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ForceField Energy Inc. – ‘10-K’ for 12/31/12

On:  Tuesday, 4/16/13, at 2:15pm ET   ·   For:  12/31/12   ·   Accession #:  1354488-13-2012   ·   File #:  0-54312

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  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

 4/16/13  ForceField Energy Inc.            10-K       12/31/12   94:8.3M                                   Issuer Direct/FA

Annual Report   —   Form 10-K   —   Sect. 13 / 15(d) – SEA’34
Filing Table of Contents

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                Comprehensive Loss                                               
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‘10-K’   —   Annual Report
Document Table of Contents

Page (sequential)   (alphabetic) Top
 
11st Page  –  Filing Submission
"Table of Contents
"Part I
"Item 1
"Business
"Item 1A
"Risk Factors
"Item 1B
"Unresolved Staff Comments
"Item 2
"Properties
"Item 3
"Legal Proceedings
"Item 4
"Mine Safety Disclosures
"Part Ii
"Item 5
"Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
"Item 6
"Selected Financial Data
"Item 7
"Management's Discussion and Analysis of Financial Condition and Results of Operations
"Item 7A
"Quantitative and Qualitative Disclosures About Market Risk
"Item 8
"Financial Statements and Supplementary Data
"Item 9
"Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
"Item 9A
"Controls and Procedures
"Item 9B
"Other Information
"Part Iii
"Item 10
"Directors, Executive Officers and Corporate Governance
"Item 11
"Executive Compensation
"Item 12
"Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
"Item 13
"Certain Relationships and Related Transactions, and Director Independence
"Item 14
"Principal Accounting Fees and Services
"Part Iv
"Item 15
"Exhibits, Financial Statement Schedules
"Signatures
"Report of Independent Registered Public Accounting Firm
"Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2012 and 2011
"Consolidated Statement of Equity (Deficit) for the Years Ended December 31, 2012 and 2011
"Consolidated Statements of Cash Flows for the Years Ended December 31, 2012 and 2011
"Notes to Consolidated Financial Statements

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

þ
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2012

¨
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

For the transition period from ________ to _________

Commission file number:  333-145910

ForceField Energy Inc.
(Exact name of registrant as specified in its charter)

Nevada
 
20-8584329
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
245 Park Avenue, 39th Floor, New York, New York
 
 
10167
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number:  (212) 672-1786

Securities registered under Section 12(g) of the Exchange Act:
 
Title of each class
Common Stock, par value $0.001 per share
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ
 
Indicate by checkmark whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive Information or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨     No þ
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter on June 30, 2012 was $42,347,657.

The number of shares of the registrant’s only class of common stock issued and outstanding was 16,181,761 shares as of April 10, 2013.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Information Statement on Schedule 14C to be filed with the Securities and Exchange Commission and delivered to shareholders in lieu of holding registrant’s 2013 Annual Meeting of Shareholders are incorporated by reference into Part III.
 


 
 

 
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Certifications
       

 
2

 
PART I
 
ITEM 1. BUSINESS
 
Overview
 
ForceField Energy Inc. (“ForceField” or, “we”, “us” “Company”) is an international manufacturer, distributor, and licensee of alternative energy products and technologies.
 
Name Change
 
On February 28, 2013, we changed our name from SunSi Energies Inc. (“SunSi”) to ForceField Energy Inc. With the exception of our wholly-owned subsidiary SunSi Energies Hong Kong Ltd. (“SunSi HK”) and SunSi USA, whose names shall remain unchanged for practicality reasons, all historic references to SunSi in this document have been changed to “ForceField”.  In March 2013, we formed  a wholly-owned subsidiary in Costa Rica, ForceField S.A. Our principal executive office is currently located in New York, New York and our website is www.forcefieldenergy.com. As a result of the name change, our registered common stock now trades on the OTCQB under the ticker symbol “FNRG”.  Formerly, prior to February 28, 2013, we traded under the ticker symbol “SSIE”.
 
Change of Fiscal Year End
 
Prior to December 7, 2011, the Company’s fiscal year-end was May 31. On December 8, 2011, the Company changed its year-end to December 31.
 
Reverse Stock Split
 
All preferred and common share amounts (except par value and par value per share amounts) referred to in this Report prior to October 9, 2012 have been retroactively restated to reflect the Company’s one-for-two reverse capital stock split effective October 9, 2012, as described in Note 17 — Stockholders’ Equity to these consolidated financial statements.
 
ForceField Business Summary
 
ForceField is a U.S. based company with four distinct operating segments:
 
Ø
Owns 50.3% of TransPacific Energy, Inc. (“TPE”) a U.S. based renewable energy technology provider that uses “waste heat” from various manufacturing and other sources to provide clean electricity.
Ø
Is the exclusive North American distributor of LED commercial lighting and fixtures for a premier LED manufacturer in China.
Ø
Is a significant producer of trichlorosilane (“TCS”) in China. TCS is a chemical primarily used in the production of polysilicon, which is an essential raw material in the production of solar cells for PV panels that convert sunlight to electricity. This TCS is sold to the marketplace via two operating segments, (1) a 90% owned TCS distribution company, and (2) through the 60% ownership of a TCS plant, both of which are located in China.
 
 
3

 
Company Business
 
Waste Heat Energy – TransPacific Energy (“TPE”)
 
On May 10 and May 17, 2012, we entered into two share exchange agreements (the “Agreements”) with shareholders of TransPacific Energy (“TPE”) to acquire an aggregate controlling equity interest of its common stock. TPE is a renewable energy technology corporation located in California and Nevada that designs and installs proprietary modular ORC units utilizing up to nine different proprietary refrigerant mixtures (which it has patented) to maximize heat recovery and convert that waste heat directly into electrical energy. Furthermore, the ORC units help to address greenhouse emissions and have qualified for various government and state subsidies available in the United States.
 
TPE’s technology converts waste heat into clean electricity using multi-component fluids that are environmentally sound, non-toxic and non-flammable. In contrast, the typical Organic Rankine Cycle uses binary cycles and organic fluids such as pentane, isobutene, butane, propane and ammonia instead of water-based fluids. Potential applications for this technology include any process that generates waste heat or flue gas (such as industrial smokestacks, landfills, geothermal, solar and garbage incinerators) or utilize warm ocean waters. Additionally, TPE’s technology can be utilized as an alternative to cooling towers and steam condensers, and use heat released to efficiently generate electricity with air cooled or water cooled condensers.
 
From June 14, 2012 through August 20, 2012, we paid $520,000 in cash and issued 255,351 shares of our common stock, valued at approximately $965,226 or $3.78 per share, in exchange for 24,753,768 shares of TPE’s common stock in accordance with the terms of the Agreements. These investments represent approximately a 50.3% equity interest in the common stock of TPE.
 
Through the period ended December 31, 2012, TPE has generated $240,238 of revenue. TPE contracts with a United States based independent third party to manufacture the major components of the ORC units. Additionally, TPE’s proprietary refrigerants are manufactured by another independent third party using TPE’s formulation.
 
A typical ORC application takes approximately six to nine months from the date of the initial order until final deployment. We believe that we can reduce this time frame to six months or less through operating efficiencies; however, there can be no assurances that we will be successful in doing so.
 
Our strategy to generate revenue and operating profits from our ORC segment is as follows:
 
Purchase and own our ORC equipment using TPE’s technology to generate ongoing, incremental electricity which can be sold back to a customer at a discount via a purchase power agreement (“PPA”) or sold back to the utility grid in the jurisdiction where the ORC unit is installed;
 
Sell our ORC equipment to a customer and receive an ongoing royalty payment from the incremental energy generated by the ORC unit; and
 
License TPE’s technology out to various markets and jurisdictions.
 
Organic Rankine Cycle (ORC) Background
 
The Organic Rankine Cycle (ORC) technology, which traces its roots to the 1970’s, is a key renewable energy technology and process that has been deployed at hundreds of sites around the world. ORC is utilized as a combination of energy conservation through the recovery of waste heat which is then converted into electricity.
 
 
4

 
ORC is a thermodynamic process where heat is transferred to a fluid at a constant pressure. The fluid is vaporized and then expanded in a vapor turbine that drives a generator, producing electricity. The fluid allows Rankine cycle heat recovery from lower temperature sources such as biomass combustion, industrial waste heat, geothermal heat, solar thermal power, and other sources. The low-temperature heat can itself be converted into electricity. According to Visiongain Ltd., an independent business information provider for the telecoms, pharmaceutical, defense, energy and the metals industries, February 2013 report, the value of the global waste heat energy market will reach $7.4 billion in 2013. Worldwide initiatives and government mandates including the 2009 American Recovery and Reinvestment Act are driving the implementation and utilization of renewable and converted sources of energy and fuel such as ORC. Other ORC incentive programs may include carbon credits, bonus depreciation, investment tax credit, production tax credit (original fuel dependent), renewable energy certificates, state grants and loans, and net metering.
 
Organic Rankine Cycle Market
 
ORC technology is a uniquely effective process that can be adapted for use in numerous industries and applications. The original applications of the technology were in geothermal and solar thermal plants. Today, the largest installed bases of the technology are found in biomass, combined heat and power plants, and in the industrial processes arena. The size of the market in the industrial processes area in the U.S. alone is estimated at $35 billion by the Gas Technology Institute of Des Plains, Il.
 
We are also targeting numerous international markets including China, where the level of CO² emissions is relatively high, opportunities abound in the iron, steel, and chemical industries, in addition to the fast-growing solar plant segment. Most industrial processes suffer from “unrecovered” waste heat. The waste heat lost from hot flue gases in particular is very high in the cement industry, along other segments such as petrochemicals, landfills (waste disposal), food processing, and others.
 
TPE Technology and Economics:
 
Ø
There are existing technologies that take “waste heat” from an industrial smokestack and convert it into clean electricity at lower prices than from the electrical grid. This process is called the Organic Rankine Cycle and is a proven technology. ORC uses a turbine steam generator in a closed loop system to convert heat into electricity.
Ø
TPE’s technology works at temperatures up to 950° Fahrenheit, whereas the competition’s ORC units currently cap out at 500° Fahrenheit. According to the US Department of Energy, ninety percent of waste heat is above 500° Fahrenheit but below 800°, a temperature range in which our ORC units operate, but above our competition’s range so we believe TPE technology’s addresses a very large potential market.
Ø
TPE has nine proprietary refrigerants for an ORC turbine system and these refrigerants are water-based and non-toxic.
Ø
This technology qualifies for a 30% government renewable energy grant for the cost of the equipment in some US states, and TPE’s system can generate additional energy savings of 20%-30%.
 
Renewable Energy Market Opportunity
 
According to the International Energy Agency (“IEA”) electricity demand is expected to double by 2030 and by then $11 trillion is expected to be spent on energy infrastructure. Renewable energy is expected to be a $500 billion component by 2017. As noted what makes TPE truly unique is that TPE’s proprietary technologies using ORC can access the entire market whereas its competition has less than 5% share of the market due to temperature application constraints.
 
TPE’s proprietary systems in certain applications reduce operating and maintenance costs and significantly improve return on capital expenditures; thus making the purchase of waste heat recovery systems that previously yielded nominal savings, economically viable thus potentially opening enormous new markets.
 
 
5

 
Our strategy to generate revenue and operating profits from our ORC segment is as follows:
 
Purchase and own our ORC equipment using TPE’s technology to generate ongoing, incremental electricity which can be sold back to a customer at a discount via a purchase power agreement (“PPA”) or sold back to the utility grid in the jurisdiction where the ORC unit is installed;
 
Sell our ORC equipment to a customer and receive an ongoing royalty payment from the incremental energy generated by the ORC unit; and
 
License TPE’s technology out to various markets and jurisdictions.
 
In August of 2012, President Obama signed an executive order to encourage energy efficiency investments for industrial facilities and creates a national goal of obtaining an additional 40 gigawatts of combined heat and power by 2020, a 50 percent increase from current standards. We believe that this type of focus and necessity to preserve energy will be beneficial to our ORC segment, and that we will be successful in executing our strategy for generating significant revenues and profits beginning in 2013. Additionally, we believe that TPE’s proprietary refrigerants will produce high levels of incremental energy when used in ORC applications; however there can be no assurance.

Prior to our acquisition of TPE in August 2012, TPE entered into two separate agreements with a large steel company in California (1 unit) and an aerospace company in Dallas(1 unit) to sell them ORC units. These ORC units are in the process of being built and are the first ORC units that will operate with our proprietary TPE fluids. These units will generate a breakeven gross margin for us because the cost of these ORC units includes very substantial one-time initial R&D and engineering work of approximately $400,000. These R&D expenses and engineering work can be leveraged and will reduce the cost of future ORC units. These costs were borne by TPE prior to our acquisition of them and do not impact our profitability.  During the period ended December 31, 2012 we recorded $240,438 in revenue from ORC sales and expect to record an additional $800,000 in aggregate revenue on these units during 2013 when they are completed. If the ORC units operate successfully at each location we expect to receive additional orders for ORC units from both companies although there can be no assurances.
 
On January 18, 2013, we entered into a definitive agreement to install up to four of our ORC units at the Zibo Qilin Fushan Iron & Steel Company (“Qilin”). Qilin, a steel producing company that is located in the Shandong province of China, is the subsidiary of a $28 billion Chinese entity. The ORC units will create significant value through the use of enhanced heat transfer techniques to maximize heat recovery and efficiently convert waste heat directly into renewable electrical energy. TPE determined that the Qilin plant can host four ORC units and generate up to 1.3 Megawatts of incremental electrical energy, annually. In the first phase of the project, we will install two ORC units that will generate approximately 650 Kilowatts of supplemental electricity. We will retain ownership of the ORC units and sell the supplemental electricity generated back to Qilin at a price discounted from the price they pay to their local utility company to purchase electricity. We expect to generate approximately $517,000 in revenue annually for a twenty year period. Upon successful completion of the first phase, we can at our discretion install two additional ORC units also generating 650 Kilowatts of supplemental electricity. The successful completion of the project is expressly contingent on our obtaining financing, on favorable terms in order to build our ORC units. We believe will be successful in obtaining such financing however we can provide no assurances.
 
We continue to assess other potential ORC projects in the United States and internationally and believe that we will enter into additional contracts that will generate ORC revenue, although there can be no assurances.
 
LED Lighting Distribution
 
On August 27, 2012, we entered into a five year distribution agreement with Shanghai Lightsky Optoelectronics Technology Co., Ltd. (“Lightsky”) located in Shanghai, China, whereby we became the exclusive distributor of Lightsky LED lighting products in the United States, Canada and Mexico.
 
 
6

 
Lightsky is a leading, high-tech enterprise which was established by the Shanghai Academy of Science and Technology and Shanghai Zhongbo Capital Co., Ltd. Lightsky researches, designs and manufactures LED lighting products to meet the world’s ever evolving lighting needs. Lightsky’s products range from illumination LED lighting, LED video display systems and architectural LED lighting. Lightsky has completed major lighting installation at the Shanghai International Airport, the 2010 Shanghai World Expo and Hong Kong University. Lightsky’s sales of its products are concentrated in China and throughout Asia. Lightsky holds a series of design and utility patents and is ISO9001 certified.
 
We issued 150,000 shares of our restricted common stock valued at $780,000, which represents fair market value, as consideration for these exclusive rights. The shares are restricted for an eighteen month period from their date of issuance. In order to maintain its exclusivity and qualify for any automatic renewal periods beyond the five year period, we must achieve certain performance milestones.
 
We are marketing Lightsky’s products through our wholly-owned subsidiary SunSi USA, which was incorporated in 2012.
 
Key Strategic Business and Marketing Objectives
 
Our strategy to generate revenues and operating profits from our LED segment is as follows:
 
Concentrate on the sale and installation of high return on investment (“ROI”) products with widest applications in the commercial, industrial and institutional sectors;
 
Focus on customers with whom economics “carry the day”, where utility costs and incentives may be at their highest (such as corporations, hospitals and institutions) and where lighting and “green image” are largely important;
 
Identify and target larger customers who can undertake multi-year LED product roll-out of high and continuous volumes; and
 
Offer complete or “turnkey” retro-fit LED project installation services to prospective customers by partnering with energy savings firms that will perform the installation of our Lightsky products, help to quantify potential future energy savings, prepare the appropriate documentation necessary for our customers to qualify for various tax subsidies and credits; as well as providing third party financing based upon the credit worthiness of the end-user of the LED products.
 
LED Technology
 
A Light Emitting Diode (LED) is a semiconductor device that converts electricity into light. LED lighting has been around since the 1960s, but recent advances in the performance of the LED have made them commercially feasible. LED fixtures are comprised of LED diodes which are combined with circuitry, housings and controllers to create the end product, the “LED fixture”. The ultimate efficiency of the LED fixture is only partly determined by the LED diode. The ultimate efficiency is determined by the way it is configured and engineered within the fixture. This is the differentiator in the industry, and what makes Lightsky’s products proprietary.
 
Recent advances in the performance of LEDs have made LED lighting applications commercially feasible. Lumens per watt from LED have increased to over 140 lumens today from only 55 lumens per watt just a few years ago making LED lighting a viable and economically attractive alternative to conventional lighting options.
 
 
7

 
Lightsky LED products perform at the highest level today surpassing traditional lighting in performance while offering energy efficiency savings up to 70%. With a longer than 50,000 hour rated operating life, maintenance costs and manpower diversions (including bulb and ballast replacement) will become a “thing of the past”.
 
By combining these recent LED advances with proprietary circuitry, mechanical thermal management, optics, electronics and controllers, Lightsky has created several widely used commercial grade lighting fixtures that exceed the resulting performance of present product development in the LED industry. Reliability, life expectancy and energy efficiency are superior with the Lightsky product. Lightsky has combined recent LED advances with proprietary circuitry, mechanical thermal management, optics, electronics and controllers to create superior lighting fixtures that produce energy savings of over 70% and a rated life of over 50,000 hours.
 
The LED light is considered “green” because of the absence of dangerous chemicals and minerals with a significant reduction in energy consumption. In certain applications, LED’s will reduce energy consumption by up to 70%. The paybacks on LED replacements of commercial lighting are as short as 18-36 months, but will soon be in the 6-24 month range. The use of higher quality diodes combined with proprietary circuitry, electronics and quality assembly means that Lightsky’s LEDs can achieve the 50,000-hour rated life of an LED. Large commercial and institutional users are our primary target market.
 
The Market Opportunity
 
It is estimated by the U.S Department of Energy (“DOE”) that there are over 2.5 billion lighting fixtures in commercial and industrial properties throughout the USA. The replacement cost of these fixtures alone could exceed one trillion dollars. According to Strategies Unlimited, a market research company based in Mountain View, CA, the LED market as a whole is forecasted to grow to $8.3 billion in 2014, with revenues for LED components alone reaching $3.1 billion in 2012.
 
The move to save energy will cause major changes in products that consume energy in coming years. Incentives will be expanded to encourage users to switch to more efficient technologies. However, the driving force will have to be the economics related to the replacement option. In that regard, advances in diode performance combined with the Lightsky technology have made many Lightsky LED fixtures highly desirable as a replacement to conventional fixtures in several applications.
 
Our LED products include replacement for the most common commercial and industrial fixtures in the USA: the fluorescent and HID light. Corporations have already begun studying and buying cost attractive LED alternatives to conventional lighting. This movement will continue to gain momentum as the cost of diodes falls, their performance rises, energy costs increase, incentives expand and we make even more advances in our applications/technology.
 
Market Size
 
In that same study, the DOE projected the rate of turnover for residential, commercial and industrial applications to LED technology based on the payback period of this new technology.
 
LED light fixtures are projected to overtake conventional light fixtures in coming years. Thus, the total market is ultimately reflective of the total lighting market in the USA and the world. While incandescent and fluorescent will make improvements as will HID lighting, incandescent will no longer be made after 2014 in the U.S.A. and the ROI on SSL is projected to be so favorable that replacement will dominate market decisions.
 
Lightsky’s replacements for HID lighting and Fluorescent lighting in Commercial and Industrial applications typically show or soon will show paybacks of 6-24 months.
 
Furthermore, we have achieved more attractive levels of payback than our industry competitors. These paybacks depend on the climate of the installation, hours of operation, the type of fixture being replaced, the energy costs in the specific locale, state and/or local energy saving incentives, the age and efficiency of the fixture being replaced, among other factors.
 
 
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We believe recent improvements in the efficiency of the diode itself (which has been occurring annually) will increase efficiencies by 1/3. We expect that improvements in our product coupled with advancements in diode efficiencies will continue to shorten the payback period.
 
Another primary factor affecting the payback period is the number of hours that a light is left on at a property. Hospitals have many lights on 24/7/365. They are very conscious of their lighting bill.  Parking garages and many warehouse operations also use extended hour lighting.
 
We believe that payback periods will continue to fall based on several factors.
 
1.
The efficiency of the diode itself will continue to improve and the cost of energy will continue to increase over time.
 
2.
More incentives will be available from local, state and federal government programs.
 
3.
We will be able to improve efficiencies in our products through proprietary advances.
 
Primary Target Customers and Current Initiatives in Process
 
We expect to secure large corporate customers with extremely large property portfolios. It is expected that sales will be concentrated among large customers. These portfolios are often measured in millions of square feet.
 
We expect that hospitals, warehouse operations, large indoor spaces that use high intensity lighting and new construction are a few of the prime candidates for initial market penetration success.
 
We intend to excel at selling to some of the larger corporate and institutional prospects. Many have a commitment to “going green” and are the most conscious of ROI and related efficiency and design improvements that are offered by the LED lighting alternative.
 
Since we acquired the LED distribution rights in August 2012, we have entered into a numbers of trials for our Lightsky LED products. Additionally we have begun appointing sub-distributors to distribute our LED products. To date, we believe we have made good progress in establishing our sub distribution network and creating awareness of our LED products. A summary of our activity is as follows:
 
Sub-Distribution Agreement and Partnerships:
 
Ø
On September 5, 2012 we retained the services of Global Resources Group, a Dallas based and well-established company specializing in building distribution networks and sales channels.
 
 
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Ø
On October 23, 2012, we announced that our entrance into a strategic alliance with Commonwealth Energy Group, LLC, an energy consulting firm focused on providing significant improvements in energy efficiency through green energy technology solutions. Through the strategic alliance, Commonwealth is expected to offer to its customers turnkey LED lighting solutions utilizing our LED products.
 
Ø
On January 29, 2013, we entered into a distribution agreement with Gonneville, Inc., a Service-Disabled, Veteran-Owned, Small Business Enterprise (SDVOB) and a Small Business Enterprise (SBE) which specializes in the distribution of MultiQuip (MQ) power generation and lighting equipment. Gonneville s customers include California and federal government agencies, which generally require multiple bids.
 
Ø
On February 22, 2013, we announced our entrance into a 5-year distribution agreement for both LED and ORC products which was signed with DEK International (“DEK”), a global supplier of gaming tables, slots and bingo products to the gaming industry. Initially, our LED products will be marketed by DEK on its website and marketing materials. Headquartered in Panama, DEK operates through a network of offices in more than 25 countries with a core presence in Latin America.
 
Ø
On March 11, 2013 we signed a cross-distribution agreement with PowerOneData whereby each company will represent and sell each other’s energy efficiency products and solutions in the United States, Canada, Mexico, and Latin America. PowerOneData will initially focus on distributing the LED products and solutions in conjunction with its Automated Street Light Management (ASLM) system, and ForceField will focus on the distribution of PowerOneData’s smart meters, Genii™ advanced Database Management Software and other related products and software.
 
Currently we are bidding on a number of projects of varying sizes, one of which is a streetlight project in Costa Rica which could generate in excess of $10.0 million in revenue over a five year period. Additionally we have LED trials in process at a number of locations throughout the United States and in Latin America. We expect to win a number of these bids including the large Costa Rica bid, however, there can be no assurances we will be successful
 
Also as part of our LED marketing activity, we expect to be able to offer non-recourse third party financing to potential LED clients. In March 2013 we entered into an agreement with two of the top ten U.S. banks to provide such financing with potential credit limits in the millions of dollars. This program enables them to obtain, in some cases up to 100% financing for an LED project with the Company at competitive rates depending on the credit-worthiness of the client. This debt or lease obligation would be carried on the books of the client and not that of the Company. We believe that the type of client we are targeting would qualify for such financing thus enabling us to sell our LED products to them and be paid in full without the necessity of providing internal capital. There can be no assurances that this financing program will be successful or that our targeted clients will qualify for such financing.
 
We did not record any revenues from the sale of our LED products for the period ended December 31, 2012 and expect to record approximately $25,000 in LED revenue for the period ended March 31, 2013. We believe the establishment of a sub-distribution network which we expect to continue to expand in size as well as the projects we are currently bidding on and have already generated revenue from, will result in significant LED revenue in 2013 and beyond, although there can be no assurances.
 
Trichlorosilane Manufacturing
 
Manufacturing
 
We own a 60% equity interest in Wendeng He Xie Silicon Co. Ltd. (“Wendeng”), a trichlorosilane manufacturing company located in the Shandong province of China close to strategic ports, including Weihai and Qingdao. The state-of-the-art Wendeng facility was built in 2008 and currently has an annual capacity of 30,000 MT of TCS.
 
Wendeng has production capacity to 30,000 MT and no capacity increases are expected for the foreseeable future.
 
 
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Distribution
 
We own 90% of Zibo Baokai Commerce and Trade Co. Ltd. (“Baokai”) a distribution company based in China which gives us the exclusive domestic and international distribution rights to 100% of the production of trichlorosilane from Zibo Baoyun Chemical Plant (“ZBC”). ZBC has an annual production capacity of 25,000 metric tons (“MT”). As part of the Baokai distribution rights, ZBC agreed to sell Baokai all of its TCS production at a price of cost, plus a 10% to 15% mark-up depending on the nature of the sale. By mutual agreement with ZBC, Baokai currently earns a profit margin of only 2%  because all of Baokai’s sales have come from existing customers of ZBC and from the efforts of the ZBC sales force. Due to the global decline in the TCS market as described throughout this report it is unlikely we can expand Baokai’s client base for the foreseeable future.
 
Trichlorosilane, Polysilicon and PV Production
 
TCS is a colorless liquid containing silica powder, hydrogen and chlorine and is the critical intermediate compound used to produce pure polysilicon. It takes approximately 6.5 MT of TCS to make 1 MT of polysilicon. Polysilicon cannot be produced without TCS. According to various industry sources approximately 75% of all solar panels manufactured in the world today use polysilicon based technology. The remaining 25% of the panels manufactured do not require the usage of TCS.
 
Polysilicon is cast into a multicrystalline ingot in a DSS furnace. The ingot then moves into the wafering operation where it is sawed into bricks and the bricks are then sawed into thin wafers. Next, the wafers are processed into solar cells through a series of etching, doping, coating and electrical contact processes. The next step involves interconnecting and assembling PV solar cells into solar modules. Finally, PV solar modules, along with other system components such as batteries and inverters, are installed as solar power systems.
 
PV Industry
 
Today, the majority of the world's electricity supply is generated by fossil fuels such as oil, coal and natural gas. Volatile global energy prices, increasing demand for electricity, particularly in developing economies, growing environmental awareness of the consequences of fossil fuel-based energy sources and the desire for energy security are, we believe, driving the demand for renewable energy sources such as solar photovoltaic (PV) systems. PV systems are used in industrial, commercial and residential applications to convert sunlight directly into electricity. Today, electricity costs generated from PV energy are higher than electricity generated by traditional energy sources, although the difference has decreased substantially in recent years. To offset the higher costs associated with solar energy and to encourage the adoption of alternative energy supplies, certain countries have implemented various tax credits and other incentives in connection with the use of renewable energy.
 
Manufacturers across the various segments comprising the PV manufacturing process are lowering their manufacturing costs and improving cell efficiency in an effort to make solar generated electricity more price competitive with electricity generated from traditional sources.
 
Overall the current outlook and industry forecast is highly uncertain due to changing government incentives for solar energy projects worldwide, and a current glut in polysilicon inventories which have led to decreasing polysilicon prices and correspondingly, TCS prices.
 
TCS Market and our Future Strategy Since November 2011, the low price of polysilicon coupled with the significant oversupply of polysilicon has had a material adverse impact on the price that we could sell TCS for and the level of plant utilization at Wendeng and our exclusive supplier to Baokai, ZBC. This has negatively impacted our revenues and results of operations. Due to the current polysilicon oversupply situation we believe that an industry consolidation is occurring where we will emerge as one of the strongest entities and lowest cost producers. Our Wendeng facility except for a brief period when it operated in November 2012, has been closed since December 2011. We had expected Wendeng to open in 2012; however, the ongoing low pricing of polysilicon and the dumping of pre-existing polysilicon inventories below cost by many polysilicon companies in order to generate cash flow has resulted in low price bids from our customers to supply them TCS at levels which would not enable us to operate profitably. During 2012, our cash operating losses at Wendeng were approximately $10,000-$20,000 per month. These losses are significantly less than the loss we would have incurred by producing TCS and selling it at the market price during 2012 which was below our cash cost of production. Therefore, our operating losses were lower by staying closed rather than manufacturing TCS at a significantly higher loss. Our Wendeng facility sold some of its existing inventory during 2012 at a loss however, it has not manufactured any significant amounts of TCS during 2012.
 
 
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In late March and early April 2013 Wendeng sold approximately 40-50 metric tons of TCS from its existing inventory and began the process of opening the Wendeng production facility to begin manufacturing TCS for a subsidiary of GCL-Poly Energy Holdings Ltd, the world's biggest polysilicon manufacturer who has placed an order with Wendeng to produce up to 1,500 metric tons per month for a 12 month period. Based on current TCS pricing, the order if completely fulfilled and delivered by Wendeng, would generate approximately $9.7 million dollars in revenue. There can be no assurances that the order will be completely fulfilled.
 
Due to the recent volatile nature of the TCS industry, and the desire of many polysilicon makers to sell their existing inventory below cost to generate cash flow and since TCS industry operates on a “spot price” market there can be no assurances that Wendeng’s client will take full delivery of the 18,000 metric tons. Nor can there be any assurances that Wendeng will open and begin manufacturing TCS. However, we believe based on current indications that this client will place a non-cancellable order for the first month of production of 1,500 metric tons.
 
Baokai, our TCS distribution company, has been open and closed at various periods during 2012 and through early 2013.  During this period of time, the Baokai distribution segment has operated at a breakeven level because we are not incurring any significant marketing or business development expenses directly associated with Baokai operations.
 
The world polysilicon prices have decreased drastically from selling at a high of $475 per kilogram (“kg”) in 2008 to a low of $15.83 per kg in December 2012. Polysilicon average spot prices have been recently increasing somewhat, most recently trading at $16.16 per kg on January 23, 2013 and up to $17.50 per kg on March 4, 2013. Mercom Capital Group in its weekly Solar Market Intelligence Report dated March 4, 2013, offered the following positive insights for the polysilicon market:
 
Spot polysilicon prices are rising, in part due to Chinese anti-dumping investigation against polysilicon import from the US, EU, and Korea
 
Despite limited transactions in the spot market for PV grade polysilicon, PV poly makers continue raising their prices
 
So far in 2013, China based polysilicon prices have been rebounding the most, pushing international firms to adjust quotes as well
 
The prices are up slightly across the supply chain due to continued strong demand from China, Japan and U.S.
 
Despite recent upticks, as a result of these historically low prices for polysilicon, the great majority of China’s polysilicon plants; and other polysilicon plants around the world have suspended production at some point during 2012 and continue to do so in early 2013. An estimated 50-80% of China’s polysilicon capacity is currently idle. Based on the recent order we received at Wendeng, our industry knowledge and market information available we expect to see continuing improvement in the first half of 2013 with further improvement in the latter half of 2013 and beyond, although there can be no assurances.
 
Intellectual Property
 
TPE has a perpetual license agreement with the founder of TransPacific to use his ORC patent granted on October 2, 2012, “Power generator using an organic Rankine cycle drive with refrigerant mixtures and low waste heat exhaust as a heat source”. The patent relates to a Rankine cycle system which uses as a refrigerant one of several quaternary organic heat exchange fluid mixtures which provide substantially improved efficiency and are environmentally sound, typically containing no chlorofluorocarbons (CFCs) or hydrochlorofluorocarbons (HCFCs). The system includes a closed circuit in which the refrigerant is used to drive a turbine, which may be used to drive an electric generator or for other suitable purposes.
 
 
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Government Incentives and Regulations
 
The market for electricity generation products is heavily influenced by foreign, federal, state and local government regulations and policies concerning the electric utility industry, as well as policies promulgated by electric utilities. These regulations and policies often relate to electricity pricing and technical interconnection of customer-owned electricity generation. In the United States and in a number of other countries, these regulations and policies are being modified and may continue to be modified. Customer purchases of, or further investment in the research and development of, alternative energy sources, including solar power technology and waste heat energy, could be deterred by these regulations and policies, which could result in a significant reduction in the potential demand for our products.
 
ORC
 
Deployment and operation of our ORC units are subject to the state and national laws of the jurisdiction of their location. In the Unites States, in addition to any state laws, our ORC units are regulated by the Public Utility Regulatory Act of 1978, which gives preferential rates and treatment to facilities under 80MW(Megawatts) which use renewable fuels or are cogeneration facilities.
 
Currently fourteen states – CA, CO, CT, IL, IN, LA, MI, NV, ND, OH, OK, SD, UT and WV – provide incentives for waste heat projects
 
Solar
 
The development of TCS manufacturing plants and the installation of solar PV systems is subject to oversight and regulation in accordance with foreign, national and local ordinances relating to building codes, safety, environmental protection, utility interconnection and metering and related matters. Any new government regulations or utility policies pertaining to TCS production or PV systems may result in significant additional expenses to us and, as a result, could cause a significant reduction in demand for PV installations. In addition, the manufacture of TCS involves the use of materials that are hazardous to human health and the environment, the storage, handling and disposal of which will be subject to government regulation. Under various foreign, federal, state and local laws, ordinances and regulations, an owner or operator of real estate is liable for costs of removal or remediation of certain hazardous or toxic substances on or in such property. These laws often impose such liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such substances.
Support programs for PV solar electricity generation, depending on the jurisdiction, include feed-in tariffs (FiTs), quotas (including renewable portfolio standards and tendering systems), and net metering programs. In addition to these, financial incentives for renewables include tax incentives, grants, loans, rebates, and production incentives.
 
Under a basic FiT program, producers of renewable energy are paid a set rate for their electricity, usually differentiated according to the technology used and size of the installation. For PV solar, the rate has historically been set above market rates and is fixed for a period of up to 25 years. In most countries with FiTs, grid operators are obliged to provide priority and guaranteed access to the grid for renewable energy installations. The additional costs of these schemes are generally passed through to the electricity consumers by way of a premium on the kilowatt hour (kWh) end-user price.
 
Whereas FiT laws set the price and let the market determine capacity and generation, quota systems work in reverse. In general, governments mandate a minimum share of capacity or (grid-connected) generation of electricity to come from renewable energy sources. This share often increases over time, with a specific final target and end-date. The mandate can be placed on producers, distributors, or consumers.
 
There are two main types of quota systems used: obligation/certificate and tendering systems. A renewable portfolio standard (RPS) is in the former category. Under an RPS, regulated utilities are required to procure a specified percentage of their total electricity sales to end-user customers from eligible renewable resources, such as solar generating facilities, by a specified date. Some programs further require that a specified portion of the total percentage of renewable energy must come from solar generating facilities. The majority of states in the U.S. have enacted legislation adopting RPS mechanisms. RPS legislation and implementing regulations vary significantly from state to state, particularly with respect to the percentage of renewable energy required to achieve the state’s RPS mandate, the definition of eligible renewable energy resources, and the extent to which renewable energy credits (paper certificates representing the generation of renewable energy) qualify for RPS compliance. Currently, there is no federal RPS mandate or clean energy standard, although the Obama Administration has called upon the United States Congress to create one. Measured in terms of the volume of renewable electricity required to meet its RPS mandate, California’s RPS program is the most significant in the U.S., and the California market for renewable energy dominates the western U.S. region. First enacted in 2002, California’s RPS statute has been amended several times to increase the overall percentage requirement as well as to accelerate the target date for program compliance. Pursuant to amendments enacted by the California Legislature in April 2011, the California RPS program now requires obligated load serving entities to procure 33% of their retail electricity demand from eligible renewable resources by 2020.
 
 
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In contrast to an RPS system, tendering systems of procurement (such as those used in South Africa and India) are focused on specific targets for new capacity. In South Africa, for example, the government is procuring bids under a competitive tender with solicitation dates spread over about two years. The request for proposal (RFP) is the first major solicitation in support of a target of over 8 GW of renewable energy in South Africa’s Integrated Resource Plan. Project proponents bid competitively at each solicitation date until all the capacity has been allocated. The tender solicitation approach allows governments or utilities to proscribe project construction time frames to achieve specific generation targets for the electricity system.
 
Net energy metering programs enable end-users to install renewable systems and to offset their retail energy consumption with production from on-site facilities and, in some cases, to sell excess solar electricity to their retail electricity provider. Because the bundled cost of retail electricity usually exceeds the cost of unbundled electricity, net metering programs provide an incentive to the end-user, based on the savings for the electricity system. The policies governing net energy metering vary by state and utility. Some utilities pay the end-user in advance, while others credit the end-user’s bill.
 
Tax incentive programs exist in the United States at both the federal and state level and can take the form of investment and production tax credits, accelerated depreciation and sales and property tax exemptions. At the federal level, investment tax credits for business and residential solar systems have gone through several cycles of enactment and expiration since the 1980’s. In October 2008, the United States Congress extended the 30% federal investment tax credit (ITC) for both residential and commercial solar installations for eight years, through December 31, 2016. The ITC is a primary economic driver of solar installations in the United States. Two federal programs related to renewable energy ended in 2011: (i) the Department of Energy Section 1705 loan guarantee program for renewable energy projects, renewable energy manufacturing facilities and electric power transmission projects and (ii) the Department of the Treasury Section 1603 cash grant program, which provided cash grants equal to 30% of the cost of the system for solar installations that were placed into service during 2009, 2010 and 2011 and for certain solar installations for which construction began prior to December 31, 2011. This cash grant was available in lieu of receiving the 30% federal investment tax credit.
 
In Europe, renewable energy targets, in conjunction with FiTs, have contributed to the growth in PV solar markets. Renewable energy targets prescribe how much energy consumption must come from renewable sources, while FiT policies are intended to support new supply development by providing investor certainty. A 2001 European Union (EU) directive for promoting renewable energy use in electricity generation (Directive 2001/77/EC) set varying national indicative targets for renewable energy production from individual member states. A 2009 EU directive on renewable energy (Directive 2009/28/EC), which replaced the 2001 directive, sets varying targets for all EU member states in support of the directive's goal of a 20% share of energy from renewable sources in the EU by 2020, and requires national action plans that establish clear pathways for the development of renewable energy sources.
 
In China, governmental authorities recently adopted a national FiT policy for large scale projects. China also expanded the Golden Sun Program, an upfront cost subsidy program, aimed primarily at distributed generation. In addition, according to the current draft of the 12th 5-year plan for solar energy, the government intends to raise the 2015 goal for total cumulative solar energy capacity to 15 GW and 50 GW by 2020.
 
LED
 
There are numerous state and federal incentives for LED lighting systems.
 
Competition
 
ORC
 
Currently, competitors in the ORC market range from large companies such as Ormat, UTC Power, Enertime, GE, MAxxtec/Adoratec and others such as United Technologies, Turboden, SMA Solar Technology AG, Fronius International GmbH and Power-One Inc. to emerging companies offering alternative Organic Rankine Cycles or other solar electronics products.
 
 
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LED
 
Our LED Products segment's primary competitors are Cree, Inc., Nichia Corporation (Nichia), OSRAM Semiconductor GmbH (OSRAM), Koninklijke Philips Electronics N.V. (Philips), and Samsung LED Company (Samsung).
 
TCS
 
We compete directly with independent producers of TCS on the basis of reputation, technology, delivery, service and price. Many of these producers have significantly greater resources than we do. We also expect the number of our competitors to increase significantly in the future. We also compete indirectly with polysilicon and solar PV panel manufacturers that produce their own proprietary TCS, as opposed to purchasing it from independent TCS manufacturers such as us. The development of other TCS plants, particularly those in close proximity to our plant, will increase the supply of TCS and may result in lower local TCS and glycerin prices and higher costs for feedstock.
 
Currently, we believe there are approximately less than 10 independent stand-alone TCS producers in China. Due to the recent significant decline in the TCS industry in China during 2012 in which many TCS producers were idled or became insolvent, accurate data is difficult to determine. We believe many of the smaller production facilities are no longer operating due to the reduction in the price of polysilicon described throughout this report. We believe total independent Chinese TCS production capacity is approximately 300,000 MT per year.
 
China’s independent TCS producers are mainly located in Jiangxi, Tangshan of Hebei, Zibo of Shandong, Chongqing of Sichuan, Wuhan of Hubei, and Shanghai. We believe our main direct competitors are Leshan Yongxiang Resins Co., Ltd., Tangshan Sunfar Silicon Industries Co., Ltd., Huaxiang Chemical Industry Co., Ltd., and Kaihua Synthetic Material Co., Ltd.
 
Employees
 
We have 42 full-time employees, 37 of these employees are located in China; 3 are employed at the corporate offices; and 2 are employed at TPE usinessbin California.
 
 
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ITEM 1A. RISK FACTORS.
 
Risks Related to our ORC Business
 
TransPacific’s Organic Rankine Cycles systems may not achieve broad market acceptance, which would prevent us from increasing our revenue and market share.
 
If we fail to achieve broad market acceptance of our products, there would be an adverse impact on our ability to increase our revenue, gain market share and achieve and sustain profitability. Our ability to achieve broad market acceptance for our products will be impacted by a number of factors, including:
 
our ability to timely introduce and complete new designs and timely qualify and certify our products;
whether the owners of industrial or commercial facility will be willing to purchase Organic Rankine Cycles systems from us given our limited operating history;
our ability to obtain long-term financing for Organic Rankine Cycles installations based on our product platform on acceptable terms or at all;
our ability to produce Organic Rankine Cycles systems that compete favorably against other solutions on the basis of price, quality, reliability and performance;
our ability to develop products that comply with local standards and regulatory requirements, as well as potential in-country manufacturing requirements; and
our ability to develop and maintain successful relationships with our customers and suppliers.
 
In addition, our ability to achieve increased market share will depend on our ability to increase sales to industrial and commercial facilities and the various sources including solar, biomass, hot flue gases from process industry, landfill, geothermal, gray water/hot fluids and warm ocean waters. These potential clients often have in certain cases made substantial investments in other type of systems, which may create challenges for us to achieve their adoption of our Organic Rankine Cycles solution.
 
The Organic Rankine Cycle industry is highly competitive and we expect to face increased competition as new and existing competitors introduce Organic Rankine Cycle products, which could negatively impact our results of operations and market share.
 
Marketing and selling our Organic Rankine Cycle solutions against traditional solutions is highly competitive, and we expect competition to intensify as new and existing competitors enter the Organic Rankine Cycle market. We believe that there are possibly a number of companies developing Organic Rankine Cycle and other products that will compete directly with our Organic Rankine Cycle systems.
 
Some of our competitors have announced plans to introduce Organic Rankine Cycle products that could compete with our Organic Rankine Cycle systems. Several of our existing and potential competitors are significantly larger, have greater financial, marketing, distribution, customer support and other resources, are more established than we are, and have significantly better brand recognition. Some of our competitors have more resources to develop or acquire, and more experience in developing or acquiring, new products and technologies and in creating market awareness for these products and technologies. Further, certain competitors may be able to develop new products more quickly than us and may be able to develop products that are more reliable or which provide more functionality than ours. In addition, some of our competitors have the financial resources to offer competitive products at aggressive or below-market pricing levels, which could cause us to lose sales or market share or require us to lower prices for our Organic Rankine Cycle systems in order to compete effectively. If we have to reduce our prices by more than we anticipated, or if we are unable to offset any future reductions in our average selling prices by increasing our sales volume, reducing our costs and expenses or introducing new products, our gross profit would suffer.
 
 
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We also may face competition from some of our customers who evaluate our capabilities against the merits of manufacturing products internally. For instance, solar module manufacturers could attempt to develop components that directly perform DC to AC conversion in the module itself. Due to the fact that such customers may not seek to make a profit directly from the manufacture of these products, they may have the ability to manufacture competitive products at a lower cost than we would charge such customers. As a result, these customers may purchase fewer of our Organic Rankine Cycle systems or sell products that compete with our Organic Rankine Cycles s systems, which would negatively impact our revenue and gross profit.
 
A drop in the retail price of electricity derived from the utility grid or from alternative energy sources may harm our business, financial condition and results of operations.
 
We believe that a system owner’s decision to purchase an Organic Rankine Cycles system is strongly influenced by the cost of electricity generated by the proposed system relative to the retail price of electricity from the utility grid and the cost of other renewable energy sources, including electricity from Organic Rankine Cycles. Decreases in the retail prices of electricity from the utility grid would make it more difficult for all Organic Rankine Cycles systems to compete. In particular, growth in unconventional natural gas production and an increase in global liquefied natural gas capacity are expected to keep natural gas prices relatively low for the foreseeable future. Persistent low natural gas prices, lower prices of electricity produced from other energy sources, such as nuclear power, or improvements to the utility infrastructure could reduce the retail price of electricity from the utility grid, making the purchase of an Organic Rankine Cycles systems less economically attractive and lowering sales of our Organic Rankine Cycles systems. In addition, energy conservation technologies and public initiatives to reduce demand for electricity also could cause a fall in the retail price of electricity from the utility grid. Moreover, technological developments by our competitors in the solar components industry, including manufacturers of central inverters, could allow these competitors or their partners to offer electricity at costs lower than those that can be achieved from Organic Rankine Cycles installations based on our product platform, which could result in reduced demand for our products. If the cost of electricity generated by Organic Rankine Cycles systems is high relative to the cost of electricity from other sources, our business, financial condition and results of operations may be harmed.
 
We depend upon one outside contract manufacturer. Our operations could be disrupted if we encounter problems with this contract manufacturer.
 
We do not have internal manufacturing capabilities, and rely upon contract manufacturers to build our products. Our reliance on those contract manufacturers makes us vulnerable to possible capacity constraints and reduced control over component availability, delivery schedules, manufacturing yields and costs.
 
The revenues that our contract manufacturer generates from our orders represent a relatively small percentage of its overall revenues. As a result, fulfilling our orders may not be considered a priority in the event of constrained ability to fulfill all of their customer obligations in a timely manner. In addition, the facilities in which our Organic Rankine Cycles are manufactured are located outside of the United States. We believe that the location of these facilities outside of the United States increases supply risk, including the risk of supply interruptions or reductions in manufacturing quality or controls.
 
If our contract manufacturers were unable or unwilling to manufacture our products in required volumes and at high quality levels or renew existing terms under supply agreements, we would have to identify, qualify and select acceptable alternative contract manufacturers. An alternative contract manufacturer may not be available to us when needed or may not be in a position to satisfy our quality or production requirements on commercially reasonable terms, including price. Any significant interruption in manufacturing would require us to reduce our supply of products to our customers, which in turn would reduce our revenues, harm our relationships with our customers and damage our relationships with our distributors and end customers and cause us to forego potential revenue opportunities.
 
If we fail to retain our key personnel or if we fail to attract additional qualified personnel, we may not be able to achieve our anticipated level of growth and our business could suffer.
 
Our future success and ability to implement our business strategy depends, in part, on our ability to attract and retain key personnel, and on the continued contributions of members of our senior management team and key technical personnel, each of whom would be difficult to replace. All of our employees, including our senior management, are free to terminate their employment relationships with us at any time. Competition for highly skilled technical people is extremely intense, and we face challenges identifying, hiring and retaining qualified personnel in many areas of our business. If we fail to retain our senior management and other key personnel or if we fail to attract additional qualified personnel, we may not be able to achieve our strategic objectives and our business could suffer.
 
 
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Risks Related to Our LED Business
 
We face significant challenges managing our growth as the market adopts LEDs for general lighting.
 
Our potential for growth depends significantly on the adoption of LEDs within the general lighting market and our ability to affect this rate of adoption. Although LED lighting has grown rapidly in recent years, adoption of LEDs for general lighting is relatively new, still limited and faces significant challenges before widespread adoption.
 
If we are unable to effectively develop, manage and expand our distribution channels for our products, our operating results may suffer.
 
We have expanded into business channels that are different from those in which we have historically operated as we grow our business and sell LED lighting products. If we are unable to effectively penetrate these channels or develop alternate channels to ensure our products are reaching the appropriate customer base, our financial results may be adversely impacted. In addition, if we successfully penetrate or develop these channels, we cannot guarantee that customers will accept our products or that we will be able to deliver them in the timeline established by our customers.
 
We intend to sell a substantial portion of our products to distributors. We will rely on distributors to develop and expand their customer base as well as anticipate demand from their customers. If they are not successful, our growth and profitability may be adversely impacted. Distributors must balance the need to have enough products in stock in order to meet their customers’ needs against their internal target inventory levels and the risk of potential inventory obsolescence.
 
The risks of inventory obsolescence are especially true with technological products. The distributors’ internal target inventory levels vary depending on market cycles and a number of factors within each distributor over which we have very little, if any control.
 
We depend upon one outside contract manufacturer. Our operations could be disrupted if we encounter problems with this contract manufacturer.

All of our products are manufactured by Shanghai Lightsky Optoelectronics Technology Co., Ltd. located in Pujiang Town, Minhang district, Shanghai, China (“Lightsky”).  Under the terms of our exclusive distribution agreement we are required to purchase all of our LED products from Lightsky.  If Lightsky is unable to deliver our products on a timely basis at a competitive price, our business may be adversely impacted.
 
The markets in which we operate are highly competitive and have evolving technical requirements.
 
The markets for our products are highly competitive. In the LED market, we compete with companies that manufacture or sell LED chips and LED components as well as those that sell LED lighting products. Competitors continue to offer new LED products with aggressive pricing and improved performance. Competitive pricing pressures may change and could impact our gross margins.
 
We will operate in an industry that is subject to significant fluctuation in supply and demand that affects our LED revenue and profitability.
 
The LED lighting industry is in the early stages of adoption and is characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving standards, short product life-cycles and fluctuations in product supply and demand. The industry has experienced significant fluctuations, often in connection with, or in anticipation of product cycles and declines in general economic conditions. These fluctuations have been characterized by lower product demand, production overcapacity, higher inventory levels and increased pricing pressure.
 
 
18

 
The adoption of or changes in government and/or industry policies, standards or regulations relating to the efficiency, performance or other aspects of LED lighting or changes in government and/or industry policies, standards or regulations that discourage the use of certain traditional lighting technologies, could impact the demand for our LED products.
 
The adoption of or changes in government and/or industry policies, standards or regulations relating to the efficiency, performance or other aspects of LED lighting may impact the demand for our LED products.
 
Demand for our LED products may also be impacted by changes in government and/or industry policies, standards or regulations that discourage the use of certain traditional lighting technologies. For example, the Energy Independence and Security Act of 2007 in the United States imposed constraints on the sale of incandescent lights which began in 2012. These constraints may be eliminated or delayed by legislative action, which could have a negative impact on demand for our products.
 
Risks Related to Our TCS Business
 
General economic conditions may have an adverse impact on demand for our TCS.
 
Demand for TCS product is affected by general economic conditions. A downturn in the global solar PV panel market reduces demand for TCS. Uncertainties about economic conditions, negative financial news, tighter credit markets and declines in asset values have recently caused our customers to postpone or cancel making purchases of TCS. Increasing budgetary pressures could reduce or eliminate government subsidies and economic incentives for on-grid solar electricity applications. A prolonged downturn in the global economy, and a continuing worldwide oversupply of polysilicon, which requires TCS to be manufactured, could have a material adverse effect on our business in a number of ways, including decreased demand and lower pricing for our products, which would result in lower sales and/or net revenues. Uncertainty about future economic conditions and the overall status of solar energy compared to other sources of energy makes it challenging for us to forecast demand for our products and our operating results, make business decisions and identify the risks that may affect our business. If we are not able to timely and appropriately adapt to changes resulting from the difficult macroeconomic environment, our business, results of operations and financial condition may be materially and adversely affected.
 
We operate in an intensely competitive industry, and there can be no assurance that we will be able to compete effectively.
 
The TCS business is highly competitive, and other companies presently in the market, or that could enter the market, could adversely affect prices for the TCS we intend to sell. There are numerous other entities operating TCS plants, some of which are near or in our potential trade territory and supply region. Additionally, the Wendeng plant and Baokai operation will be in direct competition with other TCS producers, many of which have greater resources than we do. In light of such competition, and the current oversupply of polysilicon in the world and in China and there is no assurance that we will be able to compete or successfully sell our products at a profitable price.
 
To produce TCS we must purchase significant amounts of feedstock, which may not be available to us at reasonable costs or at all. TCS production requires significant amounts of feedstock including silica powder, chlorine liquid and methanol. We have entered into agreements with third party suppliers of feedstock, including silica powder, liquid chlorine and methanol, which are needed to produce TCS. It is currently believed that these third party suppliers will likely be able to supply increased demand for either feedstock. However, even if the producers of such materials are willing to supply such feedstock for use in the operation of our plant(s), there can be no assurance at this point that we will be able to enter into long-term contracts for such supplies at all or at favorable rates. A significant reduction in the quantity of feedstock or an increase in the prices of feedstock could result in increased costs with adverse financial consequences to us.
 
 
19

 
Our operating costs could be higher than we expect, and this could reduce any profits. In addition to general market fluctuations and economic conditions, we could experience significant operating cost increases from numerous factors, many of which are beyond our control. These increases could arise from, among others:
 
Higher feedstock prices because of an inadequate supply of or greater demand for feedstock;
 
Higher labor costs, particularly if there is a labor shortage;
 
Higher costs for electricity due to market conditions and demands; and
 
Higher transportation costs because of greater demands on truck transportation services.
 
In addition, operating the plant subjects us to ongoing compliance with applicable governmental regulations, such as those governing pollution control, occupational safety and other matters. We may have difficulty complying with these regulations and our compliance costs could increase significantly.
 
The price of TCS is affected primarily by the price of polysilicon. Recently due to a significant worldwide oversupply of polysilicon, the price of TCS, and the amount of new TCS orders required has materially decreased which has decreased the amount of revenue we generate. The length of time that this oversupply will continue is unknown. Our competitors may have large inventories of TCS that they are willing to sell at a loss.
 
The demand for TCS is dependent on numerous factors, including the price of polysilicon, governmental regulations, governmental incentives, and the development of other technologies or products that may compete with TCS. We cannot assure you that the demand for TCS will increase if the oversupply situation is mitigated. If the demand for TCS does not sufficiently increase and competitive TCS suppliers are willing to sell their existing TCS inventories at a loss, then TCS prices may remain at historically low levels. Decreases in the price of TCS will result in the Company generating lower projected revenue and profitability.
 
Technological advances could significantly decrease the cost of producing TCS or result in the production of higher quality TCS, and if we are unable to adopt or incorporate technological advances into our operations, the plant could become uncompetitive or obsolete.
 
We expect that technological advances in the processes and procedures for processing TCS will continue to occur. It is possible that those advances could make the processes and procedures that we intend to use at the plant less efficient or obsolete, or cause the TCS we produce to be of a lesser quality. These advances could also allow our competitors to produce TCS at a lower cost than us. If we are unable to adopt or incorporate technological advances, our TCS production methods and processes could be less efficient than our competitors, which could cause the plant to become uncompetitive.
 
Competition for qualified personnel in the TCS industry is intense, and we may not be able to hire and retain qualified managers, engineers and operators to operate the plant efficiently.
 
Our success depends in part on our ability to attract and retain competent personnel. We must hire or otherwise engage qualified managers, engineers and accounting, human resources, operations and other personnel. Competition for employees in the TCS industry is intense. If we are unable to hire, train and retain qualified and productive personnel, we may not be able to operate the plant efficiently and the amount of TCS we produce and market may decrease.
 
 
20

 
Risks Relating to the Solar Photovoltaic Industry
 
Government subsidies and economic incentives for on-grid solar electricity applications could be reduced or eliminated.
 
Demand for PV equipment, including on-grid applications, has historically been dependent in part on the availability and size of government subsidies and economic incentives. Currently, the cost of solar electricity exceeds the retail price of electricity in most major markets in the world. The reduction, expiration or elimination of relevant government subsidies or other economic incentives may result in the diminished competitiveness of solar energy relative to conventional and other renewable sources of energy, and adversely affect demand for PV equipment or result in increased price competition, all of which could cause our sales and revenue to decline and have a material adverse effect on our financial condition, results of operations, business and/or prospects. Conversely, the Chinese government has adopted feed-in-tariffs, which could significantly increase solar market demand. We may not, however, benefit from such feed-in-tariffs if we are unable to compete with other TCS manufacturers.
 
Further, any government subsidies and economic incentives could be reduced or eliminated altogether at any time and for any reason. Relevant statutes or regulations may be found to be anti-competitive, unconstitutional or may be amended or discontinued for other reasons. Some government subsidies and incentives have been subject to challenge in courts in certain foreign jurisdictions. New proceedings challenging minimum price regulations or other government incentives in other countries in which we conduct our business may be initiated, and if successful, could cause a decrease in demand for our products.
 
The reduction, expiration or elimination of relevant government subsidies or other economic incentives may result in the diminished competitiveness of solar energy relative to conventional and other renewable sources of energy, and adversely affect demand for PV equipment or result in increased price competition, all of which could cause our sales and revenue to decline and have a material adverse effect on our financial condition, results of operations, business and/or prospects.
 
Existing regulations and policies and changes to these regulations and policies may present technical, regulatory and economic barriers to the purchase and use of photovoltaic products.
 
The market for electricity generation products is heavily influenced by government regulations and policies concerning the electric utility industry, as well as policies promulgated by electric utilities. These regulations and policies often relate to electricity pricing and technical interconnection of user-owned electricity generation. In the United States and in a number of other countries, these regulations and policies are currently being modified and may be modified again in the future. These regulations and policies could deter end-user purchases of PV products and investment in the research and development of PV technology. For example, without a mandated regulatory exception for PV systems, utility customers are often charged interconnection or standby fees for putting distributed power generation on the electric utility grid. These fees could increase the cost to end-users of PV systems and make such systems less attractive to potential customers, which may have a material adverse effect on demand for our products and our financial condition, results of operations, business and/or prospects.
 
The photovoltaic industry may not be able to compete successfully with conventional power generation or other sources of renewable energy.
 
Although the PV industry has experienced growth in recent years, it still comprises a relatively small component of the total power generation market and competes with other sources of renewable energy, as well as conventional power generation. Many factors may affect the viability of widespread adoption of PV technology and thus demand for solar wafer manufacturing equipment, including the following:
 
cost-effectiveness of solar energy compared to conventional power generation and other renewable energy sources;
 
performance and reliability of solar modules compared to conventional power generation and other renewable energy sources and products;
 
 
21

 
availability and size of government subsidies and incentives to support the development of the solar energy industry;
 
success of other renewable energy generation technologies such as hydroelectric, wind, geothermal and biomass; and
 
fluctuations in economic and market conditions that affect the viability of conventional power generation and other renewable energy sources, such as increases or decreases in the prices of oil and other fossil fuels.
 
As a result of any of the foregoing factors, our financial condition, results of operations, business and/or prospects could be materially adversely affected.
 
Risks Related to Doing Business in China
 
Our TCS business operations take place primarily in China. Because Chinese laws, regulations and policies are continually changing, our Chinese operations will face several risks summarized below.
 
Limitations on Chinese economic market reforms may discourage foreign investment in Chinese businesses.
 
The value of investments in Chinese businesses could be adversely affected by political, economic and social uncertainties in China. The economic reforms in China in recent years are regarded by China’s central government as a way to introduce economic market forces into China. Given the overriding desire of the central government leadership to maintain stability in China amid rapid social and economic changes in the country, the economic market reforms of recent years could be slowed, or even reversed.
 
Certain political and economic considerations relating to China could adversely affect our company.
 
China is transitioning from a planned economy to a market economy. While the PRC government has pursued economic reforms since its adoption of the open-door policy in 1978, a large portion of the Chinese economy still operates under five-year and annual state plans. Through these plans and other economic measures, such as control on foreign exchange, taxation and restrictions on foreign participation in the domestic market of various industries, the PRC government exerts considerable direct and indirect influence on the economy. Many of the economic reforms carried out by the PRC government are unprecedented or experimental, and are expected to be refined and improved. Other political, economic and social factors can also lead to further readjustment of such reforms. This refining and readjustment process may not necessarily have a positive effect on our operations or future business development. Our operating results may be adversely affected by changes in China’s economic and social conditions as well as by changes in the policies of the PRC government, such as changes in laws and regulations, or the official interpretation thereof, which may be introduced to control inflation, changes in the interest rate or method of taxation, and the imposition of additional restrictions on currency conversion.
 
Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.
 
Due to various restrictions under PRC laws on the distribution of dividends by our PRC operating companies, we may not be able to pay dividends to our stockholders.
 
The PRC government imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. If we ever determine to pay a dividend, we may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency.
 
 
22

 
Currency conversion and exchange rate volatility could adversely affect our financial condition and the value of our common stock.
 
The PRC government imposes control over the conversion of Renminbi, or RMB, into foreign currencies. Under the current unified floating exchange rate system, the People’s Bank of China, or PBOC, publishes an exchange rate, which we refer to as the PBOC exchange rate, based on the previous day’s dealings in the inter-bank foreign exchange market. Financial institutions authorized to deal in foreign currency may enter into foreign exchange transactions at exchange rates within an authorized range above or below the PBOC exchange rate according to market conditions.
 
Pursuant to the Foreign Exchange Control Regulations of the PRC issued by the State Council which came into effect on April 1, 1996 (which has been amended in 1997 and 2008), and the Regulations on the Administration of Foreign Exchange Settlement, Sale and Payment of the PRC which came into effect on July 1, 1996, regarding foreign exchange control, conversion of RMB into foreign exchange by Foreign Investment Enterprises, or FIEs, for use on current account items, including the distribution of dividends and profits to foreign investors, is permissible. FIEs are permitted to convert their after-tax dividends and profits to foreign exchange and remit such foreign exchange to their foreign exchange bank accounts in China. Conversion of RMB into foreign currencies for capital account items, including direct investment, loans, and security investment, is still under certain restrictions. On January 14, 1997, the State Council amended the Foreign Exchange Control Regulations and added, among other things, an important provision, which provides that the PRC government shall not impose restrictions on recurring international payments and transfers under current account items.
 
Enterprises in China, including FIEs, which require foreign exchange for transactions relating to current account items, if within a certain limited amount may, without approval of the State Administration of Foreign Exchange, or SAFE, effect payment from their foreign exchange account or convert and pay at the designated foreign exchange banks by providing valid receipts and proofs.
 
Convertibility of foreign exchange for capital account items, such as direct investment and capital contribution, is still subject to certain restrictions, and prior approval from the SAFE or its relevant branches must be sought.
 
Between 1994 and 2004, the exchange rate for RMB against the US dollar remained relatively stable, most of the time in the region of RMB8.28 to US$1.00. However, in 2005, the Chinese government announced it would begin pegging the exchange rate of the RMB against a number of currencies, rather than just the US dollar. As our operations are primarily in China, any significant revaluation of the RMB may materially and adversely affect our cash flows, revenues, financial condition and the value of our common stock. For example, to the extent that we need to convert US dollars into RMB for our operations, appreciation of this currency against the US dollar could have a material adverse effect on our business, financial condition, results of operations and the value of our common stock. Conversely, if we decide to convert our Renminbi into US dollars for the purpose of declaring dividends on our common stock or for other business purposes and the US dollar appreciates against the RMB, the US dollar equivalent of our earnings from our subsidiaries in China would be reduced.
 
The legal system in China has inherent uncertainties that may limit the legal protections available in the event of any claims or disputes with third parties.
 
The legal system in China is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. Since 1979, the central government has promulgated laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade. As China’s foreign investment laws and regulations are relatively new and the legal system is still evolving, the interpretation of many laws, regulations and rules is not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit the remedies available in the event of any claims or disputes with third parties. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.
 
Risks Related to Regulation and Governmental Action
 
Compliance with new and existing environmental laws and regulations could significantly increase our costs.
 
To operate our TCS plant, we need to comply with a number of permitting requirements. We may have difficulties obtaining these permits.
 
 
23

 
Our business is subject to extensive and potentially costly environmental regulations that could change and significantly increase our operating costs.
 
We are subject to environmental regulations of China regulatory agencies. These regulations could result in significant compliance costs and may change in the future. Also, such agencies may seek to implement additional regulations or implement stricter interpretations of existing regulations. Changes in environmental laws or regulations or stricter interpretation of existing regulations may require significant additional capital expenditures or increase our operating costs, thereby causing the loss of some or all of your investment.
 
In addition, the plant could be subject to environmental nuisance or related claims by employees, property owners, environmental groups or residents near the plant arising from air, water or other discharges.
 
These individuals and entities may object to these discharges and emissions into the environment from the plant. Environmental and public nuisance claims, tort claims based on emissions, or increased environmental compliance costs could significantly increase our operating costs and affect our profitability.
 
Risks Related to our Common Stock
 
There is no assurance that we will be able to pay dividends to our shareholders, which means that you could receive little or no return on your investment.
 
Payment of dividends from our earnings and profits may be made at the sole discretion of our board of directors, subject to the provisions of the Nevada Revised Statutes, our articles and restrictions imposed by our creditors. There is no assurance that we will generate any distributable cash from operations. Our board may elect to retain cash for operating purposes, debt retirement, plant improvements or expansion. Consequently, you may receive little or no return on your investment.
 
We may authorize and issue shares of new classes that could be superior to or adversely affect you as a holder of our common stock.
 
Our board of directors and shareholders have the power to authorize and issue shares of classes that have voting powers, designations, preferences, limitations and special rights, including preferred distribution rights, conversion rights, redemption rights and liquidation rights. These shares may be issued at a price and on terms determined by our board of directors. The terms of the shares and the terms of issuance of the shares could have an adverse impact on your rights and could dilute your financial interest in us.
 
Our shares will be subordinate to all of our debts and liabilities, which increases the risk that you could lose your entire investment.
 
Our shares are equity interests that will be subordinate to all of our current and future indebtedness with respect to claims on our assets. In any liquidation, all of our debts and liabilities must be paid before any payment is made to our shareholders. The amount of any debt financing we incur to finance the construction and commencement of operations at the plant, plus possible additional borrowings and operating liabilities, creates a substantial risk that in the event of our bankruptcy, liquidation or reorganization, we may have no assets remaining for distribution to our shareholders after payment of our debts.
 
 
24

 
There is a limited public market for our Common Stock.
 
There is currently a limited public market for the common stock. Holders of our common stock may, therefore, have difficulty selling their common stock, should they decide to do so. In addition, there can be no assurances that such markets will continue or that any shares of Common Stock will be able to be sold without incurring a loss. Any such market price of the common stock may not necessarily bear any relationship to our book value, assets, past operating results, financial condition or any other established criteria of value, and may not be indicative of the market price for the common stock in the future. Further, the market price for the common stock may be volatile depending on a number of factors, including business performance, industry dynamics, news announcements or changes in general economic conditions.
 
Our Common Stock trades on the OTCQB.
 
Our Common Stock is currently listed for trading on the OTCQB, which is generally considered to be a less efficient market than markets such as NASDAQ or other national exchanges, and which may cause difficulty in conducting trades and difficulty in obtaining future financing. For companies whose securities are traded on the OTCQB, it is more difficult: (i) to obtain accurate quotations, (ii) to obtain coverage for significant news events because major wire services, such as the Dow Jones News Service, generally do not publish press releases about such companies, and (iii) to obtain needed capital.
 
In late September 2011 we applied for listing on the NASDAQ Capital Markets. Although we met all of the NASDAQ’s quantitative listing criteria by the end of November 2012 in terms of minimum net worth, trading price and number of shareholders, NASDAQ has discretionary authority whether to grant to listing so there is a possibility that we may not be accepted for listing.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2. PROPERTIES
 
Wendeng
 
Our Wendeng TCS manufacturing facilities and related offices are located on approximately 11 acres of property in Beizhenge Village, Mishan Town, Wendeng City, China. The annual property tax is approximately $20,000.
 
TPE
 
Corporate Offices
 
We lease our principal offices at 245 Park Avenue, 39th Floor, New York, New York, 10167 at a cost of $2,400 per year. Our phone number is (212) 672-1786.
 
ITEM 3. LEGAL PROCEEDINGS
 
None.
 
ITEM 4. MINE SAFETY DISCLOSURES
 
N/A
 
 
25

 
PART II
 
 
Market Information
 
Our common stock is currently quoted on the OTCQB of OTC Markets. The OTCQB is a network of security dealers who buy and sell stock. The dealers are connected by a computer network that provides information on current "bids" and "asks", as well as volume information. Our shares are quoted on the OTCQB under the symbol “FNRG”.
 
The following table sets forth the range of high and low bid quotations for our common stock for each of the periods indicated as reported by the OTCQB. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
 
Quarter Ended
 
High
   
Low
 
 
$
5.50
   
$
4.62
 
 
$
5.64
   
$
3.40
 
 
$
4.52
   
$
2.10
 
 
$
7.60
   
$
2.42
 
 
$
8.20
   
$
6.00
 
 
$
8.06
   
$
6.80
 
 
$
7.10
   
$
6.00
 
 
$
7.20
   
$
5.40
 
 
Holders of Our Common Stock
 
As of April 10, 2013, we had 16,181,761 shares of our common stock issued and outstanding, held by 608 shareholders of record.
 
 
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Dividends
 
The Company has not declared, or paid, any cash dividends since inception and does not anticipate declaring or paying a cash dividend for the foreseeable future. Nevada law prohibits our board from declaring or paying a dividend where, after giving effect to such a dividend, (i) we would not be able to pay our debts as they came due in the ordinary course of our business, or (ii) our total assets would be less than the sum of our total liabilities plus the amount that would be needed, if the corporation were to be dissolved at the time of distribution, to satisfy the rights of any creditors or preferred stockholders.
 
Securities Authorized for Issuance under Equity Compensation Plans
 
We do not have any equity compensation plans.
 
Recent Sales of Unregistered Securities
 
During the quarter ended December 31, 2012, we had the following issuances of unregistered securities:

On October 10, 2012, we issued 4,800 shares of our common stock for compensation of the independent members of our board of directors. The shares issued were valued at $24,000.

From October 1 to December 31, 2012, as part of an ongoing private placement of up to 1,500,000 shares of our common stock, we sold 212,750 shares of our common stock to 14 accredited investors at $4.00 per share, resulting in gross proceeds of $851,000. The proceeds, net of commissions, were $765,900. In connection with the private placement, we issued warrants to purchase 212,750 shares of our common stock at an exercise price of $4.00 per share for a term of one year.

With respect to the sales of our securities described above, we relied on the Section 4(2) exemption from securities registration under the federal securities laws for transactions not involving any public offering. No advertising or general solicitation was employed in offering the securities. The securities were sold to accredited investors. The securities were offered for investment purposes only and not for the purpose of resale or distribution, and the transfer thereof was appropriately restricted by us.
 
ITEM 6. SELECTED FINANCIAL DATA
 
A smaller reporting company is not required to provide the information required by this Item.
 
ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Forward-Looking Statements
 
Information set forth in this Annual Report on Form 10-K contains various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act). All information contained in this report relative to future markets for our products and trends in and anticipated levels of revenue, gross margins and expenses, as well as other statements containing words such as “believe,” “project,” “may,” “will,” “anticipate,” “target,” “plan,” “estimate,” “expect” and “intend” and other similar expressions constitute forward-looking statements. These forward-looking statements are subject to business, economic and other risks and uncertainties, both known and unknown, and actual results may differ materially from those contained in the forward-looking statements. Any forward-looking statements we make are as of the date made, and except as required under the U.S. federal securities laws and the rules and regulations of the Securities and Exchange Commission (SEC), we disclaim any obligation to update them if our views later change. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date of this Annual Report. Examples of risks and uncertainties that could cause actual results to differ materially from historical performance and any forward-looking statements include, but are not limited to, those described in “Risk Factors” in Item 1A of this Annual Report.
 
 
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ForceField is a U.S. based company with four distinct operating segments:
 
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Owns 50.3% of TransPacific Energy, Inc. (“TPE”) a U.S. based renewable energy technology provider that uses “waste heat” from various manufacturing and other sources to provide clean electricity.
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Is the exclusive North American distributor of LED commercial lighting and fixtures for a premier LED manufacturer in China.
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Is a significant producer of trichlorosilane (“TCS”) in China. TCS is a chemical primarily used in the production of polysilicon, which is an essential raw material in the production of solar cells for PV panels that convert sunlight to electricity. This TCS is sold to the marketplace via two operating segments, (1) a 90% owned TCS distribution company, and (2) through the 60% ownership of a TCS plant, both of which are located in China.
 
Results of Operations for the Years Ended December 31, 2012 and 2011
 
ORC Overview
 
Prior to our acquisition of TPE in August 2012, TPE entered into two separate agreements with a large steel company in California (1 unit) and an aerospace company in Dallas (1 unit) to sell them ORC units. These ORC units are in the process of being built and are the first ORC units that will operate with our proprietary TPE fluids. These units will generate a breakeven gross margin for us because the cost of these ORC units includes very substantial one-time initial R&D and engineering work of approximately $400,000. These R&D expenses and engineering work can be leveraged and will reduce the cost of future ORC units. These costs were borne by TPE prior to our acquisition of them and do not impact our profitability.  During the period ended December 31, 2012 we recorded $240,438 in revenue from ORC sales and expect to record an additional aggregate $800,000 in revenue on these units during 2013 when they are completed. If the ORC units operate successfully at each location we expect to receive additional orders for ORC units from both companies although there can be no assurances.
 
On January 18, 2013, we entered into a definitive agreement to install up to four of our ORC units at the Zibo Qilin Fushan Iron & Steel Company (“Qilin”). Qilin, a steel producing company that is located in the Shandong province of China, is the subsidiary of a $28 billion Chinese entity. The ORC units will create significant value through the use of enhanced heat transfer techniques to maximize heat recovery and efficiently convert waste heat directly into renewable electrical energy. TPE determined that the Qilin plant can host four ORC units and generate up to 1.3 Megawatts of incremental electrical energy, annually. In the first phase of the project, we will install two ORC units that will generate approximately 650 Kilowatts of supplemental electricity. We will retain ownership of the ORC units and sell the supplemental electricity generated back to Qilin at a price discounted from the price they pay to their local utility company to purchase electricity. We expected to generate approximately $600,000 in revenue annually, for a twenty year period. Upon successful completion of the first phase, we can at our discretion install two additional ORC units also generating 650 Kilowatts of supplemental electricity. The successful completion of the project is expressly contingent on our obtaining financing on favorable terms in order to build our ORC units. We believe will be successful in obtaining such financing however we can provide no assurances.
 
We continue to assess other potential ORC projects in the United States and internationally and believe that we will enter into additional contracts that will generate ORC revenue, although there can be no assurances.
 
LED Overview
 
Since we acquired the LED distribution rights in August 2012, we have entered into a numbers of trials for our Lightsky LED products.  Additionally we have begun appointing sub-distributors to distribute our LED products. To date, we believe we have made good progress in establishing our sub-distribution network and creating awareness of our LED products.  A summary of our activity is as follows:
 
Sub-Distribution Agreement and Partnerships:
 
 
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On September 5, 2012 we retained the services of Global Resources Group a Dallas based and well-established company specializing in building distribution networks and sales channels.
 
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On October 23, 2012, we announced that our entrance into a strategic alliance with Commonwealth Energy Group, LLC, an energy consulting firm focused on providing significant improvements in energy efficiency through green energy technology solutions. Through the strategic alliance, Commonwealth is expected to offer to its customers turnkey LED lighting solutions utilizing our LED products.
 
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On January 29, 2013, we entered into a distribution agreement with Gonneville, Inc., a Service-Disabled, Veteran-Owned, Small Business Enterprise (SDVOB) and a Small Business Enterprise (SBE) which specializes in the distribution of MultiQuip (MQ) power generation and lighting equipment. Gonneville’s customers include California and federal government agencies, which generally require multiple bids.
 
Ø
On February 22, 2013, we announced our entrance into a 5-year distribution agreement for both LED and ORC products which was signed with DEK International (“DEK”), a global supplier of gaming tables, slots and bingo products to the gaming industry. Initially, our LED products will be marketed by DEK on its website and marketing materials. Headquartered in Panama, DEK operates through a network of offices in more than 25 countries with a core presence in Latin America.
 
Ø
On March 11, 2013 we signed a cross-distribution agreement with PowerOneData whereby each company will represent and sell each other’s energy efficiency products and solutions in the United States, Canada, Mexico, and Latin America. PowerOneData will initially focus on distributing the LED products and solutions in conjunction with its Automated Street Light Management (ASLM) system, and ForceField will focus on the distribution of PowerOneData’s smart meters, Genii™ advanced Database Management Software and other related products and software.
 
Currently we are bidding on a number of projects of varying sizes, one of which is a streetlight project in Costa Rica which could generate in excess of $10.0 million in revenue over a five year period. Additionally we have LED trials in process at a number of locations throughout the United States and in Latin America. We expect to win a number of these bids including the large Costa Rica bid, however, there can be no assurances we will be successful.
 
Also as part of our LED marketing activity, we expect to be able to offer non-recourse third party financing to potential LED clients. In March 2013 we entered into an agreement with two of the top ten U.S. banks to provide such financing with potential credit limits in the millions of dollars. This program enables them to obtain, in some cases up to 100% financing for an LED project with the Company at competitive rates depending on the credit-worthiness of the client. This debt or lease obligation would be carried on the books of the client and not that of the Company. We believe that the type of client we are targeting would qualify for such financing thus enabling us to sell our LED products to them and be paid in full without the necessity of providing internal capital. There can be no assurances that this financing program will be successful or that our targeted clients will qualify for such financing.
 
We did not record any revenues from the sale of our LED products for the period ended December 31, 2012 and expect to record approximately $25,000 in LED revenue for the period ended March 31, 2013. We believe the establishment of a sub-distribution network which we expect to continue to expand in size as well as the projects we are currently bidding on and have already generated revenue from, will result in significant LED revenue in 2013 and beyond, although there can be no assurances.
 
TCS Overview
 
Since November 2011, the low price of polysilicon coupled with the significant oversupply of polysilicon has had a material adverse impact on the price that we could sell TCS for and the level of plant utilization at Wendeng and our exclusive supplier to Baokai, ZBC. This has negatively impacted our revenues and results of operations. Due to the current polysilicon oversupply situation we believe that an industry consolidation is occurring where we will emerge as one of the strongest entities and lowest cost producers. Our Wendeng facility except for a brief period when it operated in November 2012, has been closed since December 2011. We had expected Wendeng to open in 2012; however, the ongoing low pricing of polysilicon and the dumping of pre-existing polysilicon inventories below cost by many polysilicon companies in order to generate cash flow has resulted in low price bids from our customers to supply them TCS at levels which would not enable us to operate profitably. During 2012, our cash operating losses at Wendeng were approximately $10,000-$20,000 per month. These losses are significantly less than the loss we would have incurred by producing TCS and selling it at the market price during 2012 which was below our cash cost of production. Therefore, our operating losses were lower by staying closed rather than manufacturing TCS at a significantly higher loss. Our Wendeng facility sold some of its existing inventory during 2012 at a loss however, it has not manufactured any significant amounts of TCS during 2012.
 
 
29

 
In late March and early April 2013 Wendeng sold approximately 40-50 metric tons of TCS from its existing inventory and began the process of opening the Wendeng production facility to begin manufacturing TCS for a subsidiary of GCL-Poly Energy Holdings Ltd, the world's biggest polysilicon manufacturer who has placed an order with Wendeng to produce up to 1,500 metric tons per month for a 12 month period. Based on current TCS pricing, the order if completely fulfilled and delivered by Wendeng, would generate approximately $9.7 million dollars in revenue. There can be no assurances that the order will be completely fulfilled.
 
Due to the recent volatile nature of the TCS industry, and the desire of many polysilicon makers to sell their existing inventory below cost to generate cash flow and since the TCS industry operates on a “spot price” market there can be no assurances that Wendeng’s client will take full delivery of the 18,000 metric tons. Nor can there be any assurances that Wendeng will open and begin manufacturing TCS. However, we believe based on current indications that this client will place a non-cancellable order for the first month of production of 1,500 metric tons.
 
Baokai, our TCS distribution company, has been open and closed at various periods during 2012 and through early 2013. During this period, the Baokai distribution segment operated at a breakeven level because we did not incur any significant marketing or business development expenses directly associated with Baokai operations.
 
The world polysilicon prices have decreased drastically from selling at a high of $475 per kilogram (“kg”) in 2008 to a low of $15.83 per kg in December 2012. Polysilicon average spot prices have been recently increasing somewhat, most recently trading at $16.16 per kg on January 23, 2013 and up to $17.50 per kg on March 4, 2013. Mercom Capital Group in its weekly Solar Market Intelligence Report dated March 4, 2013, offered the following positive insights for the polysilicon market:
 
Spot polysilicon prices are rising, in part due to Chinese anti-dumping investigation against polysilicon import from the US, EU, and Korea
Despite limited transactions in the spot market for PV grade polysilicon, PV poly makers continue raising their prices
So far in 2013, China based polysilicon prices have been rebounding the most, pushing international firms to adjust quotes as well
The prices are up slightly across the supply chain due to continued strong demand from China, Japan and U.S.
 
Despite recent upticks, as a result of these historically low prices for polysilicon, the great majority of China’s polysilicon plants; and other polysilicon plants around the world have suspended production at some point during 2012 and continue to do so in early 2013. An estimated 50-80% of China’s polysilicon capacity is currently idle. Based on the recent order we received at Wendeng, our industry knowledge and market information available we expect to see continuing improvement in the first half of 2013 with further improvement improve in the latter half of 2013 and beyond, although there can be no assurances.
 
 
30

 
Segment Results
 
The following table sets forth operations by segment for the years ended December 31, 2012 and 2011:
 
   
TCS
                         
   
Baokai
   
Wendeng
   
ORC
   
LED
   
Corporate
   
Consolidated
 
Sales:
                                               
2012
 
$
1,202,450
   
$
686,353
   
$
240,238
   
$
   
$
   
$
2,129,041
 
2011
 
$
14,546,790
   
$
13,791,599
   
$
   
$
   
$
   
$
28,338,389
 
Cost of goods sold:
                                               
2012
 
$
1,178,389
   
$
654,207
   
$
240,238
   
$
   
$
   
$
2,072,834
 
2011
 
$
14,234,315
   
$
9,881,216
   
$
   
$
   
$
   
$
24,115,531
 
Gross margin:
                                               
2012
 
$
24,061
   
$
32,146
   
$
   
$
   
$
   
$
56,207
 
2011
 
$
312,475
   
$
3,910,383
   
$
   
$
   
$
   
$
4,222,858
 
Operating expenses:
                                               
2012 (2)
 
$
68,310
   
$
1,770,458
   
$
57,950
   
$
148,626
   
$
1,986,312
   
$
4,031,656
 
2011 (1)
 
$
389,697
   
$
5,958,175
   
$
   
$
   
$
1,020,970
   
$
7,368,842
 
Other income (expense):
                                               
2012
 
$
   
$
(287,449
)
 
$
   
$
   
$
(19,010
)
 
$
(306,459
)
2011
 
$
   
$
   
$
   
$
   
$
   
$
 
Provision for income taxes:
                                               
2012
 
$
(129,788
)
 
$
(229,106
)
 
$
(23,138
)
 
$
   
$
48,204
   
$
(338,828
)
2011
 
$
58,802
   
$
109,944
   
$
   
$
   
$
   
$
168,746
 
Net income (loss):
                                               
2012
 
$
85,539
   
$
(1,796,655
)
 
$
(34,812
)
 
$
(148,626
)
 
$
(2,053,526
)
 
$
(3,948,080
)
2011
 
$
(136,024)
   
$
(2,157,736)
   
$
   
$
   
$
(1,020,970
)
 
$
(3,314,730
)
———————
(1) 2011 Includes goodwill impairment charge of $312,433 and $2,487,567 at Baokai and Wendeng, respectively.
(2) 2012 Includes goodwill impairment charge of $607,422 at Wendeng.
 
Our operating segments do not sell any products to each other, and accordingly, there are no inter-segment revenues to be reported.
 
Revenue
 
Sales for the year ended December 31, 2012 totaled $2,129,041, compared to $28,338,389 for the year ended December 31, 2011.
 
Sales for the year ended December 31, 2012 and 2011 were comprised of $1,202,450 and $14,546,790, respectively, from our Baokai segment; $686,353 and $13,791,599, respectively, from our Wendeng segment; and $240,238 and nil, respectively, from our ORC segment. All sales for Baokai and Wendeng segments were recorded within China; with the exception of one sale made by Wendeng to Russia valued at approximately $188,000 in 2011. All revenue recognized by our ORC segment was recorded within the United States; no prior year period comparable results exist as our ORC segment was acquired on August 20, 2012.
 
The price of TCS in China is typically based on short-term contracts and spot prices; enabling both the buyer and the seller to adapt to changing market conditions. During 2011, the price of TCS ranged from a high of approximately $1,600 per metric ton to a low of approximately $635 per metric ton. This decline in TCS pricing was consistent with the decrease in the price of polysilicon, which has fallen approximately 60%-70% from January 2011. Furthermore, a global oversupply of polysilicon has continued to materially reduce both the price and demand for TCS since the fourth quarter 2011. These factors have adversely impacted our Chinese subsidiaries’ operating results.
 
 
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The pricing of TCS is expected to remain depressed for the remainder of 2012. Both Baokai and Wendeng have received minimal orders in the fourth quarter of 2012 and are currently operating at limited capacity. We expect the TCS and polysilicon markets will improve during the first half of 2013; however, we can provide no assurances.
 
Gross Margin
 
We calculate gross margin by subtracting cost of goods sold from sales. Gross margin percentage is calculated by dividing gross margin by sales.
 
Gross margin for the year ended December 31, 2012 was $56,207, compared to $4,222,858 for the year ended December 31, 2011. Gross margin percentage for the year ended December 31, 2012 was 2.6%, compared to 14.9% for the year ended December 31, 2011.
 
The decrease in gross margin is primarily attributable to the decreased level of sales and sales prices realized compared to the prior year periods. Our gross margin and gross margin percentage continue to be adversely impacted by the low price levels and demand for polysilicon.
 
For the year ended December 31, 2012, we realized a gross margin percentage of 2.0% at our Baokai segment, compared to a gross margin percentage of 2.1% in the prior year period. Our margins are currently fixed at 2% on sales recorded at our Baokai segment. We are a distributor of TCS produced by Zibo Baoyun Chemical Factory. Our purchase price is fixed to the percentage of the selling price; therefore, our gross margin percentage is not affected by market price fluctuations. We have the opportunity to realize greater margin percentages, potentially up to 10-15%, at our Baokai segment if we introduce new customers to ZBC. There can be no assurances that we will be successful in generating new customers or realizing these higher margin opportunities.
 
For the year ended December 31, 2012, we realized a gross margin percentage of 4.7% at our Wendeng segment, compared to a gross margin percentage of 28.4% in the prior year period. The decrease in gross margin and gross margin percentage at our Wendeng segment is directly attributable to the decline in the segment’s product sales and sale prices as described above.
 
For the year ended December 31, 2012, we realized an effective gross margin percentage of 0.0% at our ORC segment. This ORC project was in process prior to our acquisition of TPE. It was contracted with the intention of demonstrating the viability of TPE’s technology. We do not expect this project to generate any positive gross margin. We do expect to generate significant revenues and gross margins from future ORC projects; however, we can provide no assurances.
 
Professional Fees
 
Professional fees totaled $582,297 for the year ended December 31, 2012, compared to $772,868 for the year ended December 31, 2011.
 
Professional fees consist of legal, accounting and other consulting or service provider fees. Most of our professional services are attributable to our status as a publicly traded company. The decrease in our professional fees when compared to the prior year is largely attributable to the increased audit accounting review and compliance services related to the acquisitions of our Chinese subsidiaries in late 2010 and early 2011, of which all were paid during 2011.
 
General and Administrative Expenses
 
General and administrative (“G&A”) expenses totaled $2,841,937 for the year ended December 31, 2012, compared to $3,795,974 for the year ended December 31, 2011.
 
The primary components of our G&A expenses include salaries and benefits not directly associated with our manufacturing processes, depreciation on non-production capital assets, amortization, facility costs and maintenance, investor relations activities and various administrative and office expenses. The decrease in our G&A expenses for the year ended December 31, 2012 when compared to the prior year period is largely attributable to the temporary closure of our Wendeng facility.
 
 
32

 
Provision for Income Taxes
 
We recorded an income tax benefit of ($333,828) for the year ended December 31, 2012, compared to a provision for income taxes of $168,746 for the year ended December 31, 2011.
 
Our provisions for income taxes or income tax benefits include the results of the operations realized at our Chinese subsidiaries. They are recorded at a 25% tax rate, which is the statutory rate in China for all earnings. Any profits generated in China are not available for offset against net operating losses in the United States.
 
As of December 31, 2012, we had federal, state and foreign net operating loss carryforwards aggregating $5,195,614 that are available to offset future liabilities for income taxes. We have generally established a valuation allowance against these carryforwards based on an assessment that it is more likely than not that these benefits will not be realized in future years. The federal and state net operating loss carryforwards expire at various dates through 2032.
 
Goodwill Impairment
 
Goodwill represents the excess of cost over fair value of assets of businesses acquired. Goodwill acquired in a business combination is not amortized. We evaluate the carrying amount of goodwill for impairment annually on December 31 and whenever events or circumstances indicate impairment may have occurred.
 
When evaluating whether goodwill is impaired, we compare the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. The fair value of the reporting unit is estimated using a combination of the income, or discounted cash flows, approach and the market approach, which utilizes comparable companies’ data. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of reporting unit goodwill to its carrying amount. In calculating the implied fair value of reporting unit goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value.
 
Due to the inability to meet anticipated sales growth, we assessed the acquired goodwill associated with our related business units for impairment as of December 31, 2012. Based on the discounted cash flows model utilizing estimated future earnings and cash flows, the fair value of the reporting units was less than the carrying value of the acquired goodwill. Our evaluation of goodwill resulted in a total impairment charge of $607,422; of which all was attributed to Wendeng.
 
At December 31, 2011, our evaluation of goodwill resulted in a total impairment charge to its goodwill of $2,800,000; of which $2,487,567 was attributed to Wendeng and $312,433 was attributed to Baokai.
 
Net loss attributable to ForceField's common shareholders
 
For the year ended December 31, 2012, we incurred a net loss of ($3,948,080), compared to a net loss of ($3,314,730) for the year ended December 31, 2011. After deducting the net loss from noncontrolling interests, our net loss attributable to our common shareholders was ($3,220,672) and ($2,438,033) for each year respectively.
 
The weighted average number of basic and fully diluted shares outstanding for the year ended December 31, 2012 was 15,390,259 compared to 14,635,641 for the year ended December 31, 2011.
 
There are no dilutive equivalents included in our calculation of fully diluted shares for the years ended December 31, 2012 and 2011, since their inclusion would be anti-dilutive due to our net loss per share.
 
 
33

 
Liquidity and Capital Resources
 
At December 31, 2012, we had cash on hand of $994,149. Of this amount, $624,688 was on deposit with institutions located in the United States, $369,418 in China and $43 in Hong Kong. For the foreseeable future, we do not intend to repatriate any funds from China to support our operations within the United States. Prior to our acquisition of a controlling interest in TPE and the exclusive North American distribution rights to Lightsky products, our U.S.-based operations consisted solely of a holding company that incurred expenses and had no revenue generating activities. Proceeds generated from private placements of our common stock and loans have been the primary sources of funding for our U.S.-based operations. We believe our current cash position and ability to raise funds through the sale of new equity and convertible notes, coupled with the revenue potential of our newly acquired U.S.-based businesses, will be sufficient to fund our U.S. activities for the next twelve months. Furthermore, we expect to generate positive cash flow over the next twelve months which will supplement our cash position.
 
At December 31, 2012, we had a working capital deficit of $4,933,978. The deficit is primarily attributable to the related party payable of $5,488,840 due to the minority shareholder of Wendeng. These funds were used to build and expand the Wendeng facility. Our Wendeng subsidiary minority shareholder is currently not requesting repayment of this amount; however, since this is an interest free demand loan to the Company, it has been categorized as a current liability.
 
Net cash used in operating activities was $1,568,306 for the year ended December 31, 2012, compared to net cash used in operating activities of $820,067 for the year ended December 31, 2011. The increase in net cash used during 2012 as compared to 2011 is attributable to an increase in our net loss to ($3,948,080) from ($3,314,730) in the prior year period; offset by a significant improvement in cash provided by the net change in our operating assets and liabilities over the prior year period. Our current period operating loss includes non-cash depreciation and amortization expenses of $1,334,722 and aggregate reserves against our working capital assets (accounts receivable and inventory) of $305,672, as compared to $928,566 of depreciation and amortization and aggregate reserves against working capital assets of $117,447 in the prior year period.
 
Net cash used in investing activities was $326,855 for the year ended December 31, 2012, compared to net cash used in investing activities of $275,562 for the year ended December 31, 2011. The net cash used in the current period is attributable to the purchase of $249,514 in capital assets by our Wendeng production facility and $520,000 to acquire a controlling interest in TPE; offset by $442,629 in cash acquired in the transaction. During the year ended December 31, 2011, we realized a net cash increase of $533,594 from our acquisition of Wendeng, which was mostly funded with shares of our common stock. Capital expenditures in the prior year period totaled $655,035 for property, plant and equipment and $356,725 for intangible assets (land use rights).

Net cash provided by financing activities was $2,211,078 for the year ended December 31, 2012, compared to $1,167,323 for the year ended December 31, 2011. We received $2,243,400 in net proceeds from the issuance of new equity, compared to $1,687,500 in the prior year period. Additionally, we received $129,600 in short term loan proceeds from third party sources and a $40,000 advance from an officer to help fund our corporate expenditures; of which all was repaid as of December 31, 2012. During the year ended December 31, 2011, we made payments totaling $389,196 on amounts due to related parties.
 
Critical Accounting Policies
 
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Our management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions.
 
Use of Estimates
 
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States 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. Actual results could differ from those estimates.
 
 
34

 
In preparing financial statements in conformity with US GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported periods. These accounts and estimates include, but are not limited to, the valuation of accounts receivable, inventories, deferred income taxes and the estimation on useful lives of property, plant and equipment. Actual results could differ from those estimates.
 
Financial Instruments
 
The Company considers all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are stated at cost and consist solely of bank deposits held in the United States, Hong Kong and China. The carrying amount of cash and cash equivalents approximates fair value.
 
At December 31, 2012, cash and cash equivalents totaling $369,461 were held in banks in China; a Wendeng branch of Industrial & Commercial Bank of China and a Central District, Hong Kong branch of HSBC Bank. The remittance of these funds out of China is subject to exchange control restrictions imposed by the Chinese government. Deposits in banks in China are not insured by any government entity or agency, and are consequently exposed to risk of loss. Management believes the probability of a bank failure, causing loss to the Company, is remote.
 
Concentration of Credit Risk
 
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. At December 31, 2012 and December 31, 2011, the Company’s cash and cash equivalents and restricted cash were held by major financial institutions located in the United States, Hong Kong and China, which management believes are of high credit quality.
 
With respect to accounts receivable, the Company extends credit based on an evaluation of the customer’s financial condition. The Company generally does not require collateral for trade receivables and maintains an allowance for doubtful accounts of accounts receivable.
 
Allowance for doubtful accounts
 
The Company establishes an allowance for doubtful accounts based on management’s assessment of the aging and collectability of its trade receivables. A considerable amount of judgment is required in assessing the amount of the allowance. The underlying assumptions, estimates and assessments we use to provide for losses are updated periodically to reflect our view of current conditions. Generally, the Company records a provision for bad debts equivalent to ten percent of the balance of its trade receivables outstanding for more than ninety days from their date of invoice. Trade receivables outstanding for more than one year from their date of invoice are reserved in full, unless the customer is actively making payments or has entered into a payment agreement with the Company. In such cases, the Company maintains its provision for bad debts at the ten percent level.
 
Furthermore, the Company makes judgments about the creditworthiness of each customer based on ongoing credit evaluations and frequent communication, and monitors current economic trends that might impact the level of credit losses in the future. If the financial condition of the customers were to deteriorate, resulting in their inability to make payments, a specific allowance will be recorded.
 
Bad debts are written off when identified. The Company extends unsecured credit to substantially all of its customers in the normal course of business. In many cases, this is necessary to remain competitive in the marketplace in which the Company operates. Potential customers for the Company’s products are finite in nature, and typically are larger, well capitalized companies. The Company does not accrue interest on aged trade accounts receivable as it is not a customary practice in the jurisdictions in which the Company operates. Historically, losses from uncollectible accounts have not significantly deviated from the specific allowance estimated by management. This specific provisioning policy has not changed since establishment and the management considers that the aforementioned specific provisioning policy is adequate and does not expect to change this established policy in the near future.
 
 
35

 
Inventory
 
Inventories are stated at the lower of cost or market value. Cost is determined on weighted average basis and includes all expenditures incurred in bringing the goods in a saleable condition to the point of sale. The Company’s inventory reserve requirements generally fluctuate based on projected demands and market conditions. In determining the adequate level of inventories to have on hand, management makes judgments as to the projected inventory demands as compared to the current or committed inventory levels. Inventory quantities and condition are reviewed regularly and provisions for excess or obsolete inventory are recorded based on the condition of inventory and the Company’s forecast of future demand and market conditions.
 
Intangible assets – land use rights
 
Land use rights are stated at cost less accumulated amortization. Amortization is provided using the straight-line method over the terms of 50 years. The lease term is obtained from the relevant Chinese land authority.
 
Property, plant and equipment
 
Property, plant and equipment is stated at cost less accumulated depreciation. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use.
 
The property, plant and equipment of the Company will be depreciated using the straight-line method according to the following estimated residual value and service life.
 
   
Service life
(year)
   
Estimated
residual rate
%
   
Annual
depreciation rate
%
 
                   
Building
   
20
     
5
     
2.05
 
Furniture and equipment
   
5
     
5
     
3.17
 
Machines and equipment
   
10
     
5
     
7.34
 
Automotive equipment
   
5
     
5
     
10.93
 
Office equipment
   
5
     
5
     
8.64
 
 
The residual value and service life of property, plant and equipment will be reviewed on each balance sheet date, and adjusted if necessary.
 
The Company capitalizes the interest expenses incurred before property, plant and equipment are built and installed to the usable state, and capitalizes other loan interest expenses.
 
Construction in progress
 
The value of construction in progress comprises buildings and plants under construction, as well as machines and equipment being installed and commissioned, specifically comprises the costs of property, plant and equipment and other direct costs, relevant interest expenses accrued during the construction period and profits and losses from foreign exchange transactions.
 
Depreciation will not start until the construction in progress is completed and put into operation.
 
Impairment of Assets
 
The Company reviews long-lived assets and certain identifiable intangibles held and used for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In evaluating the fair value and future benefits of its long-lived assets, management performs an analysis of the anticipated undiscounted future net cash flows of the individual assets over the remaining depreciation or amortization period. The Company recognizes an impairment loss if the carrying value of the asset exceeds the expected future cash flows.
 
 
36

 
Each year, the Company performs a transitional test for impairment of goodwill and other indefinite-lived intangible assets. This test is performed by comparing, at the reporting unit level, the carrying value of goodwill to its fair value. The Company assesses fair value based upon its best estimate of the present value of future cash flows that it expects to generate by the reporting unit. In conjunction with its recent change in fiscal year-end, the Company’s annual fair value assessment is performed each December 31 on subsidiaries with material goodwill on their respective balance sheets. However, changes in expectations as to the present value of the reporting unit’s future cash flows might impact subsequent years’ assessments of impairment.
 
Goodwill and Intangible Assets
 
Under ASC 350, the Company is required to perform an annual impairment test of the Company’s goodwill and indefinite-lived intangibles. On an annual basis, management assesses the composition of the Company’s assets and liabilities, as well as the events that have occurred and the circumstances that have changed since the most recent fair value determination. If events occur or circumstances change that would more likely than not reduce the fair value of goodwill and indefinite-lived intangibles below their carrying amounts, they will be tested for impairment. The Company will recognize an impairment charge if the carrying value of the asset exceeds the fair value determination. The impairment test that the Company has selected historically consisted of a ten year discounted cash flow analysis including the determination of a terminal value, and requires management to make various assumptions and estimates including revenue growth, future profitability, peer group comparisons, and a discount rate which management believes are reasonable.
 
The impairment test involves a two-step approach. Under the first step, the Company determines the fair value of each reporting subsidiary to which goodwill has been assigned. The Company then compares the fair value of each reporting subsidiary to its carrying value, including goodwill. The Company estimates the fair value of each reporting subsidiary by estimating the present value of the reporting subsidiaries' future cash flows. If the fair value exceeds the carrying value, no impairment loss is recognized. If the carrying value exceeds the fair value, the goodwill of the reporting unit is considered potentially impaired and the second step is completed in order to measure the impairment loss.
 
Under the second step, the Company calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets, including any unrecognized intangible assets, of the reporting unit from the fair value of the reporting unit, as determined in the first step. The Company then compares the implied fair value of goodwill to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, the Company recognizes an impairment loss equal to the difference.
 
Stock Purchase Warrants
 
The Company has issued warrants to purchase shares of its common stock. Warrants have been accounted for as equity in accordance with FASB ASC 480, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, Distinguishing Liabilities from Equity.
 
Income Taxes
 
The Company accounts for income taxes under FASB ASC 740, “Accounting for Income Taxes”. Under FASB ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under FASB ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. FASB ASC 740-10-05, “Accounting for Uncertainty in Income Taxes” prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities.
 
 
37

 
The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. We assess the validity of our conclusions regarding uncertain tax positions on a quarterly basis to determine if facts or circumstances have arisen that might cause us to change our judgment regarding the likelihood of a tax position’s sustainability under audit. We have determined that there were no uncertain tax positions for the periods ended December 31, 2012 and December 31, 2011.
 
Basic and Diluted Net Income (Loss) Per Share
 
The Company computes net income (loss) per share in accordance with ASC 260, “Earnings per Share”. ASC 260 requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common stockholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive.
 
Fair value of financial instruments
 
The Company adopted FASB ASC 820 on June 1, 2010. The adoption of FASB ASC 820 did not materially impact the Company's financial position, results of operations or cash flows. FASB ASC 820 requires the disclosure of the estimated fair value of financial instruments including those financial instruments for which the fair value option was not elected. The carrying amounts of both the financial assets and liabilities approximate to their fair values due to short maturities or the applicable interest rates approximate the current market rates.
 
Revenue Recognition – Product Sales
 
Revenue from the sales of the Company’s products is recognized upon customer acceptance. This occurs at the time of delivery to the customer, provided persuasive evidence of an arrangement exists, such as a signed sales contract. The significant risks and rewards of ownership are transferred to the customers at the time when the products are delivered and there is no significant post-delivery obligation to the Company. In addition, the sales price is fixed or determinable and collection is reasonably assured. The Company does not provide customers with contractual rights of return for products. When there are significant post-delivery performance obligations, revenue is recognized only after such obligations are fulfilled. The Company evaluates the terms of the sales agreement with its customer in order to determine whether any significant post-delivery performance obligations exist. Currently, the sales do not include any terms which may impose any significant post-delivery performance obligations on the Company.

Revenue from the sales of the Company’s products represents the invoiced value of goods, net of the value-added tax (VAT). All of the Company’s products that are sold in the PRC are subject to a Chinese value-added tax at a rate of 17 percent of the gross sales price. This VAT may be offset by the VAT paid by the Company on raw and other materials that are included in the cost of producing the Company’s finished products.
 
Revenue Recognition – ORC Equipment Construction Contracts

Our ORC segment’s financial statements are prepared on the percentage-of-completion accrual method of accounting. Revenue on contracts is recognized based on our estimate of the percentage-of-completion on individual contracts (cost to cost method), commencing when progress reaches a point where cost analysis and other evidence of trend is sufficient to estimate final results with reasonable accuracy. That portion of the total contract which is allocable to contract expenditures incurred and work performed is accrued as earned income. At the time a loss on a contract becomes known, the entire amount of the estimated ultimate loss is accrued.

Contract costs include all project engineering, components and materials, labor, equipment, and delivery and installation costs as well as assorted indirect costs related to contract performance. The majority of these costs are outsourced to subcontractors and suppliers, 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 may result in revisions to costs and income, which are recognized in the period in which the revisions are determined.

Costs and Billings on ORC Equipment Construction Contracts

Costs and earned income on construction contracts – unbilled represent the amount by costs of contracts in process plus any estimated earned income exceeding related progress billings. Billings in excess of costs and earned income on construction contracts represent the amount by which progress billings on contracts in process exceed related costs and estimated earned income. Changes in job performance, job conditions and estimated profitability may result in revisions to costs and income and are recognized in the period in which the revisions are determined.
Advertising expenses
 
Advertising costs are expensed as incurred.
 
Shipping and handling costs
 
All shipping and handling costs are included in cost of sales expenses.
 
 
38

 
Foreign Currency Translation
 
The Company’s functional and reporting currency is the United States dollar. Transactions may occur in Renminbi (“RMB”) dollars and management has adopted ASC 830 “Foreign Currency Matters”. The RMB is not freely convertible into foreign currencies. Monetary assets denominated in foreign currencies are translated using the exchange rate prevailing at the balance sheet date. Average monthly rates are used to translate revenues and expenses. The Company has not, to the date of these financial statements, entered into derivative instruments to offset the impact of foreign currency fluctuations.
 
Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.
 
Assets and liabilities of the Company’s operations are translated into the reporting currency, United States dollars, at the exchange rate in effect at the balance sheet dates. Revenue and expenses are translated at average rates in effect during the reporting periods. Equity transactions are recorded at the historical rate when the transaction occurred. The resulting translation adjustment is reflected as accumulated other comprehensive income, a separate component of stockholders' equity in the statement of stockholders' equity.
 
Comprehensive Gain or Loss
 
ASC 220 “Comprehensive Income,” establishes standards for the reporting and display of comprehensive income and its components in the financial statements. As of December 31, 2012 and December 31, 2011 the Company determined that it had items that represented components of comprehensive income and, therefore, has included a schedule of comprehensive income in the financial statements.
 
Off Balance Sheet Arrangements
 
As of December 31, 2012, there were no off balance sheet arrangements.
 
 
A smaller reporting company is not required to provide the information required by this Item.
 
 
See the financial statements annexed to this annual report.
 
 
None
 
 
Disclosure Controls and Procedures
 
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in company reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our chief executive officer and treasurer, as appropriate to allow timely decisions regarding required disclosure.
 
 
39

 
As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive and Financial Officers carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2012. Based on their evaluation, they concluded that our disclosure controls and procedures were effective.
 
Management's Annual Report on Internal Control over Financial Reporting.
 
Our internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive and Financial Officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of our financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with the authorization of our board of directors and management; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
 
Under the supervision and with the participation of our management, including our Chief Executive and Financial Officers, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation under the criteria established in Internal Control – Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2012.
 
This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report on Form 10-K.
 
Changes in Internal Control Over Financial Reporting.
 
During the most recently completed fiscal quarter, there has been no change in our internal control over financial reporting that has materially affected or is reasonably likely to materially affect, our internal control over financial reporting.
 
ITEM 9B. OTHER INFORMATION
 
None.
 
 
40


PART III
 
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
Set forth below is information with respect to our executive officers;
 
Name
 
Age
 
Position Held with the Company
 
Held Since
 
               
  43  
Vice President and Secretary
  2009  
               
  59  
Chief Executive Officer
  2010  
               
  39  
Chief Financial Officer
  2011  

 For other information required by this item, see the sections entitled “Election of Directors,” “Corporate Governance,” “Board of Directors and Committees” and “Security Ownership of Certain Beneficial Owners and Management—Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive Information Statement to be filed with the Securities and Exchange Commission and delivered to shareholders in lieu of holding our 2013 Annual Meeting of Shareholders, which are incorporated herein by reference.
 
 
For information with respect to executive compensation, see the section entitled “Executive Compensation” in our definitive Information Statement to be filed with the Securities and Exchange Commission and delivered to shareholders in lieu of holding our 2013 Annual Meeting of Shareholders, which is incorporated herein by reference.
 
 
For information with respect to the security ownership of the Directors and Executive Officers, see the section entitled “Security Ownership of Certain Beneficial Owners and Management” in our definitive Information Statement to be filed with the Securities and Exchange Commission and delivered to shareholders in lieu of holding our 2013 Annual Meeting of Shareholders, which is incorporated herein by reference.
 
 
For information with respect to certain relationships and related transactions and director independence, see the sections entitled “Corporate Governance” and “Board of Directors and Committees” in our definitive Information Statement to be filed with the Securities and Exchange Commission and delivered to shareholders in lieu of holding our 2013 Annual Meeting of Shareholders, which are incorporated herein by reference.

 
For information with respect to principal accounting fees and services, see the section entitled “Principal Accounting Fees and Services” in our definitive Information Statement to be filed with the Securities and Exchange Commission and delivered to shareholders in lieu of holding our 2013 Annual Meeting of Shareholders, which is incorporated herein by reference.
 
 
41

 
PART IV
 
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 
Exhibit
Number
 
Description
     
 
 
Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase
101.LAB
 
XBRL Taxonomy Extension Label Linkbase
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase
 
 
42

 
SIGNATURES
 
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
 
FORCEFIELD ENERGY INC.
 
       
April __, 2013
By:
 
     
   
Chief Executive Officer
 
 
In accordance with Section 13 or 15(d) of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
 
 
   
Principal Executive Officer:
 
       
April ___, 2013
   
     
   
Director and Chief Executive Officer
 
       
   
Principal Financial and Accounting Officer:
 
       
April __, 2013
   
     
   
Chief Financial Officer
 
       
April __, 2013
   
     
   
Chairman of the Board of Directors
 
       
April __, 2013
   
     
   
Director
 
       
April__, 2013
   
     
   
Director
 
       
April__, 2013
   
     
   
Director
 
 
 
43

 
 
Index to Financial Statements

  F-1  
       
   
F-2
 
         
   
F-3
 
         
   
F-4
 
         
   
F-5
 
         
   
F-6
 
 
 
 

 
 
 
 
Russell E. Anderson, CPA
Russ Bradshaw, CPA
William R. Denney, CPA
Sandra Chen, CPA
 
 
 
 
 
 
 
 
 
5296 S. Commerce Dr
Suite 300
Salt Lake City, Utah
84107
USA
(T) 801.281.4700
(F) 801.281.4701
 
Suite A, 5/F
Max Share Center
373 Kings Road
North Point
 Hong Kong
(T) 852.21.555.333
(F) 852.21.165.222
 
 

To the Board of Directors
ForceField Energy Inc.
245 Park Avenue, 39th Floor

We have audited the accompanying consolidated balance sheets of ForceField Energy Inc.  (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of operations and comprehensive loss,  stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Anderson Bradshaw PLLC
Salt Lake City, Utah
 
 
 
 
F-1

 
FORCEFIELD ENERGY INC.
Consolidated Balance Sheets and Comprehensive Loss
 
   
2012
   
2011
 
             
ASSETS
 
Current assets:
           
Cash and cash equivalents
 
$
994,149
   
$
674,291
 
Accounts receivable, net
   
4,469,514
     
3,773,556
 
Notes receivable
   
     
559,325
 
Inventory, net
   
323,141
     
657,287
 
Deferred tax assets, net
   
90,257
     
 
Prepaid expenses and other current assets
   
448,601
     
207,837
 
Total current assets
   
6,325,662
     
5,872,296
 
Property, plant and equipment
   
7,547,128
     
7,890,132
 
Goodwill
   
1,342,834
     
608,953
 
Intangible assets, net
   
4,862,408
     
3,142,997
 
Related party receivables
   
413,061
     
489,595
 
Other assets
   
21,956
     
21,737
 
Total assets
 
$
20,513,049
   
$
18,025,710
 
                 
LIABILITIES AND EQUITY
 
   
Current liabilities:
               
Accounts payable
 
$
3,689,065
   
$
3,333,500
 
Accrued liabilities
   
679,021
     
373,802
 
Related party payables
   
5,652,487
     
5,665,245
 
Income taxes payable
   
1,239,067
     
886,050
 
Total current liabilities
   
11,259,640
     
10,258,597
 
Convertible debenture
   
150,000
     
100,000
 
Deferred tax liabilities, net — non-current
   
409,037
     
 
Total liabilities
   
11,818,677
     
10,358,597
 
                 
Commitments and contingencies
   
     
 
                 
Equity:
               
ForceField Energy Inc. stockholders' equity:
               
Preferred stock, $0.001 par value. 12,500,000 shares authorized; zero shares
               
issued and outstanding
   
     
 
Common stock, $0.001 par value. 37,500,000 shares authorized; 16,080,815 and 15,002,814 shares
         
issued and outstanding as of December 31, 2012 and 2011, respectively
   
16,081
     
15,003
 
Additional paid-in capital
   
13,015,222
     
8,870,274
 
Accumulated deficit
   
(6,922,198
)
   
(3,701,526
)
Accumulated other comprehensive income
   
317,337
     
280,024
 
Total ForceField Energy Inc. stockholders' equity
   
6,426,442
     
5,463,775
 
Noncontrolling interests
   
2,267,930
     
2,203,338
 
Total equity
   
8,694,372
     
7,667,113
 
Total liabilities and equity
 
$
20,513,049
   
$
18,025,710
 
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
F-2

 
FORCEFIELD ENERGY INC.
Consolidated Statements of Operations and Comprehensive Loss
For the Years Ended December 31, 2012 and 2011
 
   
 
2012
   
2011
 
   
           
Sales 
 
$
2,129,041
   
$
28,338,389
 
Cost of goods sold 
   
2,072,834
     
24,115,531
 
Gross margin 
   
56,207
     
4,222,858
 
Operating expenses: 
               
Professional fees 
   
582,297
     
772,868
 
General and administrative 
   
2,841,937
     
3,795,974
 
            Goodwill impairment
   
607,422
     
2,800,000
 
Total operating expenses 
   
4,031,656
     
7,368,842
 
Loss from operations
   
(3,975,449
)
   
(3,145,984
Other income (expense):
               
Equity loss from investment in TransPacific Energy, Inc.
   
(5,798
)
   
 
Interest expense, net
   
(300,661
)
   
 
Total other income (expense):
   
(306,459
)
   
 
Loss from operations before income taxes
   
(4,281,908
)
   
(3,145,984
)
Provision for income taxes (benefit) 
   
(333,828
   
168,746
 
Net loss 
   
(3,948,080
)
   
(3,314,730
Less: Net income (loss) attributable to noncontrolling interests 
   
(727,408
   
(876,697
Net loss attributable to ForceField Energy Inc. common shareholders 
 
$
(3,220,672
)
 
$
(2,438,033
   
               
Basic and diluted loss per share 
 
$
(0.21
 
$
(0.17
   
               
Weighted-average number of common shares outstanding: 
               
Basic and diluted 
   
15,390,259
     
14,635,641
 
Comprehensive income (loss):
               
Net loss
 
$
(3,948,080
)
 
$
(3,314,730
)
Other comprehensive income, net of tax:
               
Foreign currency translation adjustment
   
37,313
     
391,346
 
Total other comprehensive income
   
37,313
     
391,346
 
Comprehensive loss
   
(3,910,767
)
   
(2,923,384
)
Comprehensive loss attributable to noncontrolling interests
   
(727,408
)
   
(755,793
)
Comprehensive loss attributable to ForceField Energy Inc.
 
$
(3,183,359
)
 
$
(2,167,591
)
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
F-3


FORCEFIELD ENERGY INC.
Consolidated Statement of Stockholders' Equity (Deficit)
For the Years Ended December 31, 2012 and 2011
 
   
Preferred Stock
   
Common Stock
   
Additional
Paid-in
   
Retained
   
Accumulated
Other
Comprehensive
   
Total
Stockholders'
   
Noncontrolling
   
Total
 
   
Shares
   
Value
   
Shares
   
Value
   
Capital
   
Earnings
   
Income
   
Equity
   
Interests
    Equity  
                                                             
   
   
$
     
13,826,750
   
$
13,827
   
$
1,646,049
   
$
(1,263,493
)
 
$
9,582
   
$
405,965
   
$
32,131
   
$
438,096
 
                                                                                 
Components of comprehensive loss:
                                                                               
                                                                                 
Net loss
   
     
     
     
     
     
(2,438,033
)
   
     
(2,438,033
)
   
(876,697
   
(3,314,730
)
                                                                                 
Other comprehensive income, net of tax
   
     
     
     
     
     
     
270,442
     
270,442
     
120,904
     
391,346
 
                                                                                 
Total comprehensive loss
   
     
     
     
     
     
(2,438,033
)
   
270,442
     
(2,167,591
)
   
(755,793
   
(2,923,384
)
                                                                                 
Issuance of common stock in connection with sales made under private offerings
   
     
     
458,750
     
459
     
1,874,541
     
     
     
1,875,000
     
     
1,875,000
 
                                                                                 
Cost of common stock issuances in connection with sales made under private offerings
   
     
     
     
     
(187,500
)
   
     
     
(187,500
)
   
     
(187,500
)
                                                                                 
Issuance of common stock in exchange for consulting, professional and other services
   
     
     
42,500
     
42
     
183,750
     
     
     
183,792
     
     
183,792
 
                                                                                 
Acquisition of equity interests in subsidiaries
   
     
     
674,814
     
675
     
5,353,434
     
     
     
5,354,109
     
2,927,000
     
8,281,109
 
                                                                                 
   
     
     
15,002,814
     
15,003
     
8,870,274
     
(3,701,526
)
   
280,024
     
5,463,775
     
2,203,338
     
7,667,113
 
                                                                                 
Components of comprehensive income (loss):
                                                                               
                                                                                 
Net income (loss)
   
     
     
     
     
     
(3,220,672
)
   
     
(3,220,672
)
   
(727,408
   
(3,820,163
)
                                                                                 
Change in foreign currency translation
   
     
     
     
     
     
     
37,313
     
37,313
     
     
37,313
 
                                                                                 
Total comprehensive income (loss)
   
     
     
     
     
     
(3,220,672
)
   
37,313
     
(3,220,672
)
   
(727,408
   
(3,910,767
)
                                                                                 
Issuance of common stock in connection with sales made under private offerings
   
     
     
635,250
     
635
     
2,475,365
     
     
     
2,476,000
     
     
2,476,000
 
                                                                                 
Cost of common stock issuances in connection with sales made under private offerings
   
     
     
     
     
(232,600
)
   
     
     
(232,600
)
   
     
(232,600
)
                                                                                 
Issuance of common stock in exchange for consulting, professional and other services
   
     
     
37,395
     
37
     
157,363
     
     
     
157,400
     
     
157,400
 
                                                                                 
Acquisition of intangible asset – exclusive distribution rights
   
     
     
150,000
     
150
     
779,850
     
     
     
780,000
     
     
780,000
 
                                                                                 
Acquisition of equity interests in subsidiaries
   
     
     
255,356
     
256
     
964,970
     
     
     
965,226
     
792,000
     
1,757,226
 
                                                                                 
   
   
$
     
16,080,815
   
$
16,081
   
$
13,015,222
   
$
(6,922,198
)
 
$
317,337
   
$
6,426,442
   
$
2,267,930
   
$
8,694,372
 
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
F-4

 
FORCEFIELD ENERGY INC.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2012 and 2011
 
   
2012
   
2011
 
Cash flows from operating activities:
           
Net loss
 
$
(3,948,080
 
$
(3,314,730
Adjustments to reconcile net loss to cash used in operating activities:
         
Depreciation and amortization
   
1,334,722
     
928,566
 
                    Goodwill impairment
   
607,422
     
2,800,000
 
Provision for doubtful accounts
   
378,925
     
34,741
 
Provision for excess or obsolete inventory
   
 
   
82,706
 
Equity loss from investment in TransPacific Energy, Inc.
   
5,798
     
 
Common stock issued in exchange for services
   
117,400
     
183,792
 
Deferred taxes
   
(326,229
)
   
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
(1,030,241
   
(463,935)
 
Notes receivable
   
557,919
     
150,004
 
Inventory
   
336,521
     
(241,420
)
Prepaid expenses and other current assets
   
(238,634
   
(50,501
Related party receivables
   
80,450
     
680,826
 
Other assets
   
     
138,565
 
Accounts payable
   
256,758
     
(1,104,097
)
Accrued liabilities
   
(45,294
   
(207,591
Income taxes payable
   
344,257
     
(431,322
)
Related party payables
   
     
(5,671
Net cash used in operating activities
   
(1,568,306
   
(820,067
                 
Cash flows from investing activities:
               
Cash consideration for acquisition of a business
   
(520,000
)
   
(231,428
)
Cash acquired in the acquisition of a business
   
442,629
     
967,626
 
Purchase of property, plant and equipment
   
(249,514
)
   
(655,035
)
Purchase of intangible assets
   
     
(356,725
)
Net cash used in investing activities
   
(326,885
   
(275,562
                 
Cash flows from financing activities:
               
Proceeds from issuance of common stock
   
2,243,400
     
1,687,500
 
Proceeds from issuance of long term debt - convertible debenture
   
50,000
     
100,000
 
    Proceeds from short term loans payable     129,600      
 
    Repayments of short term loans payable     (129,600    
 
Proceeds from related party payables
   
40,000
     
17,302
 
Repayments of related party payables
   
(122,322
)
   
(406,498
)
Proceeds from advances payable
   
     
42,700
 
Repayments of advances payable
   
     
(273,681
Net cash provided by financing activities
   
2,211,078
     
1,167,323
 
                 
Effect of exchange rates on cash and cash equivalents
   
3,971
     
26,311
 
Net increase (decrease) in cash and cash equivalents
   
319,858
     
98,005
 
Cash and cash equivalents at beginning of period
   
674,291
     
576,286
 
Cash and cash equivalents at end of period
 
$
994,149
   
$
674,291
 
                 
Supplemental disclosure of cash flow information:
               
Cash paid for interest
 
$
12,649
   
$
 
Cash paid for income taxes
 
$
   
$
454,369
 
                 
Supplemental disclosure of non-cash investing and financing activities:
               
Estimated beginning fair value of assets and liabilities received on consolidation:
               
Assets acquired
 
$
2,025,629
   
$
16,013,998
 
Liabilities assumed
 
$
(1,097,035
)
 
$
(10,294,200
)
Noncontrolling interests
 
$
(792,000
)
 
$
(2,927,000
)
Total net assets acquired
 
$
136,594
   
$
2,792,798
 
Identified intangible assets on acquisitions
 
$
1,583,000
   
$
3,093,070
 
Issuance of common stock related to acquisitions
 
$
965,226
   
$
5,354,109
 
Common stock issued to reduce accounts payable
 
$
40,000
   
$
 
Common stock issued to acquire distribution rights
 
$
780,000
   
$
 
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
F-5

 
FORCEFIELD ENERGY INC.
Notes to Consolidated Financial Statements
December 31, 2012
(Expressed in United States dollars)
 
1.
NATURE OF OPERATIONS

ForceField Energy Inc. (“ForceField” or “Company”) is an international manufacturer, distributor, and licensee of alternative energy products and technologies. ForceField was incorporated in the State of Nevada on January 30, 2007. ForceField (i) owns 50.3% of TransPacific Energy, Inc. (“TPE”) a U.S. based renewable energy technology provider that uses “waste heat” from various manufacturing and other sources to provide clean electricity, (ii) is the exclusive North American distributor of LED commercial lighting and fixtures for a premier LED manufacturer in China and also (iii) is a significant producer of trichlorosilane (“TCS”) in China. TCS is a chemical primarily used in the production of polysilicon, which is an essential raw material in the production of solar cells for PV panels that convert sunlight to electricity.  This TCS is sold to the marketplace via two operating segments, (1) a 90% owned TCS distribution company, and (2) through the 60% ownership of a TCS plant, both of which are located in China

On February 28, 2013, the Company changed its name from SunSi Energies Inc. (“SunSi”) to ForceField Energy Inc. With the exception of the Company’s wholly-owned subsidiary, SunSi Energies Hong Kong Ltd. (“SunSi HK”) and SunSi USA whose names remain unchanged, all historic references to “SunSi” in this document have been changed to “ForceField”.
 
2.
SUMMARY OF  SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation
 
The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and are expressed in United States dollars. The consolidated financial statements include the accounts of the Company; its wholly-owned subsidiaries SunSi Energies Hong Kong Limited (“SunSi HK”) and SunSi USA (“SunSi USA”); the Company’s 50.3% owned subsidiary TransPacific Energy, Inc. (“TPE”); SunSi HK's 90% owned subsidiary Zibo Baokai Commerce and Trade Co. Ltd. (“Baokai”); and SunSi HK's 60% owned subsidiary Wendeng He Xie Silicon Industry Co., Ltd. (“Wendeng”). In March 2013, we formed  a wholly-owned subsidiary in Costa Rica, ForceField S.A. All intercompany accounts have been eliminated in consolidation.
 
 
F-6

 
Reverse Stock Split

All preferred and common share amounts (except par value and par value per share amounts) have been retroactively restated to reflect the Company’s one-for-two reverse capital stock split effective October 9, 2012, as described in Note 17 — Stockholders’ Equity to these consolidated financial statements.

Change of Fiscal Year-End

On December 8, 2011, the Company changed its fiscal year-end to December 31 from May 31. This change has no impact on these consolidated financial statements.

The significant accounting policies are as follows:

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States 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 Company continually evaluates its estimates, including but not limited to those related to the valuation of accounts receivable, inventories, deferred income taxes, goodwill and intangible assets, and the estimation on the useful lives of property, plant and equipment. 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.

The Company believes that the following critical accounting policies govern its more significant judgments and estimates used in the preparation of its consolidated financial statements:

Financial Instruments

The Company considers all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are stated at cost and consist solely of bank deposits held in the United States, Hong Kong and China. The carrying amount of cash and cash equivalents approximates fair value.

As of December 31, 2012, $369,461 of the cash and cash equivalents were in banks in China; a Wendeng branch of Industrial & Commercial Bank of China and a Central District, Hong Kong branch of HSBC Bank. The remittance of these funds out of China is subject to exchange control restrictions imposed by the Chinese government. Deposits in banks in China are not insured by any government entity or agency, and are consequently exposed to risk of loss. Management believes the probability of a bank failure, causing loss to the Company, is remote.
 
Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. At December 31, 2012 and December 31, 2011, the Company’s cash and cash equivalents and restricted cash were held by major financial institutions located in the United States, Hong Kong and China, which management believes are of high credit quality.  

With respect to accounts receivable, the Company extends credit based on an evaluation of the customer’s financial condition. The Company generally does not require collateral for trade receivables and maintains an allowance for doubtful accounts of accounts receivable.

 
F-7

 
Allowance for doubtful accounts
 
The Company establishes an allowance for doubtful accounts based on management’s assessment of the aging and collectability of its trade receivables. A considerable amount of judgment is required in assessing the amount of the allowance. The underlying assumptions, estimates and assessments we use to provide for losses are updated periodically to reflect our view of current conditions. Generally, the Company records a provision for bad debts equivalent to ten percent of the balance of its trade receivables outstanding for more than ninety days from their date of invoice. Trade receivables outstanding for more than one year from their date of invoice are reserved in full, unless the customer is actively making payments or has entered into a payment agreement with the Company. In such cases, the Company maintains its provision for bad debts at the ten percent level.

Furthermore, the Company makes judgments about the creditworthiness of each customer based on ongoing credit evaluations and frequent communication, and monitors current economic trends that might impact the level of credit losses in the future. If the financial condition of the customers were to deteriorate, resulting in their inability to make payments, a specific allowance will be recorded.

Bad debts are written off when identified. The Company extends unsecured credit to substantially all of its customers in the normal course of business. In many cases, this is necessary to remain competitive in the marketplace in which the Company operates. Potential customers for the Company’s products are finite in nature, and typically are larger, well capitalized companies. The Company does not accrue interest on aged trade accounts receivable as it is not a customary practice in the jurisdictions in which the Company operates. Historically, losses from uncollectible accounts have not significantly deviated from the specific allowance estimated by management. This specific provisioning policy has not changed since establishment and the management considers that the aforementioned specific provisioning policy is adequate and does not expect to change this established policy in the near future.

Inventory
 
Inventories are stated at the lower of cost or market value. Cost is determined on weighted average basis and includes all expenditures incurred in bringing the goods in a saleable condition to the point of sale. The Company’s inventory reserve requirements generally fluctuate based on projected demands and market conditions. In determining the adequate level of inventories to have on hand, management makes judgments as to the projected inventory demands as compared to the current or committed inventory levels. Inventory quantities and condition are reviewed regularly and provisions for excess or obsolete inventory are recorded based on the condition of inventory and the Company’s forecast of future demand and market conditions.

Intangible assets – land use rights
 
Land use rights are stated at cost less accumulated amortization. Amortization is provided using the straight-line method over the terms of 50 years. The lease term is obtained from the relevant Chinese land authority.
 
Property, plant and equipment

Property, plant and equipment is stated at cost less accumulated depreciation. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use.

The property, plant and equipment of the Company will be depreciated using the straight-line method according to the following estimated residual value and service life.
 
   
Service life
(year)
   
Estimated
residual rate
%
   
Annual
depreciation rate
%
 
                   
Building
    20       5       2.05  
Furniture and equipment
    5       5       3.17  
Machines and equipment
    10       5       7.34  
Automotive equipment
    5       5       10.93  
Office equipment
    5       5       8.64  
 
 
F-8

 
The residual value and service life of property, plant and equipment will be reviewed on each balance sheet date, and adjusted if necessary.
 
The Company capitalizes the interest expenses incurred before property, plant and equipment are built and installed to the usable state, and capitalizes other loan interest expenses.
 
Construction in progress

The value of construction in progress comprises buildings and plants under construction, as well as machines and equipment being installed and commissioned, specifically comprises the costs of property, plant and equipment and other direct costs, relevant interest expenses accrued during the construction period and profits and losses from foreign exchange transactions.
 
Depreciation will not start until the construction in progress is completed and put into operation.
 
Impairment of Assets

The Company reviews long-lived assets and certain identifiable intangibles held and used for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In evaluating the fair value and future benefits of its long-lived assets, management performs an analysis of the anticipated undiscounted future net cash flows of the individual assets over the remaining depreciation or amortization period. The Company recognizes an impairment loss if the carrying value of the asset exceeds the expected future cash flows.
 
Each year, the Company performs a transitional test for impairment of goodwill and other indefinite-lived intangible assets. This test is performed by comparing, at the reporting unit level, the carrying value of goodwill to its fair value. The Company assesses fair value based upon its best estimate of the present value of future cash flows that it expects to generate by the reporting unit. In conjunction with its recent change in fiscal year-end, the Company’s annual fair value assessment is performed each December 31 on subsidiaries with material goodwill on their respective balance sheets. However, changes in expectations as to the present value of the reporting unit’s future cash flows might impact subsequent years’ assessments of impairment.

Goodwill and Intangible Assets

Under ASC 350, the Company is required to perform an annual impairment test of the Company’s goodwill and indefinite-lived intangibles. On an annual basis, management assesses the composition of the Company’s assets and liabilities, as well as the events that have occurred and the circumstances that have changed since the most recent fair value determination. If events occur or circumstances change that would more likely than not reduce the fair value of goodwill and indefinite-lived intangibles below their carrying amounts, they will be tested for impairment. The Company will recognize an impairment charge if the carrying value of the asset exceeds the fair value determination. The impairment test that the Company has selected historically consisted of a ten year discounted cash flow analysis including the determination of a terminal value, and requires management to make various assumptions and estimates including revenue growth, future profitability, peer group comparisons, and a discount rate which management believes are reasonable.
 
The impairment test involves a two-step approach. Under the first step, the Company determines the fair value of each reporting subsidiary to which goodwill has been assigned. The Company then compares the fair value of each reporting subsidiary to its carrying value, including goodwill. The Company estimates the fair value of each reporting subsidiary by estimating the present value of the reporting subsidiaries' future cash flows. If the fair value exceeds the carrying value, no impairment loss is recognized. If the carrying value exceeds the fair value, the goodwill of the reporting unit is considered potentially impaired and the second step is completed in order to measure the impairment loss.
 
Under the second step, the Company calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets, including any unrecognized intangible assets, of the reporting unit from the fair value of the reporting unit, as determined in the first step. The Company then compares the implied fair value of goodwill to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, the Company recognizes an impairment loss equal to the difference.

 
F-9

 
Stock Purchase Warrants

The Company has issued warrants to purchase shares of its common stock. Warrants have been accounted for as equity in accordance with FASB ASC 480, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, Distinguishing Liabilities from Equity.
 
Income Taxes

The Company accounts for income taxes under FASB ASC 740, “Accounting for Income Taxes”. Under FASB ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under FASB ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. FASB ASC 740-10-05, “Accounting for Uncertainty in Income Taxes” prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities.

The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. We assess the validity of our conclusions regarding uncertain tax positions on a quarterly basis to determine if facts or circumstances have arisen that might cause us to change our judgment regarding the likelihood of a tax position’s sustainability under audit. We have determined that there were no uncertain tax positions for the periods ended December 31, 2012 and December 31, 2011.
 
Basic and Diluted Net Income (Loss) Per Share

The Company computes net income (loss) per share in accordance with ASC 260, “Earnings per Share”. ASC 260 requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common stockholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive.

Fair value of financial instruments

The Company adopted FASB ASC 820 on June 1, 2010. The adoption of FASB ASC 820 did not materially impact the Company's financial position, results of operations or cash flows. FASB ASC 820 requires the disclosure of the estimated fair value of financial instruments including those financial instruments for which the fair value option was not elected. The carrying amounts of both the financial assets and liabilities approximate to their fair values due to short maturities or the applicable interest rates approximate the current market rates.
 
Revenue Recognition – Product Sales

Revenue from the sales of the Company’s products is recognized upon customer acceptance. This occurs at the time of delivery to the customer, provided persuasive evidence of an arrangement exists, such as a signed sales contract. The significant risks and rewards of ownership are transferred to the customers at the time when the products are delivered and there is no significant post-delivery obligation to the Company. In addition, the sales price is fixed or determinable and collection is reasonably assured. The Company does not provide customers with contractual rights of return for products. When there are significant post-delivery performance obligations, revenue is recognized only after such obligations are fulfilled. The Company evaluates the terms of the sales agreement with its customer in order to determine whether any significant post-delivery performance obligations exist. Currently, the sales do not include any terms which may impose any significant post-delivery performance obligations on the Company.

 
F-10

 
Revenue from the sales of the Company’s products represents the invoiced value of goods, net of the value-added tax (“VAT”). All of the Company’s products that are sold in China are subject to a Chinese VAT at a rate of 17% of the gross sales price. This VAT may be offset by the VAT paid by the Company on raw and other materials that are included in the cost of producing the Company’s finished products.
 
Revenue Recognition – ORC Equipment Construction Contracts

The Company’s ORC segment’s financial statements are prepared on the percentage-of-completion accrual method of accounting. Income on contracts is recognized based on the Company’s estimate of the percentage-of-completion on individual contracts (cost to cost method), commencing when progress reaches a point where cost analysis and other evidence of trend is sufficient to estimate final results with reasonable accuracy. That portion of the total contract which is allocable to contract expenditures incurred and work performed is accrued as earned income. At the time a loss on a contract becomes known, the entire amount of the estimated ultimate loss is accrued.

Contract costs include all project engineering, components and materials, labor, equipment, and delivery and installation costs as well as assorted indirect costs related to contract performance. The majority of these costs are outsourced to subcontractors and suppliers, 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 may result in revisions to costs and income, which are recognized in the period in which the revisions are determined.

Costs and Billings on ORC Equipment Construction Contracts

Costs and earned income on construction contracts – unbilled represent the amount by costs of contracts in process plus any estimated earned income exceeding related progress billings. Billings in excess of costs and earned income on construction contracts represent the amount by which progress billings on contracts in process exceed related costs and estimated earned income. Changes in job performance, job conditions and estimated profitability may result in revisions to costs and income and are recognized in the period in which the revisions are determined.
 
Advertising expenses
 
Advertising costs are expensed as incurred.
 
Shipping and handling costs
 
All shipping and handling costs are included in cost of goods sold.

Foreign Currency Translation

The Company’s functional and reporting currency is the United States dollar. Transactions may occur in Renminbi (“RMB”) and management has adopted ASC 830, “Foreign Currency Matters”. The RMB is not freely convertible into foreign currencies. Monetary assets denominated in foreign currencies are translated using the exchange rate prevailing at the balance sheet date. Average monthly rates are used to translate revenues and expenses. The Company has not, to the date of these financial statements, entered into derivative instruments to offset the impact of foreign currency fluctuations.
 
Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.

Assets and liabilities of the Company’s operations are translated into the reporting currency, United States dollars, at the exchange rate in effect at the balance sheet dates. Revenue and expenses are translated at average rates in effect during the reporting periods. Equity transactions are recorded at the historical rate when the transaction occurred. The resulting translation adjustment is reflected as accumulated other comprehensive income, a separate component of stockholders' equity in the statement of stockholders' equity.  
 
Comprehensive Gain or Loss

ASC 220, “Comprehensive Income”, establishes standards for the reporting and display of comprehensive income and its components in the financial statements. As of December 31, 2012, the Company has items that represent comprehensive income and, therefore, has included a schedule of comprehensive income (loss) in the financial statements.
 
3.
THE EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS

Accounting Standards Updates through ASU 2013-05 that contain technical corrections to existing guidance or affect specialized industries or entities were recently issued. These updates have no current applicability to the Company or their effect on the financial statements would not have been significant. 
 
 
F-11

 
4.
ACCOUNTS RECEIVABLE
 
Accounts receivable at December 31, 2012 and 2011 were comprised of the following:
 
         
             
Accounts receivable, trade
 
$
4,645,193
   
$
3,799,420
 
Accounts receivable, unbilled
   
26,167
     
 
Costs and unearned income unbilled
   
257,500
     
 
Allowance for doubtful accounts
   
(459,346
)
   
(25,864
)
                 
Total
 
$
4,469,514
   
$
3,773,556
 
 
As of December 31, 2012, three customers accounted for approximately 11%, 27% and 46%, respectively, or approximately 84% of total accounts receivable. These same customers also accounted for approximately 21%, 32% and 9%, respectively, of the Company’s revenues, or approximately 62% of revenues for the year ended December 31, 2012.

As of December 31, 2011, three customers accounted for approximately 11%, 22% and 65%, respectively, or approximately 98% of total accounts receivable. These same customers also accounted for approximately 3%, 50% and 23%, respectively, of the Company’s revenues, or approximately 76% of revenues for the year ended December 31, 2011.
 
5.
NOTES RECEIVABLE
 
Notes receivable at December 31, 2012 and 2011 was comprised of the following:
 
         
             
Notes receivable
 
$
   
$
559,325
 
 
Notes receivable represent negotiable commercial paper in China which can be used to make new purchases or to satisfy outstanding invoices.
 
6.
INVENTORY
 
Inventory at December 31, 2012 and 2011 was comprised of the following:
 
         
             
Raw materials
 
$
170,417
   
$
187,224
 
Finished goods
   
163,520
     
554,189
 
Allowance for excess or obsolete inventory
   
(10,796
)
   
(84,126
)
                 
Total
 
$
323,141
   
$
657,287
 

At December 31, 2012, the Company did not record any additional provisions to its allowance for excess or obsolete inventory. At December 31, 2011, the Company recorded a provision of $82,706 to allowances for excess or obsolete inventory at its Wendeng segment.
 
 
F-12

 
7. 
PREPAID EXPENSES AND OTHER CURRENT ASSETS
 
Prepaid expenses and other current assets at December 31, 2012 and 2011 were comprised of the following:
 
         
             
Advances to suppliers, net of allowance
 
$
300,396
   
$
46,632
 
Prepaid expenses
   
94,682
     
157,222
 
Value added tax (VAT) credit
   
52,656
     
 
Other
   
867
     
3,983
 
                 
Total
 
$
448,601
   
$
207,837
 
 
Advances made to suppliers are for the purchase of raw materials which are expected to be recovered within twelve months. During the years ended December 31, 2012 and 2011, the Company recorded a provision for bad debts of $1,960 and $9,314, respectively, related to its advances to suppliers. Prepaid expenses and other assets represent normal course prepayments made by the Wendeng segment
 
8. 
PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment at December 31, 2012 and 2011 is comprised of the following:

                     
         
Accumulated
   
Net book
         
Accumulated
   
Net book
 
   
Cost
   
Depreciation
   
Value
   
Cost
   
Depreciation
   
Value
 
                                     
Building
 
$
3,783,611
   
$
(340,062
)
 
$
3,443,549
   
$
3,745,873
   
$
(145,042
)
 
$
3,600,831
 
Furniture and equipment
   
9,831
     
(2,831
)
   
7,000
     
9,733
     
(773
)
   
8,960
 
Machinery and equipment
   
3,914,440
     
(733,413
)
   
3,181,027
     
3,875,396
     
(318,543
)
   
3,556,853
 
Automotive equipment
   
324,883
     
(99,292
)
   
225,591
     
172,375
     
(33,685
)
   
138,690
 
Office equipment
   
12,445
     
(3,921
)
   
8,524
     
11,558
     
(1,287
)
   
10,271
 
Construction in Progress
   
681,437
     
     
681,437
     
574,527
     
     
574,527
 
                                                 
Total
 
$
8,726,647
   
$
(1,179,519
)
 
$
7,547,128
   
$
8,389,462
   
$
(499,330
)
 
$
7,890,132
 
 
Depreciation expense for the years ended December 31, 2012 and 2011 totaled $666,743 and $488,611, respectively. The Company did own hold any property, plant or equipment prior to its March 18, 2011 acquisition of its Wendeng segment.
 
Differences may arise in the amount of depreciation expense reported in the Company's operating results as compared to the corresponding change in accumulated depreciation due to foreign currency translation. These translation adjustments are reflected in accumulated other comprehensive income, a separate component of the Company's stockholders' equity.
 
9. 
BUSINESS COMBINATIONS

During the years ended December 31, 2012 and 2011, the Company completed its acquisitions of equity interests in both Wendeng He Xie Silicon Co., Ltd and TransPacific Energy, Inc. These acquisitions were accounted for as business combinations under the acquisition method of accounting.

 
F-13

 
ACQUISITION OF WENDENG HE XIE SILICON CO., LTD.

Description of Transaction

On March 18, 2011, SunSi HK acquired a 60% equity interest in Wendeng He Xie Silicon Co., Ltd. (“Wendeng”) in exchange for total consideration of approximately $5.8 million comprised of the following:

(1)  
$445,075 of cash consideration;
(2)  
674,814 restricted shares of ForceField common stock, such shares carry an optional right of redemption whereby the Company shall buy such shares back from shareholder if shareholder exercises the option within six months at a price equivalent to RMB 18,000,000 on the transfer date; and
(3)  
787,283 restricted shares of ForceField common stock, transferred by an affiliate of ForceField.

As part of the closing, Wendeng was re-formed as a joint venture business under Chinese law and issued a new business license.

On June 13, 2011, SunSi HK executed an Addendum with Mr. Dongqiang Liu, the 40% minority shareholder of Wendeng, for the purpose of amending the terms to the Equity Transfer Agreement dated November 22, 2010, as amended on December 15, 2010 (collectively the “Original Agreement”), between the parties for the purchase of a 60% equity interest in Wendeng.
 
Under the terms of the Original Agreement,  the Company would have had an obligation, upon receiving formal notice from Mr. Dongqiang Liu, to buy back 674,814 shares of its common stock at a value of RMB 18,000,000 (approximately USD $2.00 per share) from Mr. Dongqiang Liu. The Addendum cancelled any potential obligation of the Company to buy back such shares and confirms that all purchase consideration is fully paid.

As a result of the Addendum, the Company reclassified the value of the common shares previously subject to the buyback provision, approximately $2.7 million, as additional paid-in capital. These shares were presented as redeemable common stock on the Company’s consolidated balance sheets in the prior period.

Founded in April 2008, Wendeng is located in Weihai City in the Shandong province of the People’s Republic of China. Wendeng manufactures and distributes trichlorosilane, a chemical primarily used in the production of polysilicon and an essential raw material utilized in the production of solar cells for photovoltaic panels which convert sunlight into electricity. All of Wendeng’s sales are to destinations within the People’s Republic of China.

The acquisition was accounted for as a business combination under the acquisition method of accounting in accordance with generally accepted accounting principles.
 
Fair Value of Consideration Transferred and Recording of Assets Acquired, Liabilities Assumed and Noncontrolling Interests

The following table summarizes the acquisition date fair value of the consideration transferred, identifiable assets acquired, liabilities assumed and noncontrolling interests including an amount for goodwill:
 
Consideration:
     
Cash and cash equivalents
 
$
445,075
 
Common stock, 787,283 shares of ForceField common stock (1)
   
2,645,271
 
Redeemable common stock, 674,814 shares of ForceField common stock (2)
   
2,708,838
 
Fair value of total consideration transferred
 
$
5,799,184
 
         
Recognized amount of identifiable assets acquired and liabilities assumed:
       
Financial assets
 
$
3,613,721
 
Inventory
   
473,354
 
Other current assets
   
309,329
 
Related party receivables
   
1,131,548
 
Property, plant and equipment
   
7,392,976
 
Identifiable intangible assets:
       
Land use leasehold
   
1,559,070
 
Customer relationships
   
1,534,000
 
Financial liabilities
   
(10,294,200
)
Total identifiable net assets
   
5,719,798
 
Noncontrolling interest in Wendeng
   
(2,927,000
)
Goodwill
   
3,006,386
 
   
$
5,799,184
 
 
(1)
The $3.36 per share price was determined by reference to recent private placement shares issued, less a discount for marketability. This fair value measurement is based on significant inputs that are not observable in the market and thus represents a Level 3 measurement as defined in ASC Topic 820.
(2)
Represents the redeemable option price granted by ForceField to the shareholder.

 
F-14

 
The Company utilized an alternative valuation method for the restricted common stock issued due to the limited public trading volume of its common stock prior to the measurement date. The recent average daily trading volume of the Company’s common shares was below levels considered by management to be representative of an active market.

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 general reputation of the business and the collective experience of the management and employees. The goodwill is not expected to be deductible for tax purposes.
 
Below is a summary of the methodologies and significant assumptions used in estimating the fair value of intangible assets and noncontrolling interests.
 
 
 
Intangible assets — The fair value of the acquired intangible assets was determined using a variety of valuation approaches. In estimating the fair value of the acquired intangible assets, the Company utilized the valuation methodology determined to be most appropriate for the individual intangible asset being valued as described below. The acquired intangible assets include the following:

 
Valuation
Method (2)
 
Estimated
Fair Value
   
Estimated
Useful Lives (1)
 
           
(in years)
 
Cu     Customer relationships
Multi-Period Excess Earnings
 
$
1,534,000
     
3
 
 
(1)
Determination of the estimated useful lives of the individual categories of intangible assets was based on the nature of the applicable intangible asset and the expected future cash flows to be derived from the intangible asset. Amortization of intangible assets with definite lives is recognized over the shorter of the respective lives of the agreement or the period of time the assets are expected to contribute to future cash flows.
 
(2)
The multi-period excess earnings method estimates an intangible asset’s value based on the present value of the prospective net cash flows (or excess earnings) attributable to it. The value attributed to these intangibles was based on projected net cash inflows from existing contracts or customer relationships. This fair value measurement is based on significant inputs that are not observable in the market and thus represents a Level 3 measurement as defined in ASC Topic 820.
 
Some of the more significant estimates and assumptions inherent in determining the fair value of the customer relationships are associated with forecasting cash flows and profitability. The primary assumptions used were generally based upon the present value of anticipated cash flows, assuming a three year customer attrition rate, discounted to present value at a 25% rate.
 
 
 
Noncontrolling interests — The fair value of the noncontrolling interests of $2,927,000 was estimated by applying the income approach. This fair value measurement is based on significant inputs that are not observable in the market and thus represents a Level 3 measurement as defined in ASC Topic 820. Key assumptions include (i) a compound annual sales growth rate of 33% for the five year period after the measurement date, (ii) a weighted average cost of capital of 19%, (iii) a terminal value based on a long-term sustainable growth rate of 3.5% and (iv) adjustments for lack of control and lack of marketability that market participants would consider when estimating the fair value of the noncontrolling interest in Wendeng.

ACQUISITION OF TRANSPACIFIC ENERGY, INC.

Description of Transaction

On May 10 and May 17, 2012, the Company entered into two share exchange agreements (the “Agreements”) with shareholders of TPE to acquire an aggregate controlling equity interest of its common stock. TPE is a renewable energy technology corporation located in California and Nevada that designs and installs proprietary modular Organic Rankine Cycle (“ORC”) units utilizing up to nine patented refrigerant mixtures to maximize heat recovery and convert waste heat directly from any process that generates waste heat or flue gas (such as industrial, solar, geothermal and biomass processes) converting it into electrical energy.
 
 
F-15

 
From June 14, 2012 through August 20, 2012, the Company paid $520,000 in cash and issued 255,356 shares of its common stock, valued at approximately $965,226 or $3.78 per share, in exchange for 24,753,768 shares of TPE’s common stock in accordance with the terms of the Agreements. These investments represent approximately a 50.3% equity interest in the common stock of TPE.
 
The acquisition was accounted for as a business combination under the acquisition method of accounting in accordance with generally accepted accounting principles.

Prior to gaining its controlling interest, the Company accounted for its investment in TPE as prescribed in ASC 323, “Investment — Equity Method and Joint Venture”. Accordingly, the Company adjusted the carrying amount of its investment to recognize its share of earnings or losses. During the year ended December 31, 2012, the Company recorded an equity loss from its investment in TPE of $5,798.

Fair Value of Consideration Transferred and Recording of Assets Acquired, Liabilities Assumed and Non-controlling Interests

The following table summarizes the acquisition date fair value of the consideration transferred, identifiable assets acquired, liabilities assumed and non-controlling interests including an amount for goodwill:
 
Consideration:
     
Cash and cash equivalents
 
$
520,000
 
Common stock, 255,356 shares of ForceField common stock (1)
   
965,226
 
Fair value of consideration transferred
   
1,485,226
 
Equity loss on investment in TransPacific Energy, Inc.
   
(5,798
)
Fair value of total consideration 
 
$
1,479,428
 
         
Recognized amount of identifiable assets acquired and liabilities assumed:
       
Financial assets
 
$
442,629
 
Identifiable intangible asset - technology
   
1,583,000
 
Financial liabilities
   
(452,026
)
Deferred tax liability
   
(645,009
)
Total identifiable net assets
   
928,594
 
Noncontrolling interest
   
(792,000
Goodwill
   
1,342,834
 
   
$
1,479,428
 
_____________
(1)
The $3.78 per share price was determined by calculating the 30-day weighted average trading price of the Company’s common stock immediately preceding the initial June 14, 2012 funding of the transaction.
 
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 general reputation of TransPacific’s founding owner and expected synergies. The goodwill is not expected to be deductible for tax purposes.
 
Below is a summary of the methodologies and significant assumptions used in estimating the fair value of intangible assets and noncontrolling interests.
 
 
 
Intangible assets — The fair value of the existing technology was determined using the multi-period excess earnings method. The multi-period excess earnings method estimates an intangible asset’s value based on the present value of the prospective net cash flows (or excess earnings) attributable to it. The value was based on projected net cash inflows for a discreet period plus a terminal value. This fair value measurement is based on significant inputs that are not observable in the market and thus represents a Level 3 measurement as defined in ASC Topic 820. Key assumptions in the prospective cash flows include (i) a compound annual sales growth rate of 40% for the ten year period after the measurement date, (ii) a gross margin rate of 44% in year 1 increasing to 79% in year 10, (iii) a weighted average cost of capital of 55% in year 1 decreasing to 15% in year 10, (iv) a terminal value based on a long-term sustainable growth rate of 3.0%. We estimate a useful life of 15 years which represents the shorter of the patent protection period and the estimated period that it will contribute to future cash flows.
 
 
F-16

 
 
 
Noncontrolling interest — The fair value of the noncontrolling interest of $792,000 was determined based upon the $1,485,226 fair value of consideration transferred to acquire our 50.3% interest, less adjustments for lack of control and lack of marketability that market participants would consider when estimating the fair value of the noncontrolling interest in TransPacific.

10. 
GOODWILL AND  INTANGIBLE ASSETS, NET

The carrying amount of goodwill at December 31, 2012 and 2011 was comprised of the following:
 
         
             
Goodwill – Zibo Baokai Commerce and Trade Co., Ltd
 
$
   
$
292,941
 
Goodwill – Wendeng He Xie Silicon Co., Ltd
   
583,183
     
3,006,386
 
Goodwill – TransPacific Energy, Inc.
   
1,342,834
     
 
Impairment charge
   
(607,422
 )
   
(2,800,000
 )
Foreign currency translation adjustments
   
24,239
     
109,626
 
                 
Goodwill, net at December 31, 2012
 
$
1,342,834
   
$
608,953
 
 
Goodwill Impairment

Goodwill represents the excess of cost over fair value of assets of businesses acquired. Goodwill acquired in a business combination is not amortized. The Company evaluates the carrying amount of goodwill for impairment annually on December 31 and whenever events or circumstances indicate impairment may have occurred.

When evaluating whether goodwill is impaired, the Company compares the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. The fair value of the reporting unit is estimated using a combination of the income, or discounted cash flows, approach and the market approach, which utilizes comparable companies’ data. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of reporting unit goodwill to its carrying amount. In calculating the implied fair value of reporting unit goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value.

Due to the inability to meet anticipated sales growth, the Company assessed the acquired goodwill associated with its related business units for impairment as of December 31, 2012. Based on the discounted cash flows model utilizing estimated future earnings and cash flows, the fair value of the reporting units was less than the carrying value of the acquired goodwill. The Company’s evaluation of goodwill resulted in a total impairment charge of $607,422 for the year ended December 31, 2012; of which all was attributed to Wendeng.

At December 31, 2011, the Company’s evaluation of goodwill resulted in a total impairment charge to its goodwill of $2,800,000; of which $2,487,567 was attributed to Wendeng and $312,433 was attributed to Baokai.
 
 
F-17

 
Intangible assets at December 31, 2012 and 2011 were comprised of the following:
 
       
 
 Amortization
 
Gross
         
Net
   
Gross
         
Net
 
 
Period
 
Carrying
   
Accumulated
   
Book
   
Carrying
   
Accumulated
   
Book
 
 
(Years)
 
Amount
   
Amortization
   
Value
   
Amount
   
Amortization
   
Value
 
                                                   
Intangible assets subject to amortization:
                                                 
Customer relationships
3.0
 
$
1,617,925
   
$
(966,261
)
 
$
651,664
   
$
1,601,787
   
$
(419,105
)
 
$
1,182,682
 
Exclusive distribution rights
5.0
   
780,000
     
(52,000
)
   
728,000
     
     
     
 
Land leasehold and use rights
50.0
   
2,010,872
     
(71,553
)
   
1,939,319
     
1,990,816
     
(30,501
)
   
1,960,315
 
Technology
15.0
   
1,583,000
     
(39,575
)
   
1,543,425
     
     
     
 
                                                   
Total
   
$
5,991,797
   
$
(1,129,389
)
 
$
4,862,408
   
$
3,592,603
   
$
(449,606
)
 
$
3,142,997
 

On August 27, 2012, the Company entered into a five year distribution agreement with Shanghai Lightsky Optoelectronics Technology Co., Ltd. (“Lightsky”) located in Shanghai, China whereby ForceField became the exclusive distributor of Lightsky LED lighting products in the United States, Canada and Mexico. Lightsky is an established manufacturer and seller of numerous patented LED lighting products in China and throughout Asia. ForceField issued 150,000 shares of its restricted common stock valued at $780,000, which represents the trading price of $5.20 per share of the Company’s common stock on the date of the transaction, as consideration for the rights. This amount will be amortized using the straight-line method over the five year expected life of the distribution rights. The shares are restricted for an eighteen-month period from their date of issuance. In order to maintain its exclusivity and qualify for any automatic renewal periods beyond the five-year period, ForceField must achieve certain performance milestones.
 
Amortization expense for intangible assets subject to amortization for the years ended December 31, 2012 and 2011 totaled $667,979 and $439,955, respectively. The Company did not own any intangible assets subject to amortization prior to its March 18, 2011 acquisition of its Wendeng segment.
 
Differences may arise in the amount of amortization expense reported in the Company's operating results as compared to the corresponding change in accumulated amortization due to foreign currency translation. These translation adjustments are reflected in accumulated other comprehensive income, a separate component of the Company's stockholders' equity.
 
The following table provides information regarding estimated amortization expense for intangible assets subject to amortization for each of the following years ending December 31:
 
2013
 
$
862,327
 
2014
   
448,818
 
2015
   
329,741
 
2016
   
329,741
 
2017
   
277,741
 
Thereafter
   
2,614,040
 
   
$
4,862,408
 
 
 
F-18

 
11. 
RELATED PARTY RECEIVABLES

Related party receivables were comprised of the following at December 31, 2012 and 2011:
 
         
             
Wendeng Huahai Chemical Co., Ltd.
 
$
413,061
   
$
489,595
 

Related party receivables represent trade receivables due from a customer, in which a ForceField shareholder maintains an equity interest. For the years ended December 31, 2012 and 2011, sales to this related party customer totaled $355,083 and $1,089,363, respectively; all attributable to the Company’s Wendeng segment.
 
12. 
OTHER ASSETS

Other assets were comprised of the following at December 31, 2012 and 2011:
 
         
             
Deposit – Department of Extrabudgetary Fund (Wendeng)
 
$
21,956
   
$
21,737
 
 
13. 
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
 
Accounts payable and accrued liabilities were comprised of the following at December 31, 2012 and 2011:
 
         
             
Accounts payable
 
$
3,689,065
   
$
3,333,500
 
                 
Accrued liabilities:
               
Billings in excess of cost and earned income
   
257,500
     
 
Reserve for estimated losses on uncompleted contracts
   
121,442
     
 
Other accrued liabilities
   
300,079
     
373,802 
 
Total accrued liabilities
   
679,021
     
373,802
 
                 
Total accounts payable and accrued liabilities
 
$
4,368,086
   
$
3,707,302
 
 
Accounts payable and accrued liabilities primarily represent trade payables of the Company’s Chinese operating subsidiaries.
 
14. 
RELATED PARTY PAYABLES    

Related party payables were comprised of the following at December 31, 2012 and 2011:
 
         
             
Advances from minority shareholder of noncontrolling interest (Wendeng)
 
$
5,488,840
   
$
5,501,598
 
Purchase consideration due minority shareholder of noncontrolling interest (Baokai)
   
163,647
     
163,647
 
                 
Total
 
$
5,652,487
   
$
5,665,245
 
 
 
F-19

 
The minority shareholder of the Company’s Wendeng subsidiary made a series of advances, both pre and post-acquisition, to fund capital expenditures and plant expansion. These advances were made on an interest-free basis, are unsecured and payable on demand.

The amount due to the minority shareholder of its Baokai subsidiary represents unpaid purchase consideration from the Company’s December 8, 2010 acquisition (see Note 9 — Business Combinations). This amount bears no interest, is unsecured and payable on demand.
 
15.
 INCOME TAXES                     
 
The following table sets forth the components of income tax expense (benefit) for the years ended December 31, 2012 and 2011.

         
             
Current:
               
Federal
 
$
   
$
 
State and local
   
49,004
     
 
Foreign
   
(56,602
)
   
168,746
 
Total current
   
(7,599
)
   
168,746
 
Deferred:
               
Federal
   
(20,562
)
   
 
State and local
   
(3,376
)
   
 
Foreign
   
(302,291
)
   
 
Total deferred
   
(326,229
)
   
 
Total
 
$
(333,828
)
 
$
168,746
 
 
The Company recorded a net tax benefit of ($333,828) and a net tax provision of $168,746 for the years ended December 31, 2012 and 2011, respectively, based upon their estimated effective tax rates. Pursuant to the new PRC’s enterprise income tax (“EIT”) law, the Company is subject to EIT at the statutory rate of 25%. Income taxes in the statements of operations and comprehensive income represent current taxes for the years ended December 31, 2012 and 2011. The effective income tax rate has no material difference with the PRC statutory income tax rate of 25% for the years ended December 31, 2012 and 2011.

The following table sets forth a reconciliation of income tax expense (benefit) at the federal statutory rate to recorded income tax expense (benefit) for the years ended December 31, 2012 and 2011.

         
             
Federal statutory rate
   
35.00
 %
   
35.00
 %
State and local taxes
   
2.83
       
 
Foreign rate differential
   
(5.68
)
      (7.80 )
Change in valuation allowance
   
(21.07
)
      (10.42
Permanent difference for the impairment of goodwill
   
(3.80
)
     (22.25
Other
   
1.09
       0.11  
Total
   
8.36
 %
      5.36
 %

The following tables set forth the components of income taxes payable as of December 31, 2012 and 2011.

         
             
Federal
 
$
   
$
 
State and local
   
55,183
     
 
Foreign
   
1,183,884
     
886,050
 
    Total
 
$
1,239,067
   
$
886,050
 

 
F-20

 
The following tables set forth the components of deferred income taxes as of December 31, 2012 and 2011.

         
             
Current deferred tax assets (liabilities):
               
Allowance for doubtful accounts
 
$
92,924
   
$
 
Allowance for obsolescence
   
(2,667
)
   
 
Total current deferred tax asset (liability), net
   
90,257
     
 
Non-current deferred tax assets (liabilities):
               
Intangible assets
   
(613,298
)
   
 
Net operating loss carryforwards
   
1,931,147
     
793,358
 
Less: valuation allowance
   
(1,726,886
)
   
(793,358
)
Total non-current deferred tax asset (liability), net
   
(409,037
)
   
 
Total deferred tax asset (liability)
 
$
(318,780
)
 
$
 
 
As of December 31, 2012, the Company had federal, state and foreign net operating loss carryforwards aggregating $5,195,614 that are available to offset future liabilities for income taxes. The Company has generally established a valuation allowance against these carryforwards based on an assessment that it is more likely than not that these benefits will not be realized in future years. The federal and state net operating loss carryforwards expire at various dates through 2032.

The Company remains subject to examination in federal, state and foreign jurisdictions in which the Company conducts its operations and files tax returns. These tax years range from 2008 through 2012. The Company believes that the results of current or any prospective audits will not have a material effect on its financial position or results of operations as adequate reserves have been provided to cover any potential exposures related to these ongoing audits.
 
The Company had no material adjustments to its liabilities for unrecognized income tax benefits according to the provision of FASB ASC 740. The Company has recorded no deferred tax assets or liabilities as of December 31, 2011, since nearly all differences in tax basis and financial statement carrying values are permanent differences.
 
16.
DEBT

Debt was comprised of the following at December 31, 2012 and 2011:

         
             
9% Unsecured, convertible debenture
 
$
150,000
   
$
100,000
 
Loan discount on unsecured, convertible debenture
   
     
 
     Total long term debt
   
150,000
     
100,000
 
Less: Current portion
   
     
 
     Long term debt
 
$
150,000
   
$
100,000
 

The following table summarizes the issuance of all unsecured, convertible debentures during the years ended December 31, 2012 and 2011:
 
Issue Date
 
Interest Rate
 
Face Value
 
Maturity Date
Conversion Rate of
Face Value to Common Shares
10/15/2011
 
9%
 
100,000
 
10/15/2014
0.125
11/16/2012
 
9%
   
50,000
 
11/16/2015
0.20
 Total
     
$
150,000
     

On October 15, 2011, the Company completed the private placement of an unsecured, convertible debenture in the amount of $100,000. The debenture carries an interest rate of 9% per annum, payable semiannually, for a three-year term with a fixed conversion price of $8.00 per share, or 12,500 shares of the Company’s common stock.

On November 16, 2012, the Company completed the private placement of an unsecured, convertible debenture in the amount of $50,000. The debenture carries an interest rate of 9% per annum, payable semiannually, for a three-year term with a fixed conversion price of $5.00 per share, or 10,000 shares of the Company’s common stock if converted within the first year of issuance or a fixed conversion price of $6.00 per share, or 8,333 shares of the Company’s common stock if converted during the second or third year following issuance.
 
 
F-21

 
17.
 STOCKHOLDERS’ EQUITY

Reverse Stock Split

On October 9, 2012, the Company effectuated a one-for-two reverse split of its preferred and common stock. All references in these financial statements to the number of preferred shares, common shares or warrants, price per share and weighted average number of common shares outstanding prior to the 1:2 reverse stock split have been adjusted to reflect this stock split on a retroactive basis, unless otherwise noted.

Preferred stock

The Company is authorized to issue 12,500,000 shares of preferred stock at a par value of $0.001. At December 31, 2012 and 2011, no shares of preferred stock were issued or outstanding.

Common stock

The Company is authorized to issue 37,500,000 shares of common stock at a par value of $0.001. At December 31, 2012 and 2011, shares of common stock totaling 16,080,815 and 15,002,814 were issued and outstanding, respectively.

Common Stock Issued in Private Placements

Beginning September 10, 2009, the Company conducted a private placement of its common stock at a price of $4.00 per share and a maximum issuance of 4,000,000 shares. The offer and sale of these securities was exempt from registration under the Securities Act of 1933 pursuant to Rule 506 of Regulation D. As such, all common shares issued under this private placement are restricted and subject to a minimum six month holding period. During the year ended December 31, 2011, the Company accepted subscription agreements from investors pursuant to this offering and issued 458,750 shares of its common stock for gross proceeds totaling $1,875,000. The cost of these issuances was $187,500.
 
On September 5, 2011, the Company closed this offering and commenced a new offering of 1.5 million shares at $6.00 per share. In October 2011, the Company accepted a subscription agreement from an investor for 20,000 shares of its common stock and received $120,000 in gross proceeds pursuant to this new offering. The cost of this issuance was $12,000. In February 2012, the Company issued an additional 10,000 shares of its common stock to the investor as a result of the offering amendment described below.

In February 2012, the Company amended this offering by reducing the share price from $6.00 to $4.00 per share. Since the February 2012 amendment, the Company accepted subscription agreements from investors and issued 12,500 shares of its common stock for gross proceeds totaling $50,000. The cost of these issuances was $5,000. Additionally, the Company accepted subscription agreements from two of its officers and issued 37,500 shares of its common stock for gross proceeds totaling $150,000. The purchase of these shares is consistent with the terms of the Company’s private placement described above. There was no cost associated with the officer issuances.

On July 1, 2012, the Company modified its offering to include one stock purchase warrant per share of common stock sold. The stock purchase warrants are exercisable at $4.00 per share and expire one year from their date of issuance. Since the July 1, 2012 modification, the Company has accepted subscription agreements from investors and issued 575,250 shares of its common stock and an equal amount of stock purchase warrants for gross proceeds totaling $2,276,000. The cost of these issuances was $227,600. Using the Black-Scholes model, the Company allocated a value of $1,530,577 to these stock purchase warrants.

 
F-22

 
Common Stock Issued in Exchange for Services

During the year ended December 31, 2011, the Company issued 42,500 shares of its common stock in exchange for services. These issuances were comprised of 29,400 shares valued at $125,592 to consultants for investor relations services; 13,000 shares valued at $57,600 to its directors as compensation; and 100 shares valued at $600 in promotional activities to attendees of various financing events hosted by the Company.

During the year ended December 31, 2012, the Company issued 37,373 shares of its common stock in exchange for services. These issuances were comprised of 10,000 shares valued at $4.00 per share were issued in lieu of cash to settle outstanding accounts payable aggregating $40,000; 18,123 shares valued at $72,000 to its independent directors per the terms of their compensation agreements; 5,000 shares valued at $27,000 to an independent contractor per the terms of its distribution agreement; and 4,250 shares valued at $18,400 in promotional activities to attendees of various financing events hosted by the Company.

Each share issuance made in exchange for services was valued based upon the trading price of the Company’s common stock on its respective date of award.
 
Common Stock Issued in the Acquisition of a Business

On June 13, 2011, SunSi HK executed an addendum with Mr. Dongqiang Liu, the 40% minority shareholder of Wendeng, for the purpose of amending the terms to the equity transfer agreement dated November 22, 2010, as amended on December 15, 2010, between the parties for the purchase of a 60% equity interest in Wendeng.
 
Under the terms of the agreement, as amended,  the Company would have had an obligation, upon receiving formal notice from Mr. Dongqiang Liu, to buy back 674,814 shares of its common stock at a value of RMB 18,000,000 (approximately USD $4.00 per share) from Mr. Dongqiang Liu. The addendum cancelled any potential obligation of the Company to buy back such shares and confirms that all purchase consideration is fully paid.

As a result of the addendum, the Company reclassified the value of the common shares previously subject to the buyback provision, approximately $2.7 million, as additional paid-in capital. These shares were presented as redeemable common stock on the Company’s consolidated balance sheets in the prior period.

Effective August 20, 2012, the Company exchanged 255,351 shares of its common stock valued at $965,226, or $3.78 per share, in connection with its equity investment in TPE (see Note 9 — Business Combinations). 

Common Stock Issued in the Acquisition of Distribution Rights

On August 27, 2012, the Company entered into a five year distribution agreement with Lightsky located in Shanghai, China whereby it became the exclusive distributor of Lightsky LED lighting products in the United States, Canada and Mexico. The Company issued 150,000 shares of its restricted common stock valued at $780,000, or $5.20 per share. The shares are restricted for an eighteen month period from their date of issuance (see Note 10 — Goodwill and Intangible Assets, Net).

Stock Purchase Warrants
 
The following table reflects all outstanding and exercisable warrants for the periods ended December 31, 2011 and December 31, 2012. All stock warrants are exercisable for a period of one year from the date of issuance.

   
Number of
Warrants
Outstanding
   
Weighted Average
Exercise Price
   
Remaining
Contractual
Life (Years)
 
   
     
     
 
Warrants issued
   
562,750
   
$
4.00
     
0.71
 
Warrants exercised
   
     
     
 
   
562,750
   
$
4.00
     
0.71
 
________________
(1)
The remaining contractual life of the warrants outstanding as of December 31, 2012 ranges from 0.50 to 0.95 years.
 
 
F-23

 
The value of the common stock options and warrants has been determined using the following Black Scholes methodology:

Expected dividend yield (1) 
   
0.00%
 
Risk-free interest rate (2)
   
0.16 – 0.21%
 
Expected volatility (3)
   
111.94 – 152.31%
 
Expected life (in years)
   
1.00
 
______________
(1)
The Company has no history or expectation of paying cash dividends on its common stock.
(2)
The risk-free interest rate is based on the U.S. Treasury yield for a term consistent with the expected life of the awards in effect at the time of grant.
(3)
The volatility of the Company’s common stock is based on trading activity for the previous one year period ended at each stock purchase warrant contract date.

18.
 COMMITMENTS
 
ForceField entered into various engagement agreements for advisory and consulting services on a non-exclusive basis to obtain equity capital. In the event that the Company completes a financing from a funding source provided by one of the consultants, then such consultant will receive a finders or referral fee at closing ranging from seven percent (7%) to ten percent (10%) of the amount received by the Company. The terms and condition of financing are subject to Company approval.
 
19. 
SEGMENT INFORMATION

As a result of the acquisition of its equity interest in TPE and exclusive distribution rights for Lightsky LED lighting products, the Company reassessed its requirement for segment reporting based on the operating and reporting structure of the combined company.

The Company utilized several criteria, including (i) the Company’s organizational structure, (ii) the manner in which the Company’s operations are managed, (iii) the criteria used by the Company’s Chief Executive Officer, the Chief Operating Decision Maker (“CODM”), to evaluate segment performance and (iv) the availability of separate financial information, as a basis to identify its operating segments.

The Company determined that it has four reportable business segments: Baokai, Wendeng, ORC and LED. The Baokai segment consists of the business of Zibo Baokai Commerce and Trade Co., Ltd., a company based in the Shandong province of China that distributes the trichlorosilane production of Zibo Baoyun Chemical Plant. The Wendeng segment consists of the operations of Wendeng He Xie Silicon Co., Ltd., a company based in the Shandong province of China that directly manufactures and sells trichlorosilane. The ORC segment consists of the operations of TransPacific Energy, Inc., a company based in California and Nevada that designs and installs proprietary modular Organic Rankine Cycle units utilizing patented multiple refrigerant mixtures to maximize heat recovery and convert waste heat directly from industrial processes, solar and geothermal, biomass converting it into electrical energy. The LED segment consists of the business of SunSi USA that distributes LED lighting products manufactured in China by Shanghai Lightsky Optoelectronics Technology Co., Ltd. in the major North American markets.

The accounting policies of the reportable segments are the same as those described in Note 2 — Summary of Significant Accounting Policies to the consolidated financial statements. The Company’s CODM reviews financial information presented on a consolidated basis, accompanied by disaggregated information by segment for purpose of evaluating financial performance.
 
 
F-24

 
Segment Results

The following table sets forth operations by segment for the years ended December 31, 2012 and 2011:

   
TCS
                         
   
Baokai
   
Wendeng
   
ORC
   
LED
   
Corporate
   
Consolidated
 
Sales:
                                               
2012
 
$
1,202,450
   
$
686,353
   
$
240,238
   
$
   
$
   
$
2,129,041
 
2011
 
$
14,546,790
   
$
13,791,599
   
$
   
$
   
$
   
$
28,338,389
 
Cost of goods sold:
                                               
2012
 
$
1,178,389
   
$
654,207
   
$
240,238
   
$
   
$
   
$
2,072,834
 
2011
 
$
14,234,315
   
$
9,881,216
   
$
   
$
   
$
   
$
24,115,531
 
Gross margin:
                                               
2012
 
$
24,061
   
$
32,146
   
$
   
$
   
$
   
$
56,207
 
2011
 
$
312,475
   
$
3,910,383
   
$
   
$
   
$
   
$
4,222,858
 
Operating expenses:
                                               
2012 (2)
 
$
68,310
   
$
1,770,458
   
$
57,950
   
$
148,626
   
$
1,986,312
   
$
4,031,656
 
2011 (1)
 
$
389,697
   
$
5,958,175
   
$
   
$
   
$
1,020,970
   
$
7,368,842
 
Other income (expense):
                                               
2012
 
$
   
$
(287,449
 
$
   
$
   
$
(19,010
 
$
(306,459
)
2011
 
$
   
$
   
$
   
$
   
$
   
$
 
Provision for income taxes:
                                               
2012
 
$
(129,788
)
 
$
(229,106
)
 
$
(23,138
 
$
   
$
48,204
   
$
(338,828
)
2011
 
$
58,802
   
$
109,944
   
$
   
$
   
$
   
$
168,746
 
Net income (loss):
                                               
2012
 
$
85,539
   
$
(1,796,655
)
 
$
(34,812
 
$
(148,626
 
$
(2,053,526
 
$
(3,948,080
)
2011
 
$
(136,024)
   
$
(2,157,736)
   
$
   
$
   
$
(1,020,970
)
 
$
(3,314,730
)
_______________
(1) 2011 Includes goodwill impairment charge of $312,433 and $2,487,567 at Baokai and Wendeng, respectively.
(2) 2012 Includes goodwill impairment charge of $607,422 at Wendeng.
 
Operating segments do not sell products to each other, and accordingly, there is no inter-segment revenue to be reported.
 
Total Assets

The following table sets forth the total assets by segment at December 31, 2012 and 2011:

   
TCS
                         
   
Baokai
   
Wendeng
   
ORC
   
LED
   
Corporate
   
Consolidated
 
Total assets:
                                               
2012
 
$
1,841,600
   
$
14,070,312
   
$
3,370,300
   
$
769,056
   
$
461,781
   
$
20,513,049
 
2011
 
$
840,280
   
$
16,986,030
   
$
   
$
   
$
199,400
   
$
18,025,710
 
 
 
F-25

 
Goodwill, Intangible and Long-Lived Assets

The following table sets forth the carrying amount of goodwill by segment at December 31, 2012 and 2011:

   
TCS
                         
   
Baokai
   
Wendeng
   
ORC
   
LED
   
Corporate
   
Consolidated
 
Goodwill:
                                               
2012
 
$
   
$
   
$
1,342,834
   
$
   
$
   
$
1,342,834
 
2011
 
$
   
$
608,953
   
$
   
$
   
$
   
$
608,953
 
Intangible assets:
                                               
2012
 
$
   
$
2,590,983
   
$
1,543,425
   
$
728,000
   
$
   
$
4,862,408
 
2011
 
$
   
$
3,142,997
   
$
   
$
   
$
   
$
3,142,997
 
Property, plant and equipment:
                   
                         
2012
 
$
   
$
7,547,128
   
$
   
$
   
$
   
$
7,547,128
 
2011
 
$
   
$
7,890,132
   
$
   
$
   
$
   
$
7,890,132
 

At December 31, 2012, the Company’s evaluation of goodwill resulted in a total impairment charge of $607,422 for the year ended December 31, 2012; of which all was attributed to Wendeng. At December 31, 2011, the Company’s evaluation of goodwill resulted in a total impairment charge to its goodwill of $2,800,000; of which $2,487,567 was attributed to Wendeng and $312,433 was attributed to Baokai.
 
For the year ended December 31, 2012, amortization expense totaled $667,979; of which $576,404 was attributed to Wendeng, $39,575 was attributed to ORC and $52,000 was attributed to LED. For the year ended December 31, 2011, amortization expense totaled $439,955; of which all was attributed to Wendeng.

For the years ended December 31, 2012 and 2011, depreciation expense totaled $666,743 and $488,611, respectively; of which all was attributed to Wendeng.

For the years ended December 31, 2012 and 2011, capital expenditures totaled $249,514 and $1,011,760 (which include $356,725 in land use rights, an intangible asset), respectively; of which all was attributed to Wendeng.

Customer information

For the year ended December 31, 2012, two customers accounted for 93% of Baokai's sales at individual concentration levels of 36% and 57%; three customers accounted for 100% of Wendeng’s sales at individual concentration levels of 19%, 29% and 52%; and two customers accounted for 100% of ORC’s revenue at individual concentration levels of 33% and 67%.

For the year ended December 31, 2011, one customer accounted for approximately 98% of Baokai's sales; three customers accounted for approximately 81% of Wendeng’s sales, at individual concentration levels ranging from 11% to 47%.

At December 31, 2012, two customers accounted for approximately 95% of Baokai’s accounts receivable. Concentration levels for these two customers were 27% and 68% of Baokai’s total trade receivables. At December 31, 2012, two customers accounted for approximately 98% of Wendeng’s accounts receivable. Concentration levels for these two customers were 15% and 83% of Wendeng’s total trade receivables. At December 31, 2012, one customer accounted for 100% of ORC’s accounts receivable.

At December 31, 2011, one customer accounted for approximately 100% of Baokai’s accounts receivable. At December 31, 2011, two customers accounted for approximately 98% of Wendeng’s accounts receivable. Concentration levels of these two customers were 14% and 84% of Wendeng’s total trade receivables.

Geographic Information

All of the Company’s long-lived assets are located within China.

For the year ended December 31, 2012, all of the Company’s sales as determined by shipping destination were located within China; with the exception of the $240,238 in revenue which were generated by the Company’s ORC segment in the United States.

 
F-26

 
For the year ended December 31, 2011, all of the Company’s sales as determined by shipping destination were located within China; with the exception of one sale valued at approximately $188,000 delivered to Russia by the Company’s Wendeng segment.
 
20.
DEFINED CONTRIBUTION PLAN

Pursuant to the relevant PRC regulations, the Company is required to make contributions at a rate of 28% of employees’ salaries and wages to a defined contribution retirement plan organized by a state-sponsored social insurance plan in respect of the retirement benefits for the Company’s employees in the PRC. The only obligation of the Company with respect to the retirement plan is to make the required contributions under the plan. No forfeited contribution is available to reduce the contribution payable in the future years. The defined contribution plan contributions were charged to the statements of operations.  The Company contributed $24,686 and $38,881 for the years ended December 31, 2012 and 2011.
 
21.
SUBSEQUENT EVENTS

The Company has evaluated subsequent events from the balance sheet through the date the financial statements were issued, and determined there are no other events required to be disclosed.
 
 
 
 
 
F-27


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