v3.2.0.727
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)
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6 Months Ended |
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Notes to Financial Statements |
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Predecessor and Successor Reporting |
On April 25, 2014, the Company acquired
17th Street ALD Management Corp (“ALD”, or, “American Lighting”), a leading commercial lighting specialist
based in San Diego, California. The transaction was accounted for under the acquisition method of accounting, which requires that
the assets purchased and the liabilities assumed all be reported in the acquirer's financial statements at their fair value, with
any excess purchase price over the net assets being reported as goodwill. The application of the acquisition method of accounting
represented a change in accounting basis. Accordingly, the financial statements and certain note presentations separate the Company’s
presentations into two distinct periods, the period before the consummation of the transaction (labeled “Predecessor”)
and the period after that date (labeled “Successor”), to indicate the application of the different basis of accounting
between the periods presented.
For financial reporting purposes, ALD
was deemed to be the predecessor company and ForceField was deemed to be the successor company in accordance with the rules and
regulations issued by the SEC. This change in accounting basis is represented in the unaudited consolidated financial statements
by a vertical black line which appears between the columns entitled "Predecessor" and "Successor" on the statements
and in the relevant notes. The black line signifies that the amounts shown for the periods prior to and subsequent to the acquisition
may not be comparable.
The predecessor account balances and results
of operations are effective through April 30, 2014, as the impact of transactions recorded from April 26, 2014 through April 30,
2014 was not material.
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Basis of Presentation |
The accompanying unaudited consolidated
financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United
States (“US GAAP”) for interim financial information. All amounts are expressed in United States dollars. Certain information
and disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted as
allowed by such rules and regulations, and management believes that the disclosures are adequate to make the information presented
not misleading. These unaudited consolidated financial statements include all of the adjustments which in the opinion of management
are necessary to a fair presentation of financial position and results of operations. All such adjustments are of a normal and
recurring nature.
These consolidated financial statements
should be read in conjunction with the audited consolidated financial statements and footnotes and other information included in
the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange
Commission (“SEC”). The results of operations for the three and six-month periods ended June 30, 2015 are not necessarily
indicative of the results that may be expected for the full year ending December 31, 2015 or for any other future period.
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Principles of Consolidation |
These unaudited consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions are
eliminated in consolidation.
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Use of Estimates |
The preparation of consolidated financial
statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of
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. The most significant estimates relate to revenue recognition, valuation of
accounts receivable and inventories, purchase price allocation of acquired businesses, impairment of long lived assets and goodwill,
valuation of financial instruments, income taxes, and contingencies. The Company bases its estimates on historical experience,
known or expected trends and various other assumptions that are believed to be reasonable given the quality of information available
as of the date of these financial statements. The results of these assumptions provide the basis for making estimates about the
carrying amounts of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these
estimates.
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Revenue recognition |
The Company recognizes revenue on the
percentage-of-completion method, measured by the percentage of total costs incurred to date against the estimated total costs for
each contract. Contract costs include all direct material and labor costs and those indirect costs related to contract performance,
such as indirect labor, supplies, tools, repairs and depreciation costs. General and administrative costs are charged to expense
as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.
Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions,
and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions
are determined. Profit incentives are included in revenue when their realization is reasonably assured. An amount equal to contract
costs attributable to claims is included in revenue when realization is probable and the amount can be reliably estimated.
The asset, costs and estimated earnings
in excess of billings on uncompleted contracts, represents revenue recognized in excess of amounts billed. The liability, billings
in excess of costs and estimated earnings on uncompleted contracts, represents billings in excess of revenue recognized.
Revenue from rebates from utilities may
be recognized on eligible energy-efficient lighting retrofit projects. These rebates are simultaneously credited against the quoted
contract price and assigned to the Company by the customer. The Company is responsible for the application of the rebate, and bears
the risk of any loss from the verification and collection of the rebate. Revenue from rebates from utilities totaled $53,366 and
$187,177, respectively for the three month and six month periods ended June 30, 2015, compared to $366,392 and $1,077,856, respectively,
for the same three and six month periods ended June 30, 2014.
Certain rebates from utility companies
are subject to refund rights in the event that specified energy savings are not met. The Company assesses each retrofit project
subject to refund rights to determine if the estimated energy savings are likely to be met. As of June 30, 2015 and December 31,
2014, there were no retrofit projects subject to this refund right that were not expected to meet the specified energy savings.
The utility company’s providing
the retrofit rebate, at their discretion, can audit the Company's customer installations prior to payment. These audits often result
in an adjustment to the rebate, which is netted against revenues. A reserve for adjustments is recorded based upon current period
sales and the Company’s historical experience factor in recording such rebate adjustments. During the three and six-month
periods ended June 30, 2015, the adjustments to rebates from utilities totaled ($85) and ($5,693), respectively, as compared to
($50,118) and ($62,146), respectively, during the corresponding periods in the prior year. These amounts are netted in the Company’s
accounts receivable and revenue.
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Impairment of long-lived assets |
The Company evaluates the recoverability
of its long-lived assets whenever events or changes in circumstances have indicated that an asset may not be recoverable. The long-lived
asset is grouped with other assets at the lowest level for which identifiable cash flows are largely independent of the cash flows
of other groups of assets and liabilities. If the sum of the projected undiscounted cash flows is less than the carrying value
of the assets, the assets are written down to the estimated fair value.
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Goodwill and Intangible Assets |
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 Company’s acquisitions is attributable to the value of the potential expanded market opportunity with new customers.
Intangible assets have either an identifiable or indefinite useful life. Intangible assets with identifiable useful lives are amortized
on a straight-line basis over their economic or legal life, whichever is shorter. The Company’s amortizable intangible assets
consist of customer relationships, distribution and licensing agreements, non-compete agreements and technology. Their useful lives
range from 0.5 to 15 years. The Company’s indefinite-lived intangible assets consist of trade names.
Goodwill and indefinite-lived assets are
not amortized, but are subject to annual impairment testing unless circumstances dictate more frequent assessments. The Company
performs an annual impairment assessment for goodwill during the fourth quarter of each year and more frequently whenever events
or changes in circumstances indicate that the fair value of the asset may be less than the carrying amount. Goodwill impairment
testing is a two-step process performed at the reporting unit level. Step one compares the fair value of the reporting unit to
its carrying amount. The fair value of the reporting unit is determined by considering both the income approach and market approaches.
The fair values calculated under the income approach and market approaches are weighted based on circumstances surrounding the
reporting unit. Under the income approach, the Company determines fair value based on estimated future cash flows of the reporting
unit, which are discounted to the present value using discount factors that consider the timing and risk of cash flows. For the
discount rate, the Company relies on the capital asset pricing model approach, which includes an assessment of the risk-free interest
rate, the rate of return from publicly traded stocks, the Company’s risk relative to the overall market, the Company’s
size and industry and other Company specific risks. Other significant assumptions used in the income approach include the terminal
value, growth rates, future capital expenditures and changes in future working capital requirements. The market approaches use
key multiples from guideline businesses that are comparable and are traded on a public market. If the fair value of the reporting
unit is greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount exceeds its fair
value, then the second step must be completed to measure the amount of impairment, if any. Step two calculates the implied fair
value of goodwill by deducting the fair value of all tangible and intangible net assets of the reporting unit from the fair value
of the reporting unit as calculated in step one. In this step, the fair value of the reporting unit is allocated to all of the
reporting unit’s assets and liabilities in a hypothetical purchase price allocation as if the reporting unit had been acquired
on that date. If the carrying amount of goodwill exceeds the implied fair value of goodwill, an impairment loss is recognized in
an amount equal to the excess.
Determining the fair value of a reporting
unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates, strategic
plans and future market conditions, among others. There can be no assurance that the Company’s estimates and assumptions
made for purposes of the goodwill impairment testing will prove to be accurate predictions of the future. Changes in assumptions
and estimates could cause the Company to perform impairment test prior to scheduled annual impairment tests scheduled in the fourth
quarter.
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Fair value measurements |
The Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) 820 “Fair Value Measurements and Disclosures”
(“ASC 820”) defines fair value as the exchange price that would be received for an asset or paid to transfer a liability
(an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the
use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels
of inputs that may be used to measure fair value:
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Level 1 - Quoted prices in active markets for identical assets or liabilities. |
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Level 2 - Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable. |
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Level 3 - Unobservable inputs that are supported by little or no market activity, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing. |
Fair value estimates discussed herein
are based upon certain market assumptions and pertinent information available to management as of June 30, 2015. The Company uses
the market approach to measure fair value for its Level 1 financial assets and liabilities. The market approach uses prices and
other relevant information generated by market transactions involving identical or comparable assets or liabilities. The respective
carrying value of certain balance sheet financial instruments approximates its fair value. These financial instruments include
cash, trade receivables, related party payables, accounts payable, accrued liabilities and short-term borrowings. Fair values were
estimated to approximate carrying values for these financial instruments since they are short term in nature and they are receivable
or payable on demand.
The estimated fair value of assets and
liabilities acquired in business combinations and reporting units and long-lived assets used in the related asset impairment tests
utilize inputs classified as Level 3 in the fair value hierarchy.
The Company determines the fair value
of contingent consideration based on a probability-weighted discounted cash flow analysis. The fair value remeasurement is based
on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in the fair value hierarchy.
In each period, the Company reassesses its current estimates of performance relative to the stated targets and adjusts the liability
to fair value. Any such adjustments are included as a component of Other Income (Expense) in the Consolidated Statements of Operations
and Comprehensive Loss.
The following table summarizes the Company’s
financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2015:
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Level 1 |
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Level 2 |
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Level 3 |
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Earnout liability |
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$ |
— |
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$ |
— |
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$ |
641,000 |
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The following table summarizes the change
in the Company’s financial assets and liabilities measured at fair value as of June 30, 2015:
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2015 |
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Fair value, January 1, 2015 |
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$ |
3,326,000 |
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Fair value of contingent consideration issued during the period |
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|
— |
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Change in fair value |
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|
(2,685,000 |
) |
Fair value, June 30, 2015 |
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$ |
641,000 |
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Reclassifications |
Certain prior year amounts have been reclassified
to conform to the current period presentation. These reclassifications had no impact on net earnings and financial position.
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Recent accounting pronouncements |
The Company has implemented all new accounting
pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new
pronouncements that have been issued that might have a material impact on its financial position or results of operations.
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Going Concern |
These unaudited consolidated financial
statements have been prepared on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities
and commitments in the normal course of business. The Company has generated significant operating losses which have been funded
primarily from debt and equity financings. In addition, the Company is in default of, or past due on, certain payments related
to principal and interest due on notes payable, vendor payables and other accrued liabilities. The Company is addressing its delinquencies
on a case-by-case basis; however, it can offer no assurance that the cooperation it has received thus far will continue.
The continuing operations of the Company
and the recoverability of the carrying value of assets is dependent upon the ability of the Company to obtain necessary financing
to fund its working capital requirements, and upon achieving future profitable operations. The accompanying financial statements
do not include any adjustments relative to the recoverability and classification of asset carrying amounts or the amount and classification
of liabilities that might result from the outcome of this uncertainty.
There can be no assurance that new capital
will be available as necessary to meet the Company's working capital requirements or, if the capital is available, that it will
be on terms acceptable to the Company. The issuances of additional equity securities by the Company may result in significant dilution
in the equity interests of its current stockholders. Obtaining new debt capital, assuming such debt capital would be available,
will increase the Company's liabilities and future cash commitments. If the Company is unable to obtain financing in the amounts
and on terms deemed acceptable, the business and future success may be adversely affected and the Company may cease operations.
These factors raise substantial doubt regarding its ability to continue as a going concern.
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Discontinued Operations |
In May 2015, the Company’s board
of directors authorized its management to pursue the sale of ESCO. A sale was completed on June 30, 2015. As a result, ESCO’s
results of operations have been reclassified as discontinued operations on a retrospective basis for all periods presented. See
“Note 6 — Discontinued Operations” for additional information.
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Change in Accounting Policy |
In 2014, the Company changed its accounting
policy related to revenue recognition from the completed contracts method to the percentage-of-completion method. Under the new
policy, revenue is measured by evaluating the percentage of total costs incurred to date against the estimated total costs for
each contract.
The impact of the change in accounting
policy on the June 30, 2014 financial statements resulted in an increase to sales of $299,032 and an increase to cost of goods
sold of $210,848.
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