2.	ACQUISITIONS:

Relume – On August 22, 2013 the Company purchased all the equity interests of Relume pursuant to the terms of the Agreement and Plan of Merger, dated as of August 9, 2013 (the “Relume Merger Agreement”) for $5 million in cash ($4.3 million net of an estimated working capital adjustment) and 2,179,545 shares of common stock valued at $7.3 million based on the market price of the Company’s stock on the closing date. The purchase price is subject to further adjustment to the extent that the working capital (as defined in the merger agreement) at closing differs from the amount specified in the agreement. Any such adjustment will result in a corresponding adjustment to the recorded goodwill. The cash portion of the merger consideration was funded from the proceeds from the issuance of Series F Senior Convertible Redeemable Preferred Stock (the “Series F Preferred Stock”) to RVL for $5 million in cash, of which approximately $0.7 million was retained for working capital purposes. Under the terms of the Relume Merger Agreement, the Company acquired the Relume business debt free and cash free, except for capital lease obligations.

Relume is a manufacturer and distributor of efficient the environmentally friendly LED lighting products and control systems. Relume’s technology is used in municipal lighting, commercial signage, outdoor advertising, transportation and US military applications. Relume serves outdoor LED markets, including municipal street and roadway lights, parking lots and garages, pedestrian areas, buildings, and outdoor advertising. More than 75% of Relume’s business consists of outdoor lighting, with the remaining split between smart grid control systems and LED lighting for media and signage. Relume distributes its product through independent sales agents. The Company acquired Relume with the goal of realizing synergies, expanding its product offerings and for Relume’s developed technology. The purchase price exceeded the fair value of tangible assets because of synergies and expected growth of the business.

The following amounts represent the preliminary determination of the fair value of identifiable assets acquired and liabilities assumed from the Relume acquisition. The final determination of the fair value of certain assets and liabilities including income taxes and contingencies will be completed within the one-year measurement period from the date of acquisition as required by the FASB ASC Topic 805, “Business Combinations.”

 

Cash		$	61,000
Accounts receivable			851,000
Inventory			2,499,000
Goodwill			7,184,000
Technology			2,020,000
Trademarks			1,200,000
Customer relationships			680,000
Other assets			618,000
Assets acquired		$	15,113,000
Accounts payable		$	2,574,000
Accrued liabilities			795,000
Other current liabilities			26,000
Capital lease obligations			110,000
Liabilities assumed		$	3,505,000
Preliminary purchase price (enterprise value)		$	11,608,000

All of the goodwill is included in the LED replacement lamps and fixtures segment (which is also one of the Company’s reporting units). None of the goodwill is expected to be deductible for income tax purposes.

Elite LED Solutions – On March 8, 2013, LIT a wholly owned subsidiary of the Company, acquired certain assets of Elite LED Solutions, Inc. (“Elite”) for $500,000 in cash and 300,000 shares of the Company’s common stock for consideration valued at $356,250 contingent on the fulfillment of customer revenue contracts acquired. Concurrently, the Company entered into a five-year sales consulting agreement with the principals of the sellers pursuant to which the Company is obligated to pay a $20,000 monthly fee plus additional fees based on achieving specified sales targets and 3% of the net profits of LIT as defined. In addition, the Company agreed to issue 850,000 shares of the Company’s common stock to the sellers, which vest over the five-year term of the agreement. The issuance of the shares is being accounted for as compensation to non-employees.

The transaction has been accounted as a business combination and the issuance of the common shares vesting over five years has been accounted as compensation pursuant to ASC 505-50 “Equity-Based Payments to Non-Employees.” The Company acquired the business primarily because of the unfulfilled customer revenue contracts acquired and the estimated operating synergies expected to be realized with Seesmart. The following summarizes the preliminary purchase price allocation to the acquired assets. The final allocation will be completed within one year of the acquisition:

 

Customer revenue contracts		$	1,599,000
Gain on bargain purchase			(742,750	)
Preliminary purchase price		$	856,250

 

The Company is amortizing the acquired contracts over the term of the cash flows generated by the contracts, which are expected to be realized within one year.

On October 9, 2013 the Company notified Elite Solutions, Inc. of the termination of sales consulting agreement.

Seesmart – On December 20, 2012, the Company purchased all the equity interests of Seesmart pursuant to the terms of the Agreement and Plan of Merger, dated as of December 1, 2012 (the “Seesmart Merger Agreement”), for consideration of approximately $10.1 million in cash funded by the issuance of shares of Series C Senior Convertible Preferred Stock (the “Series C Preferred Stock”),, approximately 7.7 million shares of common stock valued at approximately $5.0 million and 11,915 shares of Series D Convertible Preferred Stock (the “Series D Preferred Stock”), valued at approximately $1.0 million. The purchase price was subject to adjustment to the extent that working capital (as defined in the Seesmart Merger Agreement) at closing differed from the amount specified in the agreement. The final working capital adjustment reduced the purchase price by approximately $1.2 million and has been reflected in these financial statements as a reduction of goodwill. As described below, the Company settled outstanding convertible note obligations of Seesmart, which resulted in a total preliminary purchase price of $18.3 million for the enterprise value of the business. In accordance with the relevant accounting standard, the Company’s December 31, 2012 balance sheet has been retroactively adjusted to reduce goodwill and the Seesmart purchase price obligations liability by $ 1.3 million.

Under the Seesmart Merger Agreement, the Company agreed to distribute the consideration to Seesmart shareholders. During the three months ended September 30, 2013, the Company issued no shares of common stock and paid $148,009 as consideration for the Seesmart acquisition. During the nine months ended September 30, 2013, the Company issued 738 shares of Series D Preferred Stock and, 1,992,996 shares of common stock and paid approximately $3.5 million as consideration for the Seesmart acquisition. In addition, the Seesmart Merger Agreement contains provisions for certain escrow amounts of cash and stock. The Company has recorded a liability for the undistributed consideration and unfunded escrow of approximately $514,000 at September 30, 2013.

On the acquisition date, Seesmart had outstanding convertible notes payable. In accordance with terms of the notes, the notes were converted into the right to receive cash equal to the principal, a 20% premium on the principal, plus accrued interest. On the acquisition date, the Company’s cash obligation totaled approximately $3.4 million. During the first quarter of 2013 pursuant to the terms of the Seesmart Merger Agreement, the Company offered the note holders to exchange the notes for common stock, at an exchange rate of $0.6959 per share. Holders representing approximately $1 million of the cash obligation elected to receive a total of 1,479,947 shares of common stock. The Company has recognized an approximate $68,000 reduction in the carrying value of goodwill representing the difference in the cash obligation and the value of the common stock issued, based on the market price of the Company’s common stock at the acquisition date. The remaining holders elected to be paid in cash and received approximately $2.4 million. The Seesmart convertible notes payable was completely extinguished during the first quarter of 2013.

As of September 30, 2013, substantially all the merger consideration has been distributed. The remaining undistributed consideration consists of cash of $ 140,625 and 575,620 shares, which are reflected in the Seesmart acquisition liability in the accompanying financial statements.

The following amounts represent the preliminary determination of the fair value of identifiable assets acquired and liabilities assumed from the Seesmart acquisition. The final determination of the fair value of certain assets and liabilities including income taxes and contingencies, including the litigation discussed in Note 13, will be completed within the one-year measurement period from the date of acquisition.

 

Cash		$	68,661
Accounts receivable			1,048,345
Inventory			1,352,326
Goodwill			10,165,993
Customer relationships			7,273,000
Trademarks			3,434,000
Other assets			333,470
Assets acquired		$	23,675,795
Accounts payable		$	2,692,065
Accrued liabilities			1,137,045
Deferred revenue			104,000
Customer deposits			1,466,750
Liabilities assumed		$	5,399,860
Preliminary purchase price		$	18,275,935

 

All the goodwill is included in the LED replacement lamps and fixtures segment (which is also one of the Company’s reporting units). None of the goodwill is expected to be deductible for income tax purposes.

The following supplemental proforma information assumes the acquisitions referred to above had been completed as of January 1, 2012 and is not indicative of the results of operations that would have been achieved had the transactions been consummated on such date or of results that might be achieved in the future.

 

		Nine Months Ended September 30, 2013				Year Ended December 31, 2012
Revenues		$	24,085,000			$	18,485,000
Loss from Continuing Operations			(20,252,000	)			(22,395,000	)
Net Loss			(20,252,000	)			(22,394,000	)

The pro forma loss from continuing operations and net loss reflect the following charges recorded included in the historical results of the Company and Seesmart that are not directly attributed to the acquisitions:

 

		Nine Months Ended September 30, 2013				Year Ended December 31, 2012
Change in fair value of embedded derivative		$	(6,990,000	)		$	—
Impairment charge			—				(3,397,000	)
Gain on debt restructuring			—				1,048,000
Relume loss on extinguishment of debt pre acquisition							(1,700 000	)
		$	(6,990,000	)		$	(4,049,000	)

The pro forma loss from continuing operations and net loss also reflect the following charges and credit directly attributable to the acquisitions:

 

		Nine Months Ended September 30, 2013				Year Ended December 31, 2012
Recorded by Company:
Gain on bargain purchase of business		$	743,000			$	—
Recorded by Seesmart pre acquisition:
Fee paid by sellers in connection with the transaction			—				(1,934,000	)
Change in control premium related to debt settled			—				(530,000	)
Recorded by Relume pre acquisition:
Fees incurred by the sellers			(350,000	)			—
Change in control payment from sellers to management			(737,000	)			—
Loss on settlement of debt from proceeds of merger			(4,157,000	)			—
Gain on deconsolidation of subsidiary			1,573,000				—
		$	(2,928,000	)		$	(2,464,000	)