Advertise with us
[April 15, 2014]
FORCEFIELD ENERGY INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) 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.
As of December 31, 2013, we had four distinct operating segments: Ø Exclusive North American distributor of LED commercial lighting and fixtures for a premier LED manufacturer in China.
Ø Owner of 50.3% of TransPacific Energy, Inc. ("TPE"), a U.S.
based renewable energy technology provider that uses "waste heat" from various manufacturing facilities and other sources to provide clean electricity Ø Producer and distributor of trichlorosilane in China. The TCS is produced and 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.
On February 19, 2014 we divested our two TCS operating segments and their operations are considered discontinued operations as of December 31, 2013. Therefore all comparisons and analyses of operations and liquidity exclude discontinued operations as well as assets held for sale.
18 -------------------------------------------------------------------------------- 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 Lightsky's 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.
19-------------------------------------------------------------------------------- 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, including General Motors.
? On March 26, 2014, the Company announced the signing of a letter of intent ("LOI") to acquire American Lighting & Distribution ("ALD"), a profitable San Diego, California award-winning, leading energy-efficient, commercial lighting specialist with over 20,000 installed customers and standing relationships with many of the major California utility companies. Subject to certain conditions to closing, we expect to close the transaction on or before May 1, 2014.
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.
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 12 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.
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.
20-------------------------------------------------------------------------------- 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. These ORC units were intended to 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 intended to 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 $517,000 in revenue annually for a twenty year period.
Due to our inability to raise capital to manufacture these units the time frame for commencing production of these units lapsed. Therefore we will not be proceeding with this project.
We believe that there are other projects in the United States and internationally with similar economics where we can install our ORC 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 for the Years Ended December 31, 2013 and 2012 The following table sets forth operations by segment for the years ended December 31, 2013 and 2012: ORC LED Corporate Consolidated Sales: 2013 $ 236,672 $ 106,964 $ - $ 343,636 2012 $ 240,238 $ - $ - $ 240,238 Cost of goods sold: 2013 $ 210,992 $ 62,018 $ - $ 273,010 2012 $ 240,238 $ - $ - $ 240,238 Gross margin: 2013 $ 25,680 $ 44,946 $ - $ 70,626 2012 $ - $ - $ - $ - Operating expenses: 2013 (1) $ 1,498,639 $ 536,280 $ 1,992,517 $ 4,027,436 2012 $ 57,950 $ 148,626 $ 1,325,312 $ 1,531,888Other income (expense): 2013 $ 203 $ 4 $ (40,514 ) $ (40,721 ) 2012 $ - $ - $ (19,010 ) $ (19,010 ) Provision for income taxes: 2013 $ (201,867 ) $ - $ 4,366 $ (197,531 ) 2012 $ (23,138 ) $ - $ 48,204 $ 25,066 Net income (loss): 2013 $ (1,270,889 ) $ (491,330 ) $ (1,956,339 ) $ (3,718,558 ) 2012 $ (34,812 ) $ (148,626 ) $ (1,392,526 ) $ (1,575,964 ) _______________ (1) 2013 Includes goodwill impairment charge of $1,342,834 to the ORC segment.
Operating segments do not sell products to each other, and accordingly, there is no inter-segment revenue to be reported.
21 --------------------------------------------------------------------------------Revenue Sales for the year ended December 31, 2013 totaled $343,636, compared to $240,238 for the year ended December 31, 2012. Sales were comprised of $236,672 in ORC revenue and $106,964 in LED revenues for the year ended December 31, 2013, respectively, compared to $240,238 in ORC revenue and $-0- in LED revenue for the year ended December 31, 2012. Our ORC revenues were generated from two ongoing projects, one of which is in the final testing stages. Due to the long lead time to implement ORC projects and due to capital constraints for the majority of 2013, we were unable to secure and commence any new ORC projects in 2013. Therefore our revenue for 2014 is expected to be minimal and below 2013 levels. We believe that there will be some opportunities to generate revenue in our ORC segment in 2015 for projects we will commence in 2014, although there can be no assurances. Since 2013 our primary focus has been on our LED operating segment.
The ramp up of LED revenues has taken longer than anticipated. We believe that our LED segment is now beginning to obtain significant traction based on our efforts in building our distribution network, and the initial orders, trials and bid proposals currently outstanding will result in significant LED revenue in 2014 and beyond, although there can be no assurances. Additionally we believe the acquisition of Catalyst completed in February 2014 and the pending acquisition of ALD if successfully consummated will also materially help to increase our LED revenues in 2014. For the first quarter ended March 31, 2014 we recorded approximately $200,000 in LED revenue.
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, 2013 was $70,626 compared to $-0- for the year ended December 31, 2012. Gross margin percentage for the year ended December 31, 2013 was 20.6 %, compared to 0% for the year ended December 31, 2012. Gross margins in 2013 for ORC and LED segments were 10.9% and 42.0%, respectively. Due to the relatively low level of sales we believe that the gross margins of 10.9% are not indicative of the sustainable gross margins when applied over larger volumes. We believe ORC margins will be higher, and LED margins lower as volumes increase.
Professional Fees Professional fees totaled $709,499 for the year ended December 31, 2013, compared to $582,297 for the year ended December 31, 2012.
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 increase in our professional fees when compared to the prior year is largely attributable to increased levels of activity in our businesses.
General and Administrative Expenses General and administrative ("G&A") expenses totaled $1,856,309 for the year ended December 31, 2013, compared to $936,146 for the year ended December 31, 2012.
The primary components of our G&A expenses include salaries and benefits, travel, facility costs and maintenance, investor relations activities, insurance and various administrative and office expenses. The material increase in our G&A expenses for the year ended December 31, 2013 when compared to the prior year period is largely attributable to listing fees to be listed on the NASDAQ, an increase in officer compensation, travel expenses, insurance costs and other costs related to the efforts to expand of our business.
Provision for Income Taxes We recorded an income tax benefit of ($197,531) for the year ended December 31, 2013, compared to a tax expense of $25,066 for the year ended December 31, 2012. These provisions relate primarily to our ORC operations at TPE.
As of December 31, 2013, we had federal, state and foreign net operating loss carryforwards aggregating $7,060,771 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.
22 --------------------------------------------------------------------------------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, 2013. 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 $1,342,834, all of which was attributed to TransPacific Energy.
Net loss from continuing operations For the year ended December 31, 2013, we incurred a net loss from continuing operations of ($3,718,558) or ($0.09) per share, compared to a net loss of ($1,575,964) or ($0.06) per share for the year ended December 31, 2012. The increase in our loss in 2013 compared to 2012 is primarily attributable to an impairment charge of $1,342,834 in 2013 in our ORC segment, and increased professional fees and selling and general administrative expenses.
The weighted average number of basic and fully diluted shares outstanding for the year ended December 31, 2013 was 16,291,566 compared to 15,390,259 for the year ended December 31, 2012.
There are no dilutive equivalents included in our calculation of fully diluted shares for the years ended December 31, 2013 and 2012, since their inclusion would be anti-dilutive due to our net loss per share.
Liquidity and Capital Resources At December 31, 2013, we had cash on hand of $3,681,125 all of which was on deposit with institutions located in the United States. Proceeds generated from private placements of our common stock and convertible loans have been substantially the sole source of funding for our 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 current operating segment will be sufficient to fund our activities for the next twelve months. Furthermore, we expect to generate positive cash flow from operations during the next twelve months which will supplement our cash position.
At December 31, 2013, we had a working capital deficit of $5,291,440. The deficit is primarily attributable to the inclusion of current assets and liabilities of discontinued operations held for sale. These assets and liabilities were divested by the company on February 19, 2014. The working capital deficit recast without the assets and liabilities of discontinued operations would reflect positive working capital of $3,171,600.
23 -------------------------------------------------------------------------------- Net cash used in operating activities was $2,087,850 for the year ended December 31, 2013, compared to net cash used in operating activities of $1,615,734 for the year ended December 31, 2012. The increase in net cash used during 2013 as compared to 2012 is attributable to an increase in our net loss net of non-cash goodwill impairment of ($1,342,834) compared to nil in the prior year; offset by changes in operating assets and liabilities.
Net cash used in investing activities was ($7,143) for the year ended December 31, 2013, compared to net cash used in investing activities of ($202,897) for the year ended December 31, 2012. The decrease in net cash used in the current period is attributable to using $645,526 to acquire a controlling interest in TPE; offset by $442,629 in cash acquired in the transaction.
Net cash provided by financing activities was $5,151,400 or the year ended December 31, 2013, compared to $2,243,400 for the year ended December 31, 2012.
The material increase in 2013 compared to 2012 is attributable to an increase of $745,500 in proceeds from the issuance of common stock, $337,500 in proceeds from the exercise of stock purchase warrants and an increase of $1,850,000 in 2013 compared to 2012 of proceeds from convertible notes payable.
Critical Accounting Policies We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States ("US GAAP"). 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 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.
Cash and Cash Equivalents 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. The carrying amount of cash and cash equivalents approximates fair value. 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, 2013 and December 31, 2012, the Company's cash and cash equivalents and restricted cash were held by major financial institutions located in the United States.
24 -------------------------------------------------------------------------------- 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 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.
Inventory Inventories in the United States and Costa Rica are stated at the lower of cost (first-in, first-out) or market. A reserve is recorded for any inventory deemed excessive or obsolete.
Inventories in the PRC 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 All land in the PRC is owned by the PRC government. The government in the PRC, according to the relevant PRC law, may sell the right to use the land for a specified period of time. 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 and equipment are stated at cost or fair value if acquired as part of a business combination. Depreciation is computed by the straight-line method and is charged to operations over the estimated useful lives of the assets.
Maintenance and repairs are charged to expense as incurred. The carrying amount and accumulated depreciation of assets sold or retired are removed from the accounts in the year of disposal and any resulting gain or loss is included in results of operations. The estimated useful lives of property and equipment are as follows: 25-------------------------------------------------------------------------------- Estimated Useful Lives Building 20 years Machinery and equipment 3 - 10 years Furniture and fixtures 5 - 7 years Computers and software 3 - 7 years Motor vehicles 5 years Leasehold improvements Lessor of lease term or estimated useful life 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 Long-Lived 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.
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. Annually on each December 31, 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.
26-------------------------------------------------------------------------------- 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.
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.
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.
For the periods presented, the computation of diluted loss per share equaled basic loss per share as the inclusion of any dilutive instruments would have had an antidilutive effect on the earnings per share calculation in the periods presented.
Assets held for sale For the business where management has committed to a plan to divest, which is typically demonstrated by approval from the Board of Directors, the business is valued at the lower of its carrying amount or estimated fair value less cost to sell. If the carrying amount of the business exceeds its estimated fair value, an impairment loss is recognized. Upon designation as an asset held for sale, the Company ceased depreciation. The assets and liabilities as of December 31, 2012 related to Baokai and Wendeng segments have been reclassified as "assets and liabilities of discontinued operations held for sale" to conform to the presentation of the current period for the comparative purposes.
Fair Value Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.
Authoritative literature provides a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement as follows: Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
27 --------------------------------------------------------------------------------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.
Foreign Currency Translation The Company's functional and reporting currency is the United States dollar.
Transactions may occur in Renminbi ("RMB") dollars or Costa Rican Colones ("CRC") 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.
28-------------------------------------------------------------------------------- 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, 2013 and December 31, 2012 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.
Reclassifications Certain prior year amounts have been reclassified to conform to the current period presentation. These reclassifications had no impact on net earnings and financial position.
Off Balance Sheet Arrangements As of December 31, 2013, there were no off balance sheet arrangements.
Back To NFVZone's Homepage