Attached files
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EX-31.1 - CERTIFICATIONS - Titan Energy Worldwide, Inc. | f10q0913ex31i_titanenergy.htm |
EX-32.1 - CERTIFICATIONS - Titan Energy Worldwide, Inc. | f10q0913ex32i_titanenergy.htm |
EX-31.2 - CERTIFICATIONS - Titan Energy Worldwide, Inc. | f10q0913ex31ii_titanenergy.htm |
EX-32.2 - CERTIFICATIONS - Titan Energy Worldwide, Inc. | f10q0913ex32ii_titanenergy.htm |
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
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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6321 Bury Drive, Suite 8, Eden Prairie, MN 55346
(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
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o
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Accelerated filer
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o
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Non-accelerated filer
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o
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Smaller reporting company
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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 October 17, 2013, the issuer had 71,308,641 shares of its common stock issued and outstanding.
TABLE OF CONTENTS
PART I
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3
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24
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36
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37
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37
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37
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37
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37
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37
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37
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37
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38
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2
Not conforming to the Regulation S-X Rule 8-03 the Company’s Interim Financial Statements for the period ended September 30, 2013 (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. Upon the completion of the review of the Company's Condensed Consolidated Financial Statements for the quarterly period ended September 30, 2013 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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|||||||
2013
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2012
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ASSETS
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Current assets
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Cash and cash equivalents
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$ | 47,710 | $ | 304,374 | ||||
Accounts receivable less allowance for doubtful accounts
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2,663,294 | 2,196,908 | ||||||
Inventory, net
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1,055,298 | 1,056,099 | ||||||
Other current assets
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226,707 | 99,709 | ||||||
Total current assets
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3,993,009 | 3,657,090 | ||||||
Property and equipment, net
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483,700 | 592,995 | ||||||
Customer and distribution lists, net
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368,328 | 470,985 | ||||||
Goodwill
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1,351,695 | 1,351,695 | ||||||
Other assets
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46,770 | 37,194 | ||||||
Total assets
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$ | 6,243,502 | $ | 6,109,959 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
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Current liabilities
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Accounts payable
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$ | 2,622,746 | $ | 2,636,888 | ||||
Accrued liabilities
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2,550,759 | 2,352,653 | ||||||
Customer deposits and deferred revenue
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660,586 | 774,518 | ||||||
Factoring obligation
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865,854 | 934,930 | ||||||
Notes payable - current portion
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176,700 | 118,000 | ||||||
Current portion of convertible debt, net of discount
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2,740,000 | 2,740,000 | ||||||
Total current liabilities
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9,616,645 | 9,556,989 | ||||||
Convertible debt and notes payable
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- | 67,700 | ||||||
Other long term liabilities
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- | 302,227 | ||||||
Total long –term liabilities
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- | 369,927 | ||||||
Total liabilities
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9,616,645 | 9,926,916 | ||||||
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, $.0001 par value, issued 71,308,641 and 70,800,775 shares, respectively
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7,131 | 7,080 | ||||||
Treasury stock, at cost, held 1,550,000 and 1,550,000 shares, respectively
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(775,000 | ) | (775,000 | ) | ||||
Additional paid-in capital
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32,106,357 | 31,967,753 | ||||||
Accumulated deficit
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(34,711,632 | ) | (35,016,791 | ) | ||||
Total stockholders’ equity (deficit)
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(3,373,143 | ) | (3,816,957 | ) | ||||
Total liabilities and stockholders’ equity
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$ | 6,243,502 | $ | 6,109,959 |
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, 2013 and 2012
2013
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2012
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Sales of equipment
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$ | 2,144,434 | $ | 4,004,960 | ||||
Sales of service and parts
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3,159,644 | 1,845,952 | ||||||
Net sales
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5,304,078 | 5,850,912 | ||||||
Material cost and labor for equipment
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1,759,599 | 3,584,272 | ||||||
Material cost and labor for service and parts
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1,890,076 | 1,042,691 | ||||||
Total cost of sales
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3,649,675 | 4,626,963 | ||||||
Gross profit
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1,654,403 | 1,223,949 | ||||||
Operating expenses:
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Selling and service expenses
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860,027 | 772,066 | ||||||
General and administrative expenses
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430,493 | 384,519 | ||||||
Research and development
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1,548 | - | ||||||
Corporate overhead
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89,879 | 117,799 | ||||||
Depreciation and amortization
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83,879 | 86,660 | ||||||
Gain on sale of fixed assets
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(822 | ) | 3,405 | |||||
Total operating expenses
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1,465,004 | 1,364,449 | ||||||
Operating income
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189,399 | (140,500 | ) | |||||
Other Expenses
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Interest expense, net
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158,759 | 211,682 | ||||||
Amortization of debt discount and financing costs
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- | 27,562 | ||||||
Gain (loss) related to lease obligation
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(272,227 | ) | 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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(584 | ) | (111 | ) | ||||
Total Other Expense, net
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(114,052 | ) | 330,149 | |||||
Net Income (loss)
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303,451 | $ | (470,649 | ) | ||||
Weighted average number of shares outstanding
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71,308,641 | 50,409,974 | ||||||
Basic and diluted (loss) per common share
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$ | 0.00 | (0.01 | ) |
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, 2013 and 2012
2013
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2012
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Sales of equipment
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$ | 8,148,002 | $ | 9,782,061 | ||||
Sales of service and parts
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8,244,440 | 4,681,664 | ||||||
Net sales
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16,392,442 | 14,463,725 | ||||||
Material cost and labor for equipment
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6,812,992 | 8,432,784 | ||||||
Material cost and labor for service and parts
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4,806,238 | 2,385,610 | ||||||
Total cost of sales
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11,619,230 | 10,818,394 | ||||||
Gross profit
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4,773,212 | 3,645,331 | ||||||
Operating expenses:
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Selling and service expenses
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2,500,445 | 2,103,108 | ||||||
General and administrative expenses
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1,122,094 | 1,099,696 | ||||||
Research and development
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12,047 | - | ||||||
Corporate overhead
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313,157 | 433,993 | ||||||
Depreciation and amortization
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250,006 | 262,630 | ||||||
Gain on sale of fixed assets
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(6,528 | ) | 2,456 | |||||
Total operating expenses
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4,191,221 | 3,901,883 | ||||||
Operating income (loss)
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581,991 | (256,552 | ) | |||||
Other Expenses
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Interest expense, net
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524,222 | 693,560 | ||||||
(Gain) loss related to lease obligation
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(272,227 | ) | 162,278 | |||||
Amortization of debt discount and financing costs
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8,106 | 123,026 | ||||||
Change in fair value of embedded conversion feature
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(2,943 | ) | (69,392 | ) | ||||
Change in fair value of warrants
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19,674 | (9,054 | ) | |||||
Total Other Expense, net
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276,832 | 900,418 | ||||||
Net Income (loss)
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305,159 | $ | (1,156,970 | ) | ||||
Weighted average number of shares outstanding
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71,156,500 | 41,250,487 | ||||||
Basic and diluted (loss) per common share
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$ | 0.00 | $ | (0.03 | ) |
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, 2013 and 2012
Operating activities:
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2013
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2012
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Net Income (loss)
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$ | 305,159 | $ | (616,185 | ) | |||
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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120,016 | 123,103 | ||||||
Depreciation and amortization
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250,006 | 175,471 | ||||||
Amortization of debt discount and financing costs
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8,106 | 95,464 | ||||||
Stock issued for services
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9,000 | 24,941 | ||||||
Change in fair value of lease obligation
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(272,227 | ) | 66,341 | |||||
Change in fair value of warrants
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19,674 | (8,942 | ) | |||||
Change in fair value of embedded conversion
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(2,943 | ) | (49,769 | ) | ||||
Gain on sales of fixed assets
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(6,528 | ) | (949 | ) | ||||
Changes in operating assets and liabilities:
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Accounts receivables
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(466,386 | ) | (698,388 | ) | ||||
Inventory
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30,855 | (79,929 | ) | |||||
Other assets
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(128,315 | ) | (18,947 | ) | ||||
Accounts payable
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(15,204 | ) | (292,622 | ) | ||||
Accrued liabilities and customer deposits
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15,097 | 272,546 | ||||||
Net cash used in operating activities
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(133,690 | ) | (1,079,516 | ) | ||||
Investing activities:
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Purchase of fixed assets
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(50,628 | ) | (31,246 | ) | ||||
Proceeds from sales of fixed assets
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5,805 | 40,622 | ||||||
Net cash (used) provided in investing activities
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(44,823 | ) | 9,376 | |||||
Financing activities:
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Proceeds provided by convertible debt
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- | 360,000 | ||||||
Net borrowings from factoring obligation
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(69,076 | ) | 747,674 | |||||
Proceed of promissory note
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- | 67,700 | ||||||
Payment of notes payable
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(9,000 | ) | (110,370 | ) | ||||
Cost associated with stock issuances
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(75 | ) | ||||||
Net cash (used) provided by financing activities
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(78,151 | ) | 1,065,004 | |||||
Increase (decrease) in cash and cash equivalents
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(256,664 | ) | (5,136 | ) | ||||
Cash and cash equivalents, beginning of year
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304,374 | 139,432 | ||||||
Cash and cash equivalents, end of period
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$ | 47,710 | $ | 134,296 |
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 s 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, Grove Power, Inc., a Florida corporation (“GPI”), acquired certain assets and assumed liabilities of R.B. Grove, Inc. 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 liabilities for a sales office in New Jersey. This business had open orders at date of acquisition of approximately $3,000,000. The Company agreed to pay the owner $150,000. This sales office has been consolidated with the 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 primary asset of the business was a contract with a major utility company to perform energy assessments for the six year period from 2010 to 2012.
On November 1, 2010, the Company acquired the assets of Stanza Systems, Inc., a software development company specializing in smart-grid applications. This company is doing business as Stanza Technologies (“Stanza”). The purchase price for this company consisted of $175,000 cash and assumed liabilities of $481,190. In addition, to complete this acquisition the Company had to satisfy the senior debt holders by offering common shares of the Company. The Company offered these debt holders 413,333 shares of common stock which was valued at the closing price of our stock as of November 1, 2010 resulting in a value of $186,000.
At September 30, 2013 and December 31, 2012, 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.
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, 2012 on Form 10-K filed with SEC on April 4, 2013.
Going Concern
The accompanying Financial Statements have been prepared assuming the Company will continue as a going concern. The Company’s net income for the three months ended September 30, 2013 was 303,451, the second profitable quarter in 2013. The net income for the nine months ended September 30, 2013 was $305,159. At September 30, 2013, the Company had an accumulated deficit of $34,711,632. The Company believes it will be profitable for the year 2013 and is in the process of restructuring its balance sheet. However, the accumulated deficit and the notes that are in default 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:
The Company has achieved positive EBITDA for several past quarters and has a positive Net Income for the 2nd and 3rd quarters of 2013 and the entire first 9 months of 2013. The Company expects to continue to operate in both a positive EBITDA and Net Income manner for the foreseeable future and this should have a beneficial impact on the Company’s ability to continue its operations.
.
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Management has been successful in extending the majority of the Convertible Notes to a new due date of July 1, 2014. These extensions were achieved to allow the Company the time to complete its restructuring of the balance sheets. These note holders will convert their notes and accrued interest into equity if the Company can obtain additional capital.
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.
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Management will continue to take steps to expand and increase its service sales and work order flow. Service sales account for the highest margins of any business segment and the quickest turnaround in terms of customer payments.
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.
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Management will seek to either restructure or replace its existing factoring agreement with either an asset based or bank line of credit before the end of the year 2013. Management believes the company is eligible for a lower cost lending facility and that this could save the Company up to $300,000 a year in interest and fees.
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9
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Supplemental Cash Flow Information Regarding Non-Cash Transactions
During the three and six months ended September 30, 2013 and 2012, the Company has entered into several non-cash transactions in order to provide financing for the Company and to conserve cash. The table below shows the transactions that occurred during the periods presented.
Three Months Ended
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Nine Months Ended
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September 30
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September 30
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2013
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2012
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2013
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2012
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Stock issued for services
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$ | - | $ | - | $ | 8,000 | $ | 44,500 | ||||||||
Common stock issued for conversion of Series D Preferred Stock
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$ | - | $ | - | $ | - | $ | 30,000 | ||||||||
Stock issued for the conversion of convertible debt
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$ | $ | 68,900 | $ | 2,913 | $ | 132,971 | |||||||||
Accounts Payable settled with stock
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$ | - | $ | - | $ | - | $ | 39,002 |
Interest paid for the three months ended September 30, 2013 and 2012 were $23,180 and $28,979, respectively. The interest paid for the nine months ended September 30, 2013 and 2012 were $71,351 and $82,061. The factoring fees paid for the three months ended September 30, 2013 and 2012 were $34,579 and $91,772, respectively. The factoring fees for the nine months ended September 30, 2013 and 2012 were $156,804 and $260,456.
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 six 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 six to seven years. Expenditures for major renewals and betterments that extend the original estimated economic useful lives of the applicable assets are capitalized. Expenditures for normal repairs and maintenance are charged to expense as incurred. The cost and related accumulated depreciation of assets sold or otherwise disposed of are removed from the accounts, and any gain or loss is included in operations.
Intangible Assets
The Company evaluates intangible assets and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable from its estimated future cash flows.
Recoverability of intangible assets and other long-lived assets is measured by comparing their net book value to the related projected undiscounted cash flows from these assets, considering a number of factors including past operating results, budgets, economic projections, market trends and product development cycles that represent customer lists, distribution list and contracts. These intangibles, except in process research and development (see note 2), have finite lives and therefore are required to be amortized to expense. The Company believes that the useful life of these intangibles ranges from 5-10 years.
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.
11
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The Company has examined the qualitative factors related the goodwill recorded as on our books. These factors includes the improving operations in each business unit, the improving economic business climate and the interest in the energy related investors, Therefore, we have not performed a detail evaluation of goodwill last year
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 September 30, 2013 and December 31, 2012 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 2009 and later remain subject to examination by the IRS and respective states
The Company has not recorded any taxes payable for the three and nine months ended September 30, 2013, as it has net operating losses that will offset any tax liabilities.
Earnings or 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 or earnings for common shareholders is increased for any preferred dividends. As of September 30, 2013 and 2012, the Company had potentially dilutive shares of 174.016,944 and 126,634,631 related to outstanding stock options, warrants and convertible securities that were not included in the calculation of loss per share, because their effect would have been anti-dilutive.
Share-Based Compensation
The Company uses the fair value method of accounting for share-based payments. Accordingly, the Company recognizes the cost of employee services received in exchange for awards of equity instruments based on the grant date fair value of those rewards. Options or share awards issued to non-employees are valued using the fair value method and expensed over the period services are provided.
12
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Segment Reporting
The Company operates in a two business segments, Power Distribution and Energy Services. Power Distribution consists of the sale of emergency, standby power equipment and renewable energy solutions. Energy Services consist of the sale of maintenance and service programs, interruptible rate demand response programs, monitoring program and energy audits.
New Accounting Standards and Updates Not Yet Effective
The following are new accounting standards and interpretations that may be applicable in the future to the Company:
In July, 2013 the FASB issued an Accounting Standards Update 2013-11, “Income Taxes (Topic 740) Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss or a Tax Credit Carryforward Exists.” This update will be effective for fiscal years and interim periods within those years beginning after December 15, 2013, The Company will evaluate its provision to determine its impact on our Consolidated Financial Statements, Other Accounting Standards Updates not effective until after September 30, 2013 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,
|
|||||||
2013
|
2012
|
|||||||
Parts
|
$ | 616,982 | $ | 543,551 | ||||
Work in process
|
477,333 | 577,297 | ||||||
Finished goods
|
68,736 | 85,251 | ||||||
Obsolescence reserve
|
(107,753 | ) | (150,000 | ) | ||||
Total
|
$ | 1,055,298 | $ | 1,056,099 |
13
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statement
NOTE 3 - NOTES PAYABLE
Notes payable consists of the following at September 30, 2013 and December 31, 2012:
September 30,
|
December 31,
|
|||||||
Short -Term Debt
|
2013
|
2012
|
||||||
Convertible Notes bearing interest at 12% due on demand
|
$ | 240,000 | $ | 650,000 | ||||
Convertible Note bearing interest at 12% due July 2014
|
2,500,000 | 1,890,000 | ||||||
Convertible Note bearing interest at 8% due April 2013
|
200,000 | |||||||
Promissory Note bearing interest at 12%% due July 1, 2014
|
100,000 | 100,000 | ||||||
Promissory Note bearing interest at 8% due March 9, 2014
|
67,700 | |||||||
Other loans in default
|
9,000 | 18,000 | ||||||
$ | 2,916,700 | 2,858,000 | ||||||
Long-term
|
||||||||
Promissory Note bearing interest at 8% due March 9, 2014
|
$ | - | $ | 67,700 | ||||
Total Debt
|
$ | 2,916,700 | $ | 2,925,700 |
As of September 30, 2013, certain note holders totaling a principal balance of $2,500,000 agreed to extend their note to July 1, 2014 in return for reducing their conversion price from $0.12 to $0.05. Since the new conversion price is higher than the current stock price there is no beneficial conversion feature to be recognized. In addition, a promissory note for $100,000 has also been extended to July 1, 2014. If the Company is successful in restructuring its Balance Sheet these notes and their accrued interest will convert into equity securities.
At September 30, 2013 the Company was in default on $240,000 of convertible notes payable. These notes are accruing interest at the annual default rate of 12%. These note holders will be given the option to convert into an equity security; however they have not extended their notes. The other loans consist of a note for $9,000. The Company paid off this Note as of the date of this filing.
NOTE 4 - 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 December 10, 2012 for twelve months with cancellation after 60 days’ notice and a right of first refusal to match the term of a competing offer. The separate agreement with GPI was not extended.
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 1.00% (as amended) 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 a 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.
14
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The security for this amended Agreement includes all the assets of the Company including the assets of TEWI, Stanza and SSI.
The amounts outstanding at September 30, 2013 and December 31, 2012 were $865,854 and $934,930, respectively. The factoring fees for the nine months ended September 30, 2013 and 2012 were $156,804 and $260,456 respectively. The interest expenses on this amended Agreement for the nine months ended September 30, 2013 and 2012 were $71,351 and $80,596 respectively. The factoring fees have been reclassified as additional interest expense.
On September 30, 2013, the Company has given 60 days notice to Harborcove that they do not plan to continue this factoring agreement as the Company believes given the continuing profitability, the Company will be able to replace this line with a credit line or a lower cost factoring arrangement.
NOTE 5 – ACCRUED LIABILITIES
Accrued liabilities consist of the following:
September 30,
|
December 31,
|
|||||||
2013
|
2012
|
|||||||
Accrued Compensation
|
$ | 532,770 | $ | 604,785 | ||||
Accrued Interest
|
991,480 | 732,291 | ||||||
Embedded conversion feature at fair value
|
- | 2,942 | ||||||
Common stock warrants, at fair value
|
20,437 | 763 | ||||||
Purchase obligation on stock option, at fair value
|
250,000 | 250,000 | ||||||
Owed per assets agreement with Stanza Systems
|
247,478 | 278,137 | ||||||
Accrued costs on completed jobs
|
321,828 | 232,695 | ||||||
Accrued sales tax
|
168,522 | 246,355 | ||||||
Accrued other
|
18,244 | 4,685 | ||||||
$ | 2,550,759 | $ | 2,352,653 |
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 payment plans to paid past due sales taxes with various state agencies.
NOTE 6 - INCOME TAXES
The Company’s effective income tax rate of 0.0% differs from the federal statutory rate of 35% for the reason set forth below for the periods below:
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
September 30.
|
September 30.
|
|||||||||||||||
2013
|
2012
|
2013
|
2012
|
|||||||||||||
Income taxes at the statutory rate
|
$ | 106,208 | $ | (160,021 | ) | $ | 106,806 | $ | (393,370 | ) | ||||||
Utilization of NOL
|
(110,262 | ) | - | (119,450 | ) | - | ||||||||||
Valuation Allowance
|
150,437 | 351,919 | ||||||||||||||
Permanent differences and other
|
4,054 | 9,584 | 12,644 | 41,451 | ||||||||||||
Total income tax
|
$ | - | $ | - | $ | - | $ | - |
15
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The following presents the components of the Company’s total income tax provision:
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
2013
|
2012
|
2013
|
2012
|
|||||||||||||
Current expense
|
$ | 110,262 | $ | - | $ | 119,450 | $ | - | ||||||||
Deferred benefit
|
(110,262 | ) | (150,437 | ) | (119,450 | ) | (351,919 | ) | ||||||||
Change in valuation
|
- | 150,437 | - | 351,919 | ||||||||||||
Total
|
$ | - | $ | - | $ | - | $ | - |
Deferred tax assets and liabilities reflect the net effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. The tax effects of primary temporary differences giving rise to deferred tax assets and liabilities for the three and nine months ended September 30 are as follows:
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
2013
|
2012
|
2013
|
2012
|
|||||||||||||
Deferred tax assets
|
||||||||||||||||
Amortization
|
6,884 | 1,861 | 20,652 | 5,670 | ||||||||||||
Non qualify stock option expense
|
13,932 | 20,615 | 42,006 | 61,881 | ||||||||||||
Fair value loss
|
- | 5,856 | ||||||||||||||
Operating losses carry forward
|
7,101,687 | 6,672,624 | 7,098,471 | 7,095,577 | ||||||||||||
Deferred Tax Liabilities
|
||||||||||||||||
Fair value income
|
(204 | ) | (6,907 | ) | - | (26,672 | ) | |||||||||
Depreciation
|
(3,400 | ) | (5,588 | ) | (10,200 | ) | (19,637 | ) | ||||||||
Net deferred assets
|
7,118,899 | 6,682,605 | 7,156,785 | 7,116,819 | ||||||||||||
Valuation Allowance
|
(7,118,899 | ) | (6,682,605 | ) | (7,156,785 | ) | (7,116,819 | ) | ||||||||
|
$ | - | $ | - | $ | - | $ | - |
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.
16
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
At September 30, 2013 the Company had consolidated federal net operating losses of $20,400,795. The expiration dates 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
|
2,088,153 | |||
2032
|
2,746,742 | |||
2033
|
1,336,156 | |||
$ | 20,400,795 |
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. The Class A Warrant and Class B Warrant expired on January 31, 2013 and none were exercised.
For the nine months ended September 30, 2013, no shares were converted
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 – LEASE OBLIGATION SETTLEMENT
On September 19, 2013, The Company and Paragon Operating Associates, L.P. reached a settlement agreement to resolve the judgment of $302,227.15 for unpaid rent by Stanza. The settlement agreement is for the Company to pay $30,000 in 10 equal installments of $3,000 each. The Company had previously recognized the judgment in other expense during years 2011 and 2012. The company has recognized the reversal of 272,227.15 as other income in the third quarter 2013. Under the agreement if Stanza’s customer extends its contract additional payments of $3000 per month will be due to the end of the extension period. The Company does not believe this contract will be extended past its expiration on December 31, 2013.
17
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 9– 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. These warrants have expired. During the nine months ended September 30, 2013, no treasury shares were converted into Common Stock.
NOTE 10 – STOCK OPTIONS
The Company did not issue any stock options in the nine months ended September 30, 2013. 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
|
||||
Expected volatility
|
96
|
%
|
||
Vesting period
|
5
|
|||
Expected term
|
7
|
|||
Expected dividends
|
0
|
%
|
||
Risk free rate
|
1
|
%
|
The following is a table shows a summary of activity for the nine months ended September 30, 2013 and the year ended December 31, 2012:
Outstanding December 31, 2011
|
7,735,000 | $ | 0.31 | |||||
Granted January 16.2012
|
4,025,000 | $ | 0.07 | |||||
Granted March 27 2012
|
500,000 | $ | 0.02 | |||||
Exercised
|
||||||||
Forfeited
|
(2,030,000 | ) | $ | 0.26 | ||||
Outstanding December 31, 2012
|
10,230,000 | $ | 0.31 | |||||
Granted
|
- | |||||||
Exercised
|
- | |||||||
Forfeited
|
(82,500 | ) | $ | 0.19 | ||||
Outstanding September 30, 2013
|
10,147,500 | $ | 0.23 | |||||
Exercisable September 30, 2013
|
6,900,125 | $ | 0.24 |
As of September 30, 2013, the nonvested options totaled 3,247,375 shares. There is approximately $200,000 of unrecognized compensation and share-based expense arrangements that have been granted. These costs will be recognized over a weighted average period of 2.25 years. At June 30, 2013, the aggregate intrinsic value of exercisable stock options was $201,000.
18
NOTE 11 – COMMON STOCK TRANSACTIONS
During the nine months ended September 30, 2013 the Company issued the following shares of common stock:
●
|
The company issued 150,000 shares to a consultant for services performed with a value of $3,000.
|
●
|
The company issued 250,000 shares for an investor advisor for a value at $5,000.
|
●
|
On April 2, 2013, Southridge Partners converted the balance of accrued interest of $2,903 that was outstanding into 208,549 the Company’s common stock.
|
During the year ended December 31, 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 33,881,203 shares of common stock for the conversion in accordance with Security Transfer Agreements in exchange for the retirement of $153,602 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 an accounts payable totaling $39,162.
|
NOTE 12 - COMMON STOCK WARRANTS
There were no warrants issued during the nine months ended September 30, 2013. There were no warrants exercised during the nine months ended September 30, 2013, however 6,011,250 of warrants expired without being exercised. The following table shows the warrants outstanding at September 30, 2013:
Number of
|
Exercise
|
Expiration
|
||||
Warrants
|
Purpose
|
Price range
|
Date
|
|||
200,000
|
Acquisition of Grove Power, Inc.
|
$
|
0.01
|
Jan-2014
|
||
2,143,425
|
Extension of Convertible Notes
|
$
|
0.10
|
Apr-2017
|
||
230,000
|
Convertible Debt Offering 2009/2010
|
$
|
0.25
|
Dec-2014 –Mar 2015
|
||
2,250,000
|
Convertible Debt Offering 2010
|
$
|
0.15
|
Jan-2015 - Nov -2015
|
19
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 13 – FAIR VALUE
GAAP provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. GAAP also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets. The fair value measurements are disclosed by level within that hierarchy. The Company adopted the provisions of fair value measurements as of January 1, 2009. Hierarchical levels are directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:
Level 1 — Inputs were unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2 — Inputs (other than quoted prices included in Level 1) were either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
Level 3 — Inputs reflected management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration was given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
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 six 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,
|
|||||||
2013
|
2012
|
|||||||
Common stock price
|
$ | 0.0315 | $ | 0.01 | ||||
Exercise price
|
$ | 0.15 | $ | 0.15 | ||||
Volatility
|
131.50 | % | 89.80 | % | ||||
Interest rate
|
0.09 | % | 1.50 | % | ||||
Remaining Terms
|
2 yrs
|
3 yrs
|
2.
|
Embedded beneficial conversion options were determined by using the Black –Scholes methods with the following input variables at December 31, 2012. This conversion feature was fully exercise during the nine months ended September 30, 2013
|
December 31,
|
||||
2012
|
||||
Common stock price
|
$
|
0.01
|
||
Conversion price
|
$
|
0.005
|
||
Terms in years
|
0.3
|
|||
Volatility
|
89.80
|
%
|
||
Interest rate
|
0.15
|
%
|
20
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
3.
|
Purchase obligation of a stock option represents the value of the purchase obligation to buyback these options at any time during the next two years. The agreement is for 1,000,000 options with a guarantee buy back provision at $0.25, which is also the exercise price.
|
The following table summarizes the financial instruments measured at fair value in the Consolidated Balance Sheet as of September 30, 2013.
Fair Value Measurements
|
||||||||||||
Assets
|
Level 1
|
Level 2
|
Level 3
|
Total
|
||||||||
Liabilities
|
||||||||||||
Common stock warrants
|
$ | 20,437 | $ | 20,437 | ||||||||
Purchase obligations for stock option
|
$ | 250,000 | $ | 250,000 | ||||||||
Total
|
$ | 270,437 | $ | 270,437 |
The following table summarizes the financial instruments measured at fair value in the Consolidated Balance Sheet as of December 31, 2012:
Fair Value Measurements
|
||||||||||||
Assets
|
Level 1
|
Level 2
|
Level 3
|
Total
|
||||||||
Liabilities
|
||||||||||||
Common stock warrants
|
$
|
763
|
$
|
763
|
||||||||
Purchase obligations for stock option
|
$
|
250,000
|
$
|
250,000
|
||||||||
Embedded beneficial conversion option
|
$
|
2,942
|
$
|
2,942
|
||||||||
Total
|
$
|
253,705
|
$
|
253,705
|
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, 2012
|
$ | 253,705 | ||
Change in fair value of embedded conversion
|
(2,942 | ) | ||
Change in fair value of stock options
|
19,674 | |||
Balance September 30, 2013
|
$ | 270,437 |
Note 14 –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.
21
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Summarized financial information concerning our reportable segments is shown in the following table. 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, goodwill and in-process research and development. Customer lists and other intangibles are allocated to their segments.
For the Three Months Ended September 30, 2013
|
||||||||||||||||
Power
|
Energy
|
Unallocated
|
||||||||||||||
Distribution
|
Services
|
Costs
|
Total
|
|||||||||||||
Sales
|
$ | 2,144,434 | $ | 3,159,644 | $ | 5,304,078 | ||||||||||
Cost of Sales
|
1,759,599 | 1,890,076 | 3,649,675 | |||||||||||||
Gross profit
|
384,835 | 1,269,568 | 1,654,403 | |||||||||||||
Operating Expenses:
|
||||||||||||||||
Selling and service expenses
|
218,738 | 641,289 | 860,027 | |||||||||||||
General and administrative expenses
|
123,225 | 252,477 | 375,702 | |||||||||||||
Research and development
|
1548 | 1,548 | ||||||||||||||
Depreciation & amortization
|
23,924 | 59,781 | 174 | 83,879 | ||||||||||||
Corporate overhead
|
- | - | 89,879 | 89,879 | ||||||||||||
Gain or loss on fixed asset
|
- | (100 | ) | (722 | ) | (822 | ) | |||||||||
Operating Expense
|
365,887 | 953,447 | 90,879 | 1,410,213 | ||||||||||||
Operating Income (Loss)
|
$ | 18,948 | $ | 316,121 | $ | (90,879 | ) | $ | 244,190 | |||||||
Total assets
|
$ | 2,108,476 | $ | 2,687,494 | $ | 1,447,531 | $ | 6,243,501 | ||||||||
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
|
370,483 | 401,583 | 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 fixed asset
|
- | 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 | ) | |||||||||
Net Loss
|
$ | (214,193 | ) | $ | 100,327 | $ | (356,783 | ) | $ | (470,649 | ) | |||||
Total assets
|
$ | 2,645,829 | $ | 2,233,572 | $ | 1,995,037 | $ | 6,874,438 |
22
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2013
|
||||||||||||||||
Power
|
Energy
|
Unallocated
|
||||||||||||||
Distribution
|
Services
|
Costs
|
Total
|
|||||||||||||
Sales
|
$ | 8,148,002 | $ | 8,244,440 | $ | 16,392,442 | ||||||||||
Cost of sales
|
6,812,992 | 4,806,238 | 11,619,230 | |||||||||||||
Gross profit
|
1,335,010 | 3,438,202 | 4,773,212 | |||||||||||||
Operating Expenses:
|
||||||||||||||||
Selling and service expenses
|
701,364 | 1,799,081 | 2,500,445 | |||||||||||||
General and administrative expenses
|
304,536 | 817,558 | 1,122,094 | |||||||||||||
Research and development
|
- | - | 12,047 | 12,047 | ||||||||||||
Depreciation & amortization
|
71,967 | 177,199 | 840 | 250,006 | ||||||||||||
Loss (gain) on sale of fixed assets
|
- | (5,805 | ) | (723 | ) | (6,528 | ) | |||||||||
Corporate overhead
|
- | - | 313,157 | 313,157 | ||||||||||||
Operating expense
|
1,077,867 | 2,788,033 | 325,321 | 4,191,221 | ||||||||||||
Operating income (loss)
|
$ | 257,143 | $ | 650,169 | $ | (325,321 | ) | $ | 581,991 | |||||||
Total assets
|
$ | 2,108,476 | $ | 2,687,494 | $ | 1,447,531 | $ | 6,243,501 | ||||||||
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 | ||||||||||||
Loss (gain) on sale of fixed assets
|
(60 | ) | 1,609 | 907 | 2,456 | |||||||||||
Corporate overhead
|
- | - | 433,993 | 433,993 | ||||||||||||
Operating expense
|
1,532,949 | 1,931,982 | 436,952 | 3,901,883 | ||||||||||||
Operating income (loss)
|
$ | (183,672 | ) | $ | 364,072 | $ | (436,952 | ) | $ | (256,552 | ) | |||||
Total Assets
|
$ | 2,645,829 | $ | 2,165,781 | $ | 1,542,555 | $ | 6,354,165 |
NOTE 15– SUBSEQUENT EVENT
The Company has performed a review of events subsequent to the balance sheet date and, except for the matters described above in this note, no other matters require disclosure.
23
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 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. This company is inactive as we completed the six year contract related to this business.
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.
24
RESULTS OF OPERATIONS
Three Months Ended September 30, 2013 Compared to the Three Months Ended September 30, 2012
Sales
Sales for the three months ended September 30, 2013 were $5,304,078 compared to $5,850.912 for the three months ended September 30, 2012. The following table summarizes our sale by their segments:
Power
|
Energy
|
|||||||
Distribution
|
Services
|
|||||||
2013
|
$ | 2,144,434 | $ | 3,159,644 | ||||
2012
|
4,004,960 | 1,845,952 | ||||||
Increase (decrease)
|
$ | (1,860,526 | ) | $ | 1,313,692 | |||
Percent Change
|
-46 | % | 71 | % |
The lower sales in Power Distribution segment were attributable to the Company's decision to close the Power Distribution of our Florida office effective August 1, 2012 as it was not profitable. The sales for the Florida office in third quarter of 2012 were $409,000. In addition, our New York office Power Distribution completed a $1.2 million project in the third quarter of 2012 for a national energy company which contributed significantly to the revenues for that quarter.
The increased sales in the Energy Services segment are mainly attributable to the increased sales to national accounts. Sales to national accounts for the three months ended September 30, 2013 totaled $1,437,000 compared to $627,000 in the three months ended September 30, 2012 The sales increase in Energy Services is also partially attributable to the retrofitting of pollution control equipment as required by the EPA on older generators that are non-emergency standby units, prime power applications, load management/peak shaving and rental units. In the three months ended September 30, 2013, sales for the retrofitting were $371,000. Our traditional service programs, UPS and part sales were increased approximately 11% over the three months ended September 30, 2012.
Cost of Sales
Cost of sales was $3,649,675 for the three months ended September 30, 2013 compared to $4,626,963 for the three months ended September 30, 2012.
Power
|
Energy
|
|||||||
Distribution
|
Services
|
|||||||
2013
|
$ | 1,759,599 | $ | 1,890,076 | ||||
2012
|
3,584,272 | 1,042,691 | ||||||
Increase (decrease)
|
$ | (1,824,673 | ) | $ | 847,385 | |||
Percent of Sales
|
||||||||
2013
|
82.1 | % | 59.8 | % | ||||
2012
|
89.5 | % | 56.5 | % |
The decrease in cost of sales in the Power Distribution lower sales volume as noted above. The high percentage of cost of sales in 2012 was attributable to a large project for New York that had very low margins. The percentage of cost of sales for 2013 is in the accepted range of 82 to 86 percent of sales.
25
The higher costs for our Energy Services Segment are attributable to the higher sales volume. The increase of cost as a percentage of sales is attributable to a change in the mix of products. The national account program and the retrofitting of pollution control equipment have higher costs because we use subcontractors and incur expensive material costs for the pollution equipment, with an average cost as a percentage of sales of approximately 70%. These two products accounted for 57% of our Energy Service sales for the three months ended September 30, 2013 compared to 34% for the three months ended September 30, 2012. The percentage cost of sales for our traditional service business for the three months ended September 30, 2013 was 45%, consistent with prior periods.
Sales and Service Expenses
Sales and services expenses include all of sales and service personnel, benefits related to these personnel and other costs in support of these functions. The Sales and Service expenses were $860,027 for the three months ended September 30, 2013, compared to $772,066 for the three months ended September 30, 2012. The following table summarizes the areas of costs in this category:
Power
|
Energy
|
|||||||
|
Distribution
|
Services
|
||||||
2013
|
||||||||
Payroll related costs
|
$ | 194,727 | $ | 476,015 | ||||
Shared based compensation
|
7,142 | 28,247 | ||||||
Other
|
16,869 | 137,027 | ||||||
Total
|
$ | 218,738 | $ | 641,289 | ||||
2012
|
||||||||
Payroll related cost
|
$ | 304,076 | $ | 327,909 | ||||
Shared based compensation
|
6,252 | 12,896 | ||||||
Other
|
49,888 | 71,045 | ||||||
Total
|
$ | 360,216 | $ | 411,850 | ||||
Increase (decrease)
|
$ | (141,478 | ) | $ | 229,439 | |||
Percent of Sales
|
||||||||
2013
|
10.2 | % | 20.3 | % | ||||
2012
|
9.0 | % | 22.3 | % |
The decrease in the Power Distribution costs is attributable to the Company decision to discontinue the sales operations in our Florida office as it was not a profitable operation.
The increase in costs in the Energy Service segment is primarily attributable to the increasing volume of business being driven by our national account program. The increase in the Energy Service Other category was primarily attributable to an inventory write off of $46,000, higher vehicle maintenance costs and greater use of consumables and small tools due to higher number of jobs.
26
General and Administrative Expenses
The general and administrative expense category reflects the cost of each subsidiary’s management, accounting, facility and office functions which we can allocate to our segments. General and administrative expenses were $430,493 for the three months ended September 30, 2013, compared to $384,519 for the three months ended September 30, 2012. The following table breaks out general and administrative expenses by segment for the three months ended September 30, 2013 and 2012:
Power
|
Energy
|
|||||||
|
Distribution
|
Services
|
||||||
2013
|
||||||||
Payroll related costs
|
$ | 30,649 | $ | 66,848 | ||||
Shared based compensation
|
1,893 | 1,893 | ||||||
Facilities
|
29,373 | 90,786 | ||||||
Other
|
61,310 | 92,950 | ||||||
Total
|
$ | 123,225 | $ | 252,477 | ||||
2012
|
||||||||
Payroll related cost
|
$ | 31,326 | $ | 62,150 | ||||
Shared based compensation
|
4,753 | 11,681 | ||||||
Facilities
|
62,245 | 70,637 | ||||||
Other
|
59,613 | 82,114 | ||||||
Total
|
$ | 157,937 | $ | 226,582 | ||||
Increase
|
$ | (34,712 | ) | $ | 25,895 |
The increase in payroll related costs in the Power Distribution and the Energy Service is attributable to an increase in the number of support staff in our Minnesota office, as this office performs accounting functions for all operating division. In addition, the Energy Services segment includes the costs related to the Chief Technical Officer whose primary function is to assure our monitoring system is operating properly. The increase in the Energy Service facilities costs is attributable to the Florida office rent which was allocated 50/50 between the two segments in 2012. However, this office is now service only all costs on allocated to the Energy Service segment.
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. In the three months ended September 30, 2013, we incurred $1,548 of additional costs to enhance the program to monitor RICE NESHAP data.
27
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, 2013 was $89,879 as compared to $117,799 for the three months ended September 30, 2012. The following table show expenses related to corporate activities:
2013
|
2012
|
|||||||
Payroll related activates
|
$ | 73,103 | $ | 71,082 | ||||
Stock Compensation
|
632 | 22,319 | ||||||
Professional Fees
|
225 | 10,941 | ||||||
Travel
|
7,024 | 570 | ||||||
Other
|
8,895 | 12,887 | ||||||
Total
|
$ | 89,879 | $ | 117,799 |
The reduction in share based compensation is attributable to the fact that previous stock options have fully vested and expensed in prior years. This represents a 300,000 share stock option with an exercise price of $0.07 for the CFO vesting over four years. The reduction in professional fee is attributable to not using an advisory board this year. The increase in travel was due to the Company working with firms to raise additional capital.
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, 2013 was $83,879 compared to $86,660 in the three months ended September 30, 2012. The reduction of expense is attributable to a fully amortized customer list as of the end of 2012 and some fixed assets that have been fully depreciated.
Other Expenses
The following table below is summarizing the items in this category:
2013
|
2012
|
|||||||
Interest expense, net | $ | 124,180 | $ |
119,909
|
||||
Factoring Fees
|
34,579 | 91,772 | ||||||
(Gain) Loss related to lease obligation
|
(272,227 | ) | 110,639 | |||||
Amortization of debt discount
|
- | 19,457 | ||||||
Amortization of deferred financing costs
|
- | 8,106 | ||||||
Change in fair value of embedded conversion feature
|
- | (19,623 | ) | |||||
Fair value of warrants
|
(584 | ) | (111 | ) | ||||
Total
|
$ | (114,052 | ) | $ | 330,149 |
The decrease in factoring fees is attributable to lower receivables that were factored and a change in the factoring agreement. The debt discount and financing costs related to the convertible debt was fully amortized in 2012. The amount amortized as deferred financing cost was fully amortized at the end of the first quarter 2013.
The gain related to the lease obligation is attributable of Settlement Agreement reached with Paragon Operating Associates, L.P. The company in previous years recoded the full judgment of $302,227.15. Under this agreement the Company will pay a sum of $30,000 in 10 equal monthly installments, Additional payments may be due if the Stanza contract with a customer is extended beyond its expiration date of 12/2013. The Company does not intend to extend the contract.
28
RESULTS OF OPERATIONS
Nine Months Ended September 30, 2013 Compared to the Nine Months Ended September 30, 2012
Sales
Sales for the nine months ended September 30, 2013 were $16,392,442 compared to $14,463,725 for the nine months ended September 30, 2012. The following table summarizes our sales by their segments:
Power
|
Energy
|
|||||||
Distribution
|
Services
|
|||||||
2013
|
$ | 8,148,002 | $ | 8,244,440 | ||||
2012
|
9,782,061 | 4,681,664 | ||||||
Increase (Decrease)
|
$ | (1,634,059 | ) | $ | 3,562,776 | |||
Percent change
|
-17 | % | 76 | % |
The lower sales in the Power Distribution segment was attributable to a large project sold in 2012 through our New York office for $1.2 million, and the Company’s decision to close the Power Distribution of our Florida office effective August 1, 2012 as it was not profitable. Sales for the Florida office in the first half of 2012 were $1.1 million. The actual sales growth without the large project for New York and Florida Power Distribution sale would be 8.5% for the first nine months of 2013.
The increased sales in the Energy Services segment are primarily attributable to the retrofitting of pollution control equipment as required by the EPA on older generators that are non-emergency standby units, prime power applications, load management/peak shaving and rental units. In the nine months ended September 30, 2013, sales for the retrofitting were $1,578,000. Sales to national accounts for the nine months ended September 30, 2013 totaled $2,973,000 compared to $1,424,000 in the nine months ended September30, 2012. Sales for our traditional service programs, UPS and part sales increased approximately 13% over the nine months ended September30, 2012.
Cost of Sales
Cost of sales was $11,619,230 for the nine months ended September 30, 2013 compared to $11,818,394 for the nine months ended September 30, 2012.
Power
|
Energy
|
|||||||
Distribution
|
Services
|
|||||||
2013
|
$ | 6,812,992 | $ | 4,806,238 | ||||
2012
|
8,432,784 | 2,385,610 | ||||||
Increase (Decrease)
|
$ | (1,619,792 | ) | $ | 2,420,628 | |||
Percent of Sales
|
||||||||
2013
|
83.6 | % | 58.3 | % | ||||
2012
|
86.2 | % | 51.0 | % |
The decrease in cost of sales in the Power Distribution is due to lower volume as noted above and the high cost of sale in 2012 of the New York large project. The percentage of sales has historically been in the range of 82 to 85 percent of sales which is consistent with the 2013 percentage shown in the table above.
29
The higher costs for our Energy Services Segment are attributable to the higher sales volume. The increase of cost as a percentage of sales is attributable to a change in the mix of products. The national account program and the retrofitting of pollution control equipment have higher costs because we use subcontractors for the national account program and incur expensive material costs for the pollution equipment, with an average cost as a percentage of sales of approximately 70%. These two products comprised 55% of our Energy Service sales for the nine months ended September 30, 2013 compared to 30% for the nine months ended September 30, 2012. The percentage cost of sales for our traditional service business for the nine months ended September 30, 2013 was 42%.
Sales and Service Expenses
Sales and services expenses include all of sales and service personnel, benefits related to these personnel and other costs in support of these functions. The Sales and Service expenses were $2,500,445 for the nine months ended September 30, 2013 compared to $2,103,108 for the nine months ended September 30, 2012. The following table summarizes the areas of costs in this category:
Power
|
Energy
|
|||||||
|
Distribution
|
Services
|
||||||
2013
|
||||||||
Payroll related costs
|
$ | 628,802 | $ | 1,392,935 | ||||
Shared based compensation
|
21,605 | 85,100 | ||||||
Other
|
50,957 | 321,046 | ||||||
Total
|
$ | 701,364 | $ | 1,799,081 | ||||
2012
|
||||||||
Payroll related cost
|
$ | 896,378 | $ | 894,734 | ||||
Shared based compensation
|
18,893 | 38,315 | ||||||
Other
|
61,892 | 192,896 | ||||||
Total
|
$ | 977,163 | $ | 1,125,945 | ||||
Increase (Decrease)
|
$ | (275,799 | ) | $ | 673,136 | |||
Percent of Sales
|
||||||||
2013
|
9 | % | 22 | % | ||||
2012
|
10 | % | 24 | % |
The decrease in the Power Distribution costs is attributable to the Company’s decision to discontinue the equipment sales operations in our Florida office as it was not profitable.
The increase in costs in the Energy Service segment is primarily attributable to the increasing volume of business being driven by our national account program and our work on RICE/NESHAP product. The increase in the Energy Service “Other” category was primarily attributable to higher vehicle maintenance costs, recruiting fees, greater use of consumables and small tools and inventory adjustments.
30
General and Administrative Expenses
The general and administrative expense category reflects the cost of each subsidiary’s management, accounting, facility and office functions which we can allocate to our segments. General and administrative expenses were $1,122,094 for the nine months ended September 30, 2013, compared to $1,099,696 for the nine months ended September 30, 2012. The following table itemizes general and administrative expenses for the nine months ended September 30, 2013 and 2012:
Power
|
Energy
|
|||||||
|
Distribution
|
Services
|
||||||
2013
|
||||||||
Payroll related costs
|
$ | 102,880 | $ | 192,614 | ||||
Shared based compensation
|
5,708 | 5,708 | ||||||
Facilities
|
85,515 | 241,613 | ||||||
Travel
|
46,170 | 81,504 | ||||||
Other
|
64,263 | 296,119 | ||||||
Total
|
$ | 304,536 | $ | 817,558 | ||||
2012
|
||||||||
Payroll related cost
|
$ | 82,299 | $ | 203,973 | ||||
Shared based compensation
|
19,378 | 35,978 | ||||||
Facilities
|
169,311 | 184,809 | ||||||
Travel
|
49,729 | 46,707 | ||||||
Other
|
130,292 | 177,220 | ||||||
Total
|
$ | 451,009 | $ | 648,687 | ||||
Increase (Decrease)
|
$ | (146,473 | ) | $ | 168,871 |
The increase in payroll related costs in the Power Distribution and the Energy Service is attributable to an increased number of support staff in our Minnesota office, as this office performs accounting functions for all operating divisions. The decrease in “Other cost” amount in Power Distribution is attributable to a bad debt recovery totaling $69,300. The increase in the Energy Service “Travel Cost” is attributable to the additional travel by our CEO, CTO, Accounting Manager, President and Service Manager to have operational meetings with onsite personnel.
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. In the nine months ended September 30, 2013, we incurred $12,047 of additional costs to enhance the program to monitor RICE/NESHAP data.
31
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, 2013 was $313,157 as compared to $433,993 for the nine months ended September 30, 2012. The following table shows expenses related to corporate activities:
2013
|
2012
|
|||||||
Payroll related activates
|
$ | 245,764 | $ | 240,412 | ||||
Stock Compensation
|
1,895 | 69,446 | ||||||
Professional Fees
|
11,532 | 54,382 | ||||||
Travel
|
12,028 | 17,443 | ||||||
Other
|
41,938 | 52,310 | ||||||
Total
|
$ | 313,157 | $ | 433,993 |
The reduction in share based compensation is attributable to the fact that previous stock options have fully vested and expensed in prior years. This represents a 300,000 share stock option with an exercise price of $0.07 for the CFO vesting over four years. The reduction in professional fees is attributable to not using an investor relation firm this year. The increase in payroll related activities is due to returning the CEO salary to the level before pay cuts, partially offset by the CFO reducing his time to three days a week.
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, 2013 was $250,006 compared to $262,630 in the nine months ended September 30, 2012. The reduction of expense is attributable to a fully amortized customer list as of the end of 2012 and some fixed assets that have been fully depreciated.
Other Expenses
The following table below summarizes the items in these categories for the nine months ended September 30:
2013
|
2012
|
|||||||
Interest expense, net
|
$ | 367,418 | $ | 433,104 | ||||
Factoring Fees
|
156,804 | 260,456 | ||||||
(Gain) Loss related to lease obligation
|
(272,227 | ) | 162,278 | |||||
Amortization of debt discount
|
- | 105,625 | ||||||
Amortization of deferred financing costs
|
8,106 | 17,401 | ||||||
Change in fair value of embedded conversion feature
|
(2,943 | ) | (69,392 | ) | ||||
Fair value of warrants
|
19,674 | (9,054 | ) | |||||
Total
|
$ | 276,832 | $ | 900,418 |
The decrease in interest expense is attributable to reduced finance charges from vendors and governmental agencies. The lower factoring fees are attributable to the change in our factoring agreement and lower level of factoring receivables. The debt discount related to the convertible debt was fully amortized in 2012 and the amount amortized in 2013 relates to deferred financing costs that was fully amortized in the first quarter of 2013.
The gain related to the lease obligation is attributable of Settlement Agreement reached with Paragon Operating Associates, L.P. The company in previous years recoded the full judgment of $302,227.15. Under this agreement the Company will pay a sum of $30,000 in 10 equal monthly installments, Additional payments may be due if the Stanza extends the current contract which is set to expire at the end of this year. The Company does not plan to extend the contract.
32
Liquidity and Capital Resources
The Company recorded net income for the nine months ended September 30, 2013 of $305,159. As of September 30, 2013 we have an accumulated deficit $34,711,632. On September 30, 2013 we were in default on $240,000 of convertible notes. At June 30, 2013, certain note holders elected to extend their convertible notes until July 1, 2014 in order to help the Company restructure their balance sheet and raise some additional capital. The total notes extended were $2,475,000. Under the extension the note holders received a reduce conversion price from $0.12 to $0.05. With the improving financial results and settling some lawsuits, the Company believes it will be able to raise additional capital. While there is no guarantee that these efforts will result in any new capital for the Company, these potential funds would have a significant impact on the Company financial position and its cash flow.
The Company has had periodic difficulties keeping current with various suppliers during the past few years. Most of our major vendors require us to pay in 30 days, however collection of payment from our customers takes an average of 60 days and therefore we have used our factoring obligation to pay our suppliers in a timely manner. The cost of the factoring fees and interest paid to factor our receivable for the nine months ended September 30, 2013 was $228,156. These extra costs have had an adverse impact on our liquidity position. The Company has given notice to our factoring company that we plan to terminate this agreement and replace it with a lower cost credit agreement.
The Company was profitable for the second and third quarter and for the nine months ended September 30, 2013. This profitability will allow us to generate sufficient cash flow to operate the business. The Company believes it will have its first profitable year in its history and will be able to utilize some of their tax loss carryforwards to minimize tax expenses.
33
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. These non-GAAP measures are not in accordance with, or alternative for, generally accepted accounting principles in the United States. For example, Management uses 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.
The GAAP measure most comparable to adjusted EBITDA is GAAP net income (loss): reconciliation for adjusted EBITDA to GAAP net income (loss). 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, 2013 and 2012, respectively, as well as reasons for excluding individual items.
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Management defines adjusted EBITDA as net income (loss), excluding depreciation, amortization, stock based compensation, interest, 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 us based on our estimate of the useful life of tangible and intangible assets. These estimates could vary from the actual performance of the asset, are based on the value determined on acquisition date and may not be indicative of current or future capital expenditures. Management has also eliminated the effect of contingent consideration that was established in the purchase of Stanza which based on current assumptions this liability will not be realized. We also will eliminate from our net loss the present value of the lease obligation as this is not part of our continuing operations.
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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.
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The reconciliation of adjusted EBITDA to net loss is set forth on the next page:
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Reconciliation of adjusted EBITDA to GAAP Net Income (Loss)
For the three and nine months ended September 30 2013 and 2012
Three Months Ended September 30,
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2013
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2012
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Net (Income) loss
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$ | 303,451 | $ | (470,649 | ) | |||
Add back:
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Depreciation and amortization
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83,879 | 86,660 | ||||||
Stock based compensation
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39,806 | 69,342 | ||||||
Interest expense and factoring fees
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158,759 | 211,682 | ||||||
(Gain) or loss on lease obligation
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(272,227 | ) | 110,639 | |||||
Amortization of debt discount
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- | 27,562 | ||||||
Fair value adjustment of conversion feature
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- | (19,623 | ) | |||||
Fair value adjustment on warrants
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(584 | ) | (111 | ) | ||||
Adjusted EBITDA
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$ | 313,085 | $ | 15,502 | ||||
Nine Months Ended September 30,
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2013 | 2012 | |||||||
Net (Income) loss
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$ | 305,159 | $ | (1,156,970 | ) | |||
Add back:
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Depreciation and amortization
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250,006 | 262,630 | ||||||
Stock based compensation and payments
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138,457 | 217,386 | ||||||
Interest expense and factoring fees
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524,222 | 693,560 | ||||||
(Gain) or loss on lease obligation
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(272,227 | ) | 162,278 | |||||
Amortization of debt discount
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8,106 | 123,026 | ||||||
Fair value adjustment of conversion feature
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(2,943 | ) | (69,392 | ) | ||||
Fair value adjustment on warrants
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19,674 | (9,054 | ) | |||||
Adjusted EBITDA
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$ | 970,454 | $ | 223,464 |
Off-Balance Sheet Arrangements
None.
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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 September30.2013 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, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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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. On September 19, 2013, The Company and Paragon Operating Associates, L.P. reached a settlement agreement to resolve the judgment The settlement agreement is for the Company to pay $30,000 in 10 equal installments. Under the agreement if Stanza extends its contract beyond December 2013, additional payments of $3000 per month will be due until the end of the extension period. The Company does not believe this contract will be extended past it expiration.
Not applicable.
None
During the quarter ended September30, 2013 the following securities were in default:
Convertible notes payable, bearing interest at 12%, due on demand
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$ | 240,000 | ||
Promissory Notes bearing interest at 12%, due on demand
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$ | 9,000 |
Not applicable
None.
Exhibit
No.
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Description
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31.1
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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.
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31.2
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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.
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32.1
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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.
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32.2
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Certification of James J. Fahrner, Chief Financial Officer of the Company, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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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.
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TITAN ENERGY WORLDWIDE, INC.
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Dated: October 21, 2013
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By:
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/s/ Jeffrey W. Flannery
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Jeffrey W. Flannery
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Chief Executive Officer
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Dated: October 21, 2013
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By:
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/s/ James J. Fahrner
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James J. Fahrner
Chief Financial Officer
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EXHIBIT INDEX
Exhibit
No.
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Identification of Exhibit
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31.1
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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.
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31.2
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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.
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32.1
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Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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32.2
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Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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