| Discontinued Operations |
In May 2015, the Company’s board
of directors authorized its management to pursue the sale of its ESCO subsidiary. A sale was effectively completed on June 30,
2015 (see “Note 5 – Business Divestments” for additional information).
ASC 205-20 “Discontinued Operations”
establishes that the disposal of a component of an entity or a group of components of an entity should be reported in discontinued
operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations
and financial results. As a result, ESCO’s results of operations have been reclassified as discontinued operations on a retrospective
basis for all periods presented. Accordingly, the assets and liabilities of this component are separately reported as “assets
and liabilities of discontinued operations held for sale” as of December 31, 2014. The results of operations of this component,
for all periods, are separately reported as “discontinued operations”.
A reconciliation of the major classes of line items constituting
the loss from discontinued operations, net of income taxes as is presented in the Consolidated Statements of Operations and Comprehensive
Loss for the three and six-month periods ended June 30, 2015 are summarized below:
| |
|
Successor |
|
| |
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
| |
|
2015 |
|
|
2015 |
|
| |
|
|
|
|
|
|
| Sales |
|
$ |
373,605 |
|
|
$ |
1,875,670 |
|
| Cost of goods sold |
|
|
1,023,418 |
|
|
|
2,276,007 |
|
| Gross margin |
|
|
(649,813 |
) |
|
|
(400,337 |
) |
| Operating expenses: |
|
|
|
|
|
|
|
|
| Depreciation and amortization |
|
|
126,438 |
|
|
|
374,543 |
|
| Selling and marketing |
|
|
6,688 |
|
|
|
13,444 |
|
| General and administrative |
|
|
530,837 |
|
|
|
1,055,554 |
|
| Professional fees |
|
|
44,293 |
|
|
|
57,911 |
|
| Impairment of goodwill and other intangible assets |
|
|
- |
|
|
|
9,156,190 |
|
| Total operating expenses |
|
|
708,256 |
|
|
|
10,657,642 |
|
| Loss from operations before other income (expense) and income taxes |
|
|
(1,358,069 |
) |
|
|
(11,057,979 |
) |
| Other income (expense) |
|
|
|
|
|
|
|
|
| Interest income (expense), net |
|
|
(229 |
) |
|
|
(859 |
) |
| Other gains (losses) |
|
|
- |
|
|
|
2,685,000 |
|
| Total other income (expense) |
|
|
(229 |
) |
|
|
2,684,141 |
|
| Loss from continuing operations before income taxes |
|
|
(1,358,298 |
) |
|
|
(8,373,838 |
) |
| Provision for income taxes (benefit) |
|
|
- |
|
|
|
(409,200 |
) |
| Loss from discontinued operations, net of income taxes as presented in the Consolidated Statements of Operations |
|
$ |
(1,358,298 |
) |
|
$ |
(7,964,638 |
) |
At March 31, 2015, as a result of deteriorating
business conditions and significant delays associated with new business opportunities, the Company performed the impairment test
as prescribed by ASC 350 on the carrying value of its goodwill and recorded an impairment charge totaling $6,993,784.
Additionally, at March 31, 2015, the Company
performed an interim impairment test for long-lived assets and determined that the carrying amount of certain intangible assets
were not recoverable as its undiscounted cash flows were less than its carrying amount. The Company further determined that the
fair value of the asset group was less than its carrying value and therefore impairment must be recorded. The Company used the
discounted cash flow method under the income approach to determine the fair value of the asset group. The impairment amount was
determined by allocating the shortfall of fair value as compared to the carrying amount to each long-lived asset in the asset group
on a pro rata basis using the relative carrying amount of the assets, except the carrying amount of each asset cannot be reduced
below its fair value. To determine the fair value of each long-lived asset, the Company used the relief from royalty method for
its trade names and estimated the fair value for its customer relationships using the multi-period excess earnings method. As a
result, the Company recorded impairment charges totaling $2,162,406 for these intangible assets.
No results of operations for ESCO were
reported in the period from April 26 through June 30, 2014 as ESCO was acquired on October 17, 2014 or in the period from January
1 through April 25, 2014 as those results pertain solely to ALD as the predecessor entity.
The following table presents the reconciliation
of carrying amounts of major classes of assets and liabilities of ESCO classified as held for sale in the consolidated balance
sheets at December 31, 2014:
| |
|
Successor |
|
| |
|
December 31, |
|
| |
|
2014 |
|
| Carrying amounts of major classes of assets included as part of discontinued operations |
|
|
|
| Current assets: |
|
|
|
| Cash and cash equivalents |
|
$ |
172,925 |
|
| Accounts receivable, net |
|
|
2,593,743 |
|
| Costs and earnings in excess of billings |
|
|
525,432 |
|
| Inventory, net |
|
|
48,552 |
|
| Prepaid expenses and other current assets |
|
|
37,790 |
|
| Total current assets included in the disposal group classified as held for sale |
|
|
3,378,442 |
|
| Property and equipment, net |
|
|
137,628 |
|
| Goodwill |
|
|
8,658,492 |
|
| Intangible assets, net |
|
|
4,465,427 |
|
| Other assets |
|
|
5,181 |
|
| Total noncurrent assets included in the disposal group classified as held for sale |
|
|
13,266,728 |
|
| Total assets of the disposal group classified as held for sale in the Consolidated Balance Sheets |
|
$ |
16,645,170 |
|
| |
|
|
|
|
| Carrying amounts of major classes of liabilities included as part of discontinued operations |
|
|
|
|
| Current liabilities: |
|
|
|
|
| Accounts payable |
|
$ |
1,164,889 |
|
| Accrued liabilities |
|
|
602,342 |
|
| Billings in excess of costs and earnings |
|
|
836,975 |
|
| Loans payable -- current |
|
|
12,644 |
|
| Senior secured promissory notes, net — current |
|
|
255,355 |
|
| Related party payables |
|
|
507,500 |
|
| Income taxes payable |
|
|
2,999 |
|
| Total current liabilities included in the disposal group classified as held for sale |
|
|
3,382,704 |
|
| Loans payable |
|
|
10,384 |
|
| Senior secured promissory notes, net of loan discounts |
|
|
1,998,479 |
|
| Deferred tax liabilities, net -- noncurrent |
|
|
1,143,600 |
|
| Contingent purchase consideration |
|
|
2,685,000 |
|
| Other noncurrent liabilities |
|
|
425,000 |
|
| Total noncurrent liabilities included in the disposal group classified as held for sale |
|
|
6,262,463 |
|
| Total liabilities of the disposal group classified as held for sale in the Consolidated Balance Sheets |
|
|
9,645,167 |
|
| |
|
|
|
|
| Net assets held available for sale |
|
$ |
7,000,003 |
|
On October 17, 2014, the
Company issued two secured promissory notes to the former stockholder of ESCO in connection with its acquisition. The first note
totaled $2,075,000, bears interest at 6.02% per annum and is due in April 17, 2016. The note is collateralized by 687,500 restricted
shares of the Company’s common stock which under no circumstances can become free trading prior to its maturity date. 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 three-month period ended March 31, 2015, the Company recorded $13,661
in interest expense related to the note discount. The remaining discount balance at March 31, 2015 was $62,859.
The second note totaled
$1,075,000 and was due on November 16, 2014 along with an interest payment of $45,000. The note is collateralized by all of the
assets of ESCO. On April 3, 2015, the Company entered into a note amendment and security interest termination agreement with the
stockholder to amend and extend the original terms. At that time, all but $155,355 of the principal balance was repaid.
Pursuant to the stock purchase
agreement, dated as of June 30, 2015, by and among the Company, ESCO Energy Services, LLC, Mitchell Barack and ESCO, the Company’s
wholly owned subsidiary, Mr. Barack cancelled the two promissory notes, plus all accrued interest, in the aggregate principal amount
of $2,230,355 issued to him by the Company.
|
