Attached files
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, 2012
o 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
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26-0063012
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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6130 Blue Circle Drive, Minnetonka, MN 55343
(Address of principal executive offices) (Zip Code)
Company’s telephone number, including area code: (952)-960-2371
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 o No x
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 o No x
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 |
o
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Accelerated filer |
o
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Non-accelerated filer |
o
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Smaller reporting company |
x
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o 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 November 13, 2012 the issuer had 70,800,092 shares of its common stock issued and outstanding.
TABLE OF CONTENTS
PART I
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ITEM 1.
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FINANCIAL STATEMENTS
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3
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ITEM 2.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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27
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ITEM 4.
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CONTROLS AND PROCEDURES
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39
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PART II
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ITEM 1.
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LEGAL PROCEEDINGS
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40
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ITEM 1A
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RISK FACTORS
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40
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ITEM 2.
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UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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40
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ITEM 3.
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DEFAULTS UPON SENIOR SECURITIES
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40
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ITEM 4.
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MINE SAFETY DISCLOSURE
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40
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ITEM 5.
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OTHER INFORMATION
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40
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ITEM 6.
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EXHIBITS
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40
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SIGNATURES
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41
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2
ITEM 1. Financial Statements
Not conforming to the Regulation S-X Rule 8-03 the Company’s Interim Financial Statements for the period ended September 30, 2012 (the “Financial Statements”) included in this Quarterly Report on the form of 10-Q (the “Form 10-Q”) have not been reviewed by an independent public accountant with professional standards for conducting such reviews, as established by generally accepted auditing standards, as may be modified or supplemented by the Securities and Exchange Commission ( the “Commission”).The review was not completed due to the cost and availability of cash required to pay past due fees owed to our independent accountant. The Company believes this is a temporary situation and will request the independent public accountants to complete the review when our liquidity position improves and we have completed a payment arrangement. Upon the completion of the review of the Company's Condensed Consolidated Financial Statements for the quarterly period ended September 30, 2012 by our independent public accountants we will amend Form 10-Q, the Financial Statements have been prepared in accordance with generally accepted accounting principles and applicable rules and regulation. In the opinion of Management, the information contained herein is accurate.
3
Titan Energy Worldwide, Inc.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
September 30,
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December 31,
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2012
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2011
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ASSETS
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Current assets
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Cash and cash equivalents
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$ | 610,168 | $ | 139,432 | ||||
Accounts receivable less allowance for doubtful accounts
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2,835,919 | 2,045,766 | ||||||
Inventory, net
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870,479 | 619,518 | ||||||
Other current assets
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55,906 | 52,996 | ||||||
Total current assets
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4,372,472 | 2,857,712 | ||||||
Property and equipment, net
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608,975 | 747,566 | ||||||
Customer and distribution lists, net
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510,204 | 628,118 | ||||||
Goodwill
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1,351,695 | 1,351,695 | ||||||
Other assets
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31,092 | 31,092 | ||||||
Total assets
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$ | 6,874,438 | $ | 5,616,183 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
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Current liabilities
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Accounts payable
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$ | 2,615,291 | $ | 2,404,538 | ||||
Accrued liabilities
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2,358,490 | 1,807,422 | ||||||
Customer deposits and deferred revenue
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918,671 | 234,339 | ||||||
Factoring obligation
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1,127,114 | 959,868 | ||||||
Notes payable - current portion
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100,000 | 210,370 | ||||||
Current portion of convertible debt, net of discount
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2,779,093 | 2,551,216 | ||||||
Total current liabilities
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9,898,659 | 8,167,753 | ||||||
Notes payable, less current portion
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67,700 | - | ||||||
Other long term liabilities
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302,227 | 122,248 | ||||||
Total long-term liabilities
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369,927 | 122,248 | ||||||
Total liabilities
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10,268,586 | 8,290,001 | ||||||
Commitments and Contingencies
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Stockholders’ equity (deficit)
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Preferred Stock Series D, 10,000,000 authorized, $.0001 par value, issued and outstanding 341 and 344 shares, respectively
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1 | 1 | ||||||
Common stock 1,800,000,000 shares authorized, $.0001 par value, issued 60.552,627 and 31,472,127 shares, respectively
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6,055 | 3,147 | ||||||
Treasury stock, at cost, held 1,550,000 and 1,550,000 shares, respectively
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(775,000 | ) | (775,000 | ) | ||||
Additional paid-in capital
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31,896,501 | 31,462,769 | ||||||
Accumulated deficit
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(34,521,705 | ) | (33,364,735 | ) | ||||
Total stockholders’ equity (deficit)
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(3,394,148 | ) | (2,673,818 | ) | ||||
Total liabilities and stockholders’ equity (deficit)
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$ | 6,874,438 | $ | 5,616,183 |
See accompanying notes to unaudited condensed consolidated financial statements
4
Titan Energy Worldwide, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 2012 and 2011
2012
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2011
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Sales of equipment
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$ | 4,004,960 | $ | 2,344,206 | ||||
Sales of service and parts
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1,845,952 | 1,315,656 | ||||||
Net sales
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5,850,912 | 3,659,862 | ||||||
Material cost and labor for equipment
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3,584,272 | 1,934,771 | ||||||
Material cost and labor for service and parts
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1,042,691 | 639,101 | ||||||
Total cost of sales
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4,626,963 | 2,573,872 | ||||||
Gross profit
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1,223,949 | 1,085,990 | ||||||
Operating expenses:
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Selling and service expenses
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772,066 | 639,051 | ||||||
General and administrative expenses
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384,519 | 430,747 | ||||||
Corporate overhead
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117,799 | 302,248 | ||||||
Depreciation and amortization
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86,660 | 89,256 | ||||||
Loss (gain) on sale of fixed assets
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3,405 | (4,176 | ) | |||||
Total operating expenses
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1,364,449 | 1,457,126 | ||||||
Operating loss
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(140,500 | ) | (371,136 | ) | ||||
Other expenses
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Interest expense and factoring fees, net
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211,682 | 182,336 | ||||||
Amortization of debt discount and financing costs
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27,562 | 224,755 | ||||||
Loss on modification of debt
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- | 253,181 | ||||||
Loss related to lease obligation
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110,639 | - | ||||||
Change in fair value of embedded conversion feature
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(19,623 | ) | - | |||||
Change in fair value of warrants
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(111 | ) | (21,557 | ) | ||||
Total Other Expense, net
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330,149 | 638,715 | ||||||
Net loss
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$ | (470,649 | ) | $ | (1,009,851 | ) | ||
Weighted average number of shares outstanding
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51,409,974 | 31,342,948 | ||||||
Basic and diluted (loss) per common share
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$ | (0.01 | ) | $ | (0.03 | ) |
See accompanying notes to unaudited condensed consolidated financial statements
5
Titan Energy Worldwide, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine Months Ended September 30, 2012 and 2011
2012
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2011
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Sales of equipment
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$ | 9,782,061 | $ | 7,076,401 | ||||
Sales of service and parts
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4,681,664 | 3,601,096 | ||||||
Net sales
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14,463,725 | 10,677,497 | ||||||
Material cost and labor for equipment
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8,432,784 | 5,824,345 | ||||||
Material cost and labor for service and parts
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2,385,610 | 1,878,932 | ||||||
Total cost of sales
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10,818,394 | 7,703,277 | ||||||
Gross profit
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3,645,331 | 2,974,220 | ||||||
Operating expenses:
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Selling and service expenses
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2,103,108 | 1,886,236 | ||||||
General and administrative expenses
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1,099,696 | 1,257,619 | ||||||
Research and development
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- | 194,238 | ||||||
Corporate overhead
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433,993 | 1,027,041 | ||||||
Depreciation and amortization
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262,630 | 260,557 | ||||||
Loss on sale of fixed assets
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2,456 | (4,176 | ) | |||||
Total operating expenses
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3,901,883 | 4,621,515 | ||||||
Operating loss
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(256,552 | ) | (1,647,295 | ) | ||||
Other expenses
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Interest expense and factoring fees, net
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693,560 | 388,206 | ||||||
Amortization of debt discount and financing costs
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123,026 | 948,836 | ||||||
Loss on modification of debt
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- | 253,181 | ||||||
Loss related to lease obligation
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162,278 | - | ||||||
Change in fair value of embedded conversion feature
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(69,392 | ) | - | |||||
Change in fair value of warrants
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(9,054 | ) | (294,605 | ) | ||||
Total Other Expense, net
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900,418 | 1,295,618 | ||||||
Net loss
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$ | (1,156,970 | ) | $ | (2,942,913 | ) | ||
Weighted average number of shares outstanding
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41,250,487 | 30,898,219 | ||||||
Basic and diluted (loss) per common share
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$ | (0.03 | ) | $ | (0.10 | ) |
See accompanying notes to unaudited condensed consolidated financial statements
6
Titan Energy Worldwide, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2012 and 2011
Operating activities:
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2012
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2011
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Net loss
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$ | (1,156,970 | ) | $ | (2,942,913 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities:
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Compensation paid by issuance of stock and stock options
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182,004 | 207,403 | ||||||
Depreciation and amortization
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262,630 | 260,557 | ||||||
Amortization of debt discount and financing costs
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123,026 | 948,836 | ||||||
Stock issued for services
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35,382 | - | ||||||
Loss on modification of convertible debt
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253,181 | |||||||
Change in fair value of lease obligation
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162,278 | - | ||||||
Change in fair value of warrants
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(9,054 | ) | (294,605 | ) | ||||
Change in fair value of embedded conversion
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(69,392 | ) | - | |||||
Loss (gain) on sales of fixed assets
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2,456 | (4,176 | ) | |||||
Changes in operating assets and liabilities:
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Accounts receivables
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(790,154 | ) | 212,270 | |||||
Inventory
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(294,004 | ) | (61,932 | ) | ||||
Other assets
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45,872 | 31,141 | ||||||
Accounts payable
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267,455 | - | ||||||
Accrued liabilities and customer deposits
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1,286,935 | 488,369 | ||||||
Net cash used in operating activities
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48,465 | (901,869 | ) | |||||
Investing activities:
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Purchase of fixed assets
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(42,898 | ) | (32,148 | ) | ||||
Proceeds from sales of fixed assets
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40,569 | 5,640 | ||||||
Net cash (used) provided in investing activities
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(2,329 | ) | (26,508 | ) | ||||
Financing activities:
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Proceeds provided by Convertible Debt
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310,000 | 330,000 | ||||||
Payment of short-term credit line
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- | (992,558 | ) | |||||
Net borrowings from Factoring Obligation
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167,246 | 959,868 | ||||||
Proceeds from stock warrant exercised
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- | 2,250 | ||||||
Proceed of promissory note
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67,700 | 100,000 | ||||||
Payment of notes payable and convertible debt
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(120,037 | ) | (106,413 | ) | ||||
Cost associated with stock issuances
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(310 | ) | (270 | ) | ||||
Net cash (used) provided by financing activities
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424,600 | 292,877 | ||||||
Increase (decrease) in cash and cash equivalents
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470,736 | (635,500 | ) | |||||
Cash and cash equivalents, beginning of year
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139,432 | 968,416 | ||||||
Cash and cash equivalents, end of period
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$ | 610,168 | $ | 332,916 |
See accompanying notes to unaudited condensed consolidated financial statements
7
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
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. The Company’s stock is traded on the OTC under the symbol “TEWI”.
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. This Note obligation has been fully satisfied. The Stellar shareholders also received 1,000,000 shares of Common Stock. 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 certain 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. This Note obligation has been fully satisfied. 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 certain liabilities for a sales office in New Jersey. This business had open orders at the 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 TES 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 in cash and agreed to pay off 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.
At September 30, 2012 and December 31, 2011, 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
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Preferred Stock, Series B, authorized 10,000,000, $.0001 par value
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Preferred Stock, Series C, authorized 10,000,000, $.0001 par value
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8
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
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, TES, GPI, SSI and Stanza.
Reclassifications
The Company has determined that the factoring fees are similar to interest and has reclassified the three and nine months ended September 30, 2012 and 2011. The amounts reclassified from General and Administration expenses were $91,733 and $260,456 for the three and nine months ended September 30, 2012 respectively. The comparative amounts for the three and nine months ended September 30, 2011 were $70,943 and $77,462. The Company has also reclassified from interest expense the lease obligation expense as a separate line item on the Statement of operations.
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 unaudited consolidated financial statements and accompanying notes for the year ended December 31, 2011 on Form 10-K filed with SEC on April 27, 2012.
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 nine months ended September 30, 2012 of $1,156,970. At September 30, 2012, the Company had an accumulated deficit of $34,521,705. 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:
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Management has been able to raise funds to support its working capital needs. The Company raised $200,000 in convertible debt and $67,700 in a two year promissory note during the first quarter.
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Management has been successful in extending $1,890,000 of convertible notes that were in default. The new maturity date for these notes is April 1, 2013.
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The Company is in negotiations with certain banks to replace its current factoring agreement which would reduce the costs of borrowing expense significantly.
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The Company’s has achieved several profitable months in 2012 as service sales continue to improve our overall business mix and margins,
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The Company has terminated Grove’s equipment sales department as it was an unprofitable business division thereby improving the future overall cash position in the Company.
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9
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Supplemental Cash Flow Information Regarding Non-Cash Transactions
During the three and nine months ended September 30, 2012 and 2011, 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 period presented.
Three Months Ended
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Nine Months Ended
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September 30
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September 30
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2012
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2011
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2012
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2011
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Stock issued for services
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- | - | $ | 44,500 | - | |||||||||||
Common stock issued for conversion of Series D Preferred Stock
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- | $ | 31,123 | $ | 30,000 | $ | 113,568 | |||||||||
Stock issued for the conversion of convertible debt
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$ | 68,900 | $ | 132,971 | $ | 39,992 | ||||||||||
Accounts Payable settled with stock
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- | - | $ | 39,002 | - | |||||||||||
Stock warrants not subject to fair value
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- | - | $ | 125,000 |
Interest paid for the three months ended September 30, 2012 and 2011 was $28,979 and $17,907, respectively. Interest payments for the nine months ended September 30, 2012 and 2011 were $82,061 and $66,015 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 that 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 when the work is performed.
10
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
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 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.
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 considered 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.
11
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
We conducted our annual impairment test as of December 31, 2011. 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, 2012 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 September30, 2012 and December 31, 2011 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.
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 September 30, 2012 and 2011, the Company had potentially dilutive shares of 167,840,550 and 46,656,608 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.
12
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
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 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 July 2012, the FASB issued ASU 2012-02, “Intangible-Goodwill and Other (Topic 350) Testing Indefinite-Lived Intangibles Assets for Impairment” ASU 2012 -02 allows an entity to assessed qualitatively whether an indefinite-lived intangible assets is impaired prior to performing a qualitative analysis. This ASU 2012-02 is effective for fiscal year beginning after September 15, 2012. We expect that the adoption of ASU 2012-02 to have no material impact on our financial position and results of operations.
Other Accounting Standards Updates effective after September 30, 2012 are not expected to have a significant effect on the Company’s consolidated financial position or results of operations.
NOTE 2 – 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:
September 30,
|
December 31,
|
|||||||
2012
|
2011
|
|||||||
Parts
|
$ | 846,215 | $ | 464,225 | ||||
Work in process
|
25,686 | 125,071 | ||||||
Finished Goods
|
123,274 | 133,397 | ||||||
Obsolescence Reserve
|
(124,696 | ) | (103,175 | ) | ||||
$ | 870,479 | $ | 619,518 |
13
Titan Energy Worldwide, Inc,
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 3 - NOTES PAYABLE
Notes payable consists of the following at September 30, 2012 and December 31, 2011:
September 30,
|
December 31,
|
|||||||
Short -Term Debt
|
2012
|
2011
|
||||||
Convertible Notes bearing interest at 12% due on demand
|
$ | 653,333 | $ | 350,000 | ||||
Convertible Note bearing interest at 12% due January 2012 to March 2012
|
- | 1,250,000 | ||||||
Convertible Note bearing interest at 12% due April 2013
|
1,890,000 | - | ||||||
Convertible Note bearing interest at 8% due April 2013
|
200,000 | - | ||||||
Convertible Notes bearing interest at 11% due on demand
|
27,000 | 30,000 | ||||||
Convertible Note bearing interest at 10% due January 2012 to March 2012
|
- | 350,000 | ||||||
Promissory note bearing interest at 12% due on demand
|
100,000 | 100,000 | ||||||
Convertible Note bearing interest at 12% due April 2012
|
- | 300,000 | ||||||
Convertible Note bearing interest at 10% due April 2012
|
- | 300,000 | ||||||
Other loans
|
- | 110,370 | ||||||
Convertible Settlement agreement
|
8,760 | - | ||||||
Unamortized Discount
|
- | (28,784 | ) | |||||
$ | 2,879,093 | $ | 2,761,586 | |||||
Long-term
|
||||||||
Promissory Note bearing interest at 8% due March 9, 2014
|
$ | 67,700 |
At September 30, 2012 the Company was in default on $753,333 of convertible notes payable and is accruing interest at the default rate of 12%. The convertible notes of $1,890,000 have agreed to extend their notes to April 1, 2013 in return for receiving 2,143,425 additional five year warrants with an exercise price of $0.10 per share. The Company has determined using the Black-Scholes method the value of these warrants to be $32,442, which will be amortized over the extension period. The Company has also issued a convertible note for $200,000 due April 1, 2013 with a conversion feature that allowed the note holder to convert the note and the interest at $.03 per share. This note does not have any warrants and the conversion feature was issued at market price resulting in no beneficial conversion feature. The Company also issued a promissory note to an individual for $67,700 at 8% and maturity March 9, 2014. There are no conversion rights or warrants associated with this debt.
Certain outstanding notes related to the Stanza purchase have been sold to Southridge Partners II L.P. This Agreement requires the Company to treat these notes as debt that can be converted into common stock based on a discount of 40% of the average of the lowest two closing bid prices for the Company’s common stock during the five trading days immediately preceding a conversion date. Southridge Partners II L.P. will receive free trading stock. As of September 30, 2012 Southridge Partners II L.P has converted notes and accrued interest of $122,822 into 23,633,055 shares of common stock. The agreement limits Southridge Partners II, L.P. to holding 9.99% of the Company’s shares outstanding. Southridge Partners II has $33,743 of principal and accrued interest under these agreements that have not been converted. The embedded conversion feature determined at issuance is treated as a discount which is amortized over the estimated life to income. In addition since the embedded conversions feature have down round protection at each accounting period we have revalued the embedded conversion feature and that change is reflected in our Statement of Operations.
14
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
During the year ended December 31, 2011, the Company issued $430,000 of debt. The Convertible Notes due April 2012 have a conversion feature that allows the Noteholder to convert its principal and unpaid interest at the lesser of $0.25 cents per share or a “Qualified Offering Price” defined as a transaction with gross proceeds of $2,000,000. On December 9, 2011 the company issued an 11% Convertible Note for $30,000. The Company has agreed with this Noteholder to pay $3,000 a month beginning September 1, 2012.
NOTE4 - FACTORING AGREEMENT
On June 15, 2011, the Company replaced its bank line of credit with a Factoring and Security Agreement (“Agreement”) with Harborcove Fund I, LP. (“Harborcove”). There are two agreements that provide financing separately to TES and GPI with identical terms. This agreement was extended and amended on June 10, 2012 for six months
The amended Agreement allows the Company to sell, transfer and assign its receivables to Harborcove. In return Harborcove will loan the Company 90% of the face value of the receivable. The balance, less factoring fees and interest, are paid to the Company once the final payment is received. Harborcove has the right to reject any receivables that do not meet their credit requirement approvals. The Company pays a fee on each invoice purchased by Harborcove equal to 1.45% of the face value of the invoice, with a minimum fee of $5.00. The Company also pays interest on the amount advanced at prime plus 4.5%. If the receivable is not paid within 90 days of the invoice date or 45 days from due date, Harborcove can chargeback the receivable to the Company, unless the debtor was credit approved and the sole reason for not paying is financial difficulty.
The security for this amended Agreement includes all the assets of the Company including the assets of TEWI, Stanza and SSI. The amended Agreement has a term with a minimum contract factoring fee and interest of $30,000 for the TES line and $20,000 on the GPI line. Early termination is allowed with a minimum penalty of two times the minimum contract fee and interest.
The amounts outstanding at September 30, 2012 and December 31, 2011 were $1,127,114 and $959,868, respectively. The factoring fees for the nine months ended September 30, 2012 and the year ended December 31, 2011 was $260,456 and $77,462, respectively. The interest expenses on this amended Agreement for the nine months ended September 30, 2012 and 2011were $80,323 and $21,404, respectively. The factoring fees have been reclassified as additional interest expense.
15
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 5 – ACCRUED LIABILITIES
Accrued liabilities consist of the following:
September 30,
|
December 31,
|
|||||||
2012
|
2011
|
|||||||
Accrued Compensation
|
$ | 655,203 | $ | 533,717 | ||||
Accrued Interest
|
667,453 | 439,383 | ||||||
Embedded conversion feature at fair value
|
8,097 | 648 | ||||||
Common stock warrants, at fair value
|
3,599 | 12,651 | ||||||
Purchase obligation on stock option, at fair value
|
250,000 | 250,000 | ||||||
Stanza payroll taxes including interest and penalties
|
284,629 | 304,773 | ||||||
Accrued costs on completed jobs
|
330,941 | 154,585 | ||||||
Accrued sales tax
|
136,024 | 95,288 | ||||||
Accrued other
|
22,544 | 16,377 | ||||||
$ | 2,358,490 | $ | 1,807,422 |
The amount listed as Purchase obligation on stock option is a stock option that permits the holder to demand payment in lieu of exercising the option. The Company has reached agreements with various states to pay past due sales tax amounts on installment plans.
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 and nine months ended September 30:
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
2012
|
2011
|
2012
|
2011
|
|||||||||||||
Income taxes at the statutory rate
|
$ | (160,021 | ) | $ | (419,964 | ) | $ | (393,370 | ) | $ | (1,000,591 | ) | ||||
Valuation Allowance
|
150,437 | 407,327 | 351,919 | 971,653 | ||||||||||||
Permanent differences and other
|
9,584 | 12,637 | 41,451 | 28,938 | ||||||||||||
Total income tax
|
$ | - | $ | - | $ | - | $ | - |
The following presents the components of the Company’s total income tax provision as follows:
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
2012
|
2011
|
2012
|
2011
|
|||||||||||||
Current expense
|
$ | - | $ | - | $ | - | $ | - | ||||||||
Deferred benefit
|
(150,437 | ) | (407,327 | ) | (351,919 | ) | (971,653 | ) | ||||||||
Change in valuation
|
150,347 | 407,327 | 351,919 | 971,653 | ||||||||||||
Total
|
$ | - | $ | - | $ | - | $ | - |
16
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
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 effects of primary temporary differences giving rise to deferred tax assets and liabilities are as follows:
September 30,
|
December 31,
|
|||||||
2012
|
2011
|
|||||||
Deferred tax assets
|
||||||||
Amortization
|
$ | 5,670 | $ | 8,250 | ||||
Non qualify stock option expense
|
61,881 | 93,470 | ||||||
Operating losses carry forward
|
7,095,577 | 5,548,085 | ||||||
Deferred Tax Liabilities
|
||||||||
Fair value income
|
(26,672 | ) | (203,015 | ) | ||||
Depreciation
|
(19,637 | ) | (18,984 | ) | ||||
Net deferred assets
|
7,116,819 | 5,427,806 | ||||||
Valuation Allowance
|
(7,116,819 | ) | (5,427,806 | ) | ||||
Total net deferred tax asset liability
|
$ | - | $ | - |
The Company has recorded a valuation allowance to fully offset the net deferred assets based on the fact that the Company has not recognized any taxable income since its inception.
At September 30, 2012 the Company had consolidated federal net operating losses of $19,834,289. 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 | 2,857,803 | |||
2032 | 2,746,742 | |||
$ | 19,834,289 |
17
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
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. 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 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 nine months ended September 30, 2012, 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 three shares of Series D Preferred Stock elected to convert into Common Stock receiving an aggregate of 793.648 shares of the Company common stock. The weighted average conversion price per share was $0.038. In addition, the Class A and Class B Warrants were repriced based the 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.
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 nine months ended September 30, 2012, no treasury shares were converted into Common Stock.
18
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 9 – STOCK OPTIONS
The Company issued nonqualified stock options to employees on January 16, 2012. 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. The options granted to employees have a term of 10 years with a vesting commencing on January 16, 2013 over the four year period. The Company used the Black-Scholes method to evaluate the value of the options. The option granted on March 27, 2012 was to a member of our advisory board. The option is for 5 years and vesting immediately. We determined that the value of the option was $11,405 and will be charged to income over the one-year term to serve as an advisory board member. The expected 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.
2012
|
||||
Excepted volatility
|
96 | % | ||
Vesting period
|
5 | |||
Expected term
|
7 | |||
Expected dividends
|
0 | % | ||
Risk free rate
|
1 | % |
The following is a table that shows a summary of activity for the nine months ended September 30, 2012 and the year ended December 31, 2011:
Weighted
|
Average
|
|||||||||||||||
Average
|
Remaining
|
Grant
|
||||||||||||||
Exercise
|
Contractual
|
Date
|
||||||||||||||
Shares
|
Price
|
Terms
|
Fair Value
|
|||||||||||||
Outstanding December 31, 2010
|
8,245,000 | $ | 0.31 | 9 | ||||||||||||
Granted
|
||||||||||||||||
Exercised
|
- | |||||||||||||||
Forfeited
|
(510,000 | ) | $ | 0.33 | ||||||||||||
Outstanding December 31, 2011
|
7,735,000 | $ | 0.31 | |||||||||||||
Granted January 16.2012
|
4,025,000 | $ | 0.07 | 4.5 | $ | 127,111 | ||||||||||
Granted March 27 2012
|
500,000 | $ | 0.02 | 4.75 | $ | 11,405 | ||||||||||
Exercised
|
||||||||||||||||
Forfeited
|
(1,530,000 | ) | $ | 0.26 | ||||||||||||
Outstanding September 30, 2012
|
10,730,000 | $ | 0.23 | 4 | ||||||||||||
Exercisable as of September 30, 2012
|
5,623,095 | $ | 0.26 |
As of September 30, 2012, the nonvested options totaled 5,106,905 shares. There is approximately $380,000 of unrecognized compensation and share-based expense arrangements that have been granted. These costs will be recognized over a weighted average period of 2 years. At September 30, 2012, the aggregate intrinsic value of exercisable stock options was $56,200.
19
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 10 – COMMON STOCK TRANSACTIONS
During the nine months ended September 30, 2012 the Company issued the following shares of common stock:
●
|
The company issued 793,648 shares of common stock for the conversion for the Series D Preferred Stock.
|
●
|
The company issued 100,000 shares to a consultant for services performed with a value of $2,500.
|
●
|
The company issued 23,633,055 shares of common stock for the conversion in accordance with Security Transfer Agreements in exchange for the retirement of $122,822 of convertible notes and accrued interest.
|
●
|
The company issued 303,797 shares for investor relations services value at $12,000.
|
●
|
The company issued 750,000 shares to the Company’s Advisory Board for services value at $30,000.
|
●
|
The company issued 3,500,000 shares to settle accounts payable totaling $39,162.
|
During the year ended December 31, 2011, the Company issued 810,569 shares of common stock for the conversion of the Series D Preferred Stock. The Company also issued 239,956 shares for the conversion of Convertible Notes and accrued interest of $39,992.
NOTE 11 - COMMON STOCK WARRANTS
There were 2,143,425 warrants issued for the extension of $1,890,000 of convertible notes during the nine months ended September 30, 2012. There were no warrants exercised during the nine months ended September 30, 2012. However 1,643,827 of warrants have expired without being exercised during the nine months ended September 30, 2023. The following table shows the warrants outstanding at September 30, 2012:
Number of
|
Exercise
|
Expiration
|
||||
Warrants
|
Purpose
|
Price range
|
Date
|
|||
200,000
|
Acquisition of Grove Power, Inc.
|
$0.01
|
14-Jun
|
|||
2,143,425
|
Extension of Convertible Notes
|
$0.10
|
17-Apr
|
|||
7,851
|
Broker warrants on Debt Offerings
|
$0.10-$0.625
|
13-Jan
|
|||
920,000
|
Convertible Debt Offering 2009/2010
|
$0.25
|
Dec-14 - Mar 15
|
|||
1,650,000
|
Convertible Debt Offering 2010
|
$0.60
|
May - Nov -15
|
|||
158,000
|
Debt Offering 2007
|
$0.75
|
12-Dec
|
|||
1,476,522
|
Converted Preferred D Class A
|
$0.03 -$0.89
|
13-Jan
|
|||
1,476,522
|
Converted Preferred D Class B
|
$0.04-$0.63
|
13-Jan
|
|||
1,136,559
|
Unconverted Preferred D Class A
|
$1.20
|
13-Jan
|
|||
1,136,559
|
Unconverted Preferred D Class B
|
$1.40
|
13-Jan
|
|||
777,135
|
Broker warrants on Preferred D
|
$1.25
|
13-Jan
|
20
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
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. 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.
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. The following were the assumptions used to compute the fair value:
|
September 30,
|
December 31,
|
|||||||
2012
|
2011
|
|||||||
Common stock price
|
$ | 0.01 | $ | 0.03 | ||||
Exercise price
|
$ | 0.15 | $ | 0.15 | ||||
Volatility
|
109.0 | % | 82.7 | % | ||||
Interest rate
|
0.14 | % | 0.12 | % | ||||
Remaining Terms
|
3.25 yrs
|
4 yrs
|
2.
|
Embedded beneficial conversion options were determined using the Black-Scholes method with the following input for September 30, 2012 and December 31, 2011 as shown in the table below:
|
September 30,
|
December 31,
|
|||||||
2012
|
2011
|
|||||||
Common stock price
|
$ | 0.01 | $ | 0.03 | ||||
Exercise price
|
$ | 0.005 | $ | 0.12 | ||||
Volatility
|
109.0 | % | 82.7 | % | ||||
Interest rate
|
0.14 | % | 0.05 | % | ||||
Remaining Terms
|
0.2yrs
|
0.3 yrs
|
3.
|
Purchase obligation of a stock option represents the value of the purchase obligation to buy back these options at any time during the next year. The agreement is for 1,000,000 options with a guarantee buy back provision at $0.25, which is also the exercise price.
|
21
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The following table summarizes the financial instruments measured at fair value in the Consolidated Balance Sheet as of September 30, 2012.
Fair Value Measurements
|
|||||||||||
Assets
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||
Liabilities
|
|||||||||||
Common stock warrants
|
$ | 3,599 | $ | 3,599 | |||||||
Purchase obligations for stock option
|
250,000 | 250,000 | |||||||||
Embedded beneficial conversion options
|
8,097 | 8,097 | |||||||||
Total
|
$ | 261,696 | $ | 261,696 |
The following table summarizes the financial instruments measured at fair value in the Consolidated Balance Sheet as of December 31, 2011:
Fair Value Measurements
|
|||||||||||
Assets
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||
Liabilities
|
|||||||||||
Common stock warrants
|
$ | 12,651 | $ | 12,651 | |||||||
Purchase obligations for stock option
|
250,000 | 250,000 | |||||||||
Embedded beneficial conversion options
|
648 | 648 | |||||||||
Total
|
$ | 263,299 | $ | 263,299 |
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, 2011
|
$ | 263,299 | ||
Embedded beneficial conversion option
|
76,843 | |||
Change in fair value common warrants stock recorded in other expense
|
(9,054 | ) | ||
Change in fair value of embedded conversion option
|
(69,392 | ) | ||
Balance at September 30, 2012
|
$ | 261,696 |
22
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
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 emergency and standby power equipment and renewable energy solutions. Energy Services consist of the sale of maintenance and service programs, interruptible rate services, monitoring and energy audits.
Summarized financial information concerning our reportable segments is shown in the following tables. Unallocated costs include corporate overhead, research and development. Other expense 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 and, goodwill. . Customer lists and other intangibles are allocated to their segments.
For the Three Months Ended September 30, 2012
|
||||||||||||||||
Power
|
Energy
|
Unallocated
|
||||||||||||||
Distribution
|
Services
|
Costs
|
Total
|
|||||||||||||
Sales
|
$ | 4,004,960 | $ | 1,845,952 | $ | 5,850,912 | ||||||||||
Cost of Sales
|
3,584,272 | 1,042,691 | 4,626,963 | |||||||||||||
Gross Profit
|
420,688 | 803,261 | 1,223,949 | |||||||||||||
Operating Expenses:
|
||||||||||||||||
Selling and service expenses
|
360,216 | 411,850 | 772,066 | |||||||||||||
General and Administrative Expenses
|
157,937 | 226,582 | 384,519 | |||||||||||||
Depreciation & Amortization
|
33,320 | 52,684 | 656 | 86,660 | ||||||||||||
Corporate Overhead
|
- | - | 117,799 | 117,799 | ||||||||||||
Gain or Loss on Sale of Fixed Assets
|
- | 3,453 | (48 | ) | 3,405 | |||||||||||
Operating Expense
|
561,740 | 684,302 | 118,407 | 1,364,449 | ||||||||||||
Operating Income (Loss)
|
(141,052 | ) | 118,959 | (118,407 | ) | (140,500 | ) | |||||||||
Other Expenses
|
||||||||||||||||
Interest Expense, net
|
73,141 | 18,632 | 119,909 | 211,682 | ||||||||||||
Amortization of Debt Discount and Financing Costs
|
27,562 | 27,562 | ||||||||||||||
Loss related to Lease Obligation
|
110,639 | 110,639 | ||||||||||||||
Fair Value Income
|
(19,734 | ) | (19,734 | ) | ||||||||||||
Total Other Expense, net
|
73,141 | 18,632 | 238,376 | 330,149 | ||||||||||||
Net Loss
|
$ | (214,193 | ) | $ | 100,327 | $ | (356,783 | ) | $ | (470,649 | ) | |||||
Total Assets
|
$ | 2,645,829 | $ | 2,233,572 | $ | 1,995,037 | $ | 6,874,438 |
23
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
For the Three Months Ended September 30, 2011
|
||||||||||||||||
Power
|
Energy
|
Unallocated
|
||||||||||||||
Distribution
|
Services
|
Costs
|
Total
|
|||||||||||||
Sales
|
$ | 2,344,206 | $ | 1,315,656 | $ | 3,659,862 | ||||||||||
Cost of Sales
|
1,934,771 | 639,101 | 2,573,872 | |||||||||||||
Gross Profit
|
409,435 | 676,555 | 1,085,990 | |||||||||||||
Operating Expenses:
|
||||||||||||||||
Selling and Service Expenses
|
281,588 | 357,463 | 639,051 | |||||||||||||
General and Administrative Expenses
|
141,093 | 289,654 | 430,747 | |||||||||||||
Depreciation & Amortization
|
29,315 | 58,953 | 988 | 89,256 | ||||||||||||
Corporate Overhead
|
- | - | 302,248 | 302,248 | ||||||||||||
Gain on Sale of Fixed Assets
|
- | (4,176 | ) | - | (4,176 | ) | ||||||||||
Operating Expense
|
451,996 | 701,894 | 303,236 | 1,457,126 | ||||||||||||
Operating Income (Loss)
|
(42,561 | ) | (25,339 | ) | (303,236 | ) | (371,136 | ) | ||||||||
Other Expenses
|
||||||||||||||||
Interest Expense, net
|
54,748 | 16,195 | 111,393 | 182,336 | ||||||||||||
Amortization of Debt Discount and Financing Costs
|
224,755 | 224,755 | ||||||||||||||
Loss on Modification of Debt
|
253,181 | 253,181 | ||||||||||||||
Fair Value Income
|
(21,557 | ) | (21,557 | ) | ||||||||||||
Total Other Expense, net
|
54,748 | 16,195 | 567,772 | 638,715 | ||||||||||||
Net Loss
|
$ | (97,309 | ) | $ | (41,534 | ) | $ | (871,008 | ) | $ | (1,009,851 | ) | ||||
Total Assets
|
$ | 2,224,116 | $ | 2,232,318 | $ | 1,448,611 | $ | 5,905,045 |
24
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2012
|
||||||||||||||||
Power
|
Energy
|
Unallocated
|
||||||||||||||
Distribution
|
Services
|
Costs
|
Total
|
|||||||||||||
Sales
|
$ | 9,782,061 | $ | 4,681,664 | $ | 14,463,725 | ||||||||||
Cost of Sales
|
8,432,784 | 2,385,610 | 10,818,394 | |||||||||||||
Gross Profit
|
1,349,277 | 2,296,054 | 3,645,331 | |||||||||||||
Operating Expenses:
|
||||||||||||||||
Selling and Service Expenses
|
977,163 | 1,125,945 | 2,103,108 | |||||||||||||
General and Administrative Expenses
|
451,009 | 648,687 | 1,099,696 | |||||||||||||
Depreciation & Amortization
|
104,837 | 155,741 | 2,052 | 262,630 | ||||||||||||
Corporate Overhead
|
- | - | 433,993 | 433,993 | ||||||||||||
Gain or Loss on Sale of Fixed Assets
|
(60 | ) | 1,609 | 907 | 2,456 | |||||||||||
Operating Expense
|
1,533,009 | 1,931,982 | 436,952 | 3,901,883 | ||||||||||||
Operating Income (Loss)
|
(183,732 | ) | 364,072 | (436,952 | ) | (256,552 | ) | |||||||||
Other Expenses
|
||||||||||||||||
Interest Expense, net
|
208,830 | 51,626 | 433,104 | 693,560 | ||||||||||||
Amortization of Debt Discount and Financing Costs
|
123,026 | 123,026 | ||||||||||||||
Loss related to Lease Obligation
|
162,278 | 162,278 | ||||||||||||||
Fair Value Income
|
(78,446 | ) | (78,446 | ) | ||||||||||||
Total Other Expense, net
|
208,830 | 213,904 | 477,684 | 900,418 | ||||||||||||
Net Loss
|
$ | (392,562 | ) | $ | 150,168 | $ | (914,636 | ) | (1,156,970 | ) | ||||||
Total Assets
|
$ | 2,645,829 | $ | 2,233,572 | $ | 1,995,037 | $ | 6,874,438 |
25
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2011
|
||||||||||||||||
Power
|
Energy
|
Unallocated
|
||||||||||||||
Distribution
|
Services
|
Costs
|
Total
|
|||||||||||||
Sales
|
$ | 7,076,401 | $ | 3,601,096 | $ | 10,677,497 | ||||||||||
Cost of Sales
|
5,824,345 | 1,878,932 | 7,703,277 | |||||||||||||
Gross Profit
|
1,252,056 | 1,722,164 | 2,974,220 | |||||||||||||
Operating Expenses:
|
||||||||||||||||
Selling and Service Expenses
|
909,824 | 976,412 | 1,886,236 | |||||||||||||
General and Administrative Expenses
|
413,160 | 844,460 | 1,257,619 | |||||||||||||
Depreciation & Amortization
|
78,903 | 178,740 | 2,914 | 260,557 | ||||||||||||
Research and Development
|
- | 194,238 | 194,238 | |||||||||||||
Corporate Overhead
|
- | - | 1,027,041 | 1,027,041 | ||||||||||||
Gain or Loss on Sale of Fixed Assets
|
(5,520 | ) | 1,344 | (4,176 | ) | |||||||||||
Operating Expense
|
1,401,887 | 1,994,092 | 1,225,537 | 4,621,515 | ||||||||||||
Operating Income (Loss)
|
(149,831 | ) | (271,928 | ) | (1,225,537 | ) | (1,647,295 | ) | ||||||||
Other Expenses
|
||||||||||||||||
Interest Expense, net
|
59,098 | 18,363 | 310,744 | 388,206 | ||||||||||||
Amortization of Debt Discount and Financing Costs
|
948,836 | 948,836 | ||||||||||||||
Loss on Modification of Convertible Debt
|
253,181 | 253,181 | ||||||||||||||
Fair Value Income
|
(294,605 | ) | (294,605 | ) | ||||||||||||
Total Other Expense, net
|
59,098 | 18,363 | 1,218,156 | 1,295,618 | ||||||||||||
Net Loss
|
$ | (208,929 | ) | $ | (290,291 | ) | $ | (2,443,693 | ) | $ | (2,942,913 | ) | ||||
Total Assets
|
$ | 2,224,116 | $ | 2,232,318 | $ | 1,448,611 | $ | 5,905,045 |
NOTE 14 – SUBSEQUENT EVENT
Southridge Partners II L.P. has converted notes of $30,780 in exchange for 10,248,148 shares of common stock subsequent to September 30, 2012.
The Company has performed a review of events subsequent to the balance sheet date and expect for the matter described above in this note, no other matters require disclosures.
26
ITEM 2. Management’s Discussion and Analysis or Plan of Operation.
Statements included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, 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 specialize in the sales and management of onsite power generation for industrial and commercial customers. By utilizing advanced communication technologies, automated data collection, reporting systems and remote monitoring capabilities, we believe we are creating a new standard for power asset management and are leading the way for critical energy programs such as demand response and distributed generation. In fact, we believe we are one of the first companies to combine expertise in power generation asset management with real time information processing to create a more reliable and effective Smart Grid approach to onsite power management.
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 accounting and administrative 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 it is responsible for our long term goal to expansion throughout the Southeastern United States.
In 2009, we acquired a power generation business in New Jersey that provide us with purchase orders, backlog and extensive customer and marketing relationships in New York, Connecticut and New Jersey. This business has been merged into TES.
In 2010, we acquired Sustainable Solutions, Inc. (“SSI”), which is engaged in providing energy audits, energy consulting and energy management services in the Midwest region.
In 2010, Titan Energy Development, Inc. (“TEDI”) purchased certain assets and assumed certain liabilities of Stanza Systems, which provide us with a software development company experienced in smart grid and utility operations. The company operates this business as Stanza Technologies (“Stanza”)’ Stanza has developed network communications software that we plan to utilize in our generator service business.
27
RESULTS OF OPERATIONS
Three Months Ended September 30, 2012 Compared to the Three Months Ended September 30 2011
Sales
Sales for the three months ended September 30, 2012 were $5,850,960 compared to $3,659,862 for the three months ended September 30, 2011. The following table summarizes sales by business segment:
Power
|
Energy
|
|||||||
Distribution
|
Services
|
|||||||
2012
|
$ | 4,004,960 | $ | 1,845,952 | ||||
2011
|
2,344,206 | 1,315,656 | ||||||
Increase
|
$ | 1,660,754 | $ | 530,296 | ||||
Percent Increase
|
71 | % | 40 | % |
The increased sales in the Power Distribution segment is primarily attributable to a $1.2 million project for a national energy company. Without this sale, the Power Distribution sales would have increased by approximately $450,000 over the sales for the three months ended September30, 2011. This increase was attributable to the completion of jobs from the relatively higher backlog in our New York office. Overall our backlog for Power Distribution at October 31, 2012 was $6.1 million compared to $4.7 million at the same period as last year. In the third quarter we discontinued Grove’s Power Distribution department as this was not a profitable portion of our business. The backlog in 2011 included $1.0 million of Grove equipment orders.
The increase in our Energy Services segment sales is attributable to increased sales in our national account program which was $450,000 higher than the third quarter of 2011. In addition, service sales in New York were at their highest quarterly level. These sales were offset due to lower service sales in the Florida operations.
Cost of Sales
Cost of sales was $4,626,963 for the three months ended September 30, 2012 compared to $2,573,872 for the three months ended September 30, 2011:
Power
|
Energy
|
|||||||
Distribution
|
Services
|
|||||||
2012
|
$ | 3,584,272 | $ | 1,042,691 | ||||
2011
|
$ | 1,934,771 | $ | 639,101 | ||||
Increase
|
$ | 1,649,501 | $ | 403,590 | ||||
Percent of Sales
|
||||||||
972012
|
89.5 | % | 56.5 | % | ||||
2011
|
82.5 | % | 48.6 | % |
The increase in cost of sales in the Power Distribution segment is attributable to the higher sales volume. The reason for the increase in the percent of sales is attributable to a large low margin project for New York office. The cost of sales for this job was 96%. The reason we took this low margin job was that we hope this job would allow us to sell additional equipment at higher margins and also give us the opportunity to provide monitoring and service contracts with a prominent national energy company that has more than 200 locations. Without this sale the Power Distribution percent of sales would have been 86.4%. The Midwest region percentage cost of sales has historically been in the range of 82 to 86 percent.
28
The higher percent cost of sales in the Energy Services segment is attributable to the increases sales to national accounts, which has lower margin than our traditional service business. In the third quarter of 2012 sales to national accounts represented 34% of our total sales compared to 15% in the third quarter of 2011. The cost of sales related to national account for the three months ended September 30, 2012 was 68.9%.
Selling and Service Expenses
Sales and services expenses include all sales and service personnel, benefits related to these personnel and other costs in support of these functions. The Selling and Service expenses were $772,066 for the three months ended September 30, 2012, compared to $639,051 for the three months ended September 30, 2011. The following table summarizes the area of costs in this category:
Power
|
Energy
|
|||||||
2012
|
Distribution
|
Services
|
||||||
Payroll related costs
|
$ | 304,076 | $ | 327,909 | ||||
Shared based compensation
|
6,252 | 12,896 | ||||||
Other
|
49,888 | 71,045 | ||||||
Total
|
$ | 360,216 | $ | 411,850 | ||||
2011
|
||||||||
Payroll related cost
|
$ | 253,448 | $ | 276,607 | ||||
Shared based compensation
|
10,098 | 13,845 | ||||||
Other
|
18,042 | 67,011 | ||||||
Total
|
588 | $ | 357,463 | |||||
Increase
|
$ | 78,628 | $ | 54,387 | ||||
Percent of Sales
|
||||||||
2012
|
9 | % | 22 | % | ||||
2011
|
12 | % | 27 | % |
The higher costs in Power Distribution payroll related costs are attributable to the accrual of severance pay for terminated employees at Grove and New York offices. The higher costs in the Product Distribution Other category is partially attributable to an increase in our inventory reserve for equipment that might not be salable as result of our decision to discontinue equipment sales in Florida. The higher costs in the Energy Service payroll related costs category are primarily due to the addition of support personnel to handle the rapid growth in sales and higher commission due to the higher sales volume.
29
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 allocate to our segments. General and administrative expenses were $384,519 for the three months ended September 30, 2012, compared to $430,747 for the three months ended September 30, 2011. The following table summarizes the areas of costs in this category:
Power
|
Energy
|
|||||||
2012
|
Distribution
|
Services
|
||||||
Payroll related costs
|
$ | 30,326 | $ | 62,150 | ||||
Shared based compensation
|
5,753 | 11,681 | ||||||
Facilities
|
62,245 | 70,637 | ||||||
Other
|
59,613 | 82,114 | ||||||
Total
|
$ | 157,937 | $ | 226,582 | ||||
2011
|
||||||||
Payroll related cost
|
$ | 19,543 | $ | 110,205 | ||||
Shared based compensation
|
2,806 | 16,934 | ||||||
Facilities
|
61,393 | 83,653 | ||||||
Other
|
57,351 | 78,862 | ||||||
Total
|
$ | 141,093 | $ | 289,654 | ||||
Increase (Decrease)
|
$ | 16,844 | $ | (63,072 | ) |
The major cause for the increase in the Power Distribution Segment Costs is the addition of accounting personnel. The lower cost in the Energy Service segment is attributable to reduction in administration costs for Stanza/ Stanza administration costs of approximately $44,000 for the three months ended September 30, 2012 compared to $151,000 for the period ended September 30, 2011. This reduction was partially offset by higher travel and the addition of administration personnel to support the growth in national accounts.
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 September 30, 2012 was $117,799 as compared to $302,248 for the three months ended September 30, 2011. The following table shows the costs related to corporate activities:
2012
|
2011
|
|||||||
Payroll related activates
|
$ | 71,082 | $ | 181,362 | ||||
Stock Compensation
|
22,319 | 24,636 | ||||||
Professional Fees
|
500 | 63,299 | ||||||
Shared based payments for professional services
|
10,441 | - | ||||||
Travel
|
570 | 12,521 | ||||||
Other
|
12,887 | 20,430 | ||||||
Total
|
$ | 117,799 | $ | 302,248 |
30
Our payroll is lower due to right sizing the number of executive officers. Currently there are two executive officers, the CEO and the CFO. In 2011 we had two additional executive officers, a President and Vice President of Business Development. These latter positions have been eliminated. The payroll and related activates in 2011 include the severance pay accrual for the former Chief Operating Officer of $42,000.The lower professional fees in the three months ended September 30, 2012 was due to our decision not to have audited financial statements for the year ended December 31, 2011 and not performing an audited review on the quarterly reports in 2012. The decrease in business travel in the three months ended September 30, 2012 is attributable to reducing executive travel by moving our corporate office to Minnesota in 2012. In 2012, the Company issued stock to members of our Advisory Board, which will be recognized over their term of service. This cost is non-cash charge and is based on the actual stock price at the time of payment.
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 September 30, 2012 was $86,660compared to $89,256 in the three months ended September 30, 2011. We have limited our capital expenditures and sold certain fixed assets resulting in a small decrease in depreciation expense.
Other Expenses
The following table below summarizes the items in this category for the three months ended September 30:
2012
|
2011
|
|||||||
Interest expense, net
|
$ | 119,909 | $ | 111,393 | ||||
Factoring Fees
|
91,773 | 70,943 | ||||||
Loss on modification of debt
|
- | 253,181 | ||||||
Loss related to lease obligation
|
110,639 | - | ||||||
Amortization of debt discount
|
19,457 | 195,118 | ||||||
Amortization of deferred financing costs
|
8,105 | 29,637 | ||||||
Change in fair value of embedded conversion feature
|
(19,623 | ) | - | |||||
Fair value of warrants
|
(111 | ) | (21,557 | ) | ||||
Total
|
$ | 330,149 | $ | 638,715 |
The higher interest expense is attributable to debt issued in 2012 and higher average balance on the Company’s factoring obligation. The company has reclassified the factoring fees from general and administrative to other expense, as we believe that the factor fee is similar to interest expense. The factoring fees are higher in the third quarter of 2012 because we had greater collections than in the third quarter of 2011. We pay our factoring fees upon collection of the receivable. The average balance of the factoring obligation was approximately $1,350,000. Combining the interest expense and the factoring fees for the quarter, the effective interest rate is 35%.
The loss related to lease obligation is the amount we accrued for the full balance of the judgment received by the Landlord’s lawsuit against the Company to collect unpaid and future lease payments. The total lease obligation of $302,277 has been accrued as a long –term obligation. The Company will seek a long range payment plan for this obligation.
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 September 30, 2012, the full amount of debt discounts has been expensed in 2012. The embedded conversion feature and the warrants are treated as a liability and are re-measured with each reporting period. The gain in the embedded conversion feature reflects a stock price at September 30, 2012 of $0.005 compared to a price of $0.03 at March 31, 2012.
In 2011, we recorded a loss on the modification of convertible debt. The transaction extended the maturity, reduced the warrant exercise price and the beneficial conversion options. In accordance with ASC 815 carry value of the debt must be consistent with the risk. When the amounts were determined the additional interest rate of the carry value of the debt was 59%. We believe that the debt rate should be 20% resulting in a loss of $253,181.
31
RESULTS OF OPERATIONS
Nine Months Ended September 30, 2012 Compared to the Nine Months Ended September 30 2011
Sales
Sales for the nine months ended September 30, 2012 were $14,463,725 compared to $10,677,497 for the nine months ended September 30, 2011. The following table summarizes our sales by their segments:
Power
|
Energy
|
|||||||
Distribution
|
Services
|
|||||||
2012
|
$ | 9,782,061 | $ | 4,681,664 | ||||
2011
|
7,076,401 | 3,601,096 | ||||||
Increase
|
$ | 2,705,660 | $ | 1,080,568 | ||||
Percent Increase
|
38 | % | 30 | % |
The increased sales in the Power Distribution and the Energy Services segments is primarily attributable to the large project as explained above under the three months ended September. We also had an increase of 53% in Power Distribution sales in the second quarter attributable to record shipments out of our Midwest operations. The increased sales in the Energy Service segment are attributable to the improvements in our national account program. Sales to national accounts for the nine months ended September 30, 2012 totaled 1.4 million compared to 304,000 in the nine months ended September 30, 2011.
Cost of Sales
Cost of sales was $10,818,394 for the nine months ended September 30, 2012 compared to $7,703,277 for the nine months ended September 30, 2011:
Power
|
Energy
|
|||||||
Distribution
|
Services
|
|||||||
2012
|
$ | 8,432,784 | $ | 2,385,610 | ||||
2011
|
5,824,345 | 1,878,932 | ||||||
Increase
|
$ | 2,608,439 | $ | 506,678 | ||||
Percent of Sales
|
||||||||
2012
|
86.2 | % | 51.0 | % | ||||
2011
|
82.3 | % | 52.2 | % |
The increase in cost of sales in the Power Distribution and the Energy Services segments is attributable to higher sales volume. The high cost of sales for the $1.2 million project from the New York project increased the Power distribution cost of sales percentage by 1.5% The Midwest region percentage of sales has historically been in the range of 82 to 86 percent of sales.
The Energy Service segment improvement in the percentage of sales is attributable to lower costs due to right sizing the operations at Groves and Stanza. Also, the traditional service program in the Midwest has improved slightly to offset the lower margins in the national account program.
32
Selling and Service Expenses
Sales and Services expenses include all sales and service personnel, benefits related to these personnel and other costs in support of these functions. Selling and Service expenses were $2,103,108 for the nine months ended September 30, 2012, compared to $1,886,236 for the nine months ended September 30, 2011. The following table summarizes the area of costs in this category:
Power
|
Energy
|
|||||||
2012
|
Distribution
|
Services
|
||||||
Payroll related costs
|
$ | 896,378 | $ | 894,734 | ||||
Shared based compensation
|
18,893 | 38,315 | ||||||
Other
|
61,892 | 192,896 | ||||||
Total
|
$ | 977,163 | $ | 1,125,945 | ||||
2011
|
||||||||
Payroll related cost
|
$ | 813,073 | $ | 752,305 | ||||
Shared based compensation
|
31,048 | 42,536 | ||||||
Other
|
65,102 | 181,571 | ||||||
Total
|
909,223 | $ | 976,412 | |||||
Increase
|
$ | 67,940 | 149,533 | |||||
Percent of Sales
|
||||||||
2012
|
10 | % | 24 | % | ||||
2011
|
13 | % | 27 | % |
The higher costs in Power Distribution payroll related costs are attributable to higher sales commission and the accrual of severance pay for terminated employees. The higher costs in the Energy Services payroll related costs was primarily due the addition of support personnel to handle the rapid growth in sales and higher commissions due to the higher sales volume.
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 $1,099,696 for the nine months ended September 30, 2012, compared to $1,257,619 for the nine months ended September 30, 2011. The following table summarizes the areas of costs in this category:
Power
|
Energy
|
|||||||
2012
|
Distribution
|
Services
|
||||||
Payroll related costs
|
$ | 82,299 | $ | 209,973 | ||||
Shared based compensation
|
19,373 | 35,978 | ||||||
Facilities
|
169,301 | 184,809 | ||||||
Other
|
180,036 | 217,927 | ||||||
Total
|
$ | 451,009 | $ | 648,687 | ||||
2011
|
||||||||
Payroll related cost
|
$ | 66,010 | 356,657 | |||||
Shared based compensation
|
8,405 | 22,003 | ||||||
Facilities
|
176,238 | 239,219 | ||||||
Other
|
162,507 | 226,581 | ||||||
Total
|
$ | 413,160 | $ | 844,460 | ||||
Increase (Decrease)
|
$ | 37,849 | $ | (195,773 | ) |
33
The major cause for the increase in the Power Distribution Segment Costs is attributable to additional personnel in Midwest and New York offices. The lower costs in Energy Service segment are attributable to reduction in administration costs for Stanza of approximately $136,314 for the nine months ended September 30, 2012 compared to $412,188 for the nine months ended September 30, 2011. This reduction was partially offset by the addition of administration personnel to support the growth in national accounts and legal and consulting services for the Midwest operations.
Research and Development
We entered into a contract in September 2010 with a third party to design and develop a remote monitoring system dedicated to onsite power generation equipment. We believe that there are few alternatives available in the market place that support the management of onsite power generators in the manner that is required by peak shaving, demand response and energy efficiency programs, and so to better serve these marketplaces, Titan needed to develop its own monitoring program. The Company has completed this software package and has begun to market it to customers. Therefore, there are no Research and Development costs recorded in the nine months ended September 30, 2012
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 nine months ended September 30, 2012 was $433,993 as compared to $1,027,651 for the nine months ended September 30, 2011. The following table shows the costs related to corporate activities:
2012
|
2011
|
|||||||
Payroll related activates
|
$ | 240,412 | $ | 521,441 | ||||
Stock Compensation
|
69,446 | 73,955 | ||||||
Professional Fees
|
21,500 | 237,962 | ||||||
Shared based payments for professional services
|
32,882 | - | ||||||
Travel
|
17,443 | 126,865 | ||||||
Other
|
52,309 | 67,418 | ||||||
Total
|
$ | 433,993 | $ | 1,027,641 |
Our payroll is lower due to right sizing the number of the executive officers. Currently there are two executive officers, the CEO and the CFO. In 2011 we had in addition to the current executive officers, a President and Vice President of Business Development. These latter positions have been eliminated. The payroll and related activates in 2011 include the severance pay accrual for the former Chief Operating Officer of $42,000.The lower professional fees in the nine months ended September 30, 2012 was due to our decision not to have audited financial statements for the year ended December 31, 2011 and no independent review of our quarterly financial statements in 2012. The decrease in business travel in the nine months ended September 30, 2012 is associated with our limited fund raising activities and moving our corporate office to Minnesota in 2012. In 2012, the Company issued stock to members of our Advisory Board, which will be recognized over their service term. We also issued stock to our investor relation professional to improve communications with shareholders and investors. These stock payments are non-cash charge and are based on actual stock price at the time of payment.
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 nine months ended September 30, 2012 was $262,530 compared to $260,557 in the nine months ended September 30, 2011. We have limited our capital expenditures and sold certain fixed assets therefore incurred only a small increase in depreciation expense.
34
Other Expenses
The following table below summarizes the items in this category for the nine months ended September 30:
2012
|
2011
|
|||||||
Interest expense, net
|
$ | 433,104 | $ | 310,744 | ||||
Factoring fees
|
260,456 | 77,462 | ||||||
Loss related to lease obligation
|
162,278 | - | ||||||
Loss on modification of debt
|
- | 253,181 | ||||||
Amortization of debt discount
|
105,625 | 834,565 | ||||||
Amortization of deferred financing costs
|
17,401 | 114,271 | ||||||
Fair value of embedded conversion feature
|
(69,392 | ) | - | |||||
Fair value of warrants
|
(9,054 | ) | (294,605 | ) | ||||
Total
|
$ | 900,418 | $ | 1,295,618 |
The higher interest expense is attributable to a higher interest rate, as most of our loans were in default, raising the interest rate from 10% to 12% resulting in $53,000 of additional interest expense. The Company issued $267,700 in new loans at 8% in the first quarter of 2012. The interest expense from our factoring obligation for the nine months ended September 30, 2012 was $80,600. In 2011 our financing consisted of bank credit line for the first five months of the year and was replaced by the factoring obligation for the four months remaining in the nine months ended September 30, 2011. The interest expense for the nine months ended September 30, 2011 was $58,600.
The higher factoring fees for the nine months ended September 2011 is because the factoring obligation was outstanding for full period. In the nine months ended 2011 the factor fee was only outstanding from June17, 2011 to September 30, 2011.
The loss lease obligation is the accrued amount for the full balance of the judgment received by the Landlord’s lawsuit against the Company to collect unpaid and future lease payments. The total lease obligation of $302,277 has been accrued as a long –term obligation. The Company will seek a long range payment plan for this obligation.
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 September 30, 2012, the full amount of debt discounts has been expensed in 2012.The embedded conversion feature and the warrants are treated as a liability and are re-measured with each reporting period. . The gain in the embedded conversion feature reflect a stock price at September 30.2012 of $0.005 compared to a price of $0.03 at March 31 2012.
In 2011, we recorded a loss on the modification of convertible debt. The transaction extended the maturity date and reduced the warrant exercise price and the beneficial conversion options. In accordance with ASC 815 the carry value of the debt must be consistent with the risk. When the amounts were determined the additional interest rate of the carry value of the debt was 59%. We believe that the debt rate should be 20% resulting in a loss of $253,181.
35
LIQUIDITY AND CAPITAL RESOURCES
The Company incurred a net loss for the nine months ended September 30, 2012 of $1,156,970. At September 30, 2012 we had an accumulated deficit of $34,521,705. In addition, we are currently in default on notes payable of $703,333 of principal. These conditions raise substantial doubt as to the Company’s ability to continue as a going concern.
The Company’s ability to maintain its operations is supported by a number of activities. The Company has raised $200,000 in convertible debt and $67,700 in a promissory note the first quarter of 2012. We were able to retire $110,000 of Stanza related debt through a Security Transfer Settlement Agreement. The Company’s improvement in cash flow is allowing us stay current with our critical vendors. The debt holders that are in default have not indicated that they plan any adverse action against the Company. In fact several of these debt holders have verbally indicated they plan to extend their notes.
For the nine months ended September 30, 2012, the company reported the lowest net loss since 2006 in the first year of the Company’s history. The Adjusted EBITDA for the nine months ended September 30, 2012 was a positive $223,464 and for the three months ended September 30, 2012 we have a positive Adjusted EBITDA of $15,502.
This is the second consecutive quarter that we had positive Adjusted EBITDA. Adjusted EBITDA is a non- GAAP Financial Measure defined in detail under the Additional Information section below. In the second quarter of 2012, we were successful in amending our factoring agreement by reducing the factoring fee from 1.7% to 1.45%. We have estimated that this will result in approximately $50,000 of annual savings over the next year. We are currently seeking a lower priced financing instrument with other providers which would further reduce our interest and related expenses.
We have also reached agreement with various state agencies to pay our past due sales tax on an installment basis. We have an installment plan for the payment of the Control Crew lawsuit, which we have paid $37,000 as November 2, 2012 and are paying down the balance in $4,000 monthly payments.
We received a judgment from a lawsuit for nonpayment of lease obligation ion the total of $302,277 which has been accrued on balance sheet as a long -term liability. Titan Energy Development, Inc. (Stanza) has been subpoenaed to provide certain financial information. The company believes that an installment plan can be reached to pay this obligation.
Our continue improvement in operating the business and the opportunities that have been generated through our Energy Service segment will provide the cash needed to fund current operations. At September30, 2012, we had $610,168 in cash and short-term investments.
36
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 this 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 excludes as part of the Adjusted EBITDA measures for the three and nine months ended September 30 2012 and 2011, respectively, as well as reasons for excluding individual items.
●
|
Management defines Adjusted EBITDA as net income (loss), excluding depreciation, amortization, stock based compensation and payments, interest (including factoring fees), income taxes (benefit) and other income and expenses. 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 expenses; fair value adjustment for warrants and embedded conversion features, 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 is 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 determined on acquisition date and may not be indicative of current or future capital expenditures. We also will eliminate from our net loss from the lease obligation as this is a settlement of a lawsuit which is not consider part of our continuing operations.
|
●
|
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.
|
37
Adjusted EBITDA was positive $15,502 and negative $213,561 for the three months ended September30, 2012 and 2011, respectively. The reconciliation of adjusted EBITDA to net loss is set forth below:
|
Three Months Ended
September 30, |
|||||||
2012
|
2010
|
|||||||
Net loss
|
$ | (470,649 | ) | $ | (1,009,851 | ) | ||
Add back:
|
||||||||
Depreciation and amortization
|
86,660 | 89,256 | ||||||
Stock based compensation and payments
|
69,342 | 68,319 | ||||||
Interest and factoring fees
|
211,682 | 182,336 | ||||||
Amortization of debt discount
|
27,562 | 224,755 | ||||||
Loss on modification of convertible debt
|
- | 253,181 | ||||||
Loss related to lease obligation
|
110,639 | - | ||||||
Fair value adjustments
|
(19,734 | ) | (21,557 | ) | ||||
Adjusted EBITDA
|
$ | 15,502 | $ | (213,561 | ) |
Adjusted EBITDA was positive $223,464 and negative $1,079,335 for the nine months ended September 30, 2012 and 2011, respectively. The reconciliation of adjusted EBITDA to net loss is set forth below:
|
Nine Months Ended
September 30, |
|||||||
2011
|
2011
|
|||||||
Net loss
|
$ | (1,156,970 | ) | $ | (2,942,913 | ) | ||
Add back:
|
||||||||
Depreciation and amortization
|
262,630 | 260,557 | ||||||
Stock based compensation and payments
|
217,386 | 207,403 | ||||||
Interest and factoring fees
|
693,560 | 388,206 | ||||||
Amortization of debt discount
|
123,026 | 948,836 | ||||||
Loss on modification of convertible debt
|
- | 253,181 | ||||||
Loss related to lease obligation
|
162,278 | - | ||||||
Fair value adjustments
|
(78,446 | ) | (294,605 | ) | ||||
Adjusted EBITDA
|
$ | 223,464 | $ | (1,179,335 | ) |
OFF-BALANCE SHEET ARRANGEMENTS
None.
38
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 September 30, 2012 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 as 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 September 30, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
39
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company subsidiary Titan Energy Development, Inc. (“TEDI”) has been sued by TEDI’s landlord (the “Plaintiff”) for non-payment of the office lease in the name of Stanza Systems, Inc. in Houston, TX. The Plaintiff has received a judgment in the amount of $302,227 on September 24, 2012. Cost and interest will accrue on judgment amount from date of entry until satisfied in full. TEDI has received a subpoena to provide certain financial information on November 27, 2012. The Company will try to arrange an installment payment plan for payment of this lawsuit.
The Company has also been sued on the non-payment of a settlement agreement with a Control Crew, Inc. (the “Plaintiff”) for the work performed in 2008 and 2009 for a discontinued operation. The Plaintiff has requested that the total invoices of $44,481 be paid. On March 29, 2012 an Entry of Default was filed with the State of Michigan in the Circuit Court for the County of Oakland. On April 18, 2012, the Plaintiff’s motion for default judgment was granted. The judgment amount includes the invoices of $44,481, plus interest, totaling $52,372. The Company has recorded this amount as a liability and has paid $37,000 as of November 2, 2012 and will repay the remaining balance in monthly installments of $4,000.
ITEM 1A. Risk Factors
Not applicable.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
ITEM 4. Mine Safety Disclosures
Not applicable
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.
|
40
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 15, 2012
|
By:
|
/s/ Jeffrey W. Flannery
|
Jeffrey W. Flannery
Chief Executive Officer
|
||
Dated: November 15, 2012
|
By:
|
/s/ James J. Fahrner
|
James J. Fahrner
Chief Financial Officer
|
41
EXHIBIT INDEX
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.
|
42