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EX-32.2 - Titan Energy Worldwide, Inc.v166701_ex32-2.htm
EX-31.1 - Titan Energy Worldwide, Inc.v166701_ex31-1.htm
EX-10.1 - Titan Energy Worldwide, Inc.v166701_ex10-1.htm
EX-32.1 - Titan Energy Worldwide, Inc.v166701_ex32-1.htm
EX-31.2 - Titan Energy Worldwide, Inc.v166701_ex31-2.htm
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2009
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________ to ________
 
Commission File No. 000-26139

Titan Energy Worldwide, Inc.

Nevada
26-0063012
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
10315 Grand River Avenue, Brighton, MI 48116
(Address of principal executive offices) (Zip Code)
 
Company’s telephone number, including area code: (810)-229-5422
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x  No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ¨  No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b of the Exchange Act.
       
Large accelerated filer
¨
Accelerated filer
¨
       
Non-accelerated filer
¨
Smaller reporting company   
x
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨  No x
 
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
 
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
 
Yes ¨;    No ¨
 
Indicate the number of shares outstanding of each of the issuer’s class of common stock, as of the latest practicable date:
 
As of November 11, 2009, the issuer had 12,967,056 shares of its common stock issued and outstanding.

 

 

TABLE OF CONTENTS
 
PART I
   
2
ITEM 1.
FINANCIAL STATEMENTS
 
2
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
24
ITEM 3.
CONTROLS AND PROCEDURES
 
29
ITEM 4.
 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
29
PART II
   
31
ITEM 1.
LEGAL PROCEEDINGS
 
31
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
31
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
 
31
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
32
ITEM 5.
OTHER INFORMATION
 
32
ITEM 6.
EXHIBITS
 
33
SIGNATURES
   
34

 
1

 

PART I
ITEM 1.  Financial Statements
 
Titan Energy Worldwide, Inc.
CONSOLIDATED BALANCE SHEETS
 
   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
(Unaudited)
       
ASSETS
           
Current assets
           
Cash and cash equivalents
  $ 209,107     $ 327,166  
Accounts receivable, less allowance for doubtful accounts of $82,700 and $52,000, respectively
    2,256,433       1,349,105  
Inventory
    751,200       703,941  
Other current assets
    142,634       161,432  
Total current assets
    3,359,374       2,541,644  
Property and equipment, net
    262,354       225,389  
Customer and distribution lists, net
    653,988       1,134,720  
Goodwill
    1,027,478       1,599,160  
Other assets
    13,008       7,302  
Total assets
  $ 5,316,202     $ 5,508,215  
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities
               
Notes payable-current portion
  $ 1,338,631     $ 557,085  
Accounts payable
    1,694,663       1,007,843  
Accrued compensation
    155,574       115,409  
Accrued liabilities – other
    315,126       183,157  
Customer deposits and deferred revenue
    57,800       3,504  
Total current liabilities
    3,561,794       1,866,998  
Notes payable, less current portion
    110,083       -  
Total liabilities
    3,671,877       1,866,998  
                 
Commitments and Contingencies
               
                 
Stockholders’ equity
               
Common stock 1,800,000,000 shares authorized, $.0001 par value, issued and outstanding  12,967,056 and 15,732,056
    1,297       1,573  
Preferred Stock Series D, 10,000,000 authorized, $.0001 par value, issued and outstanding      794 and 657
    1       1  
Treasury stock, at fair value, held 2,740,000 shares of common stock
    (1,369,726 )     -  
Additional paid in capital
    28,592,283       27,0003,124  
Accumulated deficit
    (25,579,330 )     (23,363,481 )
Total stockholders’ equity
  $ 1,644,325     $ 3,641,217  
                 
Total liabilities and stockholders’ equity
  $ 5,316,202     $ 5,508,215  
 
See accompanying notes to consolidated financial statements.
 
2

 
Titan Energy Worldwide, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 

   
Three Months Ended
September 30,
 
   
2009
   
2008
 
Sales of equipment
  $ 2,450,759     $ 1,727,632  
Sales of service and parts
    902,532       577,053  
Total sales
    3,353,291       2,304,685  
                 
Material cost and labor for equipment
    2,051,344       1,481,965  
Material cost and labor for service and parts
    661,280       398,182  
Total cost of  sales
    2,712,624       1,880,147  
Gross profit
    640,667       424,538  
                 
Salaries, wages and benefits
    407,288       314,937  
Consulting  and professional fees
    79,583       (11,402 )
Other general and administrative expense
    261,048       180,929  
Total general and administrative expenses
    747,919       484,464  
                 
Loss from operations
    (107,252 )     (59,926 )
                 
Interest expenses, net
    (74,398 )     (11,926 )
Loss on sale of fixed assets
    (7,383 )     -  
Net loss from continuing operations
    (189,033 )     (71,852 )
Discontinued Operation (Note 2)
               
Losses from operation of discontinued business
    (1,191,564 )     (75,468 )
Losses from  settlement of litigation
    (185,633 )     -  
Net loss from discontinued business
    (1,377,197 )     (75,468 )
                 
Net Loss from continuing and discontinued business
  $ (1,566,230 )   $ (147,320 )
                 
Weighted average number of shares outstanding
    13,051,839       15,642,901  
                 
Basic and diluted from continuing operations  loss per common share
  $ (0.01 )   $ (0.00 )
Basic and diluted from discontinued operations loss per common share
  $ (0.11 )   $ (0.01 )
Basic and diluted loss per common share
  $ (0.12 )   $ (0.01 )
 
See accompanying notes to consolidated financial statements.

 
3

 

Titan Energy Worldwide, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
   
Nine Months Ended
September 30,
 
   
2009
   
2008
 
Sales of equipment
  $ 5,078,512     $ 4,344,867  
Sales of service and parts
    2,019,360       1,517,333  
Total sales
    7,097,872       5,862,200  
                 
Material cost and labor for equipment
    4,300,432       3,725,293  
Material cost and labor for service and parts
    1,502,526       1,108,468  
Total cost of  sales
    5,802,958       4,833,761  
Gross profit
    1,294,914       1,028,439  
                 
Salaries, wages and benefits
    1,065,283       968,405  
Consulting  and professional fees
    249,218       287,177  
Other general and administrative expense
    615,271       517,616  
Total general and administrative expenses
    1,929,772       1,773,198  
                 
Loss from operations
    (634,858 )     (744,759 )
                 
Interest expenses, net
    (105,635 )     (47,546 )
Loss on sale of fixed assets
    (10,389 )     -  
Net loss from continuing operations
    (750,882 )     (792,305 )
Discontinued Operation (Note 2)
               
Losses from operation of discontinued business
    (1,279,334 )     (375,514 )
Losses from  settlement of litigation
    (185,633 )     -  
Net loss from discontinued business
    (1,464,967 )     (375,514 )
                 
Net loss from continuing and discontinued business
    (2,215,849 )     (1,167,819 )
Preferred dividend from beneficial conversion feature on Series D
    -       (593,162 )
Net loss available to common shareholders
  $ (2,215,849 )   $ (1,760,981 )
Weighted average number of shares outstanding
    14,828,833       15,506,910  
Basic and diluted from continuing operations  loss per common share
  $ (0.05 )   $ (0.09 )
Basic and diluted from discontinued operations loss per common share
  $ (0.10 )   $ (0.02 )
Basic and diluted loss per common share
  $ (0.15 )   $ (0.11 )
 
See accompanying notes to consolidated financial statements.

 
4

 

Titan Energy Worldwide, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

   
Nine Months Ended
September 30,
 
   
2009
   
2008
 
Operating activities:
           
Net loss from continuing and discontinued operations
  $ (2,215,849 )   $ (1,167,819 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Impairment of intangibles
    1,146,087       -  
Loss on legal settlement
    185,633       -  
Depreciation and amortization
    170,859       153,452  
Amortization of debt discount
    51,012       11,133  
Compensation paid by issuance of stock or stock options
    1,265       15,992  
Stock issue for services
    29,000       -  
Stock retired for cancellation of service contract
    (31,250 )     -  
Changes in operating assets and liabilities:
               
Accounts receivable
    (609,367 )     (430,889 )
Inventory
    41,497       18,999  
Other assets
    56,934       (80,782 )
Accounts payable
    170,009       (372,503 )
Accrued liabilities
    106,004       (429,558 )
Customer deposits
    26,791       5,238  
Net cash used in operating activities
    (871,375 )     (2,276,737 )
Investing activities:
               
Proceed from sale of fixed assets
    7,205       -  
Net asset acquired from RB Grove Inc.
    (183,544 )     -  
Increase in fixed assets
    (62,225 )     (56,658 )
Net cash used in investing activities
    (238,564 )     (56,658 )
Financing activities:
               
Proceeds from issuance of Preferred Series D Stock
    -       2,153,837  
Payment of financing costs
    (46,696 )     (5,888 )
Proceeds from issuance of notes
    121,964       594,558  
Proceed provided by Seller Financing
    86,612       -  
Proceeds provided by Vendor financing accounts payable
    250,000       -  
Payment of notes
    -       (674,644 )
Proceeds from issuance of convertible debt
    580,000       -  
Purchase of common stock warrants
    -       (170,000 )
Net cash provided by financing activities
    991,880       1,897,863  
Decrease in cash and cash equivalents
  $ (118,059 )   $ (435,532 )
Cash and cash equivalents, at December 31, 2008 and 2007
    327,166       742,564  
Cash and cash equivalents, at September 30, 2009 and 2008
  $ 209,107     $ 307,032  
 
See accompanying notes to consolidated financial statements.

 
5

 

Titan Energy Worldwide, Inc. And Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
NOTE 1 - BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Background

Titan Energy Worldwide, Inc. (the “Company”) was incorporated on December 28, 2006, in the state of Nevada and was formerly known as “Safe Travel Care, Inc.,” a Nevada corporation.

Safe Travel was originally incorporated under the name “Global-Link Enterprises, Inc.” in the state of Nevada on November 20, 1998. On February 4, 2000, the Company filed a Certificate of Name Change with the state of Nevada to change the Company’s name to “MLM World News Today, Inc.” which was granted on April 7, 2000. On August 14, 2002, the Company changed its name to “Presidential Air Corporation.”

On May 2, 2003, the Company executed an agreement to acquire all of the assets of “Presidential Air Corporation.,” and changed the Company’s name from Presidential Air Corporation to “Safe Travel Care, Inc.”

On July 21, 2006, Safe Travel Care, Inc. entered into an agreement and plan of merger with Titan Energy Development, Inc. (“TEDI”) (“the Merger Agreement”). TEDI is a manufacturer and distributor of emergency on site survival equipment called the Sentry 5000TM. In exchange for transferring TEDI to Safe Travel Care, Inc., the TEDI shareholders received stock consideration consisting of 1,000,000 newly issued shares of the Company’s preferred stock (the “Merger”), which were divided proportionately among the TEDI shareholders in accordance with their respective ownership interests in TEDI immediately before the completion of the Merger. The TEDI Shareholders also received 1,000,000 shares of common stock. The Company changed its name to “Titan Energy Worldwide, Inc.” on December 26, 2006. See Note 2, as this reporting unit has been discontinued effective September 30, 2009.

On December 28, 2006, the Company acquired Stellar Energy Services, Inc., a Minnesota corporation (“Stellar”), whereby Stellar exchanged all its common shares for 750,000 newly issued shares of the Company’s preferred stock, plus a Note payable to Stellar shareholders of $823,000. The Stellar shareholders also received 1,000,000 shares of common stock. Stellar provides products and services to protect an industry’s critical equipment from power outages, over/under voltage or transient surges and harmonic distortion.

On August 1, 2007, the Company's Articles of Incorporation were amended to effect an up to Fifty (50) to One (1) reverse stock split of the issued and outstanding shares of common stock. As a result, a Fifteen (15) to One (1) reverse split took effect on August 10, 2007. The result of this split was to reduce the outstanding shares of common stock from approximately 11,602,777 as of August 9, 2007, to approximately 773,518 shares as of August 10, 2007.
   
On August 10, 2007, the Company changed its trading symbol to “TEWI.OB,” and is currently trading on the OTCBB.
 
6

 

Titan Energy Worldwide, Inc. And Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Effective August 13, 2007, the Company agreed to the conversion of its Series A Preferred Stock into common stock according to the formulas set forth in the Certificate of Designation. Each share of Series A Preferred Stock converted 200:1 into shares of Common Stock. In addition, the Company converted the Series B Preferred Stock into $2.00 of Common Stock and shares of Series C Preferred Stock into $1.50 of Common Stock. The effective date for these transactions was August 13, 2007, and the amount of Common Stock increased by 10,664,508 shares. The price of the Common Stock, based on the five days closing price before the effective date was $1.07. The Series B and Series C stockholders had an option to take a Note due on August 13, 2008, with 11% interest. In total, the Company has issued Notes totaling $159,882. Since these preferred shares were not yet convertible under the original conversion terms, these transactions have been accounted for as an extinguishment of the convertible preferred shares resulting in charges to retained earnings of $9,767,847 for the excess of the fair market value of the common stock issued over the recorded amount of the preferred stock.

On June 11, 2009, the Company through its wholly owned subsidiary, Grove Power, Inc, a Florida corporation, (“GPI”) acquired certain assets and assumed certain liabilities of R.B. Grove, Inc.’s (“RBG”), Industrial and Service Divisions. The purchase was effective as of June 1, 2009. The purchase price consisted of a cash payment of $214,827 and an $86,612 secured promissory note at 8% due in 18 months. The seller also received five year warrant to purchase 200,000 shares of the Company common stock at a price of $.01 per share. The Company determined the fair value of the warrants to be $32,000.

At September 30, 2009 and December 31, 2008 the Company has no Series A, B and C Preferred Stock outstanding.  The description of these securities is as follows:

Preferred Stock, Series A, authorized 10,000,000, $.0001 par value
Preferred Stock, Series B, authorized 10,000,000, $.0001 par value
Preferred Stock, Series C, authorized 10,000,000, $.0001 par value

Following is a summary of the Company’s significant accounting policies.

Principles of Consolidation

The financial statements include the accounts of the Company and its 100% owned subsidiaries, TEDI, Stellar and GPI. All intercompany balances and transactions have been eliminated during consolidation.

Basis of Presentation

The accompanying Unaudited Consolidated Financial Statements (“Financial Statements”) have been prepared by management in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for complete consolidated financial statements. In the opinion of management, all adjustments, consisting principally of normal recurring adjustments, considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes for the year ended December 31, 2008, included in our Annual Report on Form 10-K filed with the SEC on March 31, 2009.  Additionally, our operating results for the three and nine months ended September 30, 2009 are not necessarily indicative of the results that can be expected for the year ending December 31, 2009 or for any other period.

 
7

 

Titan Energy Worldwide, Inc. And Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Going Concern

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The Company incurred a net loss for the nine months ended September 30, 2009 of $2,215,849 and at September 30, 2009, had an accumulated deficit of $25,579,330. The loss for the nine months ended September 30, 2009 includes a non-cash charge for the discontinued operation of TEDI in the amount of $1,464,497. The accumulated deficit includes a charge of $9,767,847 for the early extinguishment of the Series A, B and C Preferred Stock and issuance of Common Stock in 2007. In addition, the Company issued Series D Convertible Preferred Stock with a beneficial conversion feature which resulted in recording a preferred stock dividend of $4,076,646. The accumulated deficit without these transactions would have been $10,270,340. However, these conditions raise substantial doubt as to the Company’s ability to continue as a going concern. These financial statements do not include any adjustments that might result from the outcome of this uncertainty. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of recorded asset amounts, or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Management has taken the following steps that it believes will be sufficient to provide the Company with the ability to continue its operations.

 
·
Management has acquired companies that it believes will be cash flow positive.
 
·
Management has been able to raise $580,000 through a convertible debt offering.
 
·
The Company’s loss from operations was reduced by $110,000 as compared to the first nine months of 2008.
 
·
The Company has discontinued the operations of one of its subsidiaries, Titan Energy Development, Inc.

Supplemental Cash Flow Information Regarding Non-Cash Transactions

During the three and nine months ended September 30, 2009, and 2008, the Company has entered into several non-cash transactions in order to provide financing for the Company in order to conserve cash. The table below shows the transactions that occurred during the three months and nine months ended September 30, 2009 and 2008.

 
8

 
 
Titan Energy Worldwide, Inc. And Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited) 
 
   
Three Months Ended Sept. 30,
   
Nine Months Ended Sept.30,
 
   
2009
   
2008
   
2009
   
2008
 
Stock Warrants issued for acquisition
  $ 32,000       -     $ 32,000       -  
Stock issued for Services
  $ 29,000     $ 44,177     $ 29,000     $ 44,177  
Stock returned for cancellation of services
  $ (31,250 )     -     $ (31,250 )     -  
Stock issued to convert long -term debt
    -       -       -     $ 29,968  
Asset given as part of legal settlement
  $ 145,633       -     $ 145,633       -  
Accrued value of  stock to be issued as
                               
part of  legal settlement
  $ 40,000       -     $ 40,000       -  

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, 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. Actual results could differ from those estimates.

Revenue Recognition

The Company recognizes revenue when the significant risks and rewards of ownership have been transferred to the customer pursuant to applicable laws and regulations, including factors such as when there has been evidence of sales arrangement, delivery has occurred, or services have been rendered, the price to the buyer is fixed or determinable, and collectability is reasonably assured.

Cash Equivalents

For purposes of reporting cash flows, the Company considers all short-term investments with an original maturity of three months or less to be a cash equivalent.

Concentration of Credit Risk

Financial instruments which subject the Company to concentrations of credit risk include cash and cash equivalents.

The Company maintains its cash in well-known banks selected based upon management’s assessment of the bank’s financial stability. Balances may periodically exceed the Federal Deposit Insurance Corporation limit which is currently $250,000 however; the Company has not experienced any losses on deposits.

Significant Customer

The Company has one customer that purchased generators during the three and nine months ended September 30, 2009 totaling approximately $697,000 and $885,000, respectively. For the three and nine months ended September 30, 2008, this customer purchased approximately $148,500 and $170,000, respectively.

 
9

 
 
Titan Energy Worldwide, Inc. And Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Property and Equipment

Property and equipment are recorded at cost, net of accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, which range from three to seven years. Expenditures for major renewals and betterments that extend the original estimated economic useful lives of the applicable assets are capitalized. Expenditures for normal repairs and maintenance are charged to expense as incurred. The cost and related accumulated depreciation of assets sold or otherwise disposed of are removed from the accounts, and any gain or loss is included in operations.

Intangible Assets

The Company evaluates intangible assets and other long-lived assets for impairment, at least on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable from its estimated future cash flows. Recoverability of intangible assets and other long-lived assets is measured by comparing their net book value to the fair value of the related operating unit. If the net book value of the asset exceeds the fair value of the related operating unit, the asset is consider impaired, and a second test is performed to measure the amount of the impairment loss.

Advertising Costs

Advertising and marketing costs are expensed as incurred. There were advertising and marketing cost for the three months ended September 30, 2009 and 2008, of $11,400 and $20,700, respectively. There were advertising and marketing cost for the nine months ended September 30, 2009 and 2008, of $20,000 and $107,500 respectively.

Income Taxes

The Company accounts for income taxes under the asset and liability method whereby, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements 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. As of September 30, 2009 and December 31, 2008 the Company had no unrecognized tax benefits due to uncertain tax positions.

Loss per Share

The basic income (loss) per common share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding. Diluted income per common share is computed similar to basic income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The loss for common shareholders would be increased for any undeclared preferred dividends.

 
10

 

Titan Energy Worldwide, Inc. And Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Stock-Based Compensation

The company uses the fair value method of accounting for share-based payments. Accordingly,  the Company’s recognize the cost of employee services received in exchange for awards of equity instruments based on the grant date fair value of those rewards. GAAP permits public companies to adopt its requirements using either the modified prospective method or the modified retrospective method. The Company elected to use the modified prospective method. Options or share awards issued to non-employees are valued using the fair value method and expensed over the period services are provided.

Stock Split

In August 2007, the Company’s Board of Directors approved a fifteen (15) to one (1) reverse stock split of common stock. The par value of the Company’s common stock remains $.0001 per share. All share and per share amounts have been restated to reflect the fifteen (15) to one (1) reverse stock split, except for the statements of stockholders’ equity which reflect the stock split by reclassifying from Common Stock to Additional Paid-in Capital an amount equal to the par value of the shares cancelled to effect the reverse stock split.

Fair value of financial instruments

The Company uses the following methods and assumptions to estimate the fair value of derivative and other financial instruments at the relative balance sheet date:

 
·
Short-term financial instruments (cash equivalents, accounts receivable and payable, short-term borrowings, and accrued liabilities) - cost approximates fair value because of the short maturity period.
 
·
Long-term debt - fair value is based on the amount of future cash flows associated with each debt instrument discounted at our current borrowing rate for similar debt instruments of comparable terms.

Segment Reporting

Based on the Company’s integration and management strategies, the Company operated in a single business segment.

Impairment of Long-Lived Assets

In the event that facts and circumstances indicate that the carrying value of a long-lived asset, including associated intangibles, may be impaired, an evaluation of recoverability is performed by comparing the estimated future undiscounted cash flows, associated with the asset or the asset’s estimated fair value, to the asset’s carrying amount to determine if a write-down to market value or discounted cash flow is required.

 
11

 

Titan Energy Worldwide, Inc. And Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Recent Accounting Pronouncements Issued but Not Effective

The following are new accounting standards and interpretations that may be applicable in the future to the Company.

In June 2009, the Financial Accounting Standards Board (FASB) issued its final Statement of Financial Accounting Standards (SFAS) No. 168 –  The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162 . SFAS No. 168 made the FASB Accounting Standards Codification (the Codification) the single source of U.S. GAAP used by nongovernmental entities in the preparation of financial statements, except for rules and interpretive releases of the SEC under authority of federal securities laws, which are sources of authoritative accounting guidance for SEC registrants. The Codification is meant to simplify user access to all authoritative accounting guidance by reorganizing U.S. GAAP pronouncements into roughly 90 accounting topics within a consistent structure; its purpose is not to create new accounting and reporting guidance. The Codification supersedes all existing non-SEC accounting and reporting standards and was effective for the company beginning July 1, 2009. Following SFAS No. 168, the Board will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead, it will issue Accounting Standards Updates. The FASB will not consider Accounting Standards Updates as authoritative in their own right; these updates will serve only to update the Codification, provide background information about the guidance, and provide the bases for conclusions on the change(s) in the Codification.
 
Accounting Standards Updates Not Yet Effective

In June 2009, the FASB amended its guidance on determining whether an entity’s variable interests constitute controlling financial interests in a variable interest entity.  Among other things, the updated guidance replaces the calculation for determining which entities, if any, have a controlling financial interest in a variable interest entity (“VIE”) from a quantitative based risks and rewards calculation, to a qualitative approach that focuses on identifying which entities have the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses of the VIE or the right to receive benefits from the VIE. The update also requires ongoing assessments as to whether an entity is the primary beneficiary of a VIE (previously, reconsideration was only required upon the occurrence of specific events), modifies the presentation of consolidated VIE assets and liabilities, and requires additional disclosures about a company’s involvement in VIEs. This update will be effective for the Company beginning January 1, 2010. Management is currently evaluating the effect that adoption of this update will have, if any, on the Company’s financial position and results of operations when it becomes effective in 2010.

 
12

 
 
Titan Energy Worldwide, Inc. And Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)

In September 2009, the FASB issued a new accounting standard that permits entities to measure the fair value of certain investments, including those with fair values that are not readily determinable, on the basis of the net asset value per share of the investment (or its equivalent) if such net asset value is calculated in a manner consistent with established fair value measurement principles. The standards update also requires enhanced disclosures about the nature and risks of investments within its scope that are measured at fair value on a recurring or nonrecurring basis. This update will be effective for the Company beginning October 1, 2009. Management is currently evaluating the effect that adoption of this update will have, if any, on the Company’s financial position and results of operations when it becomes effective.
 
In October 2009 the FASB issued an update to its revenue recognition standards that (1) removes the objective-and-reliable-evidence-of-fair-value criterion from the separation criteria used to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting, (2) replaces references to “fair value” with “selling price” to distinguish from other fair value measurement guidance, (3) provides a hierarchy that entities must use to estimate the selling price, (4) eliminates the use of the residual method for allocation, and  (5) expands the ongoing disclosure requirements.  The new standard is effective for the Company beginning January 1, 2011 and can be applied prospectively or retrospectively. Management is currently evaluating the effect that adoption of this update will have, if any, on the Company’s financial position and results of operations when it becomes effective in 2011.
 
Other Accounting Standards Updates not effective until after September 30, 2009 are not expected to have a significant effect on the Company’s consolidated financial position or results of operations.

NOTE 2 – DISCONTINUED OPERATION

The Company has reached a settlement with ERBUS, Inc. on a complaint that alleged that the Company violated a confidentiality agreement with ERBUS and used unspecified and allegedly confidential, proprietary and trade secret information related to a mobile emergency response unit that the Company had developed. The terms of the settlement include that the Company will give ERBUS certain inventory, fixed assets and intellectual property, and 200,000 shares of common stock. The settlement is in no way an admission of guilt or wrongdoing by the Company; the Company chose to settle rather than incur the costs of going to court.

The Company’s subsidiary TEDI was dedicated to producing the product that was the subject of this dispute. Based on this settlement and the Company’s decision to no longer be involved in this business, the Company has decided to discontinue the operations of TEDI.  The Company has recorded the estimated loss based on the recorded value of the assets and the fair market value of the common stock to be approximately $185,633 at September 30, 2009. The settlement agreement is effective as of November 1, 2009.

 
13

 

Titan Energy Worldwide, Inc. And Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)

The Company has reviewed the customer list and goodwill at September 30, 2009 related to the TEDI subsidiary. The Company tests for impairment whenever events occur or circumstances change that would more likely than not reduce the fair value of these assets below its carrying value. When the Company purchased the TEDI subsidiary it had a new product for the emergency response industry. The Company has agreed to a non-compete clause for five years and therefore there is no foreseeable cash flow to justify the fair value of these assets. The Company has taken a non-cash impairment charge on intangible assets of $1,146,087 at September 30, 2009. For the nine months ended September 30, 2009 the revenue and net loss from the operations of TEDI was $19,825 and $133,247, respectively. In the nine months ended September 30, 2008 the revenue was $1,240,242 and the loss from operations was $375,514. All assets have been written down to net realizable and the only remaining assets of TEDI are negligible.

The following table summarizes the carrying amounts at September 30, 2009 and December 31, 2008 of the major classes of assets and liabilities of the Company’s businesses classified as discontinued operations:

   
September 30,
   
December 31,
 
   
2009
   
2008
 
Assets
           
Cash
  $ 622     $ 259,745  
Inventory
    -       157,962  
Other current assets
    367       16,007  
Total current assets
    989       433,714  
Customer list (net of amortization)
    -       505,769  
Goodwill
    -       690,339  
Other asset
    -       2,172  
Total Assets
  $ 989     $ 1,631,994  
Liabilities
               
Accounts payable
    72,962       74,982  
Accrued liabilities
    53,704       13,796  
Total Liabilities
  $ 126,666     $ 88,778  

NOTE 3 - INVENTORIES
 
Inventories are stated at the lower of cost, determined by a first in, first out method, or market. Inventories are adjusted for estimated obsolescence and written down to net realizable value based upon estimates of future demand, technology developments and market conditions. Inventories are comprised of the following at September 30, 2009, and December 31, 2008:

 
14

 

Titan Energy Worldwide, Inc. And Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)

   
September 30,
2009
   
December 31,
2008
 
Parts
  $ 408,193     $ 376,246  
Work in Process
    118,859       185,172  
Finished Goods
    294,148       197,523  
Obsolescence Reserve
    (70,000 )     (55,000 )
    $ 751,200     $ 703,941  

NOTE 4 - NOTES PAYABLE

Notes Payable consists of the following at September 30, 2009, and December 31, 2008:

   
September 30,
2009
   
December 31,
2008
 
Revolving line of credit, prime plus 2.0% with minimum interest rate of 7.5% and due April 22, 2010
  $ 536,910     $ 449,558  
Promissory note payable, bearing interest at 11% due April 1, 2009
    103,969       103,969  
Promissory notes payable, bearing interest at 8% due between June and August 2010
    580,000       -  
Promissory note payable bearing interest at 6% due May 2, 2010
    250,000       -  
Secured promissory note payable, bearing interest at 8% due December 11, 2010
    86,612       -  
Other Loans
    37,633       3,558  
Less Unamortized Discount
    (147,059 )     -  
Total
    1,448,065       557,058  
Less current portion
    1,337,982       557,058  
Long -term Debt
  $ 110,083     $ -  

The promissory notes payable due between June and August, 2010 include 1,160,000 warrants at $.01 per share. This is a beneficial conversion feature that was “in the money” at the commitment date requiring the Company to determine the discount related to this debt. The Company allocated the proceeds based on fair value with the warrants, using the Black-Scholes method, $188,739 and $391,261 to the promissory note. The warrants are exercisable to 2014. The fair value will be amortized to interest expense over the terms of the promissory notes. Included in these notes is a $25,000 related party note from the President of the Company.

The secured promissory note payable was part of the consideration given to the Seller of the RBG assets purchased by Grove Power Inc. (“GPI”). The security for this note is all the assets that were purchased.

On August 5, 2009, a major vendor agreed to exchange $250,000 of accounts payable currently due related to the acquisition of GPI for a promissory note payable due May 2, 2010. This note payable has the personal guaranty of the CEO, President and the COO.

 
15

 

Titan Energy Worldwide, Inc. And Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)

In April 2009, Stellar refinanced their bank credit line with a Revolving Line of Credit due April 22, 2010. Borrowings under this facility are subject to a borrowing base formula consisting of 75% of the accounts receivable balances under 90 days plus 50% of the inventories, up to a maximum of $125,000. The maximum borrowing under the line is $1,000,000.

The Company issued a private placement memorandum (the “Offering”) through which it sold 657 Units from October 3, 2007, through January 31, 2008. Each Unit was sold at $10,000 and consisted of one share of Series D Convertible Preferred Stock, one Class A warrant and one Class B warrant. Gross funds from the Offering totaled approximately $6.0 million. Also during this time, holders of $1,929,921 of 11% Secured Convertible Notes converted their Notes and accrued interest into shares of common stock at $0.50 per share, and holders of $491,000 of 11% Promissory Notes due in December 2008 converted their Notes into the Offering. Net proceeds from the Offering were approximately $5.2 million in cash with a reduction in convertible debt of $2.3 million in proceeds from the converted debt. Approximately $1.5 million of the cash proceeds has been used to pay down debt.

The due date of the 11% Promissory Notes was extended from August 23, 2008 until April 1, 2009. On October 16, 2009, the noteholder agreed to a settlement of this note as explained in Note 14.  During the first quarter of 2008, one of the former noteholders elected to convert his Note and accrued interest of $29,968 into 23,962 shares of common stock.

Accrued interest is included in accrued liabilities at September 30, 2009, and December 31, 2008, in the amounts of $27,885 and $4,355, respectively.

NOTE 5 - INCOME TAXES

The Company’s effective income tax rate of 0.0% differs from the federal statutory rate of 34% for the reason set forth below for the three and nine months ended September 30:

   
Three Months Ended September 30
   
Nine Months Ended September 30
 
   
2009
   
2008
   
2009
   
2008
 
Continuing Operations
                       
Income taxes at the statutory rate
  $ (192,185 )   $ (24,430 )   $ (690,273 )   $ (269,384 )
Valuation Allowance
    171,480       14,685       653,277       243,945  
Permanent differences and other
    20,705       9,745       36,996       25,439  
 Total income taxes continuing operations
  $ -     $ -     $ -     $ -  
Discontinued Operations
                               
Income taxes at the statutory rate
  $ (468,247 )   $ (25,659 )   $ (498,089 )   $ (127,675 )
Valuation Allowance
    72,909       19,700       91,390       76,841  
Permanent differences and other
    395,338       5,959       406,699       50,834  
Total income taxes discontinued operations
  $ -     $ -     $ -     $ -  

 
16

 

Titan Energy Worldwide, Inc. And Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Deferred tax assets and liabilities reflect the net effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and amounts used for income tax purposes.

The Company has a net operating loss carry forward of approximately $7,600,000.

The Company may offset net operating loss carry forwards against future taxable income through the year 2029. No tax benefit has been reported in the financial statements as the utilization of the tax benefits related to the carry-forward is not assured. Accordingly, the potential tax benefits of the net operating loss carry-forwards are offset by valuation allowance of the same amount.

NOTE 6 – TREASURY SHARES

On June 30, 2009, the Company offered to the common shareholders that were converted in the Offering the opportunity to exchange the common shares received into units of Series D Preferred Stock. A total of 2,740,000 shares of common stock were exchanged for 137 Units of Series D Preferred Stock and 456,621 of detachable Class A Warrants and 456,621 of detachable Class B Warrants. This transaction has been accounted for using the Black–Scholes method to determine the value of the treasury shares, Series D Preferred Stock and the warrants. This method resulted in a fair value of the treasury shares of $1,369,726, the Series D Preferred Stock of $1,285,553, and the value of the warrants of $84,467.

NOTE 7 - SERIES D CONVERTIBLE PREFERRED STOCK

On October 3, 2007, the Company commenced a private placement to sell up to $10,000,000 of Units consisting of one share of Series D Convertible Preferred Stock, one Class A warrant and one Class B warrant. Each Unit was offered at $10,000 (the “Offering”). The holder of the Convertible Preferred Stock may, at any time, convert their shares, in whole or in part, into shares of the Company’s Common Stock. Assuming an initial conversion price of $1.00, each one (1) share of Preferred Stock is convertible into 10,000 shares of Common Stock. Each Class A Warrant and Class B Warrant entitles the holder to purchase three thousand three hundred and thirty-three (3,333) shares of Common Stock with exercise prices of $1.20 and $1.40, respectively.

The Units were offered by the Company on a “reasonable efforts” basis only to “accredited investors” (as defined in Rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended), on a minimum of 100 Units ($1,000,000), and a maximum of 1,000 Units ($10,000,000) at a price of $10,000 per Unit. The Offering closed on January 31, 2008. The Company had closings for cash gross proceeds of approximately $6.0 million. Approximately $513,000 of 11% Promissory Notes and accrued interest were converted into the Offering at a 10% discount from the Offering price. Net cash proceeds to the Company were approximately $5.2 million. The proceeds from the closings have been used to retire debt, repurchase stock warrants and fund inventory and operating costs.

 
17

 

Titan Energy Worldwide, Inc. And Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)

The Units offered include warrants and a beneficial conversion feature as the Series D Preferred Stock was convertible and “in the money” at closing dates. The Company has determined the value of the warrants to be $2,135,434 and the value of Series D Preferred Stock to be $3,521,558. The Company has valued the beneficial conversion feature at $4,217,541. This amount is treated as a preferred stock dividend with the amount increasing paid-in capital and reducing retained earnings. The increase in the preferred dividend in 2008 was $593,162.

In an Event of Liquidation (as defined below) of the Company, holders of any then-unconverted shares of Preferred Stock will be entitled to immediately receive accelerated redemption rights in the form of a Liquidation Preference Amount. The Liquidation Preference Amount shall be equal to 125% of the sum of: (i) the Stated Value ($10,000) of any then-unconverted shares of Preferred Stock and (ii) any accrued and unpaid dividends thereon. An “Event of Liquidation” shall mean any liquidation, dissolution, or winding up of the Company, whether voluntary or involuntary, as well as any change of control of the Company which shall include, for the purposes hereof, sale by the Company of either (x) substantially all of its assets or (y) that portion of its assets which comprises its core business technology, products or services.

NOTE 8 - COMMON STOCK TRANSACTIONS

During the third quarter ended September 30, 2009 the Company issued 100,000 shares of common stock to an investor relations firm for services to be provided. The fair value of the common stock on the day it was issued was 29 cents a share. This fair value of $29,000 was charged to expense in the third quarter. Also, in the third quarter, an investor relation firm returned 125,000 shares of common stock that were issued in July 2008. The issuance of this stock resulted in expense over 2008 and 2009.The stock was returned as the investor relations firm did not perform on its contract which was terminated. The Company has retired this stock and recognized a gain for the fair value of $31,250.

During the first quarter of 2008, the Company settled an 11% Noteholder obligation by converting the Note to common stock. This transaction resulted in the issuance of 23,962 common shares. The price for conversion was based on the current market price for the stock of $1.25 per share.

In conjunction with the Company’s Offering, noteholders with $1,929,921 of 11% convertible debt plus accrued interest elected to convert their debt into common stock. The conversion price was $0.50 per share resulting in the issuance of 3,859,844 common shares. As explained in Note 6, several of these shareholders have exchanged their common stock for Series D Preferred Stock.

NOTE 9 - STOCK OPTIONS

On May 1, 2009, the Board approved an employee stock option plan (the “2009 Plan”) and recommended that the 2009 Plan be submitted to the shareholders for approval. In event the stockholders of the Company do not approve the 2009 plan within 12 months of the adoption of the 2009 Plan by the board, the 2009 Plan shall be terminated.
 
The Company has granted to employees 305,000 options to purchase common stock at an exercise price of $.10, subject to the 2009 Plan’s approval. Using the Black-Scholes formula, these options have a fair value of $12,148 which will be amortized to expense over the 4 year vesting period.  The expense for the nine months ended September 30, 2009 was $1,265.
 
 
18

 
Titan Energy Worldwide, Inc. And Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)

NOTE 10 - COMMON STOCK WARRANTS

The total number of warrants issued for the nine months ended September 30, 2009, and for the year ended December 31, 2008, was 2,317,492 and 1,750,736, respectively. None of the warrants have been exercised this year. During the third quarter, the Company repriced certain warrants to a group of brokers that are finding investors for future financing initiatives. The warrants for 320,205 common shares were amended from an exercise price of $0.625 per share to an exercise price of $0.10 per share.  The following table shows the warrants outstanding at September 30, 2009:

Number of
 
Exercise
 
Expiration
Warrants
 
Price
 
Date
1,360,000
  $ 0.01  
Jun-14
364,455
  $ 0.10  
Jun-14
1,172,500
  $ 0.35  
Jan-12
553,800
  $ 0.50  
April-July 2012
212,297
  $ 0.63  
Jun-12
1,098
  $ 0.63  
Jan-13
79,000
  $ 0.75  
Sep-10
158,000
  $ 0.75  
Dec-12
2,646,411
  $ 1.20  
Jan-13
801,540
  $ 1.25  
Jan-13
2,646,411
  $ 1.40  
Jan-13

NOTE 11 – FAIR VALUE

In September 2006, “Fair Value Measurements” was adopted for measuring assets and liabilities. GAAP provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. GAAP also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets. The fair value measurements are disclosed by level within that hierarchy. The fair value measurements are effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  The Company adopted the provisions of fair value measurements as of January 1, 2008. Hierarchical levels are directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:

 
19

 

Titan Energy Worldwide, Inc. And Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
 
Level 1 — Inputs were unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
 
Level 2 — Inputs (other than quoted prices included in Level 1) were either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
 
Level 3 — Inputs reflected management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration was given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
 
Determining which hierarchical level an asset or liability falls within requires significant judgment.  The Company will evaluate its hierarchy disclosures each quarter.  The following table summarizes the financial instruments measured at fair value in the Consolidated Balance Sheet as of September 30, 2009:
 
   
Fair Value Measurements
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets
                       
Customer list
  $ -     $ -     $ 90,000     $ 90,000  
Goodwill
  $ -     $ -     $ 118,656     $ 118,656  
Liabilities
  $ -     $ -     $ -     $ -  

NOTE 12 – ACQUISITION

On June 11, 2009, the Company, through its wholly owned subsidiary, Grove Power, Inc. (“GPI”) a Florida corporation, entered into an asset purchase agreement with R.B. Grove Inc. (“RBG”). Under this agreement, GPI acquired certain assets and assumed certain liabilities of RBG’s Industrial and Service Departments (collectively referred to herein as the “Business”) effective June 1, 2009. The Business is engaged in the marketing, selling, distribution and servicing of backup and emergency power equipment in the state of Florida and Caribbean Islands. The fair value of the consideration paid, assets acquired and liabilities assumed at June 1, 2009 were as follows:

 
20

 

Titan Energy Worldwide, Inc. And Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)

   
June 1, 2009
 
Fair value of consideration
     
Cash payment
  $ 214,827  
Note payable for 18 months at 8%
    86,612  
200,000 Common Stock Warrants excisable at .01 for five  years
    32,000  
Fair value of consideration
  $ 333,439  
         
Fair value of assets acquired
       
Account receivables
  $ 297,961  
Inventory
    370,409  
Fixed Assets
    26,860  
Fair value of assets acquired
  $ 695,230  
         
Fair value of liabilities assumed
       
Accounts payable
  $ 516,811  
Accrued liabilities
    26,130  
Customer Deposits
    27,506  
Fair value of liabilities assumed
  $ 570,447  
         
Net fair value of assets
  $ 124,783  
         
Excess consideration over fair value of net assets
  $ 208,656  
Intangible assets
       
Fair value of customer list
  $ 90,000  
Goodwill
  $ 118,656  

The fair value of the customer list was based on the present value of the gross margin on service contracts over the next five years that are renewable, at the customer option, on an annual basis. The fair value was adjusted for estimated lost contracts during the next five years. The goodwill in this transaction is attributable to a distribution agreement with major suppliers, an educated workforce that has sold this product for many years and the synergies related to TESI controls and procedures. The goodwill is expected to be fully deductible for tax purposes.

The sales and earnings included in the Consolidated Financial Statement since the acquisition date of June 1, 2009 were $1,160,822 and $19,194. The acquisition related costs recorded in Corporate Overhead were approximately $48,000 and are included in consulting and professional fees.

The following unaudited pro forma financial information presents the combined results of the Company and GPI as if the acquisition had occurred and does not include net loss from the discontinued operations of $1,464,967 and $375,514 for the nine months ended September 30, 2009 and 2008, respectively. The unaudited pro forma financial information is not necessarily indicative of what the Company’s consolidated results of operations actually would have been had the Company completed the acquisition at the beginning of each period. In addition, the unaudited pro forma financial information does not attempt to project the future results of operations of the combined company.

 
21

 

Titan Energy Worldwide, Inc. And Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)

   
Nine Months Ended September 30,
 
   
2009
   
2008
 
Revenue
  $ 8,473,154     $ 8,323,508  
Cost of Sales
    6,917,771       6,644,693  
Gross profit
    1,555,383       1,678,815  
General and administrative expenses
    2,103,969       2,323,896  
Loss from Operation
    (548,586 )     (645,080 )
Interest Expense
    (119,923 )     (73,264 )
Loss on sale of fixed assets
    (10,389 )     -  
Net Loss from continuing business
    (678,898 )     (718,345 )
Preferred dividend from beneficial
               
conversion feature on Series D
    -       (593,162 )
Net loss available to common shareholders
  $ (678,898 )   $ (1,311,507 )
Weighted average number shares
    14,828,833       15,506,910  
Basic and diluted net loss per shareholder
  $ (0.05 )   $ (0.08 )

NOTE 13 – SUBSQUENT EVENTS SETTLEMENT OF DEBTS

On October 16, 2009, the Company reached a settlement with a Noteholder to exchange an 11% promissory note with principal balance of $103,969 and accrued interest of $12,389 which was in default, for the following securities: 646,439 shares of common stock valued at $155,145, and 500,000 common stock options with an exercise price of $0.25. The Company has guaranteed to buy back the options at the election of the Noteholder at $0.25 on December 31, 2010.  The fair value of the guarantee is $125,000.

On October 6, 2009, the Company reached a settlement with a vendor that had outstanding invoices totaling $44,381. The vendor agreed to accept a $25,000 cash payment and 100,000 shares of common stock.

NOTE 14 – SUBSEQUENT EVENTS STOCK OPTIONS GRANTED

On November 12, 2009, the Company granted 2,750,000 options for the purchase of common shares at an exercise price of $0.25 per share, to the employees of the Company. Under the plan for these options, vesting begins November 12, 2011. The vesting schedule from this date is 33% for each subsequent year. The Company has estimated the value of these options to be approximately $500,000, which will be amortized from grant date to the end of the vesting period.

 
22

 

Titan Energy Worldwide, Inc. And Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)

The Company has performed a review of events subsequent to the balance sheet date through November 16, 2009 and except for the matters described above in Note 13 and in this note no other matters require disclosure.

 
23

 

ITEM 2. Management’s Discussion and Analysis or Plan of Operation.

Statements included in this Management’s Discussion and Analysis or Plan of Operation, and in future filings by us with the Securities and Exchange Commission (the “SEC”), in our press releases and in oral statements made with the approval of an authorized executive officer which are not historical or current facts are “forward-looking statements” and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The following important factors, among others, in some cases have affected and in the future could affect our actual results and could cause our actual financial performance to differ materially from that expressed in any forward-looking statement: (i) the extremely competitive conditions that currently exist in the market for companies similar to us, and (ii) the lack of resources to maintain our good standing status and requisite filings with the SEC.  The foregoing list should not be construed as exhaustive and we disclaim any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

OVERVIEW

Titan Energy provides the power generation equipment, service and expertise to enable companies, institutions and governments to safely maintain their critical operations and services during times of power outages, suboptimal power conditions and emergencies. We deliver power generation equipment and service to a wide range of industrial customers including: hospitals and healthcare institutions, apartment buildings, schools and universities, telecom companies, data centers, financial institutions, grocery stores, manufacturers, and municipalities.  Our products range from 25kW to multiple megawatt power generation systems provided by manufacturers such as Generac Power Systems, Inc and MTU Onsite Energy Corporation.  In addition, we offer engineering, design services and specialized maintenance support for all of our customers.
 
In 2006, we acquired two companies in the distributed energy and power generator manufacturing industries: Titan Energy Development Inc., (“TEDI”), and Stellar Energy Services, Inc. (“Stellar”).  TEDI merged with us on July 21, 2006 which made us a manufacturer and supplier of a unique disaster recovery mobile utility system.  As described in Note 2 to our Consolidated Financial Statements, this business has been discontinued effective September 30, 2009. Stellar was acquired by us on December 28, 2006 giving us an established distributorship for emergency and standby power in four Midwestern states.  Stellar is operating under the name of Titan Energy Systems (“TES”).
 
On June 11, 2009, the Company, through its wholly owned subsidiary, Grove Power, Inc. (“GPI”) a Florida corporation, entered into an asset purchase agreement with R.B. Grove Inc. (“RBG”). Under this agreement, GPI acquired certain assets and assumed certain liabilities of RBG’s Industrial and Service Departments (collectively referred to herein as the “Business”) effective June 1, 2009. The Business is engaged in the marketing, selling, distribution and servicing of backup and emergency power equipment in the state of Florida and Caribbean Islands.

 
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STRATEGY

Our goal is to be a leading provider of power generation and energy management solutions.  To date, we have focused on providing thousands of customers with the most advanced power generation equipment to enable their operations to continue uninterrupted during times of power failures or disasters.  We are also offering advanced ways for customers to better manage their energy usage and their power generation assets.

We see ourselves as an important participant in the development and implementation of the Smart Grid (or Intelligent Grid), a government and business initiative that management believes will transform the way we live and work. By offering advanced equipment and smarter services to better manage energy utilization, we are striving to support efforts to modernize how our customers use and conserve power.

Our plans to grow our operations across the United States and internationally include the following:

 
·
Offer newer, larger and more advanced power generation systems to help companies better cope with power failures and interruptions.
 
·
Offer newer and better monitoring technologies to our power generation customers.
 
·
Provide advanced metering systems that allow selected customers to better utilize their power generation capabilities to avoid peak utility rates.
 
·
Work with more alternative power providers so as to help companies use solar, wind and other technologies to lessen their dependence on the electrical utility grid as well as take advantage of opportunities to sell some of their power back to the utilities.
 
·
Acquire companies that will offer us timely and competitive ways to move forward with new Smart Grid technologies and solutions.
 
Management believes that we have enough capital through reserves and expected revenues to operate at least until September 30, 2010; however, it is likely that we will need additional capital to continue operations.  We plan to raise funds through the sale of equity, debt and revenues from operations. There can be no assurance that we will generate revenues from operations or obtain sufficient capital on acceptable terms, if at all. Failure to obtain such capital or generate such operating revenues would have an adverse impact on our financial position and results of operations and our ability to continue as a going concern. Operating and capital requirements during the next fiscal year and thereafter will vary based on a number of factors, including the level of sales and marketing activities for services and products. There can be no assurance that additional private or public finances, including debt or equity financing, will be available as needed, or, if available, on terms favorable to us. Any additional equity financing may be dilutive to stockholders and such additional equity securities may have rights, preferences or privileges that are senior to those of our existing Common Stock.

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RESULTS OF OPERATIONS

Three Months Ended September 30, 2009 Compared to the Three Months Ended September 30, 2008

Sales

Sales for the three months ended September 30, 2009 were $3,353,291 compared to $2,304,685 for the three months ended September 30, 2008.  The sales for the quarter were the highest quarterly sales in our history. The increase in sales for this period is attributable to higher sales of annual maintenance contracts, parts and other service-related programs. In the three months ended September 30, 2009, sales of service and parts were $902,532 compared with $557,053 in the three months ended September 30, 2008. The majority of this increase was attributable to our acquisition of GPI which had service sales of $292,450. TES service sales increased 11% in the three months ended September 30, 2009 as compared to the three months ended September 30, 2008 which indicates that our program to grow the service business is continuing to be successful. The sale of equipment for the three months ended September 30, 2009 increased $723,127 from the three months ended September 30, 2008. This increase was partially attributable to the acquisition of GPI which had equipment revenues of $507,000 for the quarter ended September 30, 2009. In the third quarter of 2009, sales of equipment by our TES subsidiary increased by 12% over the third quarter of 2008. This increase was partially attributable to a major customer that purchased $697,000 worth of generators in the quarter.

Cost of Sales

Cost of sales was $2,712,624 for the three months ended September 30, 2009, compared to $1,880,147 for the three months ended September 30, 2008. Cost of sales as a percentage of sales was 80.9% for the three months ended September 30, 2009, as compared to 81.6% for the three months ended September 30, 2008. This decrease in the cost of sales as a percentage of sales is attributable to strong equipment sales with higher margins. The cost of sales percentage for service was impacted adversely by GPI. Cost of sales as percentage of service sales was 73.2% for three months ended September 30, 2009 compared to 69% for the three months ended September 30, 2008. We expect the GPI service program to begin achieving improved margins now that we have implemented our sales and administrative programs and trained GPI personnel on these new procedures.   As we have demonstrated at TES, the results of these measures have improved prices on parts and equipment and greater efficiencies leading to higher margins.

General and Administrative Expenses

General and administrative (“G&A”) expenses were $747,919 for the three months ended September 30, 2009, compared to $484,464 for the three months ended September 30, 2008, an increase of $263,455. Part of this increase was due to the accounting practice of deferring consulting fees as part of the purchase price for an acquisition. A total of $104,000 was deferred at September 30, 2008. At December 31, 2008, the accounting treatment of these costs were to expense them under FASB 141R.  In the third quarter of 2008, we adjusted certain accruals for marketing and consulting services based on the current facts resulting in a reduction of expenses by approximately $140,000. Without these two adjustments G&A expense for the third quarter of 2008 would have been $728,464, an increase of only  approximately $20,000.  The addition of GPI increased G&A expenses in the third quarter of 2009 by $128,000.  Therefore, without the acquisition of GPI, G&A in the nine months ended September 30, 2009 would have decreased by $100,000 compared to the same period in 2008, which was primarily attributable to lower investor relations fees and consulting fees.

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Interest Expense

Net interest expense for the three months ended September 30, 2009, was $74,398 compared to $11,926 for the three months ended September 30, 2008. The higher cost was attributable to amortization of financing fees and the beneficial conversion feature and interest expense related to the convertible debt issued in the second and third quarter of 2009. In addition we exchanged accounts payable with a vendor for a 6% promissory note that matures in May 2010. There was no gain or loss on this transaction.

Discontinued Operations

In the third quarter, we made the decision to discontinue the operations of TEDI. This decision was based partly on our decision to no longer be involved in the business segment of emergency utility systems manufacturing and marketing, the sole business of TEDI.  This decision also was influenced by our settlement of a complaint that alleged that we violated a confidentiality agreement with a third party and used unspecified and allegedly confidential, proprietary and trade secret information related to a mobile emergency response unit that we had developed. The decision to settle this lawsuit was in no way an admission of guilt or wrongdoing by us, but was made to avoid the unnecessary legal costs of going to court to resolve this claim.  The significant costs from discontinued operations are attributable to the impairment of the intangible assets that were established at the purchase date of the TEDI subsidiary. This represents a noncash charge of $1,146,087. The remaining costs relate to amortization of customer lists and legal expenses. In the quarter ended September 30, 2008, this division had sales of $905,122 and a net loss of $75,468, which includes legal expenses of $54,300.

Nine Months Ended September 30, 2009 Compared to the Nine Months Ended September 30, 2008

Sales

Sales for the nine months ended September 30, 2009 were $7,097,872, compared to $5,862,200 for the nine months ended September 30, 2008, an increase of $1,235,672.  The sales for the nine month period were the highest sales for any nine month period in our history.  As noted in the discussion of the third quarter results, GPI contributed sales of $1,160,622 for the nine months ended September 30, 2009. The increase in TES sales was $75,050. This increase is attributable to an increase in sales of TES service products. The improvement in this line of business is attributable to improving our sales and marking program, emergency repairs, and implementing sales procedures that ensure a greater renewal rate of customer service contracts.
 
Cost of Sales
 
Cost of sales was $5,802,958 for the nine months ended September 30, 2009, compared to $4,833,761 for the nine months ended September 30, 2008.  Cost of sales as a percentage of sales was 81.8% for the first nine months of 2009 as compared to 82.5% for the nine months ended September 30, 2008. As explained in the three month discussion above, if you exclude the impact of GPI, the percentage cost of sales for the nine months ended September 30, 2009 would decrease to 81.4%.

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General and Administrative Expenses

General and administrative (“G&A”) expenses were $1,929,772 for the nine months ended September 30, 2009, compared to $1,773,198 for the nine months ended September 30, 2008, an increase of $156,754. GPI has increased our G&A expenses for the four months since the acquisition by $161,000.  Without the GPI acquisition, G&A would have decreased slightly.  The G&A expense as a percentage of sales was 27.2% for the nine months ended 2009 as compared to 30.2% for the nine months ended September 30, 2008.  Going forward, we intend to focus on improving operating efficiencies, cost reductions, and increasing revenue to achieve a lower ratio of G&A expenses compared to sales.

Interest Expense

Net interest expense for the nine months ended September 30, 2009 was $105,635, compared to $47,546 for the nine months ended September 30, 2008.  The issuance of convertible promissory notes and the financing associated with the acquisition of GPI are the main reasons for the increase in the interest expense. Included in interest expense are the amortization of deferred financing costs and the beneficial conversion feature related to the warrants issued as part of the convertible promissory notes. In the nine months ended September 30, 2009 the amount amortization was $45,500. The remainder of the increase is attributable to higher debt levels on our line of credit.

Discontinued Operations

As noted in the third quarter discussion above, we have discontinued the operations of the TEDI subsidiary as part of a settlement of a legal complaint against us. The loss for the nine months ended September 30, 2009 includes the impairment of the intangible assets and losses related to the one month of operations before we decided to limit the operations of the TEDI subsidiary at the end of January 2009. The sales for the nine months ended September 30, 2009 were $19,295 compared to $1,240,424 for the nine months ended September 30, 2008. We decided that the amount of financial and other resources that would have been required to properly and effectively market these emergency utility products were beyond the capabilities of the Company.  We were seeking a partner that would assume the marketing and sales expenses of this program and pay us royalties in future years, however, with the settlement of the legal case, there is no future cash flow from this product. We believe that our resources are better spent in other, more productive segments of our business.

LIQUIDITY AND CAPITAL RESOURCES

During the nine months ended September 30, 2009, cash used by operations was $871,375 compared to the nine months ended September 30, 2008, where cash used by operations was $2,276,737.  Improved operating performance and more effective management of our accounts payable contributed to this improvement.

For the nine months ended September 30, 2009, we raised $580,000 of convertible notes to pay for the acquisition of certain assets of RBG by GPI and working capital. These notes are for one year at an 8% interest rate. They also have two detachable warrants at $0.01 per share for each dollar of principal. The notes are convertible into common stock at any time during their term, which expires in June to August of 2010.

The financing of the GPI acquisition was done through cash payments of $214,857, the assumption of liabilities from a major supplier of approximately $500,000, and an 18 month note of $86,612 from the seller. We reached an agreement in July with a major supplier to pay an aggregate of $521,509, consisting of $207,000 in cash, a $250,000 nine month note at 6%, and the balance applied to equipment purchases that are to be paid between 30 and 90 days after the date of purchase.

 
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In April 2009, we increased our revolving credit line from $750,000 to $1,000,000. This credit facility is an asset-based loan. We were able to obtain a reduction in the interest rate to 7.5%. Under the amended credit facility, there is approximately $400,000 of borrowings available at September 30, 2009. Our qualified receivables under the line are approximately $1,600,000.

We intend to continue to find ways to expand our business through strategic acquisitions. We believe that our revenues and earnings will increase as we grow. We anticipate that we will incur smaller losses in the near future if we are able to expand our business, however, we may experience losses if the costs of the anticipated acquisitions and marketing are greater than the income from operations.

During the nine months ended September 30, 2009, we incurred a net loss of $2,215,849 compared to $1,760,981 for the nine months ended September 30, 2008. The net losses for the nine months ended September 30, 2009 and 2008 include non-cash charges of $1,552,606 and $773,739, respectively. The non-cash charges in 2009 are primarily attributable to the impairment of the intangible assets due to the discontinuation of operations in one of our subidiaries. The higher non-cash charges in 2009 were the result of the issuance of our Series D Preferred Stock which has the beneficial conversion feature of a preferred dividend of $593,162. As of September 30, 2009, we have approximately $209,000 in cash. We believe that with the completion of our convertible debt offering, the collection of receivables and any additional offering of our securities, we will have adequate cash to fund our operations through September 30, 2010.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.

Not applicable.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain a set of disclosure controls and procedures, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.  In accordance with Rule 13a-15(b) of the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2009.  Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective in ensuring that material information required to be disclosed in the reports that we file with or submit to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is effective in ensuring that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 
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Notwithstanding the foregoing, we cannot assure you that our disclosure controls and procedures will detect or uncover all failures of persons within the Company to disclose material information otherwise required to be set forth in our periodic reports. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable, not absolute, assurance of achieving their control objectives.

Changes in Internal Controls

There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2009, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 
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PART II - OTHER INFORMATION

ITEM 1.    Legal Proceedings

On April 1, 2008, the Company and its wholly-owned subsidiary, Titan Energy Development, Inc. (“TEDI”), along with Thomas Black, the Company’s President, and Donald Snede, a former director of TEDI, were served with a summons and complaint (the “Complaint”) by ERBUS, Inc. (“ERBUS”) in the United States District Court, Fourth Judicial District, State of Minnesota, County of Hennepin. The Complaint alleged that the Company violated a confidentiality agreement with ERBUS and used unspecified and allegedly confidential, proprietary and trade secret information related to a mobile emergency response unit which ERBUS had been trying to develop. The Complaint sought injunctive relief and damages in an amount greater than $50,000.

On November 18, 2009, the Company entered into a settlement agreement with ERBUS, effective as of November 1, 2009 (the “Settlement Agreement”), pursuant to which the Company agreed to give ERBUS (i) certain assets related to the Sentry 5000 ™ and Remus mobile units which the Company was no longer using and which were not material to the Company’s business and (ii) 200,000 restricted shares of the Company’s common stock.  The Company had independently determined that it was not going to continue in the mobile emergency response unit market and, therefore, also agreed to a five-year non-compete clause relating to the production and sale of any Sentry-type or Remus-type units.
 
The foregoing description of the Settlement Agreement does not purport to be complete and is qualified in its entirety by reference to the Settlement Agreement, a copy of which is attached hereto as Exhibit 10.1 and is herein incorporated by reference.

ITEM 2.    Unregistered Sales of Equity Securities and Use of Proceeds

During the quarter ended September 30, 2009, we issued 100,000 shares of common stock to an investor relations firm for services to be rendered.  The aggregate fair value of the shares on the date of issue was $29,000.

This stock was issued in reliance on an exemption from registration set forth in Section 4(2) of the Securities Act of 1933 and Rule 506 of Regulation D promulgated thereunder as a transaction not involving any public offering and the purchaser met the “accredited investor” criteria required by the rules and regulations promulgated under the Securities Act.

ITEM 3.    Defaults Upon Senior Securities

We were previously in default of our 11% Promissory Note due April 1, 2009, in the amount of $113,977. On October 16, 2009, we reached a settlement with this noteholder by agreeing to issue the following securities: (i) 646,439 shares of our common stock and (ii) an option to purchase 500,000 shares of our common stock, with an exercise price of $0.25 per share, with an agreement to buy back the options at $0.25 on December 31, 2010, at the noteholder’s option.

 
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ITEM 4.    Submission of Matters to a Vote of Security Holders

None.

ITEM 5.    Other Information

None.

 
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ITEM 6.    Exhibits

Exhibit No.
 
Description
10.1
 
Settlement Agreement, effective as of November 1, 2009, between the Company and ERBUS, Inc. (without exhibits)
     
31.1
 
Certification of  Jeffrey W. Flannery, Chief Executive Officer of the Company, pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2
 
Certification of James J. Fahrner, Chief Financial Officer of the Company, pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1
 
Certification of Jeffrey W. Flannery, Chief Executive Officer of the Company, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2
 
Certification of James J. Fahrner, Chief Financial Officer of the Company, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 
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SIGNATURES
 
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
TITAN ENERGY WORLDWIDE, INC.
     
Dated: November 19, 2009
By:
 /s/ Jeffrey W. Flannery
   
 Jeffrey W. Flannery
 Chief Executive Officer
     
Dated: November 19, 2009
By:
 /s/ James J. Fahrner
   
 James J. Fahrner
 Chief Financial Officer

 
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EXHIBIT INDEX
 
Exhibit No.
 
Description
10.1
 
Settlement Agreement, effective as of November 1, 2009, between the Company and ERBUS, Inc. (without exhibits)
     
31.1
 
Certification of  Jeffrey W. Flannery, Chief Executive Officer of the Company, pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2
 
Certification of James J. Fahrner, Chief Financial Officer of the Company, pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1
 
Certification of Jeffrey W. Flannery, Chief Executive Officer of the Company, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2
 
Certification of James J. Fahrner, Chief Financial Officer of the Company, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 
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