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FORCEFIELD ENERGY INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) 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; raising sufficient capital to fund our acquisition strategy as well as raising sufficient working capital for operations; the price of electricity in various jurisdictions worldwide; the market acceptance of the ORC technology; the profitability of ALD; 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. LED LIGHTING OVERVIEW LED Lighting Distribution In the United States we are marketing LED products through our wholly-owned subsidiary ForceField USA, which was incorporated in 2012 and through ALD which was acquired in April 2014. 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 there. Throughout the rest of the world, we are marketing our products as "ForceField". Prior to the acquisition of American Lighting & Distribution ("American Lighting" or "ALD") we focused the majority of our LED marketing efforts in the United States and in territories in Latin America and other parts of the world where the cost per kilowatt hour of electricity is high, and in which the opportunity to generate significant energy savings by changing from traditional lighting to LED lighting, is the most compelling. In order to accelerate the growth of our LED business, we have undertaken the following initiatives in 2014. On February 2, 2014, we purchased the assets cash of 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 we acquired American Lighting. 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 audited revenues of approximately $7.1 million in 2013 from the sales, distribution and installation of energy efficient lighting projects. ALD has performed over 2,500 lighting installations over the past 3 years. Projects include a variety of project types including: schools, prisons, stadiums, large aerospace factories, 20 story office buildings, military bases, premier 4-Star hotels, casinos, parking garages, shopping malls, tilt-up warehouse buildings, government buildings, small retail shops, car dealerships, auto repair shops, lifeguard stands on the beach, libraries, etc. Over the years ALD has also done work outside of California in NV, OR, WA, AZ. We expect to continue to do work outside of California. 4 -------------------------------------------------------------------------------- Currently in our LED segment we have active bids in the United States, Latin America and the Caribbean in excess of $100 million. Included in the $100 million in active bids is one discrete bid amounting to $95.0 million. There can be no assurances that we will win this $95.0 million dollar bid, of if awarded the bid, that we can obtain financing to fulfill this order. We do not have enough operating history at ALD or at our previous LED business to correlate the amount of bid activity that will result in signed orders and that will generate revenue. 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 products 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. ORC OVERVIEW We have a 50.3% equity interest in TransPacific Energy ("TPE"). TPE is a renewable energy technology corporation located in California and Nevada that designs and installs proprietary modular Organic Rankine Cycle ("ORC") units utilizing up to nine 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 water- based fluids that are environmentally sound, non-toxic and non-flammable. In contrast, the typical ORC fluids such as pentane, isobutene, butane, propane and ammonia instead of water-based fluids. Potential applications for TPE's 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. Currently TPE has one completed ORC unit that has been purchased by an US based aerospace company that is awaiting deployment and initial testing at the aerospace company's facilities. The timing of when this will occur is currently indeterminable. The commercialization of TPE's technology has taken significantly longer than anticipated. Currently there are no active bids for new ORC units. We believe that there 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 determining whether TPE technology is commercially viable or in obtaining such agreements, or that we will be able to raise funding for the manufacture of new ORC units. RESULTS OF OPERATIONS The following table sets forth our results of operations during the three months ended June 30, 2014 and 2013: Successor Predecessor Period from April 1 Three Months Period from April 26 through April Ended June through June 30, 25 30, 2014 2014 2013 Sales $ 992,941 $ 300,209 $ 829,321 Cost of goods sold 723,448 254,612 566,656 Gross margin 269,493 45,597 262,665 Operating expenses: Depreciation and amortization 46,155 813 2,529 Selling and marketing 120,101 38,656 115,036 General and administrative 647,545 135,547 345,899 Professional fees 313,232 37,072 18,000 Total operating expenses 1,127,033 212,088 481,464 Income (loss) from operations (857,540 ) (166,491 ) (218,799 ) Other income (expense): Interest expense, net (61,375 ) 510 1,216 Total other income (expense) (61,375 ) 510 1,216 Income (loss) before income taxes (918,915 ) (165,981 ) (217,583 ) Provision for income taxes (benefit) - - (136,824 ) Net income (loss) (918,915 (165,981 ) (80,759 ) Less: Accretion of preferred stock - 6,856 33,846 Less: Net loss attributable to noncontrolling interests (16,619 ) - - Net loss attributable to ForceField Energy Inc. common stockholders $ (902,296 ) $ (172,837 ) $ (114,605 ) 5--------------------------------------------------------------------------------The following table sets forth our results of operations during the six months ended June 30, 2014 and 2013: Successor Predecessor Period from January 1 Six Months Period from April 26 through April Ended through June 30, 25 June 30, 2014 2014 2013 Sales $ 992,941 $ 1,604,369 $ 3,099,803 Cost of goods sold 723,448 1,130,248 1,714,334 Gross margin 269,493 474,121 1,385,469 Operating expenses: Depreciation and amortization 46,155 3,334 5,078 Selling and marketing 120,101 193,148 280,828 General and administrative 647,545 486,970 740,187 Professional fees 313,232 37,317 19,865 Total operating expenses 1,127,033 720,769 1,045,958 Income (loss) from operations (857,540 ) (246,648 ) 339,511 Other income (expense): Interest expense, net (61,375 ) 2,182 2,326 Total other income (expense) (61,375 ) 2,182 2,326 Income (loss) before income taxes (918,915 ) (244,466 ) 341,837 Provision for income taxes (benefit) - 800 134,134 Net income (loss) (918,915 (245,266 ) 207,703 Less: Accretion of preferred stock - 31,054 92,455 Less: Net loss attributable to noncontrolling interests (16,619 ) - - Net loss attributable to ForceField Energy Inc. common stockholders $ (902,296 ) $ (276,320 ) $ 115,248 Predecessor and Successor Reporting On April 25, 2014, the Company completed the acquisition of American Lighting. 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 or California utilities. At the time we acquired ALD it was significantly larger than our operations. The ALD transaction was accounted for under the acquisition method of accounting. Under the acquisition method of accounting, ALD was treated as the accounting acquirer and ForceField was treated as the acquired company for financial reporting purposes. Due to the impact of predecessor and successor reporting, the Company's financial statements have been separated into two distinct periods, the period before the consummation of the ALD transaction on April 25, 2014 (labeled "Predecessor") and the period after that date (labeled "Successor"), to indicate the application of different basis of accounting between the periods presented. Consequently, all of the historic results of operations of the Company prior to the acquisition of ALD have been excluded from all predecessor results of operations for both the three and six month periods ended June 30, 2013. Also all Company results of operations for 2014 prior to April 26, 2014 have been excluded from the successor results of operations for the three and six month periods ended June 30, 2014. As a result the comparison of operating results and segment reporting, and any analysis of variances for the and three and six month periods ended June 30, 2014 compared to June 30, 2013 in this MD&A section are not considered meaningful or indicative of any future operating performance. 6 --------------------------------------------------------------------------------Segment Results The following table sets forth operations by segment during the successor period of April 26, 2014 through June 30, 2014: LED ORC Corporate Consolidated Sales $ 992,941 $ - $ - $ 992,941 Cost of goods sold 723,448 - - 723,448 Gross margin 269,493 - - 269,493 Operating expenses: Depreciation and amortization 28,049 17,589 517 46,155 Selling and marketing 120,101 - - 120,101 General and administrative 294,238 11,885 341,422 647,545 Professional fees 1,282 3,998 307,952 313,232 Total operating expenses 443,670 33,472 649,891 1,127,033 Loss from operations (174,177 ) (33,472 ) (649,891 ) (857,540 ) Other income (expense): Interest expense, net 5,700 31 (67,106 ) (61,375 ) Total other income (expense) 5,700 31 (67,106 ) (61,375 ) Loss from operations before income taxes (168,477 ) (33,441 ) (716,997 ) (918,915 ) Provision for income taxes (benefit) - - - - Net loss $ (168,477 ) $ (33,441 ) $ (716,997 ) $ (918,915 ) All operations reported in the predecessor periods are attributable to the Company's LED segment. Operating segments do not sell products to each other, and accordingly, there is no inter-segment revenue to be reported. Revenue Revenue for both the three and six month periods ended June 30, 2014 were $1,293,150 and $2,596,310, respectively, compared to $829,321 and $3,099,803, respectively, for the three and six month periods ended June 30, 2013. All of our revenue in 2014 has come from our LED lighting segment. We have not recorded any revenue from our waste heat segment in 2014. The commercialization of our waste heat technology in our ORC segment has taken longer than anticipated. As a result we do not expect to generate any revenue for the remainder of this year and for the immediate future from our waste heat segment. We anticipate revenues for the three month period ending September 30, 2014 to be significantly higher than the three month period ended June 30, 2014 due to an anticipated higher level of activity in September period. Gross Margin Gross margin is calculated by subtracting cost of sales from revenue. Gross margin percentage is calculated by dividing gross margins by revenue. Gross margin percentage for three and six month period ended June 30, 2014 was 24.4% and 28.6%, respectively. We believe in future periods sustainable gross margin percentages in our LED segment will improve above current levels, although there can be no assurances. Selling and Marketing Expenses Selling and marketing expense for the six month period ended June 30, 2014 was $313,249 or approximately 12.1% of revenues. We expect selling and marketing expenses as a percentage of revenues to decrease as revenue levels increase 7 --------------------------------------------------------------------------------General and Administrative Expenses General and administrative expenses ("G&A") for the six month period ended June 30, 2014 was $1,134,515 or approximately 43.7% of revenues. The primary components of our G&A expenses include salaries and benefits, facility costs and maintenance, investor relations activities, public company expenses and various administrative and office expenses; a substantial portion of which are fixed. We expect to leverage these expenses in the future and anticipate that our G&A expense as a percentage of revenue will decrease significantly in future periods. Professional Fees Our professional fees for the six month period ended June 30, 2014 was $350,549. Since April 25, 2014, we have incurred professional fees of $80,000 relating to the acquisition of American Lighting and legal fees of $112,747 pertaining to the litigation of the TPE matter. Provision for Income Taxes We recorded income tax expense of 800 for the six months ended June 30, 2014. As of June 30, 2014 we had federal, state and foreign net operating loss carryforwards aggregating to approximately $9.6 million 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. Going forward we expect our ALD subsidiary to be profitable and that our NOL's will be available to offset ALD's federal income tax liability. Net Earnings (Loss) Attributable to Stockholders During the successor period of April 26, 2014 through June 30, 2014, we incurred a net loss attributable to ForceField stockholders of $902,296 or $(0.06) per basic and fully diluted share. During the predecessor period of April 1, 2014 through April 25, 2014, we incurred a net loss attributable to ForceField stockholders of $172,837 or $(0.14) per basic and fully diluted share. The aggregate of these two current year periods compare to a loss attributable to ForceField stockholders of $114,605, or $(0.09) per basic and fully diluted share, realized during the three month predecessor period ended June 30, 2013. During the successor period of April 26, 2014 through June 30, 2014, we incurred a net loss attributable to ForceField stockholders of $902,296 or $(0.06) per basic and fully diluted share. During the predecessor period of January 1, 2014 through April 25, 2014, we incurred a net loss attributable to ForceField stockholders of $276,320 or $(0.22) per basic and fully diluted share. The aggregate of these two current year periods compare to net income attributable to ForceField stockholders of $115,248, or $0.09 per basic and fully diluted share, realized during the six month predecessor period ended June 30, 2013. The weighted average number of basic and fully diluted shares outstanding for the successor period of April 26, 2014 through June 30, 2014 was 16,071,282, while the weighted average number of basic and fully diluted shares outstanding for the predecessor period of April 1, 2014 through April 25, 2014 was 1,252,403. The weighted average number of shares reported for the three month predecessor period ended June 30, 2013 is 1,252,403. There are no dilutive equivalents included in our calculation of fully diluted shares since their inclusion would be anti-dilutive due to our net loss per share. 8 -------------------------------------------------------------------------------- The weighted average number of basic and fully diluted shares outstanding for the successor period of April 26, 2014 through June 30, 2014 was 16,071,282, while the weighted average number of basic and fully diluted shares outstanding for the predecessor period of January 1, 2014 through April 25, 2014 was 1,252,403. The weighted average number of shares reported for the six month predecessor period ended June 30, 2013 is 1,252,403. There are no dilutive equivalents included in our calculation of fully diluted shares. On February 19, 2014, we reacquired 1,462,097 shares of our common stock in the divestiture of our 60% equity investment in our former China based subsidiary, Wendeng He Xie Silicon Co., Ltd. The common stock is held by the Company in treasury. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2014, we had cash on hand of $225,005. Of this amount, $208,929 was on deposit with institutions located in the United States and $16,076 in Costa Rica. 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 June 30, 2014, we had a working capital deficit of $618,935. Net cash used in operating activities from continuing operations was $613,933 for the six months ended June 30, 2014, compared to net cash provided by operating activities of $2,966,210 for the six months ended June 30, 2013. The material increase in net cash used during 2014 as compared to 2013 is primarily attributable to our net loss of $1,164,181 compared to a net profit of $207,703 in the same period in 2013, as well a significant decrease in net operating assets and liabilities to $358,225 compared to $2,758,507 in the same period in 2013. Net cash used in investing activities for the six months ended June 30, 2014 was $2,362,919 compared to $3,688 for the same six month period in 2013 due to the cash purchase portion of ALD for $2,500,000. Net cash used in financing activities was $73,000 for the six months ended June 30, 2014, compared to $2,050,000 for the six months ended June 30, 2013. During the six month period ended June 30, 2014 we received $135,000 in proceeds from the purchase of our common stock and $75,000 in proceeds from loans payable from a related party compared to $2,050,000 from the redemption payments on preferred stock from the predecessor period in 2013. In order to help improve the Company's liquidity position on August 1, 2014 the Company's Executive Chairman converted $75,000 of loans he had made to Company and $75,000 in accrued salary into 30,000 shares of the Company's restricted common stock valued at $5.00 per share. The transaction was approved by the Company's Board of Directors on August 1, 2014. We believe that we will be able generate sufficient capital to sustain our operations over the next twelve months based upon our ability to raise capital through the sale of our restricted common stock, through the issuance of convertible debentures, and the expected profitability of American Lighting. 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 for a summary of our significant accounting policies. OFF BALANCE SHEET ARRANGEMENTS As of June 30, 2014, there were no off balance sheet arrangements. 9-------------------------------------------------------------------------------- |