2.	ACQUISITIONS:

Tri-State—On November 15, 2013 the Company completed the acquisition of Tri-State, a distributor of Seesmart products, for cash at closing of approximately $1.8 million (including a preliminary working capital adjustment), an obligation to pay an additional $1.5 million in cash in six months bearing interest at 5% annually, 543,052 shares of common stock valued at approximately $1.6 million, of which one half were issued at closing, and an obligation to issue up to 365,628 additional shares contingent on Tri-State achieving specified revenue targets within one year following the acquisition date, which has been initially valued at approximately $0.9 million. Under the terms of the agreement the Company acquired Tri-State debt free and cash free. The Company acquired Tri-State for its management team, its client base in New York, New Jersey and Connecticut and operational and business development synergies. The purchase price exceeds the fair value of the tangible assets acquired and reflects the 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 Tri-State acquisition. The purchase price is subject to adjustment based on the closing working capital, which has not yet been finalized. Any such adjustment will be reflected as an adjustment to goodwill. 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.”

 

(in thousands)
Accounts receivable		$	468
Inventory			310
Goodwill			2,811
Customer relationships			1,680
Non-compete agreements			480
Other intangibles			738
Other assets			38
Assets acquired			6,525
Accounts payable			440
Accrued liabilities			208
Other current liabilities			80
Liabilities assumed			729
Preliminary purchase price		$	5,797

The acquired intangibles are being amortized consistent with the period the underlying cash flows are generated. All of the goodwill is included in the LED replacement lamps and fixtures reportable segments. Goodwill is expected to be deductible for income tax purposes.

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 (approximately $4.3 million net of an estimated working capital adjustment) and 2,174,000 shares of common stock valued at approximately $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 and has not been finalized. 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 of 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, except for capital lease obligations.

Relume is a manufacturer and distributor of efficient, 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. 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.”

 

(in thousands)
Cash		$	61
Accounts receivable			851
Inventory			2,389
Goodwill			8,170
Technology			2,020
Trademarks			1,200
Customer relationships			680
Other assets			838
Assets acquired			16,209
Accounts payable			2,574
Accrued liabilities			1,891
Other current liabilities			26
Capital lease obligations			110
Liabilities assumed			4,601
Preliminary purchase price		$	11,608

All of the goodwill is included in the LED replacement lamps and fixtures reportable segment. None of the goodwill is expected to be deductible for income tax purposes.

Elite—On March 8, 2013, LIT, a wholly owned subsidiary of the Company, acquired certain assets of 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 was 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 transaction has been accounted for as a business combination and the issuance of the common shares vesting over five years has been accounted for as compensation pursuant to ASC 505-50 “Equity-Based Payments to Non-Employees.” The Company acquired the business primarily for 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:

 

(in thousands)
Customer revenue contracts		$	1,599
Gain on bargain purchase			(743	)
Preliminary purchase price		$	856

 

The Company amortized the acquired contracts over the periods of the cash flows generated by the contracts. Substantially all the contracts were amortized in 2013.

On October 9, 2013 the Company notified Elite LED Solutions, Inc. of the termination of the sales consulting agreement and, accordingly, cancelled the 850,000 unvested shares of common stock. As a result, no stock based compensation expense has been recognized related to these shares.

Seesmart—On December 20, 2012, the Company purchased all the equity interests of Seesmart pursuant to the terms of the Seesmart Merger Agreement, dated as of December 1, 2012 , 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 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 of approximately $1.2 million and has been reflected in the 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 approximately $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 approximately $1.3 million.

Under the Seesmart Merger Agreement, the Company agreed to distribute the consideration to Seesmart shareholders. During the year ended December 31, 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 that approximates $427,000.

On the acquisition date, Seesmart had outstanding convertible notes payable. In accordance with the 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.

The following amounts represent the final determination of the fair value of identifiable assets acquired and liabilities assumed from the Seesmart acquisition.

 

(in thousands)
Cash		$	69
Accounts receivable			1,048
Inventory			1,352
Goodwill			10,166
Customer relationships			7,273
Trademarks			3,434
Other assets			334
Assets acquired			23,676
Accounts payable			2,692
Accrued liabilities			1,137
Deferred revenue			104
Customer deposits			1,467
Liabilities assumed			5,400
Preliminary purchase price		$	18,276

 

All the goodwill is included in the LED replacement lamps and fixtures reportable segment. None of the goodwill is expected to be deductible for income tax purposes.

Pro forma information. The following unaudited 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.

 

(in thousands)		Year Ended December 31, 2013				Year Ended December 31, 2012
Revenues		$	34,998			$	21,976
Loss from Continuing Operations			(19,880	)			(22,693	)
Net Loss			(19,880	)			(22,693	)

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

 

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

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

 

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

 

The revenue of the 2013 acquisitions, included in our 2013 results operations from their respective acquisition dates through December 31, 2013, totaled $15.3 million. The net income of the 2013 acquisitions, included in our 2013 results operations from their respective acquisition dates through December 31, 2013, totaled $0.4 million.