory notes and vesting for new stock option.

Provision for income taxes

Net Loss

Revenues

Revenue for the nine months ended September 30, 2017, increased $268,927 or 809.0% from $33,243 in the same period of 2016 to $302,170. $259,738 of this increase was revenue from the deployment of an energy storage asset in Southern California which was placed in service in January 2017.

Cost of Sales and Gross Profit (Loss)

Research and Development expense for the nine months ended September 30, 2017, increased $224,688 or 805.0%, from $27,910 in the same period of 2016 to $252,598. 

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the nine months ended September 30, 2017, increased $1,044,164 or 35.8%, from $2,916,743 in the same period of 2016 to $3,960,907.  Increase is primarily due to increased staffing costs as the company prepares for future growth.

Interest Expense

Interest expenses for the nine months ended September 30, 2017, increased $399,545 or 1,846.8%, from $21,634 in the same period of 2016 to $421,179. The increase is due to interest on the Company’s debt.

 

 

Provision for income taxes

Net Loss

For the nine months ended September 30, 2017, the Company had net loss of $5,344,790 or $0.14 per share, compared to net loss of $4,195,861 or $0.22 per share for the same period of 2016.

Liquidity and Capital Resources

Cash used in operating activities was $5,641,571 for the nine months ended September 30, 2017 compared to $3,963,027 used in operating activities for the same period in 2016. The decrease of cash used in operating activities is mainly due to increased accounts payable.

Cash used in investing activities was $4,767,526 and $74,866 during the nine months ended September 30, 2017 and 2016, respectively, as the Company commenced the construction of a new energy storage asset in Ontario, Canada in the  second quarter of 2017.

Cash provided by financing activities were $12,553,463 for the nine months ended September 30, 2017, compared to $1,758,885 provided by financing activities for the same period in 2016. The increase of cash provided from financing activities is due to increased proceeds from notes payables and debt and proceeds from related parties.

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 existing operating assets or assets in construction, 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.

We have no off-balance sheet arrangements.

 

 

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

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

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

PART II.  OTHER INFORMATION

In nine months ended September 30, 2017, the company did not issue any shares of Common Stock to our directors for their services on the Board of Directors.

We did not repurchase any of our Common Stock or other securities during the six-month period ended September 30, 2017.

  

None

 

 

Not Applicable.

None

 

 

SIGNATURES