We thank you for your understanding and your continued support as a shareholder.

Transcription

1 2013 Annual Report

2 Dear PFLM Shareholder: As part of our focus on profitability, we are providing you with a copy of the PowerFilm, Inc. Annual Report with the same full content that we provide to you every year, albeit printed in a lower-cost manner. We thank you for your understanding and your continued support as a shareholder. Best regards, The Employees of PowerFilm, Inc. A copy of this announcement will be available on the PowerFilm website at The common shares of PowerFilm, Inc. are traded on the AIM Market of the London Stock Exchange and are not registered under the US Securities Act 1933, as amended. Such shares may not be offered or sold to residents of the United States or to persons acting on their behalf, or to other persons who are United States Persons within the meaning of Regulation S as promulgated under the Securities Act of 1933, unless such shares have been registered under the Securities Act or there is an available exemption from registration.

3 PowerFilm, Inc. PowerFilm Announces Results for the Year Ended 31 December March 2014, LONDON, UK and AMES, IOWA PowerFilm, Inc. (AIM: PFLM) ('the Company' or 'PowerFilm'), the developer and manufacturer of thin flexible solar panels, today announces its results for the year ended 31 December Highlights for the Full Year 2013 Revenue of $8.2 million for the year ended 31 December 2013 (2012: $10.3 million). Net Loss Before Tax of $2.1 million for the year ended 31 December 2013 (2012: $1.2 million). Net cash provided by operating activities was $29,676 in 2013 (2012: net cash used in operating activities ($539,239)). As at 31 December 2013, the Company had $12.3 million in cash and cash equivalents, certificates of deposit, and investment securities (2012: $12.8 million). Net of debt the Company has $8.4 million cash resources. Gross margin for the year ended 31 December 2013 was 10.6% (2012: 27.0%). This was driven largely by a fall in revenue against fixed costs. Development contract revenue was slightly higher at $1.3 million in 2013 versus $1.0 million the prior year. The lower level of revenue in 2013 was the result of lower military sales (in part because of sequester delays) and reduced sales in the Australian market. As previously announced, PowerFilm discontinued its Building Integrated Photovoltaics (BIPV) program. The Company is now focusing on the Military, Custom OEM, and select Consumer markets. Frank Jeffrey, Co Founder and CEO of PowerFilm, commented, "In 2013 we made important advancements to our products especially to those for the military to help us maintain our product and market lead in target applications. Our overall financial results were unacceptable and we are addressing needed changes. 1

4 For further information, please contact: PowerFilm, Inc. +1 (515) Frank Jeffrey Mike Coon Oriel Securities Ltd., Nominated Adviser Giles Balleny Juliet Thompson A copy of the Full Report and Accounts will be available on the PowerFilm website at The common shares of PowerFilm, Inc. are traded on the AIM Market of the London Stock Exchange and are not registered under the US Securities Act 1933, as amended. Such shares may not be offered or sold to residents of the United States or to persons acting on their behalf, or to other persons who are United States Persons within the meaning of Regulation S as promulgated under the Securities Act of 1933, unless such shares have been registered under the Securities Act or there is an available exemption from registration. 2

5 Chairman and CEO s Statement In 2013 we achieved important product improvement advances for our rugged, lightweight foldable solar charger products for the military market, as well as made progress with the next generation of our PowerShade solar field shelter. The financial results for the year were a loss which is unacceptable to us. We maintain a strong balance sheet with limited cash burn. Our only debt is the long term bond for the manufacturing facility and land, and it is being reduced annually. This continued relatively strong financial position gives us a foundation of strength from which to build new revenue streams, which is our current focus. The past year s further reduction of solar companies headquartered in the US provides PowerFilm with opportunities for market share gains in those markets in which domestic energy security matters. The purchase of a number of US and European thin film companies by Chinese companies (with Chinese government support) creates a potential threat to some parts of our business. We are cognizant of this and are taking this into consideration as we select our product focus. This will influence our strategy. We remain committed to achieving profitability and to having the share price reflect the full value of the Company. PowerFilm s previously announced share buyback at the beginning of 2014 is one aspect of that plan. Rick Brimeyer Chairman Frank R. Jeffrey CEO 3

6 Operational Review Competitive Landscape and Position The turbulence and uncertainly in the solar market globally continued throughout 2013 but PowerFilm has continued to push forward. Price pressures continue as most solar companies focus on market share instead of profitability. However, the market now appears to be acknowledging that long term variability of product quality represents a significant risk. PowerFilm continues to believe that its positioning as a developer, manufacturer, and supplier of high quality solar panels custom engineered to solve customer power problems is a sustainable differentiated proposition in the market. Sales and Marketing PowerFilm develops, manufactures, markets, and sells a full and diversified line of solar products for the military, custom OEM, and select consumer markets. The Company sells both modules to other businesses, as well as finished solar products ready out of the box for end users. Although 2013 sales revenue fell short of the Company goals, PowerFilm continued its strong presence in the Military, Custom OEM (especially Oil and Gas Exploration), and Consumer markets, and continued to develop and release improved products to strengthen the Company market position going forward. Custom Engineering PowerFilm custom engineers products for customers with diverse power needs in a variety of application markets. The custom engineering takes many forms, ranging from variation of form factor to encapsulation, to fastening, to electrical termination and connection. In some cases the PowerFilm engineering group works with customers to optimize the overall power system: solar panel power generation, power storage, and application power use. As a result, the Company is able to provide customers with differentiated optimized solutions that are not generically available in the market. In addition to our capability of customizing OEM solar panels, we also engineer total power systems which is a growing area of emphasis for the Company. This is an area where PowerFilm has a competitive edge versus other companies including the Chinese solar companies. Military and Government For 2013 the military market was the most important market for PowerFilm product sales. The Company has been developing ruggedized lightweight Made in USA solar products for the military for more than a decade. For the military market PowerFilm reinforced its lightweight yet rugged portable solar product leadership with the launch of its next generation Military Foldable Solar Charger that reduced the weight of its 120 Watt product by more than 30%, from 6.2 pounds to 4.1 pounds. This product improvement is closely aligned with the Department of Defense s emphasis on lightweight portable 4

7 power for today s electronics equipped Soldiers. The lack of clarity in the US government budget process has added short term uncertainty to the timing and relative magnitude of follow on purchases. Military Sales are still relatively strong but are below expectations. They have been impacted by delayed acquisition schedules caused by the sequester and uncertainties that existed in where the congressional budget would be finalized. Bushnell Outdoor Products As was previously announced in May, PowerFilm s strategic partner Bushnell Outdoors launched its new line of POWERSYNC TM custom solar products. After two years of intensive development by both companies, five products integrating custom PowerFilm solar panels are now available for sale from Bushnell. The five Bushnell products incorporate PowerFilm's ultra thin, ultra durable solar material, and are sufficiently rugged to withstand wear and tear in an outdoor environment. One of the solar products being released by Bushnell is also being incorporated into Bushnell's Bear Grylls product line collection. These products are being sold on the Bushnell website under their PowerSync line of products as well as being distributed nationally through major outdoor retail chains such as LL Bean and REI, and through major retailers such as Cabela s, Academy, Dick s Sporting Goods, and Gander Mountain. The products have received significant media interest from outdoor magazines as well as mainstream media. Bushnell continues to place follow on product orders to PowerFilm for the re stocking of the sales pipeline to replenish store inventories given strong customer uptake. The products are already available in retail stores in Canada and further international sales distribution is planned. Building Integrated As was previously announced, market conditions, costs, and technical factor led PowerFilm to discontinue its Building Integrated Photovoltaics (BIPV) program. The impact of low cost crystalline modules from China and the large oversupply of panels worldwide have caused price disruptions in the BIPV sector which has put all players at extreme risk. PowerFilm concluded that it is better to focus its resources on more specialized markets where the specific advantages of low weight, flexibility, and durability are most important. As part of the change, PowerFilm has discontinued all BIPV related market efforts, demo projects, and certification efforts. PowerFilm is continuing technology development of related modules to the extent that they have applications in other markets and offer these modules into the OEM market if they fit a specific customer s needs. In particular, there appear to be applications for the modules developed under these programs in the transportation sector. 5

8 PowerFilm Brand Foldable and Rollable Solar Chargers PowerFilm offers a full line of ready to use USB+AA solar chargers, as well as foldable solar chargers and rollable solar chargers that can be used to recharge and power consumer electronics and other devices. The newest products, the 90 Watt and 120 Watt foldable solar chargers, are experiencing strong market demand. These products are commercially available through major US outdoor retailers such as West Marine. Sales to our distributor in Australia in 2013 were measurably reduced versus 2012, largely driven by a reduction in sales for RV applications. Original Equipment Manufacturer (OEM) Custom Panels The Company engineers and supplies custom solar panels optimized to meet the specific power needs of diverse OEM customers in a wide array of applications. In the first half of 2013 we redesigned the custom panel for one of our largest OEM customers. The core OEM products are available in a variety of voltage and current configurations and form factors. The core solar panels are encapsulated in different materials depending upon the application need. The encapsulated solar panels are bonded to and integrated with a broad range of materials and power systems. PowerFilm s ability to custom engineer integrated products and total power solutions is a strong source of competitive advantage in the industry. Each prospective custom product inquiry is evaluated for market and technical viability, volume, margin, and total value to the Company continued to be a good year for sales to the oil and gas exploration market, for recharging remote data collection systems. The golf cart market has not evolved as planned and, as a result, sales revenues from this market did not materialize. Other diverse applications using custom solar panels are being developed with established partners in their respective markets. Research and Development The Company is making good progress on the previously announced $2.2 million development contract with the US Army. This contract had a balance of $880,000 at the end of The development contract is for research and development to reduce the cost and to increase the power output from PowerFilm's PowerShade solar field shelter. A new module design and a significant modification of the PowerShade design have been completed which should allow us to provide nearly twice the power delivered by the tent. Progress is also being made on automation for reducing manufacturing cost and technology advancements which will increase device performance. 6

9 A full prototype of the next generation PowerShade has been completed for testing. Units will be ready for Army program testing this summer. Roll to Roll Flexible Electronics Update: Phicot, Inc. Subsidiary In the Company s 2012 Annual Report it was noted that although the flexible electronics process using the self aligned imprint lithography system showed great promise, there were still major technological barriers to commercial implementation and PowerFilm did not have the resources to pursue this independently and our partner in development, HP, was dropping their program. As was previously announced in the Company s 2013 first half result announcement, PowerFilm has now stopped its roll to roll flexible electronics development program. Other opportunities in flexible electronics are evaluated on an ongoing basis. Share Buyback As was previously announced, PowerFilm, Inc. acquired 245,000 common shares in the Company at an average share price of US$.09 per share. Following this acquisition, these shares are being held in Treasury. The PowerFilm, Inc. Board of Directors approved the share repurchase based on the view of the management of the Company that the current trading prices of the shares of the Company (on the LSE AIM) were substantially below the inherent value of such shares. Along with a strong balance sheet, PowerFilm s relative market position continues to improve as it outlasts the challenging industry dynamics that have impacted many competitors, especially U.S. solar companies. PowerFilm and PowerShade are trademarks of PowerFilm, Inc. Bushnell and PowerSync are trademarks of Bushnell Outdoor Products. 7

10 Financial Review Financial Results Revenue of $8,226,199 was realized for the year ended 31 December 2013, compared with $10,333,926 for the year ended 31 December 2012; a 20.4% decrease. The decrease in 2013 over 2012 was attributable to a $2,340,837 (25.1%) decrease in product sales. There was a $233,110 (22.6%) increase in development contract revenue. Gross Margin for the year ended 31 December 2013 was 10.6%, compared with 27.0% for the year ended 31 December The net loss was $(2,838,625) for the year ended 31 December 2013, compared with a net loss of $(698,036) for the year ended 31 December Cost containment measures were enacted which reduced SG&A expenses and R&D expenses in 2013 compared to 2012, due to a thorough, across the board analysis and trimming of expenses. Cost of revenues decreased only slightly even though revenues are lower due to fixed costs of production. Additionally, a valuation allowance recorded on deferred tax assets contributed to a 2013 tax expense of $727,000 compared to a 2012 tax benefit of $(452,000). Every year, PowerFilm evaluates tax treatments to comply with U.S. tax code and U.S. GAAP. In recent years, tax treatments have had a net positive impact on the after tax line. This year, after careful consideration, the Company concluded a valuation allowance was necessary which resulted in a negative impact on the after tax line. The Company s balance sheet remains strong as at 31 December 2013 it includes cash and cash equivalents of $4,190,373 and certificates of deposit with original maturities greater than six months of $7,090,136, and securities held to maturity of $1,000,000. These accounts total $12,280,509 at 31 December 2013, compared to a total of $12,831,924 at 31 December The securities held tomaturity consists entirely of one United States Government agency backed debt security. In 2013, the restriction placed by the bank that issued the letter of credit on the industrial revenue was amended to remove the compensating balance requirement and instead add a covenant requiring the Company to maintain $3.5 million in liquid unrestricted assets. The Company had an increase in 2013 of development contracts in place which led to a decreased amount of internally funded research and development. Internal research and development for 2013 was $1,049,520, compared to $1,565,916 for Selling, general and administrative expenses were $1,845,524 in 2013, compared to $2,356,316 for 2012 reflecting cost reductions achieved during the year. Interest and dividend income for the year ended 31 December 2013 was $101,146, compared to $157,967 for the previous year. The Company s policy is to place its cash and certificates of deposit with high credit quality financial institutions in order to limit the amount of credit exposure. Although, globally interest rates still are at a very low level, the Company seeks investments in higher yielding 8

11 certificates of deposit and US agency backed debt securities held to maturity to get the maximum yields for highly secure investments. Related Party Transactions As was disclosed at the time of the initial public offering in the AIM Admission document, PowerFilm s Co Founder and CEO Frank Jeffrey, a related party, leases his industrial building to PowerFilm, Inc. The 2013 annual lease amount was $90,000. The lease currently extends to December 31, 2014, with a renewal option. Richard Brimeyer, non executive director, received 2013 compensation as an independent consultant in the amount of $ 9,600 in addition to his director s compensation as listed below Board of Directors Remuneration The 2013 remuneration for the PowerFilm, Inc. Board of Directors is presented in the table below. Director Name 2013 Compensation in USD Richard Brimeyer $ 22,667 Derrick Grimmer $ 22,667 David Lindop $ 22,667 Frank Jeffrey * $ 123,818 * Frank Jeffrey received no board compensation beyond his compensation of $123, as CEO. Shown below are the Company s employee costs Total Wages and Salaries $ 3,260,724 $ 4,015,300 Total Health Insurance Expense $ 286,484 $ 315,256 Average monthly number of employees during the year Accounts Audited The financial information in this announcement is from the Company's audited accounts for the years ended 31 December 2013 and The Company's complete financial statements and footnotes will be included in the Company's annual report and will be posted on PowerFilm s website, A hard copy will be sent to shareholders, with additional copies available upon request. The information presented herein has been prepared on the basis of current accounting principles generally accepted in the United States of America (US GAAP). 9

12 Outlook The outlook for 2014 is for progress especially with PowerFilm s products and sales volume into the military market. The testing of the next generation PowerShade solar field shelter is to be completed during the year and expected to be ready for shipment in the second half of the year. This, along with the advances made to the foldable solar chargers provides the Company with a broad product range to provide to the military. Additional product sales volumes are expected as follow on to the multiple years of product testing with the US Army and other branches. Ongoing federal budget discussions and dynamics, and the fact that 2014 is an election year, make it difficult to determine the magnitude of military product sales and the probability of additional development contracts for military products. Close attention is being given to evaluation of the Company s overall product volumes and the associated optimal approach to achieve profitability. Along with a strong balance sheet, PowerFilm s relative market position has the potential to continue to improve as it outlasts the challenging industry dynamics that have impacted many competitors, especially US solar companies. The outcome will be impacted by the competing product market choices of the Chinese solar companies. As with the overall economy, the solar market appears to be stabilizing, yet still with a wide range of potential divergent scenarios. PowerFilm remains on solid ground to outlast the volatility, and to be positioned to seize the subsequent market opportunities. Forward looking Statements This release includes forward looking statements which are based on certain assumptions and reflect management's current expectations as contemplated under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of These forward looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. Some of these factors include: uncertainty as to whether our strategies, partnerships and business plans will yield the expected benefits; general global economic conditions; general industry and market conditions and growth rates; increasing competition; the ability to identify, develop and achieve commercial success for new products, services and technologies; changes in technology; changes in laws and regulations, including government incentive programs; intellectual property rights; our ability to secure and maintain strategic relationships, including key supply relationships; the availability and cost of capital; the availability of, and our ability to retain, key personnel; and the failure of the Company to effectively integrate acquisitions. Additional factors are discussed in our public disclosure materials from time to time. We disclaim any intention or obligation to update or revise any forward looking statements, whether as a result of new information, future events or otherwise. 10

13 Notes on PowerFilm Technology The thorough technology evaluation and choices that PowerFilm made in the early days of the Company are withstanding the test of time. PowerFilm s technology choices highlighted in the table below enable both differentiated low cost mass customization of products and low cost industrial scale manufacturing. Core Manufacturing Process Semiconductor Absorber Layer Criteria Industrial scale low cost manufacturing process Abundant supply Positive environmental profile PowerFilm Selection Roll to Roll Manufacturing (not batch processing) Amorphous Silicon (After extensive evaluation, PowerFilm eliminated the Copper Indium Gallium Selenide (CIGS) semiconductor absorber layer option out of concerns regarding the economic viability of CIGS technology at industrial scale, given the limited world supply of Indium and competition for that supply from the flat panel display industry. The materials costs for CIGS solar panels are currently high and potentially going to become extremely high cost. CIGS has some manufacturing wastes that are negative from an environmental standpoint. Cell Connection Technology Substrate Low cost and durable cell connection process To work with printed interconnect and to be lightweight and flexible Printed Interconnect Flexible Plastic Substrate 11

14 PowerFilm, Inc. and Subsidiary Consolidated Financial Report December 31, 2013

15 Contents Independent Auditor s Report 1 Financial Statements Consolidated Balance Sheets 2-3 Consolidated Statements of Operations 4 Consolidated Statements of Comprehensive (Loss) 5 Consolidated Statements of Stockholders Equity 6 Consolidated Statements of Cash Flows 7-8 Notes to Consolidated Financial Statements 9-21

16 Independent Auditor s Report The Board of Directors and Stockholders PowerFilm, Inc. Ames, Iowa Report on the Financial Statements We have audited the accompanying consolidated financial statements of PowerFilm, Inc. and subsidiary which comprise the balance sheets as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive (loss), stockholders equity and cash flows for the years then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PowerFilm, Inc. and subsidiary as of December 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Des Moines, Iowa March 14,

17 PowerFilm, Inc. and Subsidiary Consolidated Balance Sheets December 31, 2013 and 2012 Assets Current Assets Cash and cash equivalents, net of restricted cash $ 4,190,373 $ 3,414,343 Short-term certificates of deposit 5,336,013 2,040,717 Accounts receivable, less allowance for doubtful accounts 2013 $26,915; 2012 $41,567 2,125,819 2,503,942 Inventories 3,426,339 3,814,483 Prepaid expenses and other assets 134, ,742 Income tax receivable 8,000 41,087 Deferred income taxes - 182,000 Total current assets 15,220,989 12,362,314 Restricted Assets Cash - 1,093,159 Certificates of deposits - 4,000,000 Securities held-to-maturity - 1,000,000-6,093,159 Long-Term Certificates of Deposit 1,754,123 1,283,705 Securities Held-to-Maturity 1,000,000 - Property and Equipment Land 972, ,432 Building and improvements 5,059,825 5,059,825 Machinery and equipment 12,305,034 12,251,119 Leasehold improvements 272, ,276 Construction in progress 3,404,293 3,346,248 22,013,860 21,901,900 Less accumulated depreciation (7,216,357) (6,093,528) 14,797,503 15,808,372 Other Assets 130, ,958 Deferred Income Taxes - 648,000 $ 32,903,097 $ 36,329,508 See Notes to Consolidated Financial Statements. 2

18 Liabilities and Stockholders' Equity Current Liabilities Current maturities of long-term debt $ 250,000 $ 250,000 Trade accounts payable 101,692 74,669 Other payables and accrued expenses 353, ,834 Total current liabilities 705, ,503 Long-Term Liabilities Revenue bonds payable, less current maturities 3,375,000 3,625,000 Derivative financial instrument, interest rate swap 429, ,867 Commitments Total long-term liabilities 3,804,616 4,332,867 Stockholders' Equity Common stock 381, ,518 Additional paid-in capital 32,718,910 32,709,962 Retained (deficit) (3,954,695) (1,116,070) Treasury stock, at cost (468,300) (452,820) Accumulated other comprehensive (loss) (284,201) (467,452) Total stockholders' equity 28,393,353 31,055,138 $ 32,903,097 $ 36,329,508 3

19 PowerFilm, Inc. and Subsidiary Consolidated Statements of Operations Years Ended December 31, 2013 and Operating revenues: Sales $ 6,960,215 $ 9,301,052 Development contracts 1,265,984 1,032,874 8,226,199 10,333,926 Cost of revenues 7,354,324 7,543,605 Gross profit 871,875 2,790,321 Operating expenses: Research and development 1,049,520 1,565,916 Selling, general and administrative 1,845,524 2,356,316 2,895,044 3,922,232 Operating (loss) (2,023,169) (1,131,911) Other income (expense): Interest and dividend income 101, ,967 Interest (expense) (194,382) (206,753) Other income 4,780 26,895 (88,456) (21,891) (Loss) before income tax expense (benefit) (2,111,625) (1,153,802) Income tax expense (benefit) 727,000 (452,000) Net (loss) (2,838,625) (701,802) Less: Net loss attributable to the noncontrolling interest - 3,766 Net (loss) attributable to PowerFilm, Inc. and Subsidiary $ (2,838,625) $ (698,036) Basic and diluted (loss) per share $ (0.08) $ (0.02) See Notes to Consolidated Financial Statements. 4

20 PowerFilm, Inc. and Subsidiary Consolidated Statements of Comprehensive (Loss) Years Ended December 31, 2013 and Net (loss) $ (2,838,625) $ (701,802) Other comprehensive income, unrealized derivative gain, net of tax 183,251 12,825 Comprehensive (loss) (2,655,374) (688,977) Comprehensive loss attributable to the noncontrolling interest - 3,766 Comprehensive (loss) attributable to PowerFilm, Inc. and Subsidiary $ (2,655,374) $ (685,211) See Notes to Consolidated Financial Statements. 5

21 PowerFilm, Inc. and Subsidiary Consolidated Statements of Stockholders Equity Years Ended December 31, 2013 and 2012 Accumulated Additional Other Common Paid-In Retained Treasury Comprehensive Noncontrolling Total Stock Capital (Deficit) Stock (Loss) Interest Equity Balance, December 31, 2011 $ 381,518 $ 32,691,698 $ (418,034) $ (462,613) $ (480,277) $ 3,766 $ 31,716,058 Net (loss) - - (698,036) - - (3,766) (701,802) Unrealized derivative gain, net of tax expense of $7, ,825-12,825 49,250 restricted shares awarded from treasury shares, net of forfeitures - (9,793) - 9, Stock-based compensation expense - 28, ,057 Balance, December 31, ,518 32,709,962 (1,116,070) (452,820) (467,452) - 31,055,138 Net (loss) - - (2,838,625) (2,838,625) Unrealized derivative gain, net of tax expense of $95, , ,251 Stock awards exercised for 12,121 common shares ,000 Restricted shares forfeited to treasury shares (777) Stock-based compensation expense - 7, ,292 Acquisition of 175,000 shares for the treasury (14,703) - - (14,703) Balance, December 31, 2013 $ 381,639 $ 32,718,910 $ (3,954,695) $ (468,300) $ (284,201) $ - $ 28,393,353 See Notes to Consolidated Financial Statements. 6

22 PowerFilm, Inc. and Subsidiary Consolidated Statements of Cash Flows Years Ended December 31, 2013 and Cash Flows from Operating Activities Net (loss) $ (2,838,625) $ (701,802) Adjustments to reconcile net (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 1,331,733 1,061,268 Provision for doubtful accounts (14,652) (23,145) Deferred income taxes 735,000 (405,000) Stock-based compensation expense 7,292 28,057 Changes in working capital components: Accounts receivable 392, ,569 Inventories 388,144 (753,224) Prepaid expenses and other assets 231,297 (97,727) Income tax receivable 33,087 4,673 Trade accounts payable 27,023 (187,217) Other payables and accrued expenses (263,398) (5,691) Net cash provided by (used in) operating activities 29,676 (539,239) Cash Flows from Investing Activities Purchase of property and equipment (311,960) (439,867) Purchase of restricted securities held-to-maturity - (2,000,000) Proceeds from calls of restricted securities held-to-maturity - 6,000,000 Purchase of restricted certificates of deposits (7,000,000) (4,000,000) Proceeds from maturities of restricted certificates of deposits 7,000,000 - Redemption of certificates of deposit 234,286 (3,324,422) Decrease in cash and short-term investments held for property and equipment construction - 6,850,000 (Increase) decrease in restricted cash 1,093,159 (67,848) (Increase) decrease in other assets (5,428) 37,206 Net cash provided by investing activities 1,010,057 3,055,069 Cash Flows from Financing Activities Principal payments on long-term debt (250,000) (250,000) Repurchase of common stock (14,703) - Proceeds from issuance of common stock, net 1,000 - Net cash (used in) financing activities (263,703) (250,000) Net increase in cash and cash equivalents 776,030 2,265,830 Cash and Cash Equivalents Beginning 3,414,343 1,148,513 Ending $ 4,190,373 $ 3,414,343 (Continued) 7

23 PowerFilm, Inc. and Subsidiary Consolidated Statements of Cash Flows (Continued) Years Ended December 31, 2013 and Supplemental Disclosure of Cash Flow Information Cash payments (receipts) for: Interest, net of capitalized $ 210,373 $ 218,315 Income taxes $ (41,000) $ (52,000) Supplemental Schedule of Noncash Investing and Financing Activities Gain on interest rate swap agreement $ 183,251 $ 12,825 Restricted shares awarded from treasury shares, net of forfeitures $ 777 $ 9,793 See Notes to Consolidated Financial Statements. 8

24 PowerFilm, Inc. and Subsidiary Notes to Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies Nature of business: PowerFilm, Inc. was incorporated on October 13, 1988 for the purpose of research and development of thin film technologies. PowerFilm, Inc. s focus is now the use of such developed technologies to manufacture solar modules. PowerFilm, Inc. sells its solar modules throughout the world and continues to enter into research contracts to further develop the thin film technology for use in the manufacturing of solar cells. Phicot, Inc. was incorporated as a subsidiary during 2008 for the purpose of conducting further research and development under these research contracts. The Phicot, Inc. related contracts expired during 2012 and the entity had no activities at December 31, 2012 or during Principles of consolidation: The consolidated financial statements include the accounts of PowerFilm, Inc. and its 92% owned subsidiary, Phicot, Inc. (collectively, the Company). All intercompany balances and transactions have been eliminated in consolidation. Use of estimates: The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fair value measurements: The Company measures fair value of financial instruments in accordance with the Fair Value Measurements and Disclosures topic of the Accounting Standards Codification. In general, fair value measurements are based upon quoted market prices, where available. If quoted market prices are not available, fair value measurements are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and require some degree of judgment regarding interest rates, credit risk, prepayments and other factors. The use of different assumptions or estimation techniques may have a significant effect on the fair value amounts reported. Cash and cash equivalents: The Company considers all cash accounts which are not subject to restrictions and all highly liquid investments with an original maturity of three months or less to be cash equivalents. At December 31, 2013 and 2012, approximately $444,000 and $533,000, respectively, of cash is denominated in a foreign currency. During the years ended December 31, 2013 and 2012, approximately $5,000 and $27,000 of foreign currency gain, respectively, were recognized in other income on the consolidated statements of operations. Certificates of deposit: Certificates of deposit not subject to restrictions and not meeting the definition of a cash equivalent are classified as current or long-term based on remaining months to maturity as of December 31, All certificates of deposit are in United States banks, are recorded at cost and mature from February 2014 through January Interest income on these certificates is recorded on the accrual basis. Accounts receivable: Accounts receivable are carried at original invoice amount less an estimate for doubtful receivables based on a review of outstanding amounts. Management determines the allowance for doubtful accounts by identifying troubled accounts and by using historical experience applied to an aging of accounts. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received. Inventories: Inventories are stated at the lower of cost or market, with cost determined on the first-in, first-out (FIFO) basis. 9

25 PowerFilm, Inc. and Subsidiary Notes to Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies (Continued) Securities: Securities which the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and are recorded at amortized cost. Premiums and discounts on investments in securities are amortized over the contractual lives of those securities. The method of amortization results in a constant effective yield on those securities (the interest method). Interest on debt securities is recognized in income as earned. Realized gains and losses, including losses from declines in value of specific securities determined by management to be other-than-temporary, are included in income. The Company evaluates securities for other-than-temporary impairment on an ongoing basis for those securities with a fair value below amortized cost. The evaluation takes into consideration current market conditions, issuer rating changes and trends, the credit worthiness of the obligator of the security, current analysts evaluations, failure of the issuer to make scheduled interest or principal payments, the Company s lack of intent to sell the security or whether it is more-likely-than-not that the Company will be required to sell the security before its anticipated recovery, as well as other qualitative factors. The term OTTI is not intended to indicate that the decline is permanent, but indicates that the prospects for a nearterm recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Any portion of such a decline in value associated with credit loss is recognized in earnings as an impairment loss with the remaining noncredit-related component being recognized in other comprehensive income. A credit loss is determined by assessing whether the amortized cost basis of the security will be recovered, by comparing the present value of cash flows expected to be collected from the security, computed using original yield as the discount rate, to the amortized cost basis of the security. The shortfall of the present value of the cash flows expected to be collected in relation to the amortized cost basis is considered to be the credit loss. Property and equipment: Property and equipment is recorded at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets. During 2013 and 2012, the Company capitalized interest totaling approximately $27,000 each year related to construction in progress. Construction in progress is not depreciated until items are complete and placed in service. Revenue recognition: Revenue from product sales is recognized upon shipment of the product to the customer. Revenue from development contracts is recognized as services are performed. Shipping and handling charges to customers are included in operating revenue. Shipping and handling costs incurred by the Company are included in cost of revenues. Foreign sales: Sales to customers located in foreign countries (primarily Hong Kong and China) totaled approximately $2,300,000 and $4,200,000 for the years ended December 31, 2013 and 2012, respectively. Concentration of credit risk: The Company s financial instruments that are subject to concentrations of credit risk consist primarily of cash, certificates of deposit and accounts receivable. The Company s policy is to place its cash and certificates of deposit with high credit quality financial institutions in order to limit the amount of credit exposure. The Company maintains cash in bank accounts and certificates of deposit that at times may exceed federally insured limits. The Company has not experienced any losses in such accounts. Restricted assets: Amounts were restricted in accordance with compensating balance agreement discussed in Note 4. Amounts were classified as long-term to match the contractual term of the related revenue bonds payable. Restrictions were removed during

26 PowerFilm, Inc. and Subsidiary Notes to Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies (Continued) (Loss) per share: Basic (loss) per share is calculated by dividing net (loss) by the weighted average number of common shares outstanding during the period. Diluted (loss) per share is calculated by dividing net (loss) by the weighted average number of common shares and potential common shares outstanding during the period. Stock-based compensation: Compensation cost for all stock-based awards is measured at fair value on the date of grant and recognition of compensation expense over the requisite service period for awards expected to vest. The Company s consolidated statements of operations include stock-based compensation expense of approximately $7,000 and $28,000 for the years ended December 31, 2013 and 2012, respectively. Income taxes: Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The Company follows the accounting standard on accounting for uncertainty in income taxes, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under this guidance, the Company may recognize the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The guidance on accounting for uncertainty in income taxes also addresses de-recognition, classification, interest and penalties on income taxes, and accounting in interim periods. The Company has evaluated their material tax positions and determined no effects on the financial statements related to uncertainty to income taxes. In general the Company is no longer subject to federal and state examinations by tax authorities for years before The Internal Revenue Service (IRS) has examined the Company s U.S. federal income tax return for 2010 and that year is effectively closed for the federal tax jurisdiction. Derivative financial instruments: The Company has adopted hedge accounting for an interest rate swap contract in connection with borrowings on variable rate long-term debt. The swap is utilized to manage variable interest rate exposure and on the date the contract was entered into, the Company designated the derivative as a hedge of the variability of cash flows to be received or paid related to a recognized liability ( cash flow hedge). Changes in the fair value of a derivative that are highly effective and that are designated and qualify as a cash flow hedge are recorded in other comprehensive income (loss) until earnings are affected by the variability of cash flows (e.g., when periodic settlements on a variable-rate liability are recorded in earnings). 11

27 PowerFilm, Inc. and Subsidiary Notes to Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies (Continued) The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedged transactions. This process includes linking all derivatives that are designated as cash flow hedges to specific liabilities on the balance sheet. The Company also formally assesses, both at the hedge s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively. No ineffectiveness was recognized on the interest rate swap for the years ended December 31, 2013 or At December 31, 2013 management s expectation is that no significant amounts in 2013 accumulated other comprehensive (loss) will be reclassified to earnings during the next 12 months. The fair value of the interest rate swap was a liability of approximately $430,000 and $708,000 at December 31, 2013 and 2012, respectively. The notional amount of the interest rate swap at December 31, 2013 is $3,625,000 and the interest rate swap agreement expires June 1, Under the swap agreement, the Company pays interest at a fixed rate of 3.6% and receives interest at a variable rate equal to 70% of 1-month LIBOR (approximately 0.12% at December 31, 2013). Accumulated other comprehensive (loss): Accumulated other comprehensive (loss) consists of the effective portion of net gains or losses on derivative instruments designated as qualifying cash flow hedges. Operating segment: The Company uses the management approach for reporting information in financial statements. The management approach is based on the way the chief operating decision maker organizes segments within a company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure and any other manner in which management disaggregates a company. Based on the management approach model, the Company has determined that its business is comprised of a single operating segment. Recent accounting pronouncements: In February 2013, the FASB issued Accounting Standards Update No , Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (AOCI), to improve the transparency of reporting reclassifications out of AOCI. The amendments in the Update do not change the current requirements for reporting net income or other comprehensive income in the financial statements. The new amendments require an organization to present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of AOCI if the item reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. Additionally, for other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP to provide additional detail about those amounts. For public companies, the amendments were effective for reporting periods beginning after December 15, The adoption of this guidance did not have a material impact on the Company's consolidated financial statements. 12

28 PowerFilm, Inc. and Subsidiary Notes to Consolidated Financial Statements Note 2. Securities Held-to-Maturity The Company s investment in held-to-maturity securities consists entirely of one United States agencybacked debt security. This security had an aggregate amortized cost of $1,000,000 for both the years ended December 31, 2013 and The security had gross unrealized gains (losses) of approximately ($80,000) and $4,000 at December 31, 2013 and 2012, respectively. The aggregate estimated fair value of this security was $920,000 and $1,004,000 at December 31, 2013 and 2012, respectively. The security had a contractual maturity date of greater than 5 years as of December 31, No realized gains or losses were recognized on the disposition of securities during the years ended December 31, 2013 or Securities are evaluated for other-than-temporary declines in the estimated fair value of each individual security. As of December 31, 2013 and 2012 the Company had no securities which were considered to be other-than-temporarily impaired. The unrealized losses are due to changes in interest rates and not from deterioration in the creditworthiness of the issuer. In addition, the Company does not have the intent to sell the security and it is not more-likely-than-not that the Company will be required to sell the debt security before its anticipated recovery. No impairment losses were recorded during the years ended December 31, 2013 and Note 3. Inventories Inventories were composed of the following at December 31: Raw materials $ 1,380,364 $ 1,455,112 Work in process 1,300,754 1,403,704 Finished products 745, ,667 $ 3,426,339 $ 3,814,483 Note 4. Revenue Bonds Payable The Company has a $3,625,000 tax exempt industrial revenue bond issued by the Iowa Finance Authority. Interest payments, at a variable interest rate calculated weekly based on adjustable rates, are due monthly. Principal payments of $125,000 are due June 1 and December 1 of each year through June 1, 2028, when all remaining principal and interest are due. Future bond maturities as of December 31, 2013 total $250,000 for each of the years ending 2014 through 2018 and $2,375,000 thereafter. The Bonds are secured by a first lien on real estate, including improvements thereon, together with the machinery and equipment purchased with the proceeds of the bond issue. Proceeds from the bond were restricted for use in construction of a new facility and all of the proceeds have been used for the new facility; therefore, no restriction remains on the balance sheet. To provide additional security for payment, the Company is required to maintain a letter of credit agreement with a bank in the amount of the outstanding principal and interest payable on the related bonds. No amounts are outstanding on the letter of credit as of December 31, 2013 or