UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
| þ | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 2014
| ¨ | Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period __________ to __________
Commission File Number: 001-36133
ForceField Energy Inc.
(Exact name of registrant as specified in its charter)
| Nevada | | 20-8584329 |
| (State or other jurisdiction of incorporation or organization) | | (IRS Employer Identification No.) |
245 Park Avenue, 39th Floor New York, New York | | 10167 |
| (Address of principal executive offices) | | (Zip Code) |
212-672-1786
(Issuer’s telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days þ Yes ¨ 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
| 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 þ No
State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 16,055,600 common shares as of May 16, 2014.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
| Our unaudited financial statements included in this Form 10-Q are as follows: |
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| F-1 | |
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| F-2 | |
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| F-3 | |
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| F-4 | |
FORCEFIELD ENERGY INC.
Consolidated Balance Sheets
| | March 31, 2014 | | December 31, 2013 | |
| | (Unaudited) | | | |
| ASSETS | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 2,451,146 | | | $ | 3,681,125 | |
| Accounts receivable, net | | | 397,446 | | | | 276,996 | |
| Inventory | | | 92,644 | | | | 28,944 | |
| Prepaid expenses and other current assets | | | 357,569 | | | | 139,229 | |
| Current assets of discontinued operations held for sale | | | — | | | | 2,963,527 | |
| Total current assets | | | 3,298,805 | | | | 7,089,821 | |
| Property, plant and equipment | | | 21,824 | | | | 7,073 | |
| Goodwill | | | 229,850 | | | | — | |
| Intangible assets, net | | | 1,944,508 | | | | 2,009,892 | |
| Other assets | | | 103,769 | | | | 91,632 | |
| Noncurrent assets of discontinued operations held for sale | | | — | | | | 11,170,108 | |
| Total assets | | $ | 5,598,756 | | | $ | 20,368,526 | |
| LIABILITIES AND SHAREHOLDERS' EQUITY | |
| Current liabilities: | | | | | | | | |
| Accounts payable | | $ | 404,308 | | | $ | 379,957 | |
| Accrued liabilities | | | 428,407 | | | | 472,763 | |
| Convertible debentures, net-current | | | 100,000 | | | | 100,000 | |
| Income taxes payable | | | 29,878 | | | | 1,974 | |
| Current liabilities of discontinued operations held for sale | | | — | | | | 11,426,567 | |
| Total current liabilities | | | 962,593 | | | | 12,381,261 | |
| Convertible debenture, net of loan discount | | | 1,960,542 | | | | 1,685,868 | |
| Deferred tax liabilities, net — non-current | | | 418,404 | | | | 418,404 | |
| Other noncurrent liabilities | | | 45,355 | | | | 45,337 | |
| Noncurrent liabilities of discontinued operations held for sale | | | — | | | | 1,324,226 | |
| Total liabilities | | | 3,386,894 | | | | 15,855,096 | |
| | | | | | | | | |
| Commitments and contingencies | | | — | | | | — | |
| | | | | | | | | |
| | | | | | | | | |
| 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; 17,058,616 and 17,033,531 | 17,059 | | | | 17,034 | |
| issued and outstanding as of March 31, 2014 and December 31, 2013, respectively | | | | | |
Common stock held in treasury, at cost, 1,462,097 shares and nil held at March 31,2014 and December 31, 2013, respectively | | | (1,166,071) | | | | — | |
| Additional paid-in capital | | | 16,922,918 | | | | 16,762,527 | |
| Accumulated deficit | | | (13,693,717) | | | | (12,683,134 | ) |
| Accumulated other comprehensive income | | | 20,107 | | | | 416,575 | |
| Total ForceField Energy Inc. stockholders' equity | | | 2,100,296 | | | | 4,513,002 | |
| Noncontrolling interests | | | 111,566 | | | | 428 | |
| Total shareholders' equity | | | 2,211,862 | | | | 4,513,430 | |
| Total liabilities and shareholders' equity | | $ | 5,598,756 | | | $ | 20,368,526 | |
The accompanying notes are an integral part of the unaudited consolidated financial statements.
Consolidated Statements of Operations and Comprehensive Loss (Unaudited)
| | | | Three Months Ended March 31, | |
| | | | 2014 | | | | 2013 | |
| Sales | | $ | 183,565 | | | $ | 231,954 | |
| Cost of goods sold | | | 185,546 | | | | 219,317 | |
| Gross margin | | | (1,981 | ) | | | 12,637 | |
| Operating expenses: | | | | | | | | |
| Selling and marketing | | | 34,588 | | | | 30,254 | |
| General and administrative | | | 723,037 | | | | 354,763 | |
| Professional fees | | | 165,281 | | | | 189,576 | |
| Loss from divestment of business | | | 30,001 | | | | — | |
| Total operating expenses | | | 952,907 | | | | 574,503 | |
| Loss from continuing operations before other income (expense) and income taxes | | | (954,888 | ) | | | (561,866 | ) |
| Other income (expense) | | | | | | | | |
| Interest expense, net | | | (82,882 | ) | | | (4,419 | ) |
| Total other income (expense) | | | (82,882 | ) | | | (4,419 | ) |
| Loss from continuing operations before income taxes | | | (1,037,770 | ) | | | (566,285 | ) |
| Provision for income taxes (benefit) | | | 28,722 | | | | (40,313 | ) |
| Net loss from continuing operations | | | (1,066,492 | ) | | | (525,972 | ) |
| Discontinued operations, net of income taxes | | | 40,631 | | | | (238,593 | ) |
| Net loss | | | (1,025,861 | ) | | | (764,565 | ) |
| Less: Net loss attributable to noncontrolling interests | | | (15,278 | ) | | | (116,863 | ) |
| Net loss attributable to ForceField Energy Inc. common stockholders | | $ | (1,010,583 | ) | | $ | (647,702 | ) |
| Amounts attributable to ForceField Energy Inc. common stockholders: | | | | | | | | |
| Continuing operations, net of income taxes | | | (1,051,214 | ) | | | (409,109 | ) |
| Discontinued operations, net of income taxes | | | 40,631 | | | | (238,593 | ) |
| Net loss attributable to ForceField Energy Inc. common stockholders | | $ | (1,010,583 | ) | | $ | (647,702 | ) |
Basic and diluted loss per share | | | | | | | | |
| Continuing operations | | $ | (0.06 | ) | | $ | (0.03 | ) |
| Discontinued operations | | $ | 0.00 | | | $ | (0.01 | ) |
| Net loss attributable to ForceField Energy Inc. common stockholders | | $ | (0.06 | ) | | $ | (0.04 | ) |
| Weighted average number of common shares outstanding: | | | | | | | | |
| Basic and diluted | | | 16,396,614 | | | | 16,132,284 | |
| Comprehensive loss: | | | | | | | | |
| Net loss | | $ | (1,025,861 | ) | | $ | (764,565 | ) |
| Foreign currency translation adjustment | | | 12,200 | | | | 13,686 | |
| Comprehensive loss | | | (1,013,661 | ) | | | (750,879 | ) |
| Comprehensive loss attributable to noncontrolling interests | | | (15,278 | ) | | | (116,863 | ) |
| Comprehensive loss attributable to Forcefield Energy Inc. common stockholders | | $ | (998,383 | ) | | $ | (634,016 | ) |
The accompanying notes are an integral part of the unaudited consolidated financial statements.
FORCEFIELD ENERGY INC.Consolidated Statements of Cash Flows
(Unaudited)
| | | Three Months Ended March 31, | |
| | | 2014 | | | 2013 | |
| Cash flows from operating activities of continuing operations: | | | | | | |
| Net loss | | $ | (1,025,861 | ) | | $ | | ) |
| Net (income) loss from discontinued operations | | | (40,631 | ) | | | 238,593 | |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | |
| Depreciation and amortization | | | 65,825 | | | | 65,383 | |
| Loss from divestment of business | | | (30,001 | ) | | | — | |
| Amortization of debt discount | | | 24,674 | | | | — | |
| Common stock issued in exchange for services | | | 2,955 | | | | 52,060 | |
| Deferred taxes | | | | | | | (40,313 | ) |
| Changes in operating assets and liabilities: | | | | | | | | |
| Accounts receivable | | | (120,762 | ) | | | 224,241 | |
| Inventory | | | (63,699 | ) | | | — | |
| Prepaid expenses and other current assets | | | (120,074 | ) | | | | ) |
| Other assets | | | (12,137 | ) | | | — | |
| Accounts payable | | | 74,085 | | | | (75,334 | ) |
| Accrued liabilities | | | 6,043 | | | | (8,529 | ) |
| Income taxes payable and other noncurrent liabilities | | | 27,922 | | | | (800 | ) |
| Net cash used in operating activities – continuing operations | | | (1,211,661 | ) | | | (451,075 | ) |
| Net cash provided by operating activities - discontinued operations | | | (229,169 | ) | | | 106,095 | |
| Net cash used in operating activities | | | (1,440,830 | ) | | | (344,980 | ) |
| | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | |
| Cash consideration for acquisition of business | | | (200,000 | ) | | | | |
| Cash paid on disposal of business | | | (60,000 | ) | | | | |
| Advance for acquisition of business | | | (100,000 | ) | | | — | |
| Purchase of property, plant and equipment | | | (15,685 | ) | | | — | |
| Net cash used in investing activities – continuing operations | | | (375,685 | ) | | | | |
| Net cash used in investing activities – discontinued operations | | | (96,467 | ) | | | (332,658 | ) |
| Net cash used in investing activities | | | (472,152 | ) | | | (332,658 | ) |
| | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | |
| Proceeds from issuance of common stock, net of issuance costs | | | | | | | 306,900 | |
| Proceeds from exercise of stock purchase warrants, net of issuance costs | | | 59,400 | | | | | |
| Proceeds from issuance of convertible debentures | | | 300,000 | | | | 50,000 | |
| Repayments of related party payables | | | — | | | | (50,000 | ) |
| Net cash provided by financing activities – continuing operations | | | 359,400 | | | | 306,900 | |
| Net cash provided by financing activities – discontinued operations | | | 268,059 | | | | | |
| Net cash provided by financing activities | | | 627,459 | | | | 306,900 | |
| | | | | | | | | |
| Effect of exchange rates on cash and cash equivalents | | | (2,220 | ) | | | 623 | |
| Net increase in cash and cash equivalents | | | (1,287,743 | ) | | | (370,115 | ) |
| Cash and cash equivalents at beginning of period | | | 3,738,889 | | | | 994,149 | |
| Cash and cash equivalents at end of period | | $ | 2,451,146 | | | $ | 624,034 | |
| | | | | | | | | |
| Supplemental disclosure of cash flow information: | | | | | | | | |
| Cash paid for interest | | $ | 45,216 | | | $ | 481 | |
| Cash paid for income taxes | | $ | 17,532 | | | $ | 800 | |
| | | | | | | | | |
| Supplemental disclosure of non-cash investing and financing activities: | | | | | | | | |
| Common stock issued for acquisition of business | | $ | 29,850 | | | $ | | |
| Discount for beneficial conversion features on convertible debentures | | $ | 50,000 | | | $ | — | |
| Common stock issued to reduce accrued liabilities | | $ | 18,000 | | | $ | — | |
The accompanying notes are an integral part of the unaudited consolidated financial statements.
Notes to Interim Unaudited Consolidated Financial Statements
March 31, 2014
(Expressed in United States dollars)
ForceField Energy Inc. (“ForceField” or the “Company”) is an international designer, distributor, and licensee of high-efficiency energy products and alternative energy technologies. ForceField is the exclusive North American distributor of light emitting diode (LED) commercial lighting products and fixtures for a premier manufacturer in China; ForceField owns 50.3% of TransPacific Energy, Inc., a U.S. based renewable energy technology provider that uses “waste heat” from various manufacturing and other sources to provide clean electricity; and through the period ended February 19, 2014 was a 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 photovoltaic (“PV”) panels that convert sunlight to electricity. This TCS was sold to the marketplace via two operating segments (which ceased operating on February 19, 2014) (1) a 90% owned TCS distribution company, and (2) through the 60% ownership of a TCS plant, both of which are located in China.
| 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 (“US 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”), ForceField Energy USA Inc. (“FNRG USA”), and ForceField Energy SA (“FNRG SA”), formed in March 2013 and located in Costa Rica; the Company’s 50.3% owned subsidiary TransPacific Energy, Inc. (“TPE”); and through the period ended February 19, 2014 SunSi HK's 90% formerly owned subsidiary Zibo Baokai Commerce and Trade Co. Ltd. (“Baokai”); SunSi HK's 60% formerly owned subsidiary Wendeng He Xie Silicon Industry Co., Ltd. (“Wendeng”). All intercompany accounts and transactions are eliminated in consolidation.
Management’s Representation of Interim Financial Statements
The accompanying unaudited consolidated financial statements have been prepared by the Company without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted as allowed by such rules and regulations, and management believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements include all of the adjustments, which in the opinion of management are necessary to a fair presentation of financial position and results of operations. All such adjustments are of a normal and recurring nature. Interim results are not necessarily indicative of results for a full year. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements at December 31, 2013 as presented in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission.
Discontinued Operations
In December 2013, the Company’s Board of Directors authorized ForceField’s management to pursue the sale of its Baokai and Wendeng segments. These segments were each classified as discontinued operations and assets held for sale beginning with the Company’s December 31, 2013 consolidated financial statements. In February 2014, the Company entered into two definitive agreements to sell and transfer its equity interests in Baokai and Wendeng. These transactions each closed on February 19, 2014.
ForceField’s results of operations related to its Baokai and Wendeng segments have been reclassified as discontinued operations on a retrospective basis for all periods presented. See Note 12 — Discontinued Operations for additional information.
Use of Estimates
The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company continually evaluates its estimates, including but not limited to the allowance for doubtful accounts, the useful lives and impairment for property, plant and equipment, goodwill and acquired intangible assets, write-down in value of inventory and deferred income taxes. 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:
Refer to Note 2 — Summary of Significant Accounting Policies in the Company’s audited 2013 consolidated financial statements in Form 10-K for a summary of its significant accounting policies.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no impact on net earnings and financial position.
| 3. | THE EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS |
Accounting Standards Updates through ASU 2014-08 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.
| 4. | ACCOUNTS RECEIVABLE, NET |
Accounts receivable at March 31, 2014 and December 31, 2013 were comprised of the following:
| | | March 31, 2014 | | | December 31, 2013 | |
| | | | | | | |
| Accounts receivable | | $ | 421,000 | | | $ | 262,744 | |
| Unbilled receivables, not billable | | | - | | | | 37,806 | |
| Allowance for doubtful accounts | | | (23,554 | ) | | | (23,554 | ) |
| | | | | | | | | |
| Total | | $ | 397,446 | | | $ | 276,996 | |
During the year ended December 31, 2013, the Company recorded an allowance for doubtful accounts related to its trade accounts receivable and recorded bad debt expense of $23,554. No bad debt expense was recorded during the three months ended March 31, 2014.
As of March 31, 2014, two customers accounted for approximately 57% and 39%, respectively, or approximately 96% of total accounts receivable.
As of December 31, 2013, one customer accounted for approximately 86% of total accounts receivable.
Inventory at March 31, 2014 and December 31, 2013 was comprised of the following:
| | | March 31, 2014 | | | December 31, 2013 | |
| | | | | | | |
| Finished goods | | $ | 92,644 | | | $ | 28,944 | |
| Total | | $ | 92,644 | | | $ | 28,944 | |
At March 31, 2014 and December 31, 2013, the Company did not record any provisions to its allowance for excess or obsolete inventory.
| 6. | PREPAID EXPENSES AND OTHER CURRENT ASSETS |
Prepaid expenses and other current assets at March 31, 2014 and December 31, 2013 were comprised of the following:
| | | March 31, 2014 | | | December 31, 2013 | |
| | | | | | | |
| Advances to employees | | $ | 25,740 | | | $ | 15,755 | |
| Advances to suppliers | | | 122,750 | | | | 66,649 | |
| Prepaid listing fees | | | 24,000 | | | | — | |
| Advance deposit on acquisition | | | 100,000 | | | | — | |
| Insurance premiums | | | 24,336 | | | | 24,074 | |
| Service agreements | | | 16,667 | | | | 16,000 | |
| Other | | | 44,076 | | | | 16,731 | |
| | | | | | | | | |
| Total | | $ | 357,569 | | | $ | 139,229 | |
Advances made to suppliers are for the purchase of LED lighting products that are expected to be shipped within two months of receipt of funds. The advance deposit relates to a deposit on the American Lighting acquisition. See Note 18 — Subsequent Events.
Prepaid expenses and other assets represent prepayments made in the normal course and in which the economic benefit is expected to be realized within twelve months.
| 7. | PROPERTY, PLANT AND EQUIPMENT |
Property, plant and equipment at March 31, 2014 and December 31, 2013 were comprised of the following:
| | | March 31, 2014 | | | December 31, 2013 | |
| | | Cost | | | Accumulated Depreciation | | | Net Book Value | | | Cost | | | Accumulated Depreciation | | | Net Book Value | |
| Furniture and equipment | | $ | 22,290 | | | $ | (466 | ) | | $ | 21,824 | | | $ | 7,108 | | | $ | (35 | ) | | $ | 7,073 | |
| Total | | $ | 22,290 | | | $ | (466 | ) | | | 21,824 | | | $ | 7,108 | | | $ | (35 | ) | | $ | 7,073 | |
Depreciation expense for the three months ended March 31, 2014 and 2013 totaled $431 and $ nil, respectively.
ACQUISITION OF CATALYST LED’S LLC
On February 2, 2014, we completed a purchase of LED assets for $200,000 in cash and 5,000 shares of ForceField common stock valued at $5.97 per share for a total of $29,850 in common stock from Idaho-based Catalyst LED’s LLC (“Catalyst”), a provider of customized LED lighting products and solutions, and an authorized vendor for a number of leading companies. In connection with acquisition of Catalyst’s assets, the Company also entered into an employment agreement with the owner of Catalyst, under which agreement, he may achieve commission payments if certain milestones are attained.The transaction was considered as an acquisition of a business and accordingly the acquisition method of accounting has been applied.
Fair Value of Consideration Transferred and Recording of Assets Acquired
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 | | $ | 200,000 | |
| Common stock | | | 29,850 | |
| Fair value of total consideration transferred | | $ | 229,850 | |
| Recognized amount of identifiable assets acquired and liabilities assumed: | | | | |
| Total identifiable net assets | | $ | — | |
| Goodwill | | $ | 229,850 | |
The purchase consideration, allocated in total to goodwill, is considered preliminary and subject to change upon the completion of a valuation analysis to be performed by the Company's management by June 30, 2014. The final valuation may identify certain intangible assets that would reduce the amount of recorded goodwill.
| 9. | GOODWILL AND INTANGIBLE ASSETS, NET |
The carrying amount of goodwill at March 31, 2014 and December 31, 2013 was comprised of the following:
| | | March 31, 2014 | | | December 31, 2013 | |
| | | | | | | |
| Goodwill Catalyst LED, LLC | | $ | | | | $ | -0- | |
Intangible assets at March 31, 2014 and December 31, 2013 were comprised of the following:
| | | March 31, 2014 | | December 31, 2013 |
| | Amortization | | Gross | | | | | | Net | | | Gross | | | | | Net |
| | Period | | Carrying | | | Accumulated | | | Book | | | Carrying | | | Accumulated | | Book |
| | (Years) | | Amount | | | Amortization | | | Value | | | Amount | | | Amortization | | Value |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Intangible assets subject to amortization: | | | | | | | | | | | | | | | | | | | | | | | |
| Exclusive distribution rights | 5 | | | 780,000 | | | | (247,000 | ) | | | 533,000 | | | | 780,000 | | | | (208,000 | ) | | 572,000 |
| Technology | 15 | | | 1,583,000 | | | | (171,492 | ) | | | 1,411,508 | | | | 1,583,000 | | | | (145,108 | ) | | 1,437,892 |
| Total | | | $ | 2,363,000 | | | | (418,492 | ) | | | 1,944,508 | | | $ | 2,363,000 | | | $ | (353,108 | ) | $ | 2,009,892 |
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 three months ended March 31, 2014 and 2013 totaled $65,384 for both periods.
Differences may arise in the amount of amortization 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.
Other assets were comprised of the following at March 31, 2014 and December 31, 2013:
| | | March 31, 2014 | | | December 31, 2013 | |
| | | | | | | |
| Deferred financing costs, net of accumulated amortization — Debt issue costs | | $ | | | | $ | 91,632 | |
Deferred financing costs relate to the issuance of the Company’s convertible securities and will be amortized over the term of the convertible debentures.
| 11. | ACCOUNTS PAYABLE AND ACCRUED LIABILITIES |
Accounts payable were comprised of the following at March 31, 2014 and December 31, 2013:
| | | March 31, 2014 | | | December 31, 2013 | |
| | | | | | | |
| Accounts payable | | $ | 404,308 | | | $ | 379,957 | |
Accrued liabilities were comprised of the following at March 31, 2014 and December 31, 2013:
| | | March 31, 2014 | | | December 31, 2013 | |
| | | | | | | |
| Board and executive compensation | | | 115,890 | | | | 139,500 | |
| Interest on convertible debentures | | | 58,583 | | | | 20,917 | |
| Finder’s fees | | | 25,000 | | | | 95,900 | |
| Billings in excess of costs and earned income | | | 197,200 | | | | 197,200 | |
| Reserve for estimated losses on contracts in progress | | | 14,868 | | | | 13,987 | |
| Other | | | 16,866 | | | | 5,259 | |
| Total accrued liabilities | | $ | 428,407 | | | $ | 472,763 | |
12. DISCONTINUED OPERATIONS
In December 2013, the Board of Directors authorized ForceField’s management to pursue the sale of its equity interests in Baokai and Wendeng. Accordingly, the assets and liabilities of these business segments were separately reported as “assets and liabilities of discontinued operations held for sale” as of December 31, 2013. In February 2014, the Company entered into two definitive agreements to sell and transfer its equity interests in Baokai and Wendeng. Under the terms of the agreement to dispose Wendeng, the Company agreed to pay $50,000 in cash consideration and received 1,462,097 shares of its restricted common stock for the sale of its 60% equity interest in Wendeng to the minority owner of Wendeng. The common stock was placed in treasury and reduced the Company’s issued and outstanding shares count. Under the terms of the agreement to dispose Baokai, the Company agreed to sell its 90% equity interest in Baokai to the minority shareholders and agreed to pay $10,000 to them to indemnify the Company from any present or future obligations or liabilities.
These transactions were closed on February 19, 2014 and the results of operations of these two business segments, for all periods, were separately reported as “discontinued operations”. The loss on disposal of Baokai and Wendeng totaled $30,001, which was reported as “Loss from divestment of business” for the period ended March 31, 2014.”
In connection with this transaction, ForceField reacquired 1,462,097 shares of its common stock through the disposal of Wendeng. The reacquired common stock is held as treasury stock by the Company. See Note 15 — Stockholders' Equity.
The operating results of the Company’s Baokai and Wendeng segments for the three month periods ended March 31, 2014 and 2013 classified as discontinued operations are summarized below:
| | | Three Months Ended March 31, 2014 | | | Three Months Ended March 31, 2013 | |
| | | Baokai | | | Wendeng | | | Total | | | Baokai | | | Wendeng | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Sales | | $ | — | | | $ | 1,214,467 | | | $ | 1,214,467 | | | $ | 36,973 | | | $ | 16,218 | | | $ | 53,191 | |
| Cost of goods sold | | | — | | | | 1,128,260 | | | | 1,128,260 | | | | 36,234 | | | | 20,316 | | | | 56,550 | |
| Gross margin | | | — | | | | 86,207 | | | | 86,207 | | | | 739 | | | | (4,098) | | | | (3,359) | |
| Operating expenses | | | — | | | | 45,576 | | | | 45,576 | | | | (95,158 | ) | | | 356,172 | | | | 261,014 | |
| Other income (expense) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Provision for income taxes (benefit) | | | — | | | | — | | | | — | | | | 23,974 | | | | (49,754) | | | | 25,780 | |
| Net income (loss) | | $ | — | | | $ | 40,631 | | | $ | 40,631 | | | $ | 71,293 | | | $ | (310,516) | | | $ | 238,593 | |
As of March 31, 2014, the Company had federal, state and foreign net operating loss carryforwards aggregating approximately $8,000,000 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 2033.
The tax expense of $28,722 for the period ended March 31, 2014 relates to taxes payable in New York where our corporate headquarters are domiciled and taxes are payable irrespective of whether or not we are generating profits.
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 2010 through 2013. 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.
Debt was comprised of the following at March 31, 2014 and December 31, 2013:
| | | March 31, 2014 | | | December 31, 2013 | |
| | | | | | | |
| 7% Convertible debenture | | $ | 200,000 | | | $ | 150,000 | |
| 9% Convertible debenture | | | 2,150,000 | | | | 1,900,000 | |
| Loan discount on convertible debenture | | | (289,458) | | | | (264,132) | |
| Total debt | | | 2,060,542 | | | | 1,785,868 | |
| Less: Current portion | | | 100,000 | | | | 100,000 | |
| Long term debt | | $ | 1,960,542 | | | $ | 1,685,868 | |
The following table provides a summary of all unsecured, convertible debentures as of March 31, 2014 and December 31, 2013:
| Issue Date | | Interest Rate | | | Face Value | | Maturity Date |
| 10/15/2011 | | | 9 | % | | $ | 100,000 | | 10/14/2014 |
| 11/16/2012 | | | 9 | % | | | 50,000 | | 11/16/2015 |
| 02/11/2013 | | | 9 | % | | | 50,000 | | 02/11/2016 |
| 08/01/2013 | | | 9 | % | | | 100,000 | | 08/01/2016 |
| 09/23/2013 | | | 9 | % | | | 50,000 | | 09/23/2016 |
| 10/22/2013 | | | 9 | % | | | 50,000 | | 10/22/2016 |
| 11/04/2013 | | | 9 | % | | | 500,000 | | 11/04/2016 |
| 12/06/2013 | | | 7 | % | | | 50,000 | | 12/06/2016 |
| 12/16/2013 | | | 9 | % | | | 250,000 | | 12/16/2016 |
| 12/26/2013 | | | 9 | % | | | 750,000 | | 12/26/2016 |
| 12/27/2013 | | | 7 | % | | | 50,000 | | 12/27/2016 |
| 12/27/2013 | | | 7 | % | | | 50,000 | | 12/27/2016 |
| 01/13/2014 | | | 7 | % | | | 50,000 | | 01/13/2017 |
| | | 9 | % | | | 250,000 | | 02/11/2017 |
| | | | | | | $ | 2,350,000 | | |
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 semi-annually in cash for a three year with a fixed conversion of $8.00 per share, or 12,500 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 in cash, 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.
During 2013, the Company completed the private placement of seven unsecured, convertible debentures for gross proceeds of $1,750,000 with six different investors. These debentures carry an interest rate of 9% per annum, payable semiannually in cash, for a three-year term with a fixed conversion price of $5.00 per share, or 350,000 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 291,667 shares of the Company’s common stock if converted during the second or third year following issuance.
Additionally in 2013, the Company completed the private placement of three unsecured, convertible debentures for gross proceeds of $150,000 with three different investors. These debentures carry an interest rate of 7% per annum, payable semiannually in cash, for a three-year term with a fixed conversion price of $7.00 per share, or 21,429 shares of the Company’s common stock if converted within the first year of issuance or a fixed conversion price of $9.00 per share, or 16,667 shares of the Company’s common stock if converted during the second or third year following issuance.
During the three months ended March 31, 2014, the Company completed the private placement of two unsecured, convertible debentures for gross proceeds of $300,000. One debenture of $250,000 carries an interest rate of 9% per annum, payable semiannually in cash, for a three-year term with a fixed conversion price of $5.00 per share, or 50,000 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 41,667 shares of the Company’s common stock if converted during the second or third year following issuance. The other debenture for $50,000 carries an interest rate of 7% per annum, payable semiannually in cash, for a three-year term with a fixed conversion price of $7.00 per share, or 7,143 shares of the Company’s common stock if converted within the first year of issuance or a fixed conversion price of $9.00 per share, or 5,556 shares of the Company’s common stock if converted during the second or third year following issuance.
The convertible debentures were analyzed at issuance for a beneficial conversion feature and the Company concluded that a beneficial conversion feature exists. The beneficial conversion feature was measured using the commitment-date stock price and was determined to be $321,090, of which $50,000 was related to the convertible debentures issued during the three-month period ended March 31, 2014. This amount was recorded as a debt discount and is amortized to interest expense over the term of the convertible debentures. The debt discount related to beneficial conversion feature was $289,458 and $264,132 as of March 31, 2014 and December 31, 2013, respectively. The related amortization expense was $24,674 and $6,958 for the periods ended March 31, 2014 and December 31, 2013, respectively. The Company also analyzed the convertible debentures for derivative accounting consideration and determined that derivative accounting does not apply.
Preferred Stock
ForceField is authorized to issue 12,500,000 shares of preferred stock at a par value of $0.001. No shares of preferred stock were issued and outstanding as of either March 31, 2014 or December 31, 2013.
Common Stock
ForceField is authorized to issue 37,500,000 shares of common stock at a par value of $0.001 and had 17,058,616 and 17,033,531 shares of common stock issued and outstanding as of March 31, 2014 and December 31, 2013, respectively. ForceField reacquired 1,462,097 shares of its common stock through the disposal of Wendeng. The reacquired common stock is held as treasury stock by the Company. See Note 12 — Discontinued Operations.
Common Stock Issued in Private Placements
During the year ended December 31, 2013, the Company accepted subscription agreements from investors and issued 830,250 shares of its common stock and 842,750 stock purchase warrants for gross proceeds totaling $3,321,000. The cost of these issuances was $332,100. The stock purchase 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. Using the Black-Scholes model, the Company allocated a relative fair value of $1,139,550 to these stock purchase warrants.
During the three-month period ended March 31, 2014, the Company did not receive any subscription agreements from investors.
Common Stock Issued in Exchange for Services
During the three month period ended March 31, 2014, the Company issued 525 shares of its common stock valued at $2,955 for promotional activities. Additionally, the Company issued 3,060 shares of its common stock valued at $18,000 to its three independent directors in accordance with their board compensation accrued for the last quarter ended December 31, 2013. Each of these share issuances were valued based upon the closing trading share price of the Company’s common stock on their respective dates of award.
Common Stock Issued in the Acquisition of a Business
In connection with the acquisition of the assets of Catalyst LED's LLC the Company issued 5,000 shares of restricted common stock valued at $5.97 per share or $29,850 in value.
Stock Purchase Warrants
The following table reflects all outstanding and exercisable warrants for the periods ended March 31, 2014 and December 31, 2013. All stock warrants are exercisable for a period of one year from the date of issuance.
| | | Number of Warrants Outstanding | | | Weighted Average Exercise Price | | | Average Remaining Contractual Life (Years) | |
| Balance, December 31, 2013 | | | 830,250 | | | $ | 4.00 | | | | 0.80 | |
| Warrants issued | | | — | | | | | | | | | |
| Warrants exercised | | | (16,500 | ) | | $ | 4.00 | | | | | |
| Warrants expired | | | (68,750) | | | | — | | | | | |
| Balance March 31, 2014 | | | 745,000 | | | $ | 4.00 | | | | 0.62 | |
The remaining contractual life of the warrants outstanding as of March 31, 2014 ranges from 0.19 to 0.75 years.
During the three month period end March 31, 2014, the Company issued 16,500 shares of its common stock for gross proceeds totaling $66,000 following the exercies of an equal amount of stock purchase warrants. The cost of these issuances was $6,600. During the year ended December 31, 2013, the Company issued 93,750 shares of common stock for gross proceeds totaling $375,000 following the exercise of 93,750 shares of stock purchase warrants. The cost of issuance was $37,500.
| 16. | COMMITMENTS AND CONTINGENCIES |
A claim was made by the Company against TransPacific Energy, Inc. and certain managing shareholders asserting breaches of a Share Exchange Agreement entered on May 10, 2012 by and between the Company and ACME Energy Inc., Apela Holdings, ABH Holdings, and TransPacific Energy, Inc. The claimed breaches were presented to counsel for TransPacific Energy, Inc. and its two primary managing shareholders by letter dated February 13, 2014. By letter dated February 19, 2014, counsel for TransPacific and its two primary managing shareholders denied the breaches and stated their intent to counterclaim for fraud, breach of contract, and other related claims. The Company, TransPacific Energy, Inc., and its two primary managing shareholders had reached tentative agreement to resolve matters in dispute and the parties were in the process of negotiating a binding term sheet to document same.
On April 28, 2014, TransPacific Energy Inc. (“TPE”), Karen Kahn, Alexander Goldberg, John Howard, Audrey Boston, Anne Howard, ACME Energy, Inc., and Samuel Sami (collectively, the “Plaintiffs”) filed a lawsuit against ForceField Energy, Inc. The lawsuit claims various breaches by FNRG of the Share Exchange Agreement dated May 10, 2012 between FNRG, ACME Energy, Inc., Apela Holdings, and ABH Holdings, which lawsuit seeks unspecified damages in excess of $25,000. FNRG disputes all of these allegations by Plaintiffs and intends to vigorously defend against them and to also assert its own claims in response at the appropriate time and in the appropriate venue. The lawsuit is pending before the Superior Court of the State of California for the County of San Diego. No amounts have been accrued on the financial statements for any loss contingency because the Company deems the claims to be without merit and the amounts involved indeterminable.
ForceField has entered into a number of engagement agreements for advisory and consulting services on a non-exclusive basis to obtain new equity capital and debt financing. In the event that the Company receives new capital proceeds from a source identified by one of the consultants, then such consultant will receive a finders or referral fee of up to ten percent (10%) of the amount received by the Company. The terms and condition of financing are subject to Company approval.
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 Companys organizational structure, (ii) the manner in which the Companys operations are managed, (iii) the criteria used by the Companys 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.
As of December 31, 2013, the Company determined that it had 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 Industry Co., Ltd., a company based in the Shandong province of China that directly manufactures and sells trichlorosilane. On February 19, 2014 concurrent with the sale of Wendeng and Baokai, these segments ceased to operate. After this date, the Company has two reportable business segments.
The assets and liabilities of Baokai and Wendeng were separately reported as assets and liabilities of discontinued operations held for sale as of December 31, 2013 and the results of operations of these two business segments were separately reported as discontinued operations for the three months ended March 31, 2014 and 2013, thus, were not included in the segment results, customer information and geographic information. See Note 12 — Discontinued Operations for additional information.
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 Company’s CODM reviews financial information presented on a consolidated basis, accompanied by disaggregated information by segment for purpose of evaluating financial performance.
Segment Results
The following table sets forth operations by segment for the three months ended March 31, 2014 and 2013:
| | | ORC | | | LED | | | Corporate | | | Consolidated | |
| | | | | | | | | | | | | |
| Sales: | | | | | | | | | | | | | | | | |
| 2014 | | $ | 110 | | | $ | 183,455 | | | $ | — | | | $ | 183,565 | |
| 2013 | | $ | 208,355 | | | $ | 23,599 | | | $ | — | | | $ | 231,954 | |
| Cost of goods sold: | | | | | | | | | | | | | | | | |
| 2014 | | $ | 110 | | | $ | 185,436 | | | $ | — | | | $ | 185,546 | |
| 2013 | | $ | 203,055 | | | $ | 16,262 | | | $ | — | | | $ | 219,317 | |
| Gross margin: | | | | | | | | | | | | | | | | |
| 2014 | | $ | — | | | $ | (1,981) | | | $ | — | | | $ | (1,981) | |
| 2013 | | $ | 5,300 | | | $ | 7,337 | | | $ | — | | | $ | 12,637 | |
| Operating expenses: | | | | | | | | | | | | | | | | |
| 2014 | | $ | 63,466 | | | $ | 194,302 | | | $ | 695,139 | | | $ | 952,907 | |
| 2013 | | $ | 37,500 | | | $ | 114,867 | | | $ | 422,136 | | | $ | 574,503 | |
| Other income (expense): | | | | | | | | | | | | | | | | |
| 2014 | | $ | 20 | | | $ | 25 | | | $ | (82,927) | | | $ | (82,882) | |
| 2013 | | $ | 57 | | | $ | — | | | $ | (4,476) | | | $ | (4,419) | |
| Provision for income taxes: | | | | | | | | | | | | | | | | |
| 2014 | | $ | — | | | $ | — | | | $ | 28,722 | | | $ | 28,722 | |
| 2013 | | $ | — | | | $ | — | | | $ | (40,313) | | | $ | (40,313) | |
| Net income (loss): | | | | | | | | | | | | | | | | |
| 2014 | | $ | (63,446) | | | $ | (196,258) | | | $ | (806,788) | | | $ | (1,066,942) | |
| 2013 | | $ | (932,143) | | | $ | (107,530) | | | $ | (386,299) | | | $ | (525,972) | |
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 March 31, 2014 and December 31, 2013:
| | | ORC | | | LED | | | Corporate | | | Consolidated | |
| | | | | | | | | | | | | |
| Total assets: | | | | | | | | | | | | | | | | |
| 2014 | | $ | 1,796,356 | | | $ | 87,907 | | | $ | 3,714,493 | | | $ | 5,598,756 | |
| 2013 | | $ | 1,903,094 | | | $ | 712,806 | | | $ | 461,781 | | | $ | 4,601,137 | |
Goodwill, Intangible and Long-Lived Assets
The following table sets forth the carrying amount of goodwill and intangible and long-lived assets by segment at March 31, 2014 and December 31, 2013:
| | | ORC | | | LED | | | Corporate | | | Consolidated | |
| | | | | | | | | | | | | |
| Intangible assets: | | | | | | | | | | | | | | | | |
| 2014 | | $ | 1,411,508 | | | $ | — | | | $ | 533,000 | | | $ | 1,944,508 | |
| 2013 | | $ | 1,437,892 | | | $ | 572,000 | | | $ | — | | | $ | 2,009,892 | |
| Goodwill by segment | | | | | | | | | | | | | | | | |
| 2014 | | $ | — | | | $ | — | | | $ | 229,850 | | | $ | 229,850 | |
| 2013 | | $ | 0 | | | $ | — | | | $ | — | | | $ | 0 | |
| Property, plant and equipment: | | | | | | | | | | | | | | | | |
| 2014 | | $ | — | | | $ | 8,137 | | | $ | 13,687 | | | $ | 21,824 | |
| 2013 | | $ | — | | | $ | 7,073 | | | $ | — | | | $ | 7,073 | |
Customer Concentration and Credit Risk
For the three — month period ended March 31, 2014, ORC sales were immaterial. In the LED segment one customer accounted for approximately 70% of LED revenue and consolidated Company revenue.
As of March 31, 2014, two customers accounted for approximately 57% and 39%, respectively, of approximately 96% of total accounts receivable.
Geographic Information
During the three months ended March 31, 2014, all of the Company’s sales for its LED and ORC segments were in the United States with the exception of $1,586 in LED revenue in Costa Rica. For the three — month period ended March 31, 2013, all of the Company’s sales were in the United States.
On April 25, 2014, the Company completed the acquisition of American Lighting & Distribution (“American Lighting” or “ALD”). Based in San Diego, California, American Lighting is a leading energy-efficient, commercial lighting specialist with over 20,000 installed customers and standing relationships with many major California utilities. ALD reported unaudited revenues of approximately $7.0 million in 2013.
Under the terms of the purchase agreement, ForceField paid $2.5 million in cash, issued $1.5 million of its restricted common stock and $1.0 million in 5% senior secured notes for all of the outstanding equity of ALD; or total purchase consideration of approximately $5,000,000. The 289,529 restricted shares of ForceField Energy’s common stock issued are subject to an initial twelve month lock-up period and are then released in equal monthly installments over the following six months.
The Sellers are also entitled to post- closing payments to excess working capital on ALD’s closing balance sheet of up to $1,200,000 in cash collected from accounts receivables carried on ALD’s Balance Sheet, as of the Closing Date, subject to certain adjustment, are due and payable from time to time on and after the Closing Date upon collection of such receivables. At the closing date, ALD’s unaudited balance sheet reflected approximately $2.1 million in working capital, which was comprised of cash, accounts receivable and inventory, less accounts payable, accrued liabilities and other liabilities.
Additionally, the American Lighting equity holders will have the opportunity for contingent, earn-out payments of up to $2.0 million if certain increased ALD revenue and EBITDA thresholds over the three-year period post-closing, are achieved. The earn-out payments, if made, shall be equally allocated between cash and restricted common stock.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the PSLRA, and are included in this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Some of the factors that could cause results or events to differ materially from current expectations include, but are not limited to: general economic, market or business conditions; general stock market performance; an increasingly competitive business environment; changing regulatory conditions or requirements;; changing alternative energy technologies; our ability to generate revenues from ORC units and LED lighting sales; entering into definitive agreements on LED trials currently in process, obtaining financing for ORC and LED installations; the acceptance of the lighting market to LED technology; the price of electricity in various jurisdictions worldwide; our successful management of outside contractors; the market acceptance of the ORC technology; and our ability to integrate the ALD acquisition in the Company These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Additional information concerning our business, including other factors that could materially affect our financial results, is included herein and in our other filings with the Securities and Exchange Commission.
OVERVIEW
LED Overview
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.
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.
On November 11, 2013 we entered into an amendment with Lightsky to modify the terms of the original distribution agreement. The amendment was entered into to extend the time period for ForceField to achieve performance milestones to maintain our exclusivity. In early April 2014, we entered into another amendment to enable us to use other LED suppliers, in addition to Lightsky, while maintaining exclusivity for the Lightsky product line. During the past three months we have secured a number of high quality LED suppliers with products of similar or superior quality to those of Lightsky, at more competitive pricing levels, which products we have already sold and begun to market. In the event that we ultimately lose our exclusivity with Lightsky, we do not believe our LED business will be materially impacted, due to access to numerous high quality LED suppliers (primarily located in China) at competitive pricing levels.
In the United States we are marketing Lightskys products through our wholly-owned subsidiary ForceField USA, which was incorporated in 2012. Throughout the rest of the world we are marketing our products through the ForceField name.
Since we acquired LED distribution rights in August 2012, we have focused the majority of our LED marketing efforts in territories in Latin America and other parts of the world where the cost per kilowatt hour of electricity is very high, and in which the opportunity to generate significant energy savings by changing from traditional lighting to LED lighting is the most compelling. In March 2013 we formed a subsidiary in Costa Rica, ForceField S.A; and in October 2013 we opened an office in Costa Rica to expand our presence in the region to be able to benefit from significant opportunities we believe exist in the region. Currently we have approximately $50.0 million in active bids in Latin America, two of which amounting to approximately $40.0 million for utility companies are covered by a Letter of Intent. There can be no assurance that we will win the bids on any of these active proposals; and if we win the bids there can be no assurances that we can obtain financing to fund these projects.
Our target customers are hospitals, utility companies, companies with warehousing operations or large indoor spaces that use high intensity lighting and new construction projects. For example, we have sold and installed LED lighting products to public schools and have sold and installed LED High Bay Lighting products, which products are designed for usage in large warehouse facilities with high ceilings, to a Fortune 100 oil company. In order to expand our customer base, in several cases we have installed LED Streetlight products, LED High Bay Lighting products and other less industrial LED products in order to provide potential high-value customers with a testing period in which they can gauge the efficacy and energy-savings of our products. For example, such installations and testing periods have been provided to (i) a number of Costa Rican utilities (as previously mentioned); (ii) various companies that utilize large warehousing, packaging and manufacturing facilities; and (iii) hospitals and various other companies with large facilities or multiple-locations that are likely to see benefits from high-efficiency LED tube and similar products. Additionally, we have made and continue to seek out projects for which we provide significant LED bid proposals in Europe, Latin America and the United States.
The realization of revenue from such prospective customers or projects will be dependent on the successful completion of initial trials, consummation of definitive agreements, delivery of LED product by our LED supplier, and the ability of both the Company and the end-users to obtain financing on reasonable terms. We believe we will be successful in obtaining some of these prospective clients or projects and generating significant revenue over a multi-year period, however there can be no assurances that all the conditions necessary to commence the projects we are successful in obtaining, if any, can be met.
In order to accelerate the growth of our LED business, we have undertaken the following initiatives in 2014.
On February 2, 2014, we completed a purchase of LED assets for $200,000 in cash from Idaho-based Catalyst LED’s LLC (“Catalyst”), a provider of customized LED lighting products and solutions, and an authorized vendor for a number of leading companies.
On April 25, 2014 the Company completed the acquisition of American Lighting & Distribution (“American Lighting” or “ALD”). Based in San Diego, California, American Lighting is a leading energy-efficient, commercial lighting specialist with over 20,000 installed customers and standing relationships with many major California utilities. ALD reported unaudited revenues of approximately $7.0 million in 2013.
ORC Overview
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.
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. The Dallas unit is in the process of being built and will be the first ORC unit that will operate with our proprietary TPE fluids. The California project is on hold indefinitely. The Dallas unit 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.
We believe that are ORC projects in the United States and internationally where we can install and implement our ORC technology and generate revenue, however, there can be no assurances we will be successful in obtaining such agreements or that we will be able to raise funding for the purchase of the units.
RESULTS OF OPERATIONS
The following table sets forth operations by segment for the three months ended March 31, 2014 and 2013:
| | | ORC | | | LED | | | Corporate | | | Consolidated | |
| | | | | | | | | | | | | |
| Sales: | | | | | | | | | | | | | | | | |
| 2014 | | $ | 110 | | | $ | 183,455 | | | $ | — | | | $ | 183,565 | |
| 2013 | | $ | 208,355 | | | $ | 23,599 | | | $ | — | | | $ | 231,954 | |
| Cost of goods sold: | | | | | | | | | | | | | | | | |
| 2014 | | $ | 110 | | | $ | 185,436 | | | $ | — | | | $ | 185,546 | |
| 2013 | | $ | 203,055 | | | $ | 16,262 | | | $ | — | | | $ | 219,317 | |
| Gross margin: | | | | | | | | | | | | | | | | |
| 2014 | | $ | — | | | $ | (1,981) | | | $ | — | | | $ | (1,981) | |
| 2013 | | $ | 5,300 | | | $ | 7,337 | | | $ | — | | | $ | 12,637 | |
| Operating expenses: | | | | | | | | | | | | | | | | |
| 2014 | | $ | 63,466 | | | $ | 196,283 | | | $ | 665,138 | | | $ | 924,877 | |
| 2013 | | $ | 37,500 | | | $ | 114,867 | | | $ | 422,136 | | | $ | 574,503 | |
| Other income (expense): | | | | | | | | | | | | | | | | |
| 2014 | | $ | 20 | | | $ | 25 | | | $ | (112,928) | | | $ | (82,882) | |
| 2013 | | $ | 57 | | | $ | — | | | $ | (4,476) | | | $ | (4,419) | |
| Provision for income taxes: | | | | | | | | | | | | | | | | |
| 2014 | | $ | — | | | $ | — | | | $ | 28,722 | | | $ | 28,722 | |
| 2013 | | $ | — | | | $ | — | | | $ | (40,313) | | | $ | (40,313) | |
| Net income (loss): | | | | | | | | | | | | | | | | |
| 2014 | | $ | (63,446) | | | $ | (196,258) | | | $ | (806,788) | | | $ | (1,066,942) | |
| 2013 | | $ | 932,143) | | | $ | (107,530) | | | $ | (386,299) | | | $ | (525,972) | |
Revenue
Sales for the three months ended March 31, 2014 totaled $183,565 compared to $231,594 for the same period ended March 31, 2013. The decrease in revenue in 2014 compared to 2013 is attributable to a decline in revenues from $208,355 to $110 in our ORC segment offset by an increase in revenues, from $23,599 to $ 183,455 in our LED segment. The commercialization of our ORC technology has taken longer than anticipated. Due to the long lead times to initiate ORC projects we do not anticipate generating significant revenues from the ORC segment in 2014. Our LED segment is beginning to gain traction. Additionally we completed the acquisition of ALD on April 25, 2014. Going forward we will begin to consolidate their revenue in the LED segment. Based on current activity at ALD we anticipate generating approximately $1.5 million in LED revenue from our LED segment during the second quarter ending June 30, 2014, although there can be no assurances.
Gross Margin
Gross margin for the three months ended March 31, 2014 was $(1,981) compared to $ 12,637 for the three months ended March 31, 2013. Gross margin percentage for the three months ended March 31, 2014 was negative (1.1%) compared to 5.5 % for the three months ended March 31, 2013. Due to the low amount of revenues in each of our operating segments as well as numerous no cost trials in our LED division that are underway, we believe the low gross margin is not indicative of the future gross margins we expect we can generate as revenues increase in future periods. We anticipate that beginning in the second quarter ending June 30, 2014 our sustainable margins in the LED segment will be in excess of 30%; although there can be no assurances
Selling and Marketing Expenses
Selling and marketing expenses totaled $34,588 for the three months ended March 31, 2014, a slight increase compared to $30,254 for the three months ended March 31, 2013. We anticipate that our selling and marketing expenses will increase in the immediate future due to the acquisition of ALD.
General and Administrative Expenses
General and administrative expenses totaled $723,037 for the three months ended March 31, 2014, compared to $354,673 for the three months ended March 31, 2013.
The primary components of our general and administrative expenses include salaries and benefits, facility costs and maintenance, investor relations activities and various administrative and office expenses. The material increase in general and administrative expenses is attributable to public company expenses, additional build-up of infrastructure including additional personnel and facilities cost in anticipation of our growth plans; and an increase in the salaries of our three officers of approximately $300,000 in the aggregate on an annualized basis, to a level commensurate with their duties for a listed public company.
Professional Fees
Professional fees totaled $165,281 for the three months ended March 31, 2014, compared to $189,576 for the three months ended March 31, 2013. 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 professional fees for the quarter ended March 31, 2014 is not indicative of the a permanent decrease on an annualized level
Provision for Income Taxes (Benefit)
We recorded an income tax expense of $28,722 for the three months ended March 31, 2014, compared to a benefit of $(40,313) for the three months ended March 31, 2013. The tax expense in 2014 relates to taxes payable in New York where our corporate headquarters are domiciled and taxes are payable irrespective of whether or not we are generating profits.
As of March 31, 2014, we had federal, state and foreign net operating loss carryforwards aggregating to approximately $8,000,000 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 2033.
Net loss Attributable to ForceField's Shareholders
For the three months ended March 31, 2014, we incurred a net loss from continuing operations of ($1,051,214) or $(0.06) per share, compared to a net loss of $(409,109) or $(0.03) per share for the three months ended March 31, 2013. The increase in net loss is attributable to increased administrative expenses and an increase in our interest expense related to the issuance convertible debentures.
The weighted average number of basic and fully diluted shares outstanding for the three months ended March 31, 2014 was 16,396,614 compared to 16,132,284 for the three months ended March 31, 2013. There are no dilutive equivalents included in our calculation of fully diluted shares for the three months ended March 31, 2014 and 2013, since their inclusion would be anti-dilutive due to our net loss per share. We reacquired 1,462,097 shares of its common stock through the disposal of Wendeng. The reacquired common stock is held as treasury stock on our balance sheet. See Note 12. Discontinued Operations.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2014, we had cash on hand of $2,451,146. Of this amount, $2,248,225 was on deposit with institutions located in the United States and $46,133 in China. We used a substantial portion of our cash on hand to purchase ALD in April 2014. 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 ALD business and our existing Led business, 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 March 31, 2014, we had a working capital surplus of $2,336,212. We used a substantial portion of this surplus to purchase ALD in April 2014
Net cash used in operating activities from continuing operations was $1,211,661 for the three months ended March 31, 2014, compared to net cash used in operating activities of $451,075 for the three months ended March 31, 2013. The material increase in net cash used during 2014 as compared to 2013 is primarily attributable to an increase in our net loss to $1,066,492 compared to a net loss of $525,972 in the same period in 2013, as well a significant decrease in net operating assets and liabilities of $226,624 compared to 2,233 in the same period in 2013
Net cash used in investing activities from continuing operations increased to $375,685 for the three months ended March 31, 2014 compared to $-0- for the same three month period in 2013 due to the cash purchase portion of the assets of Catalyst of $200,000, cash paid of $100,000 towards the acquisition of American Lighting, and the cash paid of $60,000 in the disposal of the TCS operating segment in discontinued operations as well as increase in the purchase of property, plant and equipment of $15,685.
Net cash provided by financing activities was $359,400 for the three months ended March 31, 2014, compared to $306,900 for the three months ended March 31, 2013. During the period ended March 31, 2014 we received $59,400 in net proceed from the exercise of warrants and $300,000 in proceeds from convertible notes compared to $306,900 from issuance of common stock in the same period in 2013.
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.
Refer to Note 2 — Summary of Significant Accounting Policies in our audited 2013 consolidated financial statements in Form 10-K for a summary of our significant accounting policies.
OFF BALANCE SHEET ARRANGEMENTS
As of March 31, 2014, there were no off balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A smaller reporting company is not required to provide the information required by this Item.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) and 15d-15 under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, our chief executive officer and chief financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 28, 2014, TransPacific Energy Inc. (“TPE”), Karen Kahn, Alexander Goldberg, John Howard, Audrey Boston, Anne Howard, ACME Energy, Inc., and Samuel Sami (collectively, the “Plaintiffs”) filed a lawsuit against ForceField Energy, Inc. (“FNRG”). The lawsuit is captioned TransPacific Energy, Inc. et al. v. ForceField Energy, Inc., Case No. 37-2014-00013110-CU-BC-CTL (Cal. Super. Ct. filed April 28, 2014) and is pending before the Superior Court of the State of California for the County of San Diego.
The lawsuit was filed after the parties had reached tentative agreement to resolve all matters in dispute and while the parties were in the process of negotiating a binding term sheet to document same. The lawsuit claims various breaches by FNRG of the Share Exchange Agreement dated May 10, 2012 between FNRG, ACME Energy, Inc., Apela Holdings, and ABH Holdings, which lawsuit seeks unspecified damages in excess of $25,000. FNRG disputes all of these allegations by Plaintiffs, contends they lack basis in fact or law, and intends to vigorously defend against them and to also assert its own claims in response at the appropriate time and in the appropriate venue.
Information on risk factors can be found in “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission on April 15, 2014. There were no material changes during the period of this report from such risk factors.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None during the period ended March 31, 2014
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
| Exhibit Number | | Description of Exhibit |
| | | |
| | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | |
| | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | |
| | Certification of the 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. |
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. | |
| | | | |
| May 20, 2014 | By: | /s/ David Natan | |
| | | David Natan | |
| | | Chief Executive Officer | |
| May 20, 2014 | By: | /s/ Jason Williams | |
| | | Jason Williams | |
| | | Chief Accounting and Financial Officer | |
