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EX-32.1 - Titan Energy Worldwide, Inc.v223537_ex32-1.htm
EX-31.2 - Titan Energy Worldwide, Inc.v223537_ex31-2.htm
EX-31.1 - Titan Energy Worldwide, Inc.v223537_ex31-1.htm
EX-32.2 - Titan Energy Worldwide, Inc.v223537_ex32-2.htm
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(Mark One)
 
¨ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2011
 
¨ 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.)
 
55820 Grand River Avenue, New Hudson, MI 48165
(Address of principal executive offices) (Zip Code)
 
Company’s telephone number, including area code: (248)-264-1900
 
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
 
Indicate the number of shares outstanding of each of the issuer’s class of common stock, as of the latest practicable date:
 
As of May 19, 2011 the issuer had 30,851,736 shares of its common stock issued and outstanding.
 
 
 

 
 
TABLE OF CONTENTS
 
PART I
   
3
       
ITEM 1.
FINANCIAL STATEMENTS
 
3
       
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
22
       
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 
 
       
ITEM 4.
CONTROLS AND PROCEDURES
 
28
       
PART II
   
29
       
ITEM 1.
LEGAL PROCEEDINGS
 
29
       
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
29
       
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
 
29
       
ITEM 4.
REMOVED AND RESERVED
 
29
       
ITEM 5.
OTHER INFORMATION
 
29
       
ITEM 6.
EXHIBITS
 
29
       
SIGNATURES
   
30
 
 
2

 
 
ITEM 1.  Financial Statements
 
Titan Energy Worldwide, Inc.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
   
March 31,
   
December 31,
 
   
2011
   
2010
 
ASSETS
           
Current assets
           
Cash and cash equivalents
  $ 260,739     $ 968,416  
Accounts receivable less allowance for doubtful accounts of $70,942 for each period
    1,844,220       2,291,837  
Inventory, net
    717,929       693,013  
Other current assets
    216,673       279,397  
Total current assets
    3,039,561       4,232,663  
Property and equipment, net
    543,620       566,224  
Customer and distribution lists, net
    745,582       787,365  
In-process research & development
    341,136       341,136  
Goodwill
    1,351,695       1,351,695  
Other assets
    41,414       60,062  
Total assets
  $ 6,063,008     $ 7,339,145  
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities
               
Accounts payable
  $ 1,950,893     $ 2,417,950  
Accrued liabilities
    1,475,280       1,649,176  
Customer deposits and deferred revenue
    183,682       265,222  
Short- term credit facility
    992,558       992,558  
Notes payable - current portion
    119,702       165,862  
Current portion of convertible debt, net of unamortized discount
    1,735,684       1,220,317  
Total current liabilities
    6,457,799       6,711,085  
Notes payable, less current portion
    6,782       7,405  
Convertible debt, net of unamortized discount and current portion
    -       185,520  
Other long term liabilities
    117,898       117,898  
Total long –term liabilities
    124,680       310,823  
Total liabilities
    6,582,479       7,021,908  
Commitments and Contingencies
               
Stockholders’ equity
               
Preferred Stock Series D, 10,000,000 authorized, $.0001 par value, issued and outstanding 358 and 368, shares, respectively
    1       1  
Common stock 1,800,000,000 shares authorized, $.0001 par value, issued 30,720,966 and 30,371,522 shares, respectively
    3,072       3,037  
Treasury stock, at cost, held 1,700,000 shares
    (850,000 )     (850,000 )
Additional paid-in capital
    31,289,368       31,093,925  
Accumulated deficit
    (30,961,912 )     (29,929,726 )
Total stockholders’ equity
    (519,471 )     317,237  
Total liabilities and stockholders’ equity
  $ 6,063,008     $ 7,339,145  

 
See accompanying notes to unaudited condensed consolidated financial statements
 
 
3

 
 
Titan Energy Worldwide, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2011 and 2010
(Unaudited)
   
2011
   
2010
 
Sales of equipment
  $ 2,386,150     $ 2,112,484  
Sales of service and parts
    1,085,897       904,553  
Net  sales
    3,472,047       3,017,037  
                 
Material cost and labor for equipment
    1,948,851       1,670,813  
Material cost and labor for service and parts
    555,353       408,160  
Total cost of  sales
    2,504,204       2,078,973  
Gross profit
    967,843       938,064  
Operating expenses:
               
Selling and service expenses
    652,483       563,577  
General and administrative expenses
    446,262       286,510  
Research and development
    125,588       -  
Corporate overhead
    414,322       403,424  
Depreciation and amortization
    81,282       57,495  
Gain on sale of fixed assets
    -       (2,708 )
Total operating expenses
    1,719,937       1,308,298  
Operating loss
    (752,094 )     (370,234 )
Other income (expense)
               
Interest expense, net
    (94,550 )     ( 45,541 )
Amortization of debt discount and financing costs
    (372,580 )     (138,147 )
Change in fair value of warrants
    187,038       -  
Total Other Expense, net
    (280,092 )     (183,688 )
                 
Net loss
  $ (1,032,186 )   $ (553,922 )
Weighted average number of shares outstanding
    28,792,658       15,808,117  
Basic and diluted (loss) per common share
  $ (0.04 )   $ (0.04 )
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
 
4

 
 
Titan Energy Worldwide, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2011 and 2010
(Unaudited)
    
2011
   
2010
 
Operating activities:
               
Net loss
  $ (1,032,186 )   $ (553,922 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Compensation paid by issuance of stock and stock options
    70,719       116,479  
Depreciation and amortization
    81,282       57,495  
Amortization of debt discount and financing costs
    372,580       138,147  
Stock and Stock Options for services
    -       101,103  
Change in fair value of warrants
    (187,038 )     -  
Changes in operating assets and liabilities:
               
Accounts Receivables
    447,617       (270,084 )
Inventory
    (27,917 )     161,368  
Other assets
    38,639       (23,365 )
Accounts payable
    (467,057 )     59,155  
Accrued liabilities and customer deposits
    57,734       764  
Net cash used in operating activities
    (645,626 )     (212,860 )
                 
Investing activities:
               
Purchase of  fixed assets
    (16,895 )     (27,789 )
Asset purchased in business acquisitions
    -       (52,000 )
Proceeds from sales of fixed assets
    -       3,000  
Net cash used in investing activities
    (16,895 )     (76,789 )
                 
Financing activities:
               
Net change short term revolving line of credit, net of costs
    -       215,000  
Proceeds provided  by Convertible Debt
    -       460,000  
Proceeds from stock warrant exercised
    2,250       -  
Payment of Notes Payable
    (47,406 )     (3,505 )
Payment of financing costs
    -       (17,000 )
Cost associated with conversion of Preferred Stock
    -       (1,613 )
Net cash (used in) provided by financing activities
    (45,156 )     652,882  
Increase (decrease) in cash and cash equivalents
    (707,677 )     363,234  
Cash and cash equivalents, beginning of period
    968,416       45,401  
Cash and cash equivalents, end of period
  $ 260,739     $ 408,635  
See accompanying notes to unaudited condensed consolidated financial statements.
 
 
5

 
 
Titan Energy Worldwide, Inc.
Notes to Condensed Consolidated Financial Statements
(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. On August 10, 2007, the Company changed its trading symbol to “TEWI.OB,” and is currently trading on the OTCBB.
 
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 Stellar is doing business as Titan Energy Systems, Inc (“TES”).
 
On June 11, 2009, the Company through its wholly owned subsidiary, Grover Power, Inc., a Florida corporation (“GPI”), acquired certain assets and assumed liabilities of R.B. Grove, Inc.’s Industrial and Service Divisions. The purchase was effective June 1, 2009. The purchase price consisted of a cash payment of $214,827 and an $86,612 secured promissory note at 8% interest rate due November 11, 2010. The seller also received five year warrants to purchase 200,000 shares of the Company common stock at a price of $0.01 per share. The Company determined the fair value of these warrants to be $32,000.
 
On November 1, 2009, the Company acquired certain assets and assumed liabilities for a sales office in New Jersey. This business had open orders at date of acquisition of approximately $3,000,000. The Company agreed to pay the owner $150,000. This sales office has been consolidated with the Titan Energy Systems operations.
 
On January 1, 2010, the Company acquired the stock of Sustainable Solutions, Inc., (“SSI”) a company that performs energy audits, consulting and management services. The purchase price for this business was a stock option to purchase 200,000 shares of the Company’s common stock at of $0.50 per share. We used the Black-Scholes method to value the stock option for this acquisition at $71,671. The asset of the business is a contract with a major utility company to perform energy assessments for the three year period from 2010 to 2012.
 
On November 1, 2010, the Company acquired certain assets and assumed certain liabilities of Stanza Systems, Inc. , a software development company specializing in smart-grid applications. This company is doing business as Stanza Technologies (“Stanza”). The purchase price for this company consisted of $175,000 cash and assumed liabilities of $481,190. In addition, to complete this acquisition the Company had to satisfy the senior debt holders by offering common shares of the Company. The Company offered these debt holders 413,333 shares of common stock which was valued at the closing price of our stock as of November 1, 2010 resulting in a value of $186,000. In addition these debt holders have an opportunity to receive additional shares if Stanza achieves certain revenue levels. The Company used a discounted cash flow model to determine the value of the contingent payment at $117, 898.
 
At March 31, 2011 and March 31, 2010, the Company has no Preferred Stock Series A, B and C 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.
 
 
6

 
 
Titan Energy Worldwide, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
    
Principles of Consolidation
 
The financial statements include the accounts of the Company and its 100% owned subsidiaries, TES, GPI, SSI and Stanza. The Company had an operation that manufactured mobile emergences unit, Titan Energy Development, Inc., which was closed in September 2009. This business has been treated as a discontinued business.
 
Reclassifications
 
In 2010, the Company’s presentation of the Statement of Operations has been changed to reflect the shared-based compensation expense and payments into the line items for sales and service expense, research and development, general and administrative and corporate overhead.
 
Basis of Presentation
 
The accompanying Consolidated Financial Statements (“Financial Statements”) have been prepared by management in accordance with 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 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 for 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, 2010 on Form 10-K filed with SEC on April 6, 2011.
 
Going Concern
 
The accompanying Financial Statements have been prepared assuming the Company will continue as a going concern. The Company incurred a net loss for the three months ended March 31, 2011 of $1,032,186. At March 31, 2011, the Company had an accumulated deficit of $30,961,912.   In addition, the Company is in default on $284,982 of various notes and is in violation of its loan covenants.  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 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 raised $300,000 in convertible debt and $100,000 in a three-month promissory note since the end of the quarter.
·  
Management is currently in the process of raising up to $5 million in capital through a private placement of common stock and warrants expected to be completed by June 30, 2011.
·  
The Company is in discussions to enter into a factoring agreement to provide working capital for the Florida operations.
·  
The Company is seeking to increase the borrowing base on its line of credit.
·  
The Company has instituted cost-saving actions to reduce expense by approximately $700,000 over the remainder of the year.
  
Supplemental Cash Flow Information Regarding Non-Cash Transactions
 
During the three months ended March 31, 2011 and 2010, the Company has entered into several non-cash transactions in order to provide financing for the Company and to conserve cash. The table below shows the transactions that occurred during the past two years.
 
 
7

 
 
Titan Energy Worldwide, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
   
2011
   
2010
 
Stock warrants reclassified to equity
  $ 125,000       -  
Common stock issued for conversion of Series D Preferred Stock
    -     $ 2,695,807  
Stock issued for the conversion of convertible debt
    -     $ 47,507  
Common stock issued for net share exercise of warrants
    -     $ 189,161  
Stock option issued for purchase of SSI
    -     $ 71,671  
 
Interest paid for the three months ended March 31, 2011 and 2010 was $18,610 and $15,552, respectively.
 
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 and assumptions 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.
 
For equipment sales, the Company recognizes revenue when the equipment has been delivered to the customer and the customer has taken title and risk of the equipment. For service and parts sales, the Company recognizes revenue when the parts have been installed and over the period in which the services are performed. The Company in some circumstances will require customers to make a down payment which is included in customer deposits and the revenue is deferred until work has been completed. The Company also has long-term maintenance agreements that the customer may elect to pay in advance. The revenue recognition on these contracts is based on the work performed.
 
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.
 
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 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 related projected undiscounted cash flows from these assets, considering a number of factors including past operating results, budgets, economic projections, market trends and product development cycles that represent customer lists, distribution list and contracts. These intangibles, except in-process research and development (see Note 2), have finite lives and therefore are required to be amortized to expense. The Company believes that the useful life of these intangibles ranges from 5-10 years.
 
 
8

 
 
Titan Energy Worldwide, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
Goodwill
 
In accordance with ASC 350, we test goodwill at the reporting unit level for impairment on an annual basis and between annual tests if events and circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying value. We have determined that the reporting unit level is the subsidiary level as discrete financial information is not available at a lower level and our chief operating decision maker, which is our chief executive officer and executive management team, collectively, make business decisions based on the evaluation of financial information at the entity level. Events that would indicate impairment and trigger an interim impairment assessment include, but are not limited to, current economic and market conditions, including a decline in market capitalization, a significant adverse change in legal factors, business climate or operational performance of the business, and an adverse action or assessment by a regulator. Our annual impairment test date is December 31.
 
In performing the test, we utilize the two-step approach prescribed under ASC 350. The first step requires a comparison of the carrying value of the reporting units, as defined, to the fair value of these units. We consider a number of factors to determine the fair value of a reporting unit. The valuation is based upon expected future discounted operating cash flows of the reporting unit.. We base the discount rate used to arrive at a present value as the date of the impairment test on our weighted average cost of capital. If the carrying value of the reporting unit exceeds its fair value, we will perform the second step of the goodwill impairment test to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of a reporting unit’s goodwill to its carrying value.
 
We conducted our annual impairment test as of December 31, 2010. In order to complete the annual impairment test, we performed detailed analyses estimating the fair value of our reporting unit utilizing our forecast for the fiscal year ending December 31, 2011 with updated long-term growth assumptions. As a result of completing the first step, the fair value of the reporting units exceeded the carrying values, and as such the second step of the impairment test was not required.
 
Income Taxes
 
The Company accounts for income taxes whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  Effective January 1, 2009 the Company adopted guidance regarding accounting for uncertainty in income taxes. This guidance clarifies the accounting for income taxes by prescribing the minimum recognition threshold an income tax position is required to meet before being recognized in the financial statements and applies to all federal or state income tax positions. Each income tax position is assessed using a two step process. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more likely than not criteria, the benefit recorded in the financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement. As of March 31, 2011 and December 31, 2010 there were no amounts that had been accrued in respect to uncertain tax positions.
 
None of the Company’s federal or state income tax returns is currently under examination by the Internal Revenue Service (“IRS”) or state authorities.  However, fiscal years 2007 and later remain subject to examination by the IRS and respective states.
 
 
9

 
 
Titan Energy Worldwide, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
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 is increased for any preferred dividends. As of March 31, 2011 and 2010, the Company had potentially dilutive shares of 22,492,797 and 16,958,732 related to outstanding stock options, warrants and convertible securities that were not included in the calculation of loss per share, because their effect would have been anti-dilutive.
 
Share-Based Compensation
 
The Company uses the fair value method of accounting for share-based payments. Accordingly, the Company recognizes the cost of employee services received in exchange for awards of equity instruments based on the grant date fair value of those rewards.  Options or share awards issued to non-employees are valued using the fair value method and expensed over the period services are provided.
 
Segment Reporting
 
The Company operates in a two business segments, Power Distribution and Energy Services. Power Distribution consists of the sale of emergency, standby power equipment and renewable energy solutions. Energy Services consist of the sale of maintenance and service programs, interruptible rate demand response programs, monitoring program and energy audits.
 
New Accounting Standards and Updates Not Yet Effective
 
The following are new accounting standards and interpretations that may be applicable in the future to the Company.
 
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 has adopted this update and it had no material effect on the Company’s financial position and results of operations.
 
Other accounting standards updates not effective until after March 31, 2011 are not expected to have a significant effect on the Company’s consolidated financial position or results of operations.
 
NOTE 2 – ACQUISITIONS
 
On November 1, 2010, The Company purchased certain assets and assumed certain liabilities of Stanza Systems, Inc., a software development company. This transaction required the approval of Stanza Systems, Inc.’s senior debt holders. The senior debt holder agreed to exchange their debt and accrued interest for 413,333 shares in the Company plus a contingent payment in the Company’s common stock. The Company will operate this business under the assumed name of Stanza Technologies (“Stanza”). If Stanza’s sales for 2011 or 2012 is $3,000,000 or greater the debt holders will receive $206,667 of value paid in the Company shares. If Stanza’s sales are $5,000,000 or greater the debt holders will receive $413,334 of value paid in Company’s common stock. The Company has valued the contingent consideration of $117,898 at December 31, 2010 under ASC 805 using a probability and discounted cash flow approach. At March 31, 2011, the Company has reviewed this discounted cash flow assumptions and concluded that no change in valued of the contingent consideration is required.
 
The fair value of the Customer List and the In-Process Research and Development was based on a valuation analysis in accordance with ASC 805. The Customer List was based on the income approach using a discounted cash flow for this asset adjusted for probability of renewal. The value of the In-Process Research and Development asset was determined by discounting the cash flow approach based on an assumed royalty rate. We also performed an income approach on a multi-period excess earnings discounted cash flow and adjusted for probability. The two methods were averaged to determine the value of In-Process Research and Development asset.  The goodwill is expected to be fully deductible for tax purposes.
 
 
10

 
 
Titan Energy Worldwide, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
The sales and operating loss of Stanza included in the Financial Statements for the three months ended March 31, 2011 were $113,447 and $(229,519), respectively. The Company’s primary objective in this acquisition is to control the research and development of our state-of-the-art monitoring system. Stanza’s prior business was not focused on research and development, but only contract sales. Proforma financial information has not been presented as the impact would not be materially different from reported amounts.  The Research and Development expense included in the loss for the first quarter was $125,585 and total amount spent on this project as of March 31, 2011 was approximately $475,000. The Company estimates that the total cost to complete this project will be an additional $100,000.
 
On January 1, 2010, the Company also purchased the stock of Sustainable Solutions, Inc. This company is engaged in energy audits, energy consulting and energy management services. The purchase price was 200,000 stock options of TEWI common stock with a strike price of $0.50. We used the Black-Scholes method to value this option resulting in a purchase price of $71,761. The only asset this company had was a contract with a major utility to perform audits from 2010 to 2012. We used a discounted cash flow based on estimated audits to be performed to value the contract at $60,000. We will amortize this contract over three years. The sales and operating loss for the three months ended March 31, 2011 were $16,100 and $(2,014), respectively. Proforma financial data is not provided since the impact would not be materially different than reported amounts..
 
NOTE 3 – INVENTORY, NET
 
Inventory is stated at the lower of cost, determined by a first in, first out method, or market. Inventory is 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:
 
   
March 31,
   
December 31,
 
   
2011
   
2010
 
Parts
  $ 516,344     $ 499,738  
Work in process
    80.602       64,009  
Finished Goods
    215,158       220,441  
Obsolescence Reserve
    (94,175 )     (91,175 )
    $ 717,929     $ 693,013  
 
NOTE 4 - NOTES PAYABLE
 
Notes payable consists of the following at March 31, 2011 and December 31, 2010:
 
   
March 31,
   
December 31,
 
   
2011
   
2010
 
Convertible notes payable, bearing interest at 10%, due May to November 2011    
  $ 1,650,000     $ 1,650,000  
Convertible notes payable, bearing interest at 12%, due on demand
    175,000       175,000  
Convertible notes payable, bearing interest at 10%, due November 2011 to March 2012  
    460,000       460,000  
Secured promissory note, interest at 8%, payable on demand
    43,612       86,612  
Other Loans        
    82,872       86,655  
Unamortized discount
    (549,316 )     (879,163 )
Total        
    1,862,168       1,579,104  
Less current portion
    1,855,386       1,386,179  
Long-term debt        
  $ 6,782     $ 192,925  
 
 
11

 
 
Titan Energy Worldwide, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
At March 31, 2011 and December 31, 2010, the Company was in default on $175,000 of convertible notes payable which are accruing interest at the default rate of 12%. These note holders can demand payment in cash or elect to convert their note and accrued interest into Company common stock at the average bid price for five days preceding the conversion date. If they elect this option they will also receive ten stock warrants for every $1,000 of principal with a strike price of $0.01. In addition, at March 31, 2011, the Company is in default on three other notes totaling $110,466. The Company is actively raising capital to resolve these issues and discussing options with the debt holders.
 
The convertible notes payable due in May and November, 2011 were issued with 1,650,000 detachable warrants to purchase Company’s common stock at $0.60 cents per share. The proceeds received from these notes were allocated to the convertible notes payable and warrants totaling of $1,267,941 and $382,059, respectively, based on their relative fair values.  These notes are convertible at maturity based on the current share price, with a minimum price of $0.30 per share, or if the Company does an equity raise in excess of $5,000,000, the notes can be converted to the new offering. The warrants have a round down provision and, as such, the warrants’ fair value is determined at each reporting period and any gain or loss is recognized through the statement of operations. The Company has recorded a beneficial conversion feature on these notes in the amount of $681,203 which is treated as a debt discount.
 
The convertible notes payable due in November to March of 2012 were issued with 1,120,000 detachable warrants to purchase the Company’s common stock at $.25 per share.  The proceeds received from these notes were allocated to the promissory note and the warrants totaling $301,418 and $258,582, respectively, based on their relative fair values with the warrants’ fair value being determined using the Black-Scholes method.  The value allocated to the warrants was recorded as a debt discount and will be amortized into interest expense over the life of the promissory notes.  The note holders will have the option of converting their notes into common stock based on the principal balance plus accrued interest multiplied by four. This beneficial conversion feature has intrinsic value of $297,430, is recorded as a discount on the debt, and will be amortized to expense over the life of the debt.  In 2010, notes totaling $100,000 plus accrued interest of $5,761 were converted into 579,964 shares of the Company’s common stock.
 
The secured promissory note payable was part of the consideration given to the Seller of the R.B. Grove, Inc. assets purchased by GPI. The security for this note is all the assets that were purchased. The Company was in default on this note as March 31, 2011. This note was paid in full on May 16, 2011.
 
The Company has a revolving line of credit with a Venture Bank, bearing interest at prime plus 2.0% with minimum interest rate of 7.5%, due June 22, 2011. The amount outstanding at March 31, 2011 and December 31, 2010 was $992,558. Borrowings under the revolving line of credit are subject to a borrowing base formula consisting of 75% of the accounts receivable balances fewer than 90 days plus 50% of the inventories, up to a maximum of $125,000. The Company was in violation of the loan covenants at March 31, 2011and December 31, 2010 for making intercompany advances to TEWI and failing a net income covenant for the first quarter of 2011. These loan violations have been discussed with the bank and although they will not grant a waiver, they do not plan to accelerate their loans or take any other action at this time.
 
NOTE 5 – ACCRUED LIABILITIES
 
Accrued liabilities consist of the following:
 
   
March 31,
   
December 31,
 
   
2011
   
2010
 
Accrued compensation        
  $ 397,939     $ 350,071  
Accrued interest
    207,451       144,098  
Common stock warrants, at fair value        
    108,183       295,221  
Purchase obligation on stock option, at fair value
    250,000       375,000  
Stanza payroll taxes including interest and penalties        
    311,570       311,570  
Accrued costs on completed jobs
    160,806       135,977  
Accrued other        
    39,331       37,239  
    $ 1,475,280     $ 1,649,176  
 
 
12

 

Titan Energy Worldwide, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
The amount listed as purchase obligation on stock option is a stock option that permits the holder to demand payment in lieu exercising the option. The amount for Stanza payroll taxes was assumed in the purchase of this company. The payroll taxes are from June 2009 through September 2010. We have reached an agreement with the Internal Revenue Service to pay $4,011 per month beginning in May 2011 until paid in full.
 
NOTE 6 - 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 months ended March 31:
 
   
2011
   
2010
 
Income taxes at the statutory rate
  $ (350,943 )   $ (188,334 )
Valuation allowance
    313,978       61,588  
Permanent differences and other
    36,965       126,746  
Total income taxes of continuing operations
  $ -     $ -  
The following presents the components of the Company total income tax provision:
 
   
2011
   
2010
 
Current expense
  $ -     $ -  
Deferred benefit
    (313,978 )     (61,537 )
Change in valuation
    313,978       61,537  
Total
  $ -     $ -  
 
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 tax effect of primary temporary differences giving rise to the Company deferred tax assets and liabilities for the three months ended March 31 are as follows:
 
   
2011
   
2010
 
Deferred tax assets
           
Amortization
  $ 27,960     $ 7,500  
Non qualified stock option expense
    24,045       73,978  
Operating losses carry forward
    5,152,091       3,945,079  
Deferred tax liabilities
               
Warrants fair value income
    (63,593 )     -  
Depreciation
    (1,570 )     (2,167 )
Net deferred assets
    5,138,933       4,024,390  
Valuation Allowance
    (5,138,933 )     (4,024,390 )
Total net deferred tax asset liability
  $ -     $ -  
 
 
13

 
 
Titan Energy Worldwide, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
The Company has recorded a valuation allowance to fully offset the net deferred assets based on the fact that the Company has not recognized taxable income since its inception.
 
At March 31, 2011 the Company had consolidated federal net operating losses of $15,153,209. The expiration date of these net operating losses are as follows:
 
   
2019
 
       104,604
 
   
2020
 
       654,454
 
   
2021
 
    1,700,703
 
   
2022
 
          72,209
 
   
2023
 
       451,382
 
   
2024
 
       262,795
 
   
2025
 
       385,410
 
   
2026
 
       911,684
 
   
2027
 
    2,540,363
 
   
2028
 
    1,543,573
 
   
2029
 
    2,807,561
 
   
2030
 
    2,795,006
 
   
2031
 
       923,465
 
       
  15,153,209
 
 
NOTE 7 - SERIES D CONVERTIBLE PREFERRED STOCK
 
On October 3, 2007, the Company issued a private placement memorandum 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 together an “Unit.” Each Unit was offered at $10,000. The holder of the Convertible Preferred Stock may convert, at any time and is required to convert their preferred stock 24 months after issuance, in whole or in part, into shares of the Company common stock. Assuming an initial conversion price of $1.00, each one (1) share of Preferred Stock is convertible into 10,000 shares of the Company common stock. Each Class A Warrant and Class B Warrant entitles the holder to purchase 3,333 shares of Common Stock with exercise prices of $1.20 and $1.40, respectively.
 
For the three months ended March 31, 2011, investors holding  Series D Preferred Stock elected to convert their holdings into the Company common stock using the Volume Weighted Average Price “VWAP” formula as provided for in the offering documents. A total of 10 shares of Series D Preferred Stock elected to convert into common stock receiving an aggregate of 349,394 shares of the Company common stock. The weighted average conversion price per share was $0.30. In addition, the Class A and Class B warrants were repriced based on conversion price multiplied by 120% and 140%, respectively.
 
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.
 
 
14

 
 
Titan Energy Worldwide, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
    
NOTE 8 – TREASURY SHARES
 
On June 30, 2009, the Company offered to the common shareholders that were converted in the Series D Convertible Preferred stock offering the opportunity to exchange the Company common stock received into units of Series D Preferred Stock. A total of 2,740,000 shares of the Company common stock were repurchased 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 detachable warrants. This method resulted in a cost of the treasury shares of $1,370,000, which is the sum of the value of the Series D Preferred Stock of $1,285,553, and the fair value of the warrants of $84,467.
 
During the three months ended March 31, 2011, no treasury shares were converted into Company common stock.
 
 NOTE 9 – STOCK OPTIONS
 
The Company issued stock options to employees, consultants and to a note holder in settlement of an outstanding note during 2009 and 2010. There were no new options issued in the three months ended March 31, 2011. These options were not issued under any plan that required stockholder approval. The Company believes that such stock options align the interest of its employees with the shareholders. Stock option awards are granted with an exercise price equal to the market price of the Company common stock at the date of grant.  Options granted to consultants have a five year contractual term. The option granted to employees have from a 3 year contractual term to no expiration date, however we would expect that all options will be exercised within 10 years. All options issued are non-qualified options. There is one option totaling 1,000,000 shares that are guaranteeing a minimum value of $0.25 a share and which represent the fair value and are recorded as accrued liability. For all other options the Company uses the Black-Scholes method to evaluate the value of the options. The excepted volatility is computed based on a twelve month standard deviation of our month ended closing price. The risk free rate for periods within the contractual life of the option is based on the U.S. treasury yield curve in effect at time of grant. Below are the parameters in determining the fair value of these options.
 
   
2011
   
2010
 
Expected volatility
  N/A       66%-113 %
Weighted average volatility
  N/A       75 %
Vesting Periods (in years)
  N/A       1.5-4  
Expected term (in years)
  N/A       2-5  
Expected dividends
  N/A       0 %
Risk free rate
  N/A       .5%-2.7 %
 
The following is a table shows a summary of activity for the three months ended March 31, 2011 and the year ended December 31, 2010:
 
 
15

 
 
Titan Energy Worldwide, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
               
Weighted
       
         
Weighted
   
Average
       
         
Average
   
Remaining
   
Grant
 
         
Exercise
   
Contractual
   
Date
 
   
Shares
   
Price
   
Terms
   
Fair Value
 
Outstanding at January 1, 2010
    7,045,000     $ 0.24       9     $ 1,143,785  
Granted
    1,665,000     $ 0.57       9     $ 294,049  
Exercised
                               
Forfeited
    (365,000 )   $ 0.22                  
Outstanding at December 31, 2010
    8,345,000     $ 0.31       9          
Granted
                               
Exercised
                               
Forfeited
                               
Outstanding at March 31, 2011
    8,345,000     $ 0.31       8          
Excisable as of March 31, 2011
    2,429.166     $ 0.28       6          
 
As of March 31, 2011, the non vested options totalled 6,357,500 shares. There is approximately $705,000 of unrecognized compensation and share-based expense arrangements that have been granted. These costs will be recognized over a weighted average period of 3 years. At March 31, 2011, the aggregate intrinsic value of stock options exercisable was $631,583.
 
NOTE 10 – COMMON STOCK TRANSACTIONS
 
During the three months ended March 31, 2011, the Company issued 349,394 shares of common stock for the conversion of the Series D Preferred Stock.
 
During the year ended December 31, 2010, the Company issued common stock for the following transactions:
 
·  
The Company issued 50,000 shares of common stock to an investor relations firm as part of compensation for services

·  
The Company issued 6,802,044 shares of common stock for the conversion of the Series D Preferred Stock.
 
·  
The Company’s warrant holders elected to exercise warrants totaling 5,163,715 shares at prices ranging from $.01 to $.35 per share. Most of the exercises were done on a net share basis resulting in actual common stock issuances of 4,703,045 shares.
 
·  
Debt holders also converted $405,000 of Convertible Notes plus, the accrued interest, into 1,249,655 shares of common stock.
 
·  
The Company issued 413,333 shares of common stock to the senior debt holders of Stanza for the forgiveness of principal of $620,000 plus accrued interest. This transaction was required as part of the purchase of Stanza assets.

 
 
16

 

Titan Energy Worldwide, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
  
NOTE 11 - COMMON STOCK WARRANTS
 
There were no warrants issued or exercised during the three months ended March 31, 2011. The total number of warrants issued for the year ended December 31, 2010, was 5,889,661. Also in the year ended December 31, 2010 there were 5,163,715 warrants exercised. The following table shows the warrants outstanding at March 31, 2011:
 
Number of
     
Exercise
 
Expiration
 
Warrants
 
Purpose
 
Price range
 
Date
 
200,000
 
Acquisition of Grove Power, Inc.
 
$0.01
 
Jun-14
 
293,536
 
Broker warrants on debt Offerings
 
$0.10-$0.625
 
Dec 12-Jan-13
 
920,000
 
 Convertible Debt Offering 2009/2010
 
$0.25
 
Dec-14 - Mar 15
 
847,500
 
Debt Offering 2006
 
$0.35
 
Jan-12
 
553,800
 
Debt offering  2007
 
$0.50
 
April-July-12
 
1,650,000
 
Convertible Debt Offering 2010
 
$0.60
 
May - Nov -15
 
158,000
 
Debt Offering 2007
 
$0.75
 
Dec-12
 
1,421,533
 
Converted Preferred D Class A
 
$0.35 -$0.89
 
Oct-12
 
1,421,553
 
 Converted Preferred D Class B
 
$0.41-$0.63
 
Oct-12
 
1,224,878
 
Unconverted Preferred D Class A 
 
$1.20
 
Oct-12
 
1,224,878
 
Unconverted Preferred D Class B
 
$1.40
 
Oct-12
 
777,135
 
Broker warrants on Preferred D
 
$1.25
 
Jan-13
 
 
NOTE 12 – FAIR VALUE
 
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 Company adopted the provisions of fair value measurements as of January 1, 2009. 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:

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.
 
 
17

 
 
Titan Energy Worldwide, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
   
Determining which hierarchical level an asset or liability falls within requires significant judgment.  The Company will evaluate its hierarchy disclosures each quarter. The Company’s fair value measurements for level three inputs were based on the following methods:
 
1.  
Common Stock Warrants – are valued using the Black-Scholes model updated for current stock price, volatility, interest rate and remaining term.
 
2.  
Purchase obligation of a stock option – represent the value of the purchase obligation to buyback these options at any time during the next two years.
 
3.  
Contingent Consideration was determined under ASC 805 using a probability and discounted cash flow approach. The assumptions are reviewed quarterly to determine if an adjustment is required.
 
The following table summarizes the financial instruments measured at fair value in the Consolidated Balance Sheet as of March 31, 2011:
 
   
Fair Value Measurements
 
Assets
 
Level 1
 
Level 2
 
Level 3
   
Total
 
                     
Liabilities
                   
Common stock warrants
          $ 108,183     $ 108,183  
Purchase obligations for stock option
          $ 250,000     $ 250,000  
Contingent consideration from the acquisition of Stanza
          $ 117,898     $ 117,898  
Total
          $ 476,081     $ 476,081  
 
The following table summarizes the financial instruments measured at fair value in the Consolidated Balance Sheet as of December 31, 2010:
 
   
Fair Value Measurements
 
Assets
 
Level 1
 
Level 2
 
Level 3
   
Total
 
                     
Liabilities
                   
Common stock warrants
          $ 295,221     $ 295,221  
Purchase obligations for stock option
          $ 375,000     $ 375,000  
Contingent consideration from the acquisition of Stanza
          $ 117,898     $ 117.898  
Total
          $ 763,119     $ 763,119  
 
 
18

 
 
Titan Energy Worldwide, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
The table below includes a roll forward of the fair value of financial instruments that are classified as within Level 3 of the valuation hierarchy.
 
   
Level 3
 
   
Liabilities
 
Balance at December 31, 2010
  $ 788,119  
Change in fair value recorded in other expense
    (187,038 )
Expiration of purchase obligation recorded in additional paid in capital
    (125,000 )
Balance at March 31, 2011
  $ 476,081  
 
Note 13 –Segment Data
 
Our operating segments represent components of our business for which discrete financial information is available and is reviewed regularly by the chief operating decision-maker, or decision-making group, to evaluate performance and make operating decisions. We conduct our operations through two operating segments: Power Distribution and Energy Service. Our reportable segments are strategic business units that offer different products and services and serve different customers. Power Distribution consists of the sale of equipment Emergency and standby power equipment and Renewal Energy solutions. Energy Services consist of the sale of maintenance and service programs, interruptible rate program, monitoring program and energy audits.
 
Summarized financial information concerning our reportable segments is shown in the following table. Unallocated cost amounts include corporate overhead, research and development. Other expense which, for purposes of evaluating the operations of our segments, is not allocated to our segment activities. Total asset amounts exclude intercompany receivable balances eliminated in consolidation.  The Unallocated Costs for assets includes cash, goodwill and in-process research and development. Customer lists and other intangibles are allocated to their segments.
 
For the Three Months ended March 31, 2011
 
   
Power
   
Energy
   
Unallocated
       
   
Distribution
   
Services
   
Costs
   
Total
 
Sales
  $ 2,386,150     $ 1,085,897           $ 3,472,047  
Cost of Sales
    1,948,851       555,353             2,504,204  
Gross profit
    437,299       530,544             967,843  
                               
Operating Expenses:
                             
Selling and service expenses
    322,053       330,430             652,483  
General and administrative expenses
    152,976       293,286             446,262  
Depreciation & Amortization
    40,805       39,514       963       81,282  
Research and Development
    -       -       125,588       125,588  
Corporate overhead
    -       -       414,322       414,322  
Operating Expense
    515,834       663,230       540,873       1,719,937  
                                 
Operating Income (Loss)
    (78,535 )     (132,686 )     (540,873 )     (752,094 )
                                 
Other Income (Expenses)
                               
Interest expense, net
    -       -       (94,550 )     (94,550 )
Amortization of debt discount and financing costs
                    (372,580 )     (372,580 )
Fair value of warrants
                    187,038       187,038  
Total Other Expense, net
    -       -       (280,092 )     (280,092 )
                                 
Net Loss
  $ (78,535 )   $ (132,686 )   $ (820,965 )   $ (1,032,186 )
                                 
Total assets
  $ 1,944,107     $ 2,046,683     $ 2,072,218     $ 6,063,008  
 
 
19

 


Titan Energy Worldwide, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
For the Three Months Ended March 31, 2010
 
   
Power
   
Energy
   
Unallocated
       
   
Distribution
   
Services
   
Costs
   
Total
 
Sales
  $ 2,112,484     $ 904,553           $ 3,017,037  
Cost of Sales
    1,670,813       408,160             2,078,973  
Gross profit
    441,671       496,393             938,064  
                               
Operating Expenses:
                             
Selling and service expenses
    264,098       299,479             563,577  
General and administrative expenses
    140,036       146,474             286,510  
Depreciation & Amortization
    22,604       33,985       906       57,495  
Research and Development
    -       -       -       -  
Corporate overhead
    -       -       403,424       403,424  
Gain on sale of fixed assets
            (2,708 )     -       (2,708 )
Operating Expense
    426,738       477,230       404,330       1,308,298  
                                 
Operating Income (Loss)
    14,933       19,163       (404,330 )     (370,234 )
                                 
Other Expenses
                               
Interest expense, net
                    (45,541 )     (45,541 )
Amortization of debt discount and financing costs
                    (138,147 )     (138,147 )
Total Other Expense, net
    -       -       (183,688 )     (183,688 )
                                 
Net Income (Loss)
  $ 14,933     $ 19,163     $ (588,018 )   $ (553,922 )
                                 
Total assets
  $ 2,463,381     $ 1,508,213     $ 1,823,883     $ 5,795,477  

 
20

 
 
Titan Energy Worldwide, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
NOTE 14– SUBSEQUENT EVENT – DEBT FINANCING
 
During the period subsequent to the end of first quarter, the Company has raised $300,000 in a one year convertible debt and $100,000 on a three month short term note. The proceeds were used for working capital and to pay off the secured promissory note that was in default.
 
On May 16, 2011, the Company paid in full the 8% Secured Promissory Note that was in default.
 
The Company has performed a review of events subsequent to the balance sheet date and, except for the matters described above in this note, no other matters require disclosure.

 
21

 
 
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.
 
OUR BUSINESS
 
We are a provider of onsite power generation, energy management and energy efficiency, products and services that help support and improve the performance of our nation’s electrical utility grid. We specialize in the deployment of power generation equipment at the consumer’s facility and the integration of that equipment through monitoring and communication systems into programs such as demand response that supports the function and integrity of the utility’s electrical grid.  These onsite power generation systems support a customer’s critical operations during times of power failure and serve as demand reduction systems that work to reduce energy usage and decrease demand on the electrical grid during peak periods. When managed with the proper intelligent monitoring systems and controls, this onsite power generation assets offer a vital and significant contribution to the development of the nation’s Smart Grid. We contribute the tools and resources to produce immediate and long term improvements in the performance and stability in the energy production and transmission segments of the electrical grid and reduce the need for new power plants.
 
 In 2006, we acquired Stellar Energy, a Minneapolis-based provider of power generation equipment and service. Stellar Energy is now called Titan Energy Systems (‘TES”) and has expanded its number of sales and service offices to include Nebraska, Iowa, North and South Dakota, New York, New Jersey and Connecticut. TES provides our company and its satellite offices with much of it’s accounting and back office support.
 
In 2009, we acquired the Industrial and Service Division of RB Grove, a 52-year old power generation provider located in Miami, Florida.  This company is now called Grove Power Inc. (“GPI”) and will be responsible for our expansion throughout the Southeastern United States, the Caribbean and Central America.
 
In 2009, we acquired a power generation business in New Jersey which gave us purchase orders, backlog and extensive customer and marketing relationships in New York, Connecticut and New Jersey.  This business has been involved in managing several major solar installations as well as electrical generators. This business has been merged into TES.
 
In 2009, we discontinued the operations of Titan Energy Development, Inc. (“TEDI”).  TEDI was dedicated to producing a multifunctional utility product.

In 2010, we acquired Sustainable Solutions, Inc (“SSI”), which is engaged in the energy audits, energy consulting and energy management services in the Midwest region.

In 2010, we acquired Stanza Systems ("Stanza") in a stock purchase transaction, which gave us a software development company experienced in smart grid and utility operations with developed network communications software that we plan to utilize in our business.

 
22

 

RESULTS OF OPERATIONS
 
 Three Months Ended March 31, 2011 Compared to the Three Months Ended March 31, 2010
 
Sales
 
Sales for the three months ended March 31, 2011 were $3,472,047 compared to $3,017,037 for the three months ended March 31, 2010. The following table summarizes our sales by their segments:
 
   
Power
   
Energy
 
   
Distribution
   
Services
 
2011
  $ 2,386,150     $ 1,085,897  
2010
    2,112,484       904,553  
Increase
  $ 273,666     $ 181,344  
Percent Increase
    13 %     20 %
 
The increased sales in the Power Distribution segment are primarily attributable to increased sales in Grove Power of approximately $100,000 and by increased sales in our New York sales office of approximately $400,000. The increase in these locations was primarily attributable to new sales personnel. TES Power Distribution sales declined $250,000 compared to the three months ended March 31, 2010. This decrease is attributable to lower sales to a major customer. First quarter orders for our Power Distribution were up 13% compared to same period of last year.
 
The increase in our Energy Services segment sales is partially attributable to a full quarter of Stanza contract sales totaling approximately $113,500. The remainder increase in service sales is also attributable to higher sales in energy audits and our success signing on larger national accounts.
 
Cost of Sales
 
Cost of sales was $2,504,204 for the three months ended March 31, 2011 compared to $2,078,973 for the three months ended March 31, 2010:
 
   
Power
   
Energy
 
   
Distribution
   
Services
 
2011
  $ 1,948,851     $ 555,353  
2010
    1,670,813       408,160  
Increase
  $ 278,038     $ 147,193  
Percent of Sales
               
2011
    82 %     51 %
2010
    79 %     45 %
 
The higher cost of sales in the Power Distribution segment is partially attributable to the increase in sales volume in New York and Florida to obtain market share in these locations. The Midwest region has more competitors and is more willing to take lower margins on some sales in order to maintain a certain market position in this region.
 
The higher amount of cost of sales in the Energy Service segment is attributable to a Stanza contract managed service where the cost on the contract is 60% compared to our generator service average cost which is approximately 47%. For the first quarter of 2011, our generator service business cost of sales was 50% due to lower margin attributable to national accounts.
 

 
23

 
 
Selling and Service Expenses
 
Sales and services expenses includes all of sales and service personnel, benefits related to these personnel and other costs in support of these functions. The Selling and Service expenses were $652,483 for the three months ended March 31, 2011, compared to $563,577 for the three months ended March 31, 2010. The following table summarizes the area of costs in this category:
 
   
Power
   
Energy
 
 
 
Distribution
   
Services
 
2011
               
Payroll related costs
  $ 285,552     $ 253,357  
Shared based compensation
    11,452       14,846  
Other
    25,050       62,227  
Total
  $ 322,053     $ 330,430  
2010
               
Payroll related cost
  $ 175,498     $ 213,689  
Shared based compensation
    70,578       18,750  
 Other
    18,022       67,040  
Total
  $ 264,098     $ 299,479  
                 
Increase
  $ 57,955     $ 30,951  
Percent of Sales
               
2011
    13 %     30 %
2010
    13 %     33 %
 
The increase in costs is partially attributable to payroll related costs to add additional sales personnel in order to gain market share. The share base compensation was lower for Power Distribution in 2011 as in 2010 the Company recognized the value of a guaranteed stock option over its vesting period.  The increase in the Energy Service payroll related costs was primarily due to the increase in support staff. The Company has taken action, beginning in the second quarter of 2011, to reduce payroll related cost in all areas through reduce pay and consolidation of positions. The Company estimated savings per quarter in this category will be approximately $75,000.
 
General and Administrative Expenses
 
The general and administrative expense category reflects the cost of each subsidiary’s management, accounting, facilities and office functions which we can allocate to our segments. General and administrative expenses were $446,262 for the three months ended March 31, 2011, compared to $286,510 for the three months ended March 31, 2010. The following table summarizes the areas of costs in this category:
 
   
Power
   
Energy
 
 
 
Distribution
   
Services
 
2011
               
Payroll related costs
  $ 30,333     $ 123,785  
Shared based compensation
    2,320       3,291  
Facilities
    54,182       74,802  
Other
    71,730       85,820  
Total
  $ 158,565     $ 287,697  
2010
               
Payroll related cost
  $ 60,308       45,121  
Shared based compensation
    3,132       2,343  
Facilities
    32,136       41,754  
 Other
    42,564       59,152  
Total
  $ 138,140     $ 148.370  
                 
Increase
  $ 20,425     $ 139,327  

 
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The major cause for the increase in the Energy Service costs is attributable to the full quarter effect of Stanza which added $77,000 to our payroll related costs, $28,000, in facility costs and $10,000 in other costs. The payroll related cost includes the Company’s Chief Technology Officer salary and benefits. The increase in Power Distribution facility costs is attributable to new offices in Florida and New York/ New Jersey offices. The increase in Power Distribution other costs is attributable to higher travel, leased equipment and office supplies associated with the new offices. The Company has taken action, beginning in the second quarter of 2011, to reduce payroll related costs in this category through reduced pay and consolidation of positions. The Company estimated savings per quarter in this category will be approximately $40,000.
 
Research and Development
 
We entered into a contract in June 2010 with a third party to enhance our monitoring system to be able to provide better information to our customers on the condition and operations of their onsite power generation equipment.  This program is designed to assist us in entering the demand response market, which is part of our business strategy. The expense for this research and development the three months ended March 31, 2011 was $125,588. Included in this amount is $14,128 of share-based compensation. We acquired Stanza, which was developing this software package on November 1, 2010. It is estimated that the total cost of this software package will be approximately $600,000 including approximately $100,000 of equipment. The Company has introduced this product after successful feasibility testing which was completed in April. Management believes that the acquisition of Stanza provides the Company with quality monitoring technology what will enhance our ability to service our customers as well as give us a significant competitive edge in our marketplace. There were no research and development expenses for the three months ended March 31, 2010.
 
Corporate Overhead
 
Included in corporate overhead expenses are the salaries and travel expenses of our officers, legal fees, audit fees, investor relations and other costs associated with being a SEC registrant. Corporate overhead for the three months ended March 31, 2011 was $414,322, as compared to $403,424 for the three months ended March 31, 2010. The following table shows the costs related to corporate activities:
 
   
2011
   
2010
 
Payroll related activates
  $ 187,384     $ 140,439  
Stock Compensation
    24,682       21,676  
Professional Fees
    97,889       78,627  
Shared based payments for professional services
    -       101,103  
Travel
    87,120       33,874  
Other
    17,247       30,705  
Total
  $ 414,322     $ 403,424  
 
Our payroll was higher because the addition of a Vice President for Business Development in the fall of 2010. The Company’s senior executives have taken significant pay cuts which will reduce the payroll amount by $43,500 starting in the second quarter of 2011. The higher professional fees in the three months ended March 31, 2011 was due to our audit costs and the acquisition valuation expenses. The increase in business travel in the three months ended March 31, 2011 is associated with our fund raising activities which began in the second quarter of 2010. We are currently completing this activity and expect that these costs will be reduced in future periods. In 2010, the Company issued stock and stock options associated with our legal and investor relations professionals, although we may elect to offer this type of compensation, presently we have no commitments. These costs are non-cash charges and are based on actual stock price at the time of payment for stock issued or grant date for stock options through the Black-Scholes calculations.
 
 
25

 
 
Depreciation and Amortization
 
The amounts in this category include depreciation on our fixed assets and amortization of our intangibles, represented by our customer lists. The expense for the three months ended March 31, 2011 was $81,282 compared to $57,495 in the three months ended March 31, 2010. The higher costs are due to the full quarter effect of the acquisition of Stanza which added $20,500 of additional depreciation and amortization.
 
Other Expenses
 
The following table below summarizes the items in this category for the three months ended March 31:
 
   
2011
   
2010
 
             
Interest expense, net
  $ 94,550     $ 45,541  
                 
Amortization of debt discount
    329,847       122,493  
                 
Amortization of deferred financing costs
    42,733       15,654  
                 
Change in fair value of common stock warrants
    (187,038 )     -  
                 
Total
  $ 280,092     $ 183,688  
 
The higher interest expense is related to the Company’s higher debt level in 2011. The Company had two offerings of convertible debt totaling $2,110,000 with an interest rate of 10%. Our weighted average interest rate for the three months ended March 31, 2011 was 9.1% compared the three months ended March 31, 2010 of 8.0%. At March 31, 2011 the principal balance of our debt outstanding was $3.4 million compared to $2.3 million at March 31, 2010. Our convertible debt has warrants and beneficial conversion features which are accounted for in accordance with ASC 470, whereas we must determine the fair value of the warrants and the beneficial conversion feature and treat that amount as a debt discount to be amortized over the life of the debt. At March 31, 2011 there is unamortized discount totaling approximately $549,000 on our balance sheet that will be expensed in future quarters in 2011. Although this is a large expense it is important to note that it does not impact our cash flow. Our second offering of convertible debt of $1,650,000 included detachable warrants to these notes that were determined to be a liability and must be measured at fair value each reporting period. Because our stock price has declined, we have a gain of $187,038. The deferred financing costs represent fees and commissions paid to brokers or individuals that helped us raise debt or equity. The fees are amortized over the life of the debt. The higher fees are due to the debt outstanding.
 
Liquidity and Capital Resources
 
 The Company incurred a net loss for the three months ended March 31, 2011 of $1,032,186. At March 31, 2011 we have an accumulated deficit $30,961,912. In addition, we are currently in default on notes payable of $284,982 of principal. These conditions raise substantial doubt as to the Company’s ability to continue as a going concern.
 
The Company has raised $300,000 in convertible debt and $100,000 in a three month promissory note since the end of the quarter.  The Company has instituted cost savings actions to reduce our out flow of cash by $700,000 over the remainder of the year. These actions are the result of pay cuts and consolidation of jobs. Management is currently in process of raising an additional capital through private placement of Company common stock expected to be completed by June 30, 2011. It is estimated that the amount of the raise will between $1 million and $3 million although there can be no assurance that any additional funds will be raised.

 
26

 

During the three months ended March 31, 2011, cash used by continuing operations was $645,626. This cash was used to pay our vendors as we were exceeding our credit limits and therefore to keep receiving products, we needed to make significant payments.   We paid our largest vendor $1.4 million in the first quarter. We used cash for investing activities of $16,895, primarily for furnishing the Company’s offices.  We also made a small payment on debt of $47,000.
 
Major cash out flow relates to our research and development activities in which we provided cash to Stanza of 183,000 in the three months ended March 31, 2011. This business has only one customer that provides approximately $40.000 of revenue a month. We have also assumed a tax liability for back payroll taxes of $311,000 including interest and penalties. We have reached an agreement with the Internal Revenue Service to pay $4,011 a month to settle this liability; the first payment is scheduled for May 26, 2011. Our research and development costs were averaging about $60,000 a month since November 2010, but as of March 31, 2011, we have cut research and development expenditures to less than $30,000 as our remote monitoring and control technology has been introduced with the first sale of units in May 2011.
 
At March 31, 2011, we had $260,739 in cash and short-term investments. The actions explained above and the success of new offering should provide sufficient cash to operate the business.
 
Additional Information
 
Non-GAAP Financial Measures
 
 To supplement our consolidated financial statements presented on a GAAP basis, we believe disclosing certain non-GAAP measures are useful information to our investors, we use an adjusted EBTDA to provide this additional information. These non-GAAP measures are not in accordance with, or alternative for, generally accepted accounting principles in the United States.
 
The GAAP measure most comparable to adjusted EBITDA is GAAP net income (loss): reconciliation for adjusted EBITDA to GAAP net income (loss) is provided below.
 
Management uses these adjusted EBITDA as measure of operating performance and for internal planning and forecasting. Management believes that such measures help to indicate underlying trends in our business, are important in comparing our current results with prior period results and our useful to investors and financial analysts in assessing our operating performance. Management considers adjusted EBITDA to be an important indicator of our operational strength and performance of our business and good measure of our historical operating trend.
 
The following is an explanation of non-GAAP, adjusted EBITDA that we utilize, including the adjustments that management exclude as part of the adjusted EBITDA measures for the three months ended March 31, 2011 and 2010,respectively, as well as reasons for excluding individual items.
 
 
·
Management defines adjusted EBITDA as net income (loss), excluding depreciation, amortization, stock based compensation, interest, income taxes (benefit) and other income and expense. Adjusted EBITDA also eliminates items that do not require cash outlays, such as warrants and beneficial conversion features from issuing convertible securities which are treated as debt discounts and amortized to expense; fair value adjustment for warrants which is dependent on current stock price, volatility, term and interest rate which are factors that are not easily controlled; and amortization expense related to acquisition-related assets, which us based on our estimate of the useful life of tangible and intangible assets.  These estimates could vary from the actual performance of the asset, are based on the value determine on acquisition date and may not be indicative of current or future capital expenditures.
 
 
·
Adjusted EBITDA may have limitations as an analytical tool. The Adjusted EBITDA financial information presented here should be considered in conjunction with, and not as a substitute for or superior to, financial information presented in accordance with GAAP and should not be considered as a measure of our liquidity. Further, adjusted EBITDA as a measure may differ from other companies and therefore should not be used to compare our performance to that of other companies.
 
Adjusted EBITDA was negative $600,093 and negative $95,157 for the three months ended March 31, 2011 and 2010, respectively. The reconciliation of adjusted EBITDA to net loss is set forth below:
 
 
27

 
 
   
Three Months Ended March 31,
 
   
2011
   
2010
 
Net loss
  $ (1,032,186 )   $ (553,922 )
Add back:
               
Depreciation and amortization
    81,282       57,495  
Stock Based Compensation
    70,719       217,582  
Interest
    94,550       45,541  
Amortization of debt discount
    372,580       138,147  
Fair value adjustment on warrants
    (187,038 )     -  
Adjusted EBITDA
  $ (600,093 )   $ (95,157 )
 
Off-Balance Sheet Arrangements
 
 None.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of March 31, 2011 covered by this Quarterly Report on Form 10-Q  have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
 
Notwithstanding the foregoing, there can be no assurance that the Company’s 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 the Company’s 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 Control over Financial Reporting
 
No changes in the Company’s internal control over financial reporting have occurred during the quarter ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 
28

 

PART II - OTHER INFORMATION

ITEM 1.    Legal Proceedings

None

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

None.

ITEM 3.    Defaults Upon Senior Securities

Convertible notes payable, bearing interest at 12%, due on demand
  $ 175,000  
Secured promissory note interest at 8% payable paid in full on May 16, 2011
  $ 43,612  
Debenture 10% due on demand
  $ 30,000  
Short-term note interest 12% due on demand
  $ 36,000  

ITEM 4.   Removed and Reserved

None.

ITEM 5.    Other Information

None.

ITEM 6.    Exhibits

Exhibit No.
 
Description
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.
 
 
29

 

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: May 20, 2011
By:
/s/ Jeffrey W. Flannery
   
Jeffrey W. Flannery
Chief Executive Officer
     
Dated: May 20, 2011
By:
/s/ James J. Fahrner
   
James J. Fahrner
Chief Financial Officer
 
 
30

 
 
EXHIBIT INDEX
 
Exhibit No.
 
Identification of Exhibit
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 Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2
 
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
31