Acquisition of Catalyst LED’s LLC

On February 2, 2014, the Company completed its purchase of certain assets of Catalyst LED’s LLC. Under the terms of the asset purchase agreement, ForceField paid $200,000 in cash consideration and issued 5,000 shares of its common stock valued at $29,850, or $5.97 per share. In connection with acquisition, the Company entered into an employment agreement with Catalyst’s owner under he may achieve commission payments if certain milestones are attained. The transaction was deemed to be an acquisition of a business and was accounted for under the acquisition method of accounting in accordance with generally accepted accounting principles.

Fair Value of Consideration Transferred and Recording of Assets Acquired

The following table summarizes the acquisition date fair value of the consideration paid, identifiable assets acquired, and liabilities assumed including an amount for goodwill:

The Company followed the guidance in ASC 805 and considered the fair value of all acquired assets, including intangible assets relating to contractual or legal rights of the assets we acquired from Catalyst.  Management’s analysis considered working capital, fixed assets, customer contracts, customer lists and relationships, trade names, internet domain name and website. Due the nature of Catalyst’s operations, limited history and lack of profitability, the Company did not assign any value to the identifiable intangible assets and there was limited to no value to the existing inventory and other physical assets that it acquired.

Goodwill represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized. The goodwill arising from the acquisition is attributable to the value of the potential expanded market opportunity with new customers. The goodwill is not expected to be deductible for tax purposes.

Acquisition of 17th Street ALD Management Corp

On April 25, 2014, the Company completed its acquisition of American Lighting. Under the terms of the stock purchase agreement, ForceField paid $5.1 million in consideration including $2.5 million in cash, the issuance of $1.6 million of its common stock and the issuance of $1.0 million in 5% senior, secured promissory notes in exchange for all of the equity of American Lighting. The 289,529 shares of ForceField’s common stock issued are subject to an initial twelve month restrictive period and are then released in equal monthly installments over the following six months.

The sellers were also entitled to receive $1,329,528 in post-closing cash payments for the excess working capital, as defined by the agreement, on ALD’s closing balance sheet. These amounts were subject to certain adjustments, and are payable from time to time upon collection of certain accounts receivables identified as of the transaction closing date. As of December 31, 2014, the excess working capital obligation was fully satisfied.

Additionally, the former stockholders will have the opportunity for contingent, earn-out payments of up to $2.0 million if certain revenue and EBITDA thresholds are achieved over the three-year post-closing period. The earn-out payments, if made, shall be equally allocated between cash and restricted common stock.

Fair Value of Consideration Transferred and Recording of Assets Acquired

The following table summarizes the acquisition date fair value of the consideration paid, identifiable assets acquired, and liabilities assumed including an amount for goodwill:

In determining the fair value of the common stock issued, the Company considered, among other factors, the discount to the market price of the shares that a market participant would most likely take due to the minimum six month holding period. In order to estimate a discount from the traded price, the Company calculated the cost of a hypothetical put option. A put option grants the owner the right, but not the obligation to sell a specified number of shares at a specified price within a specified time. It constructed the hypothetical put with the strike price equal to the traded price at the measurement date so that it would act as price protection for the unregistered shares. Using the Black-Scholes Model, the Company calculated the cost of a hypothetical put option at $.6164 per share, based on the following inputs: a current share and strike price of $5.72; a term of 0.5 years; a risk free rate of 0.04%; and volatility 38.4%. The Company reduced the fair value of the common shares by $178,466 based on the hypothetical cost of a put to account for the volatility of the stock and the six month minimum holding period.

In determining the fair value of the promissory notes issued, the Company considered, among other factors, the market yields on debt securities depending on the time horizon and level of perceived risk of the specific investment. The Company arrived at an estimated market rate of 9% and calculated the present value of the $1.0 million promissory note and its related interest to be $965,019. As a result, the Company recorded a discount against the promissory notes of $34,981. The discount is being amortized using the effective interest method over the life of the notes. For the year ended December 31, 2014, the Company recorded $22,984 in interest expense related to the note discount. The remaining discount balance at December 31, 2014 was $11,997.

Goodwill represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized. The goodwill arising from the acquisition is attributable to the value of the potential expanded market opportunity with new customers. The goodwill is not expected to be deductible for tax purposes.

In determining the purchase price allocation, the Company considered, among other factors, how a market participant would likely use the acquired assets. The estimated fair value of intangible assets was based on the income approach. The income approach requires a projection of the cash flow that the asset is expected to generate in the future. The projected cash flow is discounted to its present value using a rate of return, or discount rate, which accounts for the time value of money and the degree of risk inherent in the asset. The expected future cash flow that is projected should include all of the economic benefits attributable to the asset, including the tax savings associated with the amortization of the intangible asset value over the tax life of the asset. The income approach may take the form of a “relief-from-royalty” methodology, a cost savings methodology, a “with and without” methodology, or excess earnings methodology, depending on the specific asset under consideration.

The “relief-from-royalty” method was used to value the trade names acquired from American Lighting. The “relief-from-royalty” method estimates the cost savings that accrue to the owner of an intangible asset that would otherwise be required to pay royalties or license fees on revenues earned through the use of the asset. The royalty rate used is based on an analysis of empirical, market-derived royalty rates for guideline intangible assets. Typically, revenue is projected over the expected remaining useful life of the intangible asset. The key assumptions in the prospective cash flows include a15% compound annual sales growth rate over the five years period subsequent to the acquisition. The royalty rate is then applied to estimate the royalty savings. The key assumptions used in valuing the existing trade names acquired were as follows: royalty rate of 2.0%, discount rate of 17.5%, and a tax rate of 40.0%. The trade names are expected to be used indefinitely and the value includes a terminal value, based on a long-term sustainable growth rate of 3.5%, of the after-tax royalty savings determined using a form of the Gordon Growth model.

The “with and without” method was used to value the non-compete agreement which will be amortized over three years.

Acquisition of ESCO Energy Services Company

On October 17, 2014, the Company completed its acquisition of ESCO Energy Services Company. Under the terms of the stock purchase agreement, ForceField paid $7.7 million in consideration in exchange for all of the equity of ESCO Energy Services. The purchase consideration was comprised of the following:

The $2.075 million note is secured by 687,500 shares of restricted common stock, pursuant to a stock pledge agreement between the Company and the seller. The $1.075 million note is secured by all of the assets of ESCO. All of the promissory notes and employee liabilities may be repaid before maturity without any prepayment penalty to the Company. On the date of closing, the Company paid approximately $1.5 million in cash to retire all of the bank debt on ESCO’s balance sheet.

Pursuant to the stock purchase agreement, the seller will have the opportunity to earn up to $5.0 million in additional purchase consideration if certain EBITDA thresholds are achieved over rolling, three-year post-closing period. The earn-out payments, if made, shall be equally allocated between cash and restricted common stock.

Fair Value of Consideration Transferred and Recording of Assets Acquired

The following table summarizes the acquisition date fair value of the consideration paid, identifiable assets acquired, and liabilities assumed including an amount for goodwill:

In determining the fair value of the common stock issued, the Company considered, among other factors, the discount to the market price of the shares that a market participant would most likely take due to the minimum six month holding period. In order to estimate a discount from the traded price, the Company calculated the cost of a hypothetical put option. A put option grants the owner the right, but not the obligation to sell a specified number of shares at a specified price within a specified time. It constructed the hypothetical put with the strike price equal to the traded price at the measurement date so that it would act as price protection for the unregistered shares. Using the Black-Scholes Model, the Company calculated the cost of a hypothetical put option at $.4163 per share, based on the following inputs: a current share and strike price of $6.33; a term of 0.5 years; a risk free rate of 0.5%; and volatility 23.4%. The Company reduced the fair value of the common shares by $189,227 based on the hypothetical cost of a put to account for the volatility of the stock and the six month minimum holding period.

In determining the fair value of the promissory notes issued, the Company considered, among other factors, the market yields on debt securities depending on the time horizon and level of perceived risk of the specific investment. The Company arrived at an estimated market rate of 9% and calculated the present value of the $2,075,000 promissory note and its related interest to be $1,989,539. As a result, the Company recorded a discount against the promissory notes of $85,461. The discount is being amortized using the effective interest method over the life of the notes. For the year ended December 31, 2014, the Company recorded $8,940 in interest expense related to the note discount. The remaining discount balance at December 31, 2014 was $76,521.

Goodwill represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized. The goodwill arising from the acquisition is attributable to the value of the potential expanded market opportunity with new customers. The goodwill is not expected to be deductible for tax purposes.

In determining the purchase price allocation, the Company considered, among other factors, how a market participant would likely use the acquired assets. The estimated fair value of intangible assets was based on the income approach. The income approach requires a projection of the cash flow that the asset is expected to generate in the future. The projected cash flow is discounted to its present value using a rate of return, or discount rate, which accounts for the time value of money and the degree of risk inherent in the asset. The expected future cash flow that is projected should include all of the economic benefits attributable to the asset, including the tax savings associated with the amortization of the intangible asset value over the tax life of the asset. The income approach may take the form of a “relief-from-royalty” methodology, a cost savings methodology, a “with and without” methodology, or excess earnings methodology, depending on the specific asset under consideration. 

The “relief-from-royalty” method was used to value the trade names acquired from ESCO. The “relief-from-royalty” method estimates the cost savings that accrue to the owner of an intangible asset that would otherwise be required to pay royalties or license fees on revenues earned through the use of the asset. The royalty rate used is based on an analysis of empirical, market-derived royalty rates for guideline intangible assets. Typically, revenue is projected over the expected remaining useful life of the intangible asset. The key assumptions in the prospective cash flows include a 29% compound annual sales growth rate over the five year period subsequent to the acquisition. The royalty rate is then applied to estimate the royalty savings. The key assumptions used in valuing the existing trade names acquired were as follows: royalty rate of 2.0%, discount rate of 16.6%, and a tax rate of 40.0%. The trade names are expected to be used indefinitely and the value includes a terminal value, based on a long-term sustainable growth rate of 3.5%, of the after-tax royalty savings determined using a form of the Gordon Growth model.

Pro Forma Information

The following unaudited supplemental pro forma information assumes the 2014 and 2013 acquisitions referred to above had been completed as of January 1, 2013 and is not indicative of the results of operations that would have been achieved had the transactions been consummated on such date or of results that might be achieved in the future.