During
the years ended December 31, 2013 and 2012, the Company completed the acquisition of a 50.3% equity interest in TransPacific Energy,
Inc. The acquisition was accounted for as business combination under the acquisition method of accounting.
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 TransPacific Energy, Inc. (“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.
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. |
| |
● |
|
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. |
|
