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EX-32.1 - CERTIFICATION - Titan Energy Worldwide, Inc.f10k2013ex32i_titanenergy.htm
EX-31.1 - CERTIFICATION - Titan Energy Worldwide, Inc.f10k2013ex31i_titanenergy.htm
EX-21 - SUBSIDIARIES - Titan Energy Worldwide, Inc.f10k2013ex21_titanenergy.htm


U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
For the fiscal year ended December 31, 2013
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
For the transition period from ________ to ________
 
Commission File No. 000-26139

Titan Energy Worldwide, Inc.
 
Nevada
 
26-0063012
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
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 
Securities registered under Section 12(b) of the Exchange Act: None.
 
Securities registered under Section 12(g) of the Exchange Act:

Common stock, par value $0.0001 per share.
(Title of class)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act  Yes ¨   No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨   No x

Indicate by check mark whether the Company (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 twelve months (or such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes o   No x

Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained in this form, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 definitions of “large accelerated filer,” ““accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
Smaller reporting company x

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
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of September 30, 2013 (the last business day of the registrant’s most recently completed third fiscal quarter):      $1,625,696
 
Indicate the number of shares outstanding of the Company’s classes of common stock as of December 31, 2013 was 71,308,641 shares.

Documents incorporated by reference: None.
 


 
 

 
 
TABLE OF CONTENTS
 
PART I
 
3
3
15
15
15
PART II
 
16
16
17
25
26
26
26
PART III
 
27
27
29
31
33
33
34
 
 
2

 
 
PART I
 
 
Statements in this Form 10-K Annual Report may be “forward-looking statements.”  Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions. These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions made by our management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may, and probably will, differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors, including those described above and those risks discussed from time to time in this Form 10-K Annual Report, including the risks described under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in other documents which we file with the Securities and Exchange Commission (“SEC”).
 
In addition, such statements could be affected by risks and uncertainties related to our financial condition, factors that affect our industry, market and customer acceptance, competition, government regulations and requirements, pricing, general industry and market conditions, growth rates, and general economic conditions. Any forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-K Annual Report.

Overview
 
We specialize in the sales, service 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 management programs such as demand response and distributed generation. In fact, we believe we are one of the first companies to combine expertise in power generation asset management with real time information processing to create a more reliable and effective approach to onsite power management.
 
We provide our products and services to customers nationwide. These customers include utilities, major national retailers, telecommunications companies, banks, data centers, grocery stores, hospitals and other health care facilities, schools and colleges, property management companies, government and military facilities, manufacturers, retail stores among others. We are an exclusive dealer/distributor for Generac Power Systems (NYSE:GNRC). We also provide and service automatic transfer switches and Uninterruptible Power Supply (UPS) systems which allow us  to more completely meet the onsite energy management needs of our customers.
 
We have dedicated considerable resources to developing a technologically superior service program that benefits our customer from a cost and quality standpoint. Our professionally trained technicians service more than 5,000 generators owned by more than 1,000 customers located throughout the United States. We are always striving to advance our capabilities and improve our customers’ experiences. For example, to meet a critical need in our industry, we engineered our own proprietary remote monitoring and automated control system for onsite power generation. In addition, we have developed specialized asset management and auditing tools to more efficiently and cost effectively provide our customers with detailed information about their onsite power systems.  These tools provide Titan with a market advantage over service companies that do not have these technologies as we believe we can complete certain jobs more efficiently, maintain higher levels of service quality and realize higher margins by using these tools.   We have also created a national network of professionally trained service technicians so that we can effectively service equipment in any city of the United States and maintain the same high level of quality for each job at every site.
 
Since our inception in 2006, we have grown substantially. We reported gross sales revenues of $21,898,288 in 2013, an increase of 14% over 2012.  As discussed in more detail below, 49% of our sales revenues were from power generation equipment and 51% from our service programs.  We have significantly grown our service business which largely consists of recurring revenue service contracts to maintain and manage our customers’ power generation assets. Service sales grew in 2013 from $7,553,874 to $11,076,005 in 2012, an increase of 47%.   Our current equipment backlog at the end of 2013 was nearly $6 million, which represents jobs on hold and purchase orders for new jobs.  These are revenues that are expected to be realized in 2014.   This backlog number, which can fluctuate between $4 million and $7 million, was relatively high for our Company at the end of 2013, and so is suggestive of stronger equipment sales in 2014.
 
Currently, we are reporting a net profit of $108,215 for 2013.  The Company believes the “Adjusted EBITDA” (a non-GAAP financial measure) is a better indicator of our liquidity position which is calculated by adjusting our cash outflow by the changes in operating assets and liabilities and reducing it by interest expense. Our 2013 adjusted EBITDA was $1,039,245. Based on a number of positive economic factors that are carrying forward into 2014, including increased sales revenues, sales backlog and higher margin service sales, Management believes that the Company can maintain and improve its profitability in 2014.
 
 
3

 
 
Significant Recent Developments
 
The following developments were critical to building our business in 2013:
  
 
1.
Expansion of our National Accounts program.  We were able to grow our national accounts business by nearly 70%, from $2.2 million in 2012 to $3.7 million in 2013.
 
 
2.
Success of our RICE NESHAP program. We realized more than $2.2 million in RICE NESHAP modifications in 2013.  Titan is one of a select number of companies capable of providing the modifications to generators in peak shaving programs required by recent changes in EPA standards for emissions.   In addition to the modifications, Titan is also one of the few companies that offer the specialized monitoring service which is required by the RICE NESHAP standards set forth by the EPA.  Our monitoring system can provide EPA monitoring requirements as well as provide full generator monitoring.  We expect this business to produce about $1 million in revenues in 2014 as the deadlines for these modifications have passed.
 
 
3.
Expansion of our Uninterruptible Power Systems (UPS) Business. Our UPS business grew from $92,366 in 2012 to $405,522 in 2013, and produced significant margins for the Company.
 
Background
 
The Electric Power Industry
 
When the National Academy of Engineering convened a jury in 2003 to recognize the most important technological developments of the twentieth century, they chose national electrification as the preeminent engineering achievement. Across the country, an integrated system of nearly ten thousand power plants and six million miles of power lines had been constructed, connecting an inconceivable array of electric devices. This massive, complicated network with its millions upon millions of circuits, switches, breakers and other elements, operated with 99.97% reliability. Impressive as that may sound, it is simply not good enough. According to the DOE, the 0.03% unreliability resulting from grid failures is responsible for $150 billion in annual losses in the U.S. (Source: U.S. Department of Energy (DOE), The Smart Grid: An Introduction, 2009).
 
Traditionally, the utility system can be thought of in terms of three interconnected segments: energy production, transmission and distribution. Utilities have been constrained in their ability to invest in new power production plants needed to meet projected growth in demand by a restrictive regulatory process, the increased burden of environmental constraints and a lack of government and public support for long-term, major capital infrastructure projects. This has increased the strain on the existing electric power grid , in particular in capacity constrained areas and, combined with higher costs to produce electricity, has caused the price of electricity to increase in nearly all areas of the country, especially during peak demand periods.
 
Challenges at the level of production are mirrored on the transmission side of the electrical power grid. Under-investment in the transmission infrastructure required to deliver power from centralized power plants to end-use customers has resulted in an overburdened electric power grid. This periodically prevents the transport of the lowest cost power to constrained areas, which can affect reliability and cause significant economic impact. For example, although a base load power plant might have sufficient capacity, if the grid is underdeveloped for delivery, it will result in congestion on the grid. When there is congestion on the grid, the grid operator might call upon a generating plant to operate based on its ability to alleviate the congestion (its location). If the called-upon generator is a peaking plant the cost of energy will be higher. Not only does this increase the cost of energy during non-peak times, when a peaking event occurs the capacity intended for peaking is already being used.
 
This under-investment in generation and transmission, coupled with a growth in electricity consumption, has led to an increased frequency of brownouts (when power delivery is severely reduced) and blackouts (when power delivery is completely disrupted), which results in lost productivity, loss of perishable goods, and other major problems. This environment of increasing demand coupled with inadequate resources has generated a growing need in the marketplace for products and services in our strategic growth areas of Emergency and Back-up Power, Power Generation Maintenance Programs, Demand Response and Distributed Generation. Titan has created programs that will allow onsite power generation to participate more effectively and reliably in these programs as they become more popular across the United States.
 
 
4

 
 
While grid failures impact all of us to some extent, there are many industries which simply cannot afford to lose power for any length of time for economic reasons. The table below illustrates the economic damages across several industries:
 
Cost of One-Hour Power Service
Interruption in Various
Industries
 
Average
Cost of
1-Hour of
Interruption
     
Cellular communications
 
$
41,000
 
Telephone ticket sales
 
$
72,000
 
Airline reservation system
 
$
90,000
 
Semiconductor manufacturer
 
$
2,000,000
 
Credit card operation
 
$
2,580,000
 
Brokerage operation
 
$
6,480,000
 
 
 
Source: U.S. Department of Energy
 
Its impressive engineering accomplishments notwithstanding, the electrical utility industry has not kept up with the growth in demand for power during the last decades, potentially increasing rates of failure especially in densely populated cities and rapidly growing industrial zones. While energy consumption has actually declined in the United States the last few years, partially due to the response to the recent economic downturn, according to the North American Electric Reliability Council, demand for electricity is expected to increase over the next 10 years by approximately 18%, while generation capacity is expected to increase by only 6%. Another way of looking at this is that since 1982, growth in peak demand for electricity – driven by population growth, bigger houses, bigger TVs, more air conditioners and computers – has exceeded growth by almost 25% every year. As a result, in North America, margin between electric supply and demand is projected to drop below minimum target levels (below what is needed for regulatory requirements) over the next few years.
 
Population growth has the most straightforward effect on energy consumption. According to the U.S. census estimate, the United States will grow by over 100 million people by 2050. Even if we could keep per capita electricity use constant, as California has done for a decade, we would increase total power sales by nearly 33%. Distribution companies will also need to install about forty million more electric meters in new housing units and expand their systems accordingly. Economic activity and power use are, of course, related. The stronger the U.S. economy grows, that more power is used by industrial and commercial firms and more residential customers buy and more use electrical equipment.
 
In addition, electricity is gradually stealing market share from other fuels for the overall mix of applications we use in the United States. In the residential sector, for example, electricity use is projected to grow six times faster than natural gas use through 2030. During the next century this trend will take a giant leap forward. In the United States the largest use of energy outside the power sector is gasoline use for personal vehicles. As plug-in hybrid-electric vehicles (PHEVs) are introduced, electricity will gradually displace gasoline, boosting power sales at the expense of oil-based fuels. Over the long run, PHEVs represent a large new use of electricity. The timing depends on how quickly these vehicles will become affordable and how well public policies encourage their adoption. A 2007 study by the Electric Power Research Institute (EPRI) forecasts that we will need 282 million megawatt hours - the output of thirty-eight large power plants - to "fuel" all these cars.
 
In any case, many experts have argued that our ability to manage consumption and maintain reasonable pricing for electricity as the EIA has set forth will ultimately depend on the availability, strength and efficacy of our energy efficiency, demand response and distributed generation programs. (For example, Peter Fox-Penner. Smart Power: Climate Change, the Smart Grid, and the Future of Electric Utilities, 2010; and Amory Lovins, Reinventing Fire, 2011). Advanced technologies, improved service and better management are the keys, and this is where the expertise of Titan Energy can play a significant role in our nation’s energy management programs.
 
 
5

 
 
The Impact of Regulation and the Opportunity It Creates
 
Regulation by State and Federal Government. The state and federal governments’ regulation of the energy industry continue to advance our market opportunities. The states regulate the retail sales and transmission of energy to consumers, whereas the Federal Energy Regulatory Commission (FERC) protects consumers by ensuring the wholesale electric market is just and reasonable.
 
FERC’s regulation of the wholesale electric market includes sales and transmission of electricity in interstate commerce, and promoting safe, reliable and efficient energy infrastructure. In The Strategic Plan FY 2009-2014 (September, 14, 2009) FERC identifies key strategies which include the Smart Grid, Demand Response, and Renewable Resources.
 
The states regulatory oversight of retail energy rates for consumers also encompasses renewable energy and energy conservation mandates and programs. Interruptible rate programs, offered by utilities and regulated by each state’s Public Utility Commission, or other state regulatory agency, have increased the payback for customers who choose on-site generation. These rate programs and our ability to work with the utility on behalf of a customer provide us with a substantial strength in marketing our on-site generation products.
  
Regulation of Power Engines and Emission. In 1996, the Environmental Protection Agency (EPA) introduced new emission standards aimed at non-road mobile diesel engines including onsite stationary power generators. To be phased in over a four-year period beginning January 2007, these regulations require the new diesel engines that power these generators to comply with a tiered timing structure of emission allowances. Based on the system’s engine horsepower rating, generators are rated from Tier 1 to 4, with most non-emergency diesel engine generators required to arrive at Tier 4 by 2012. Tier 4 requirements are the most stringent.
 
Beginning January 1, 2011, the EPA introduced the next phase of its Tier 4 emissions control regulations. The regulations limit emissions of oxides of nitrogen, particulate matter, hydrocarbons and carbon monoxide. Non-emergency diesel engines less than 10 liters per cylinder and greater than 175 hp will be required to meet Tier 4 regulations. The term “non-emergency” is very important in this context. Essentially, if an installation is classified as emergency, the power generator must not run unless the primary electrical power source is not available. However, owner/operators are allowed to run their emergency-classified power generators up to 100 hours per year for maintenance and testing. There is no current limit for run time during an emergency or power outage. The challenges facing the electric power industry are unique in a number of areas, particularly with the larger power generators, where regulations focus on reducing nitrogen oxide emissions from generator sets by 90 percent, compared to a 45 percent reduction for other equipment types.
 
Since the Tier 4 emissions levels are so low, the EPA decided that emergency standby generator sets, which by their nature run very few hours per year, would be exempt from Tier 4 regulations, including any associated after-treatment. Furthermore, the EPA states that emergency standby applications can utilize current Tier products such as today’s Tier 2 and Tier 3 offerings. The list of applications that will require Tier 4 certified generator sets are as follows: non-emergency standby units, prime power applications, load management/peak shaving and electric power rental units. These include nearly all generators that would be deployed in a demand reduction or load management type of program.
 
In addition to these federal standards, there are state and local regulations that may force the use of Tier 4 generator sets in 2012 and beyond. The State of California will most likely have emissions regulations requiring the use of after-treatment on all standby generator sets including emergency units. As a result it is believed that the vast majority of standby generator sets sold into the State of California in 2012 will be Tier 4. Along with California, some regions and localities have stationary emission limits far more stringent than EPA diesel engine tier levels including: the New England states; Atlanta, Georgia; and Houston, Texas. The result is that diesel-fueled generator sets deployed in these areas, even if certified to the appropriate EPA tier level, may not meet local requirements.
 
While good maintenance has always been among end-user best practices, the new emissions regulations now imply that maintenance will be larger part of compliance. Although the regulations are not explicit, the EPA requires a diesel power generator to remain in compliance throughout its defined useful life, and that normal maintenance is the only way to accomplish this. This may also include record keeping, validation and other compliance measures that could be audited.
 
Diesel engine manufacturers will bear the burden of testing their diesel engines and certifying them according to EPA guidelines. However, owner/operators have a great deal of responsibility to understand how the regulations affect power generator availability, how installations are classified, as well as the record-keeping and maintenance requirements. Many companies in the standby and demand reduction industry are rightfully concerned about the impact these new standards will have on their respective businesses. In effect, Tier 4 will likely increase the expense, lower profitability, and lengthen returns on investment for both back-up power and demand reduction providers and consumers. However, these new requirement have long been anticipated and the major generator engine manufacturers have been announcing their technological answers to Tier 4 standards and more solutions are becoming available both for new engines as well as for after treatment options. Management believes that engine design and engineering will solve many of these problems and that suitable solutions to its business applications will be available and affordable.
 
 
6

 
 
At the same time, we believe that this change in emission policy brings significant opportunity for Titan Energy. The need for emergency power and demand reduction is not going to lessen. The costs of not having power or the ability to support our ailing grid are too high. We feel that we have alternative equipment technologies that will satisfy Tier 4 standards, superior solutions such as natural gas engines and smaller diesel units arranged in parallel configurations. There will also be a greater need for our maintenance and service programs as this will be a requirement of the owners/operators. And Titan Energy will benefit from the monitoring and validations technologies what will allow for improved operations and compliance with the new regulations.
 
Our Market
 
We have developed the expertise, strategic relationships and technological solutions that we believe will help customer avoid potentially devastating electrical grid failures, save customers money, improve the operation of the electrical utility system, and help our nation build a stronger and more effective Smart Grid. We operate our business in the industrial and commercial sectors of the US economy. According to a study by McKinsey & Company (“Unlocking Energy Efficiency in the US Economy”), the industrial sector accounts for 51 percent of the end use consumption and 40 percent of the end use potential for energy efficiency. The commercial sector consumes 20 percent of the end use energy and offers 25% of the efficiency potential. Electricity represents the major share of consumption in this sector. Therefore, the industrial and commercial sectors combined represent more than 75% of the energy market as well as the greatest potential for creating energy efficiency results for every dollar invested in energy efficiency.
  
Business Segments
 
We operate under two business segments: Power Distribution Segment and Energy Services Segment. Within these business segments we provide our products and services across five strategic business areas: Emergency and Back-up Power Solutions, Power Maintenance Programs, and Remote Monitoring and Control Technologies. .
 
POWER DISTRIBUTION SEGMENT
 
Emergency and Back-up Power Solutions. Our Emergency and Back-up Power business provides customers with sophisticated electrical power generation equipment to be used during a power outage or emergency or for load shedding in demand response programs. Titan Energy offers a complete turn-key solution to help companies avoid costly power outages as well as ensure smooth, uninterrupted operations during times of emergency. We help design, engineer and install the power equipment needed by each customer.
 
In 2013, sales of power generation equipment accounted for more than $10,822,283 million or approximately 49% of our business. We provide what we consider to be the most advanced and reliable power generation systems on the market and operate as an exclusive dealer (10KW and above) for Generac Power Systems in three Midwestern states (Minnesota, Iowa and Nebraska). We also sell switchgear, UPS and related equipment used to fully support our customers’ power generation systems.
 
ENERGY SERVICES SEGMENT
 
Power Maintenance Programs. Power generation systems represent considerable investments that require proper maintenance and service in order to operate when required during a time of emergency or during a demand reduction request. Titan Energy’s Power Maintenance Programs offer maintenance, repair and support service for our customers’ power generation systems. In 2013 these annualized contracts contributed $11 million (51%) of our gross sales revenues. To support our customers, we maintain warehouses of inventory and parts, a fleet of service trucks and a staff of 14 trained service technicians in the Midwest and Florida.
 
We expect our service business to grow considerably in the coming years. With every new generator we sell, we expect to sign a service contract for one to five years in term-length. Our market potential however is not solely defined by the generators we sell but also by our service of any manufacturers’ generator. Titan continues to service an increasing number of customers who have acquired generators from our competitors but sign up with Titan Energy for their service needs.
 
 
7

 
 
Our Products and Services
 
Emergency and Back-Up Power Generation Systems.
 
We provide a variety of customers with power generation equipment, depending on their needs and applications that can range from 5kW to several Megawatts. We also provide the transfer switches, UPS systems and other necessary equipment to create a reliable and dependable power generation system. We are the exclusive distributor for Generac Power Systems in the states of Minnesota, Iowa and Nebraska.   For switch gear, we utilize GE Zenith, ASCO Power Technologies and others. For Uninterruptible Power Supply (UPS) systems, we are an authorized dealer for GE and also represent APC, Eaton-Powerware and other UPS manufacturers.
 
Generac Power Systems Generators. In the Midwest, through our Titan Energy Services, Inc. (TESI) subsidiary, we are an authorized dealer for Generac Power Systems, Inc. (“Generac”) generators and other products in three Midwestern states. TESI provides products to protect a company’s critical equipment from over/under voltage or outages, transient surges and harmonic distortion. TESI provides a full line of power generation equipment for all kinds of applications, in both diesel and natural gas fuel options. The Generac brand features fully integrated power generation systems that include industrial, commercial, and residential generator sets, as well as automatic transfer switches, controls, fuel tanks, enclosures and remote monitoring software. 

For higher kilowatt requirements, Generac’s Modular Power System (“MPS”) utilizes multiple diesel or natural gas generators in various side-by-side arrangements that match the power output of large single engine units.  The MPS system is based upon diesel fueled units of 400, 500 or 600 kW working in concert to offer outputs ranging from 800 to 9000 kW, and natural gas units of 100 to 400 kW with combined outputs of 200 to 4000 kW. In addition to the above models, the entire MPS product offering uses Generac’s PowerManager® Digital Control Platform, which brings reliability and flexibility to the control of these systems.
 
Generac Natural Gas Generators. Many of our customers are seeking “greener” solutions for stand by and emergency power generation, considering how their overall environmental footprint affects the world. Regulatory issues are also impacting these decisions and the cost of diesel generators. Diesel engines have been subject to intense emission level regulations and have seen aggressive Environmental Protection Agency (EPA) regulatory changes. This additional oversight has increased the total cost of both diesel engines and fuel. Future governmental cap and trade regulations for emissions trading may cause diesel engines to be taxed at a higher rate due to higher CO2 emissions. Fuel containment and the environmental concerns surrounding large quantities of fuel stored on site are considerable issues, as well.
 
Combining fuel cost with environmental impact provides companies with a broader view to the true bottom line, and overall environmental impact, of their generator choice. Natural gas generators have historically cost less per installed kilowatt than their diesel counterparts in the smaller sizes. The most noticeable advantage of natural gas-fueled generators over diesel is the extended run time provided by a continuous supply of natural gas. According to the Edison Electric Institute, severe weather events account for 62% of unexpected power outages in the United States. These events can close roads and cripple municipal infrastructures, making it difficult or impossible to refuel the diesel generators used in so many standby applications. The natural gas infrastructure has shown itself to be extremely reliable in situations that cause power outages; through four Florida hurricanes in 2004 and Northeast grid failure of 2003, the natural gas supply was unaffected.
 
The Generac Bi-Fuel™ configuration provides a number of alternative energy options. This technology uses a combination of diesel and natural gas to take advantage of the best qualities of each fuel (more power from diesel, lower emissions from natural gas). Bi-Fuel configurations are available for both stand-alone and MPS applications.  Single-engine units are available at 300 and 375 kW output, while Gemini Twin Pack modules are rated at 600 and 750 kW. MPS versions can be combined as needed to achieve numerous power outputs up to 3750 kW.  While operating under load, Bi-Fuel units can operate on up to 90% natural gas. If conditions dictate, the unit can revert to 100% diesel fuel with a no-break, automatic fuel changeover. The on-site diesel fuel tank required for Bi-Fuel units can also be smaller, if desired, to save space and cost.
 
Transfer Switches and Switchgear. ASCO Power Technologies and General Electric-Zenith offer automatic transfer switches and paralleling switchgear built for dependability and ease of operation, ranging from 40amp to 4000amp, in 2, 3, and 4 pole configurations.
 
Uninterruptible Power Supply (UPS) SystemsThe UPS system provides battery backup power until an emergency backup engine generator comes online. Once the engine generator is producing proper voltage and frequency the UPS switches the building load onto the engine generator. This provides the highest degree of protection typically used by data Centers, banks and credit card companies
 
Maintenance and Service Programs.
 
Titan Energy recognizes additional revenues from service contracts, installation and maintenance services for its customers and owners of power generation equipment. We offer service contracts and support to all generator owners. The service contracts yield higher margins as compared to equipment sales and help support our effort to achieve profitability. These service contracts may also include remote monitoring services that allow owners to be informed of the condition and operations of their equipment at any time and from any place. With terms ranging from one to five years, service and remote monitoring contracts are providing the Company with strong recurring revenues.
 
 
8

 
 
We provide factory-trained technicians equipped with the necessary tools, parts and manuals in their trucks. We support our technicians with our specialized training and education.
  
Remote Monitoring and Control Technology for Onsite Power Generation.
 
The ability of onsite power systems to respond quickly and efficiently to either a grid failure or a utility demand response event is critical to almost any business operation. Titan has developed a monitoring and control systems that performs 24 hours/7 days a week, monitoring dozens of critical functions on these onsite generators, ATSs and UPS.  In this way, we can see in advance if there is a problem that needs to be addressed, if servicing programs are being administered appropriately and if trends are occurring that suggest immediate action in order to prevent future problems. This information can be incorporated into a comprehensive service and management program to insure that these power generators are ready to perform when called upon. The result is a system that is as reliable as any in the marketplace.
 
Automated Audit and Inventory Services.
 
We have developed a state of the art auditing and asset management application that can be used to quickly and efficiently record and categorize the power generation assets of a facility. These applications utilize handheld computer tablets and specialized software that downloads wirelessly to Titan’s servers. The process was designed so as to minimize input errors, or missed data points by the recording technicians. Reports are available immediately to Company personnel and the customer and can be updated anytime.
 
The advantage of these electronic audit systems is that when combined with Titan’s remote monitoring and service programs, the customer now has a comprehensive asset management program that better protects its equipment, ensures that systems will operate properly and when needed and will save costs on service and repairs through preventative maintenance.
 
Strategy
 
Currently, Titan Energy specializes in providing industrial, commercial and institutional customers with the power generation equipment and energy management solutions that they need to maintain critical operations during a grid failure, to better manage their energy usage, and save money on electrical power usage. We consider ourselves experts when it comes to integrating onsite power generation equipment with the needs of the local electrical grid and utility based programs. Our knowledge of key technologies, our network of offices and service centers in more than 12 key states, our national network of third party vendors, our expanding base of more than 1,000 customers including several Fortune 500 companies, and our established working relationships with utilities across the country are all key factors that position Titan Energy to capitalize strongly in the energy management arena.
 
Our strategy is to capitalize on our growing national footprint of sales and service centers, our scalable technology platform and our market position to continue providing intelligent energy solutions to commercial, institutional and industrial customers and utilities. Ultimately, our aim is to become one of the leading energy management solutions providers for commercial, institutional and industrial customers throughout the United States.
 
We plan to grow significantly as a company over the next several years through the development and successful implementation of the following business initiatives:
 
Expansion of Our Power Generation Sales in Existing Territories.
 
Sales of power generation and associated equipment will provide the company with significant revenues and create opportunities for Titan Energy to develop long term customer contracts for service and in some cases demand reduction programs. These sales also create opportunities for us to deploy our monitoring and communication technologies, services that generate recurring revenues and stronger profit margins. We will grow our Equipment sales in the following ways:
 
Increase Equipment Sales in Existing Territories. We now cover market territories in the Midwestern, Southeastern and Northeast United States. Our goal is to now begin to exploit these territories by bringing in qualified, professional sales people from the power generation industry that can help us build our brand, our sales and our revenues.
 
Expand Equipment Sales through Sub Dealer Programs. Titan Energy has made a commitment to expand its Sub-dealer program in all Titan Energy’s existing territories where it has an exclusive relationship with a manufacturer. Sub-dealers are independent sales and service companies that are authorized by Titan to market, sell and service our line of power generation equipment. Sub-dealers are generally paid a commission on sales. There are several potential sub-dealers in our current territories, representing the ability of Titan Energy to double its equipment and service sales through this program alone.
 
 
9

 
 
Expand Our Equipment Offerings. We will continue to grow our current business in UPS, emissions retrofits, and related areas through the hiring of qualified personnel, expanded business relationships with other providers and increased marketing efforts.
 
Web-based Sales. We will seek to expand our ability to offer web based sales of equipment and parts through improved web marketing programs and the development of an online ordering system.
 
Expansion of Our Power Maintenance Programs
 
Our Maintenance and Service programs usually involve recurring revenues and offer the Company higher margins than equipment sales. Therefore, the Company is focused on aggressively increasing the number of these contracts throughout our territories and expanding the number of national accounts that allow us to service multiple facilities for a customer throughout the United States. We will seek to accomplish this expansion in the following ways:
 
Improve our Service Management Systems. We are in the process of improving the capability and efficiencies of our software systems that support our Service programs. These improvements will allow us to process, monitor, and validate orders more accurately and efficiently, thereby allowing our company to take on getter numbers of customers.
 
Increase the Number of National Accounts. We have developed a nationwide network of service providers that can assist us in providing Titan level of service to our customer anywhere in the United States. We are now in the position to bring on several new national accounts and are actively seeking this business through a number of opportunity channels.
 
Expand Our Service Sales Force. We believe we have the internal capacity to aggressively expand our service sales in the Midwest and Florida, where we have established operations, without adding significantly to our administrative or overhead expenses. We also plan to open service sales operations in additional territories such as New York, New Jersey and parts of the Midwest where we do not currently have service operations.
 
  Sub Dealer Program. Through our sub-dealer program in the Midwest, we expect to acquire relationships with a number of established companies that will offer additional service opportunities. As with equipment sales, the cost of new service contracts through our sub-dealer program is minimal and as an exclusive dealer in these territories, and we are the only authorized service provider for the industrial line of products.
 
Sales of Technology-Enabled Energy Management Solutions
 
At Titan Energy, we believe literally in the maxim: “You can’t manage what you can’t measure.” One of our goals is to develop and expand the use of more effective monitoring and communication technologies that will allow us to better measure and manage our customers’ energy assets. We feel that as the industry experts in power generation systems and maintenance, we need to offer the most sophisticated and effective monitoring and reporting systems on the market. The result of utilizing these technologies is greater efficiencies in managing customer assets, greater revenues through the deployment of recurring revenue service programs, and lowered costs due to less need for technicians to manually monitor and service equipment. Key systems we plan to offer include:
 
Remote, Automated, On-line Monitoring Systems. Titan Energy offers one of the most effective and reliable online metering systems for power generation systems. We plan to expand the capabilities of this technology and make it available to a greater number of our customers as part of our services and maintenance program.
 
Online, Automated Reporting Services. As the need increases for detailed, real-time information about generator operations and efficiencies due to regulatory and other factors, we intend to provide the reporting and management programs that will allow our customers to more easily and cost effectively comply with regulators.
 
Sales and Service Support for EPA Requirements on Diesel Engines
 
Changes in the EPA’s regulatory requirements for diesel engines could have a number of significant impacts on owners of diesel engine generators. We believe that these changes in emissions policy, while posing challenges to everyone in the industry, also bring significant opportunity for Titan Energy. The EPA estimates that there are more than 900,000 back up diesel generators in the U.S. EPRI estimated more than 50,000 of these onsite power generators were enrolled in utility sponsored DR programs back in 2003. The need for emergency power and demand reduction is not going to lessen. The costs of not having power or the ability to support our ailing grid are too high. It is safe to assume that this number could well have doubled by 2013. All of these generators face modification, replacement or additional service requirements in light of the new regulatory requirements as the EPA rolls out its changes in emission policies in 2013 and beyond. This creates a significant market where the expertise of Titan Energy can be uniquely valuable.
 
 
10

 
 
Requirements were also established for the cleaner natural gas burning engines. For example, the customer gets the option of buying either a rich-burn natural gas fueled manufacturer certified EPA compliant product or a non-certified product and getting it certified it in the field. For certified engines the owner/operator may adjust, operate, and maintain engine per manufacturer’s instructions and keep adequate records. If manufacturer’s instructions are not followed, the engine becomes non-certified and compliance must be demonstrated.
 
For non-certified rich-burn, natural gas fueled engines, the provisions include keeping maintenance records and performance testing on a scheduled basis depending on the size of the engine. These are detailed and technically demanding requirements for any business owner. The ability of a Titan to manage these reporting and testing requirements as well as the paperwork and compliance issues, will be a valuable resource to many business owners.
 
We feel that we have alternative equipment technologies that will satisfy Tier 4 standards, technologies which offer superior solutions such as natural gas engines and smaller units arranged in parallel configurations. There will also be a greater need for our maintenance and service programs as this will be a requirement imposed on the owners and operators. And Titan Energy will benefit from the monitoring and validation technologies that will allow for improved operations and compliance with the new regulations.
 
We see the following as new areas of significant business for the Company in 2014 onward:
 
 
·
New Engines – to replace old generators that either does not meet EPA standards or do not run properly or efficiently. Replacement of diesel with natural gas engines is an opportunity to upgrade as well as meet EPA requirements.
     
 
·
Retrofits of old engines – many diesel engines that are enrolled in load shaving programs will have to be retrofitted with systems that remove pollutants from the exhaust. There may also be added requirements and modifications for fuel storage, cleaning and treatment.
     
 
·
Improved service and maintenance – all generators, whether in back up or peak shaving, will require improved and more regular service and maintenance.
     
 
·
Monitoring, reporting – all generators, diesel and natural gas, will require monitoring and reporting functions that Titan can provide through its automated management platform.
 
Operations

As of December 31, 2013, we had 50 employees. None of our employees are covered by a collective bargaining agreement, and we have not experienced any work stoppage. We consider our relations with our employees to be good. Our future success is dependent in substantial part upon our ability to attract, retain and qualified management, technical, marketing and other personnel. Our operation comprises several functionally distinct sub-groups: Executive, Customer, Sales and Services.

Company Offices

Currently we have five offices covering operations in more than twelve states.  Our offices are located in Minneapolis, MN; Des Moines, IA; Omaha, NE; Bernardsville, NJ; and Miami, FL.

Executive Operations

Executive operations primarily deal with the roles and responsibilities that we have as a public traded company.  This involves general fiduciary and operational oversight, compliance with SEC financial reporting requirements, meeting with our Board of Directors, as well as shareholder and investor relations.  As of December 31, 2013, we had three individuals in executive operations: our Chief Executive Officer, our Chief Financial Officer and our Chief Technology Officer. Our Chief Financial Officer has retired effective January 1, 2014.
 
 
11

 

Customer Operations

Customer operations are responsible for all project management, hardware installation, and on-going customer relationship management. The twenty-one (21) members of this group include project managers, accounts receivable and accounts payable personnel, warranty specialists, accounting staff and administrative support. Sixteen of these individuals are located at our Minneapolis office, two in Florida, two in Iowa and one in New Jersey.

Sales Operations

As of December 31, 2013, our sales team consisted of 12 employees. We organize our sales efforts by product type (Generator, UPS, or service).
 
Our commercial and industrial sales group sells Generac Power Systems equipment to commercial, institutional and industrial customers. Our commercial and industrial sales group operates out of offices in Minneapolis, MN, Des Moines, IA and Omaha, NE.

Our UPS sales group sells UPS equipment and service programs to commercial, industrial and institutional customers nationwide.  This sales group is based in the Minneapolis, MN office.

Our service sales department sells maintenance and repair service contracts to industrial and commercial customers which have power generators.  These contracts can vary in term from one year to as many as ten years. In many cases, our service sales teams follow up on sales of power generators from our industrial sales group, while also pursuing service contracts with customers which own power generation equipment from other suppliers. We have service sales personnel in the Minneapolis, MN, Des Moines, IA and Omaha, NE.  These people report to the General Manager in each of these areas. 
 
Service Operations

Titan Energy prides itself on the quality, training and commitment of our Service Department.  We feel that delivering timely, quality service to our customers is the best way to maintain loyalty and generate new sales.

Personnel.  We have a total of 14 service technicians located in the Midwest and Florida.  Three of these people are master technicians who have received advanced training and instruction on power generation systems and related equipment.  All technicians are required to receive on-going training and education through programs offered by our manufacturers.
 
Trucks and Service Vehicleswe have a total of 15 modern, fully equipped service trucks which collectively carry more than $115,000 of equipment, parts and tools.  Since some of our customers are located in remote areas, our trucks must be properly equipped to complete a job while on site.
 
Equipment – we also have numerous special tools and equipment which are necessary to perform our duties as service technicians for these sophisticated power generation systems.  These tools include load banks, fuel cells for refueling, fluke meters, infrared scanners, warranty kits, and all tools required to work on electrical and mechanical systems that make up a power generation system.

Technologies – we offer remote monitoring systems which allow us to place a monitoring device on a power generation system and transmit data from that equipment to our offices where systems can be monitored 24-hours a day.  These systems can also be used to remote start power generation equipment and perform various tests that provide the equipment’s status and diagnostics...
 
Inventory -- Titan Energy carries approximately $938,612 in inventory. 

Warehouses – we have fully equipped and stocked warehouses in Minneapolis, Minnesota; Des Moines, Iowa; Omaha, Nebraska; and Doral, Florida.
 
Competition
 
We face intense competition in all of our business segments, strategic growth areas and business units.
 
In our Emergency and Back-Up Power business, we face competition from larger, more established companies that represent Caterpillar, Cummins, Kohler and other smaller equipment manufacturers. We believe we offer power generators that in many cases feature improved capabilities, more fuel alternatives and greater redundancy features.
 
In our Power Maintenance business, we face some competition from manufacturers of power generation equipment as well as electrical contractors and small companies that specialize in service of power generation equipment.  Management believes that we offer a higher level of service, provided by better trained and more professional service technicians.  We also believe we offer technological service tools that improve our service offerings and allow us to act proactively in more cases.
 
 
12

 
 
Overall, the markets for our products, services and technologies are competitive and are characterized by rapidly changing technology, new and emerging products and services, frequent performance improvements and evolving industry standards. We expect the intensity of competition to increase in the future because the growth potential of the energy market has attracted and is anticipated to continue to attract many new competitors, including new businesses as well as established businesses from different industries. As a result of increased competition, we may have to reduce the price of our products and services, and we may experience reduced gross margins, loss of market share or inability to penetrate or develop new markets, any one of which could significantly reduce our future revenues and adversely affect our operating results.
 
We believe that our ability to compete successfully will depend upon many factors, some of which are outside of our control. These factors include:
 
 
The performance and features functionality and benefits of our, and of our competitors’ products and services;
     
 
The value to our customers for the price they pay for our products and services;
     
 
The timing and market acceptance of new products and services and enhancements to existing products and services developed by us and by our competitors, including the effects of environmental initiatives on new technologies and customer preferences;
     
 
Our responsiveness to the needs of our customers;
     
 
The ease of use of our, and of our competitors’ products and services;
     
 
The quality and reliability of our, and of our competitors’ products and services;
 
 
Our reputation and the reputation of our competitors;
     
 
Our sales and marketing efforts;
     
 
Our ability to develop and maintain our strategic relationships; and
     
 
The price of our, and of our competitors’ products and services, as well as other technological alternatives in the marketplace.
 
            We believe that in many of our markets we have established ourselves as a niche supplier of high quality, reliable products and services and, therefore, compete favorably with respect to the above factors, other than price. We do not typically attempt to be the low cost provider. Rather, we endeavor to compete primarily on the basis of the quality of our products and services. In order to be successful in the future, we must continue to respond promptly and effectively to the challenges of technological change and our competitors’ innovations. We cannot provide any assurance that our products and services will continue to compete favorably in the future against current and future competitors or that we will be successful in responding to changes in other markets including new products and service and enhancements to existing products and service introduced by our existing competitors or new competitors entering the market.
 
Many of our existing and potential competitors have better name recognition, longer operating histories, access to larger customer bases and greater financial, technical, marketing, manufacturing and other resources than we do. This may enable our competitors to respond more quickly to new or emerging technologies and changes in customer requirements or preferences and to devote greater resources to the development, promotion and sale of their products and services than we can. Our competitors may be able to undertake more extensive marketing campaigns, adopt more aggressive pricing policies and make more attractive offers to potential employees, customers, strategic partners and suppliers and vendors than we can. Our competitors may develop products and services that are equal or superior to the products and services offered by us or that achieve greater market acceptance than our products do. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to improve their ability to address the needs of our existing and prospective customers. As a result, it is possible that new competitors may emerge and rapidly acquire significant market share or impede our ability to acquire market share in new markets. Increased competition could also result in price reductions, reduced gross margins and loss of market share, and the inability to develop new businesses. We cannot provide any assurance that we will have the financial resources, technical expertise, or marketing and support capabilities to successfully compete against these actual and potential competitors in the future. Our inability to compete successfully in any respect or to timely respond to market demands or changes would have a material adverse effect on our business, financial condition and results of operations.
 
 
13

 
 
Regulatory Issues
 
Our businesses and operations are affected by various federal, regional, state, local and foreign laws, rules, regulations and authorities. While to date, our compliance with those requirements has not materially adversely affected our business, financial condition or results of operations, we cannot provide any assurance that existing and new laws and regulations will not materially and adversely affect us in the future. Likewise, as promising as we hope some of the new regulations are for Titan’s business, it is feasible that those opportunities may not come to fruition.  At this time we cannot assess the impact that the new stimulus package adopted by Congress in February 2009, the American Recovery and Reinvestment Act, will have on our business and operations or on our competitors.  Nor can we assure results from the National Action Plan for Demand Response or dynamic or real-time rates.
 
Regulation of Electricity. Rules and regulations within the electricity markets impact how quickly our projects may be completed, could affect the prices we can charge and the margins we can earn, and impact the various ways in which we are permitted or may choose to do business and, accordingly, our assessments of which potential markets to most aggressively pursue. The policies regarding our distributed generation solutions, safety regulations and air quality or emissions regulations, which vary by state, could affect how we do business. For example, some state environmental agencies may limit the amount of emissions allowed from generators utilized by our customers. We expect the electric industry to continue to undergo changes due to the changing and uncertain regulatory environment.
 
Regulation of Diesel and Other Engine Generators. In 1996, the Environmental Protection Agency (EPA) introduced new emission standards aimed at non-road mobile diesel engines such as construction and agriculture equipment. Based on the systems’ engine horsepower rating, generators are rated from Tier 1 to 4, with most non-emergency diesel engine generators required to arrive at Tier 4 by 2012. Tier 4 requirements are the most stringent and will most likely increase the expense, lower profitability, and lengthen returns on investment of back-up power and demand reduction solutions.
 
Management believes that engine design and engineering on the part of the manufacturers will solve many of these problems and that suitable solutions to its business applications will be available and affordable.  At the same time, we believe that this change in emission policy brings significant opportunity for Titan Energy.   We feel that we have alternative equipment technologies that will satisfy Tier 4 standards, technologies which actually offer superior solution such as natural gas engines and smaller units arranged in parallel configurations.  There will also be a greater need for our maintenance and service programs as this will be a requirement of the owners and operators.  And Titan Energy will benefit from the monitoring and validation technologies what will allow for improved operations and compliance with the new regulations.
 
Overall we believe current regulatory changes bring Titan and our customers more opportunities.  Savvy customers will be the first to take advantage of Smart Grid opportunities and will participate in cutting-edge energy rates and incentives for renewable and efficient technologies to help their bottom line.  Titan’s core offerings are a good match for these applications and we are well positioned to facilitate our customers’ participation.  Likewise, we are committed to helping our customers achieve compliance of regulations, such as Tier 4, and will continue to monitor regulatory agencies and industry to help our customers and make wise cost-effective business decisions.
 
Research and Development
 
            We have expended considerable resources in the development of our monitoring and control technologies. We expect to continue to have to expense additional capital and resources to expand the capabilities of these systems and to maintain it as we introduce it into the marketplace.

Seasonality

The demand for equipment and service varies from region to region and by season.  In the Midwest, we often experience a dramatic slow-down in orders and completed jobs during the winter months due to ice, snow and cold weather conditions.  In the Southeast, we often see increased business activity during times of storms or hurricanes.  Typically we experience considerably higher revenues in our second and third quarters as compared to our first and fourth quarters.
 
Available Information
 
Our corporate website is located at www.titanenergy.com. On the investor relations section of our website,  we make available, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file them with or furnish them to the SEC. Further, a copy of this Annual Report on Form 10-K is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington, and D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding our filings at http://www.sec.gov.
 
 
14

 
 
We provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events and press and earnings releases as part of our investor relations website. The contents of and the information on or accessible through our corporate website and our investor relations website is not a part of, and is not incorporated into, this report or any other report or document we file with or furnish to the SEC.

Risk Factors
 
Our Need for Capital to Support Future Growth
 
Titan Energy will need additional capital to continue operations and will endeavor to raise funds through the sale of equity shares and revenues from operations. There can be no assurance that Titan Energy will generate revenues from operations or obtain sufficient capital on acceptable terms, if at all. Failure to obtain such capital or generate such operating revenues would have an adverse impact on Titan Energy’s financial position and results of operations and ability to continue as a going concern. Operating and capital requirements during the next fiscal year and thereafter will vary based on a number of factors, including the level of sales and marketing activities for services and products. There can be no assurance that additional private or public finances, including debt or equity financing, will be available as needed, or, if available, on terms favorable to Titan Energy. Any additional equity financing may be dilutive to stockholders and such additional equity securities may have rights, preferences or privileges that are senior to those of our existing common stock
 
 
We lease office space and warehouses at the following locations:
 
 
o
6177 Center St., Suite 103, Omaha, NE 68106. This is a 2-year lease agreement, at a cost of $2,300 per month. This lease expiration date is February 28, 2016.
     
 
o
6321 Bury Drive, Suite 8, Eden Prairie, MN 55346 (our executive offices). This is a 38 month lease with a cost of 1st year: $4,992 per month, 2nd year: $5,142 per month, 3rd year: $5,296 per month, 4th year (2 months): $5,455 per month. The lease expiration date is January 31, 2016. 
     
 
o
1645 Dixon St., Des Moines, IA 50316. This is a 3-year lease at a cost of $2,400 per month. This lease expiration date is July 31, 2016.
     
 
o
7855 NW 29 ST.   Suite: 158, Miami, Fl. 33122.  This is a lease for 38-month at a cost of 1st year $2,500 per month, 2nd year $2,575 per month and 3rd year $2,652 per month. This lease expiration date is July 31, 2016
     
 
o
150 Morristown Road, Suite 207, Bernardsville, NJ  07924. We have a twelve month lease at a cost of $3,300 per month. This lease expiration date is January 31, 2015.

 
No legal proceedings.
 
 
 
15

 
 
PART II
 
 
MARKET INFORMATION
 
Since May 19, 2003, our common stock has been quoted on the OTC Bulletin Board under the symbol “SFTV.OB.” On December 28, 2006, our symbol was changed to “TEWW.OB.” On August 10, 2007, our symbol was changed to “TEWI.OB”.

The following table sets forth, for the fiscal quarters indicated, the high and low bid prices. These quotations reflect the closing inter-dealer prices, without mark-up, mark-down or commission, and may not represent actual transactions.

   
High
   
Low
 
Calendar Year 2013
           
First Quarter
   
0.0500
     
0.0100
 
Second Quarter
   
0.0400
     
0,0200
 
Third Quarter
   
0.0500
     
0.0300
 
Fourth Quarter
   
0.0400
     
0.0200
 
                 
Calendar Year 2012
               
First Quarter
   
0.0700
     
0.0200
 
Second Quarter
   
0.0600
     
0.0070
 
Third Quarter
   
0.0100
     
0.0063
 
Fourth Quarter
   
0.0100
     
0.0049
 
 
HOLDERS
 
We have 71,308,641 shares of our common stock outstanding as of March 18, 2014 held by approximately 275 stockholders of record. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies.
 
DIVIDENDS
 
We have not paid dividends to our stockholders in the last two fiscal years and have no intention to pay dividends in the foreseeable future.
 
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
 
See “Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
 
RECENT SALES OF UNREGISTERED SECURITIES
 
None

PURCHASES OF EQUITY SECURITIES BY THE ISSUER
 
Neither the Company nor our affiliates purchased any shares during the year ended December 31, 2013 of equity securities that are registered by us pursuant to Section 12 of the Securities Exchange Act of 1934.
 
 
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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.
 
We specialize in the sales and management of onsite power generation for industrial and commercial customers. By utilizing advanced communication technologies, automated data collection, reporting systems and remote monitoring capabilities, we believe we are creating a new standard for power asset management and are leading the way for critical energy programs such as demand response and distributed generation. In fact, we believe we are one of the first companies to combine expertise in power generation asset management with real time information processing to create a more reliable and effective Smart Grid approach to onsite power management.
 
In 2006, we acquired Stellar Energy, a Minneapolis-based provider of power generation equipment and service. Stellar Energy is now called Titan Energy Systems (‘TES”) and has expanded its number of sales and service offices to include Nebraska, Iowa, North and South Dakota, New York, and New Jersey. 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 expand into 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 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 three year contract related to this business.
 
In 2010, Titan Energy Development, Inc. (“TEDI”), a wholly owned subsidiary of Titan Energy Worldwide (“TEWI”) 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 is now inactive as it has completed any contracts it had with customers.
 
RESULTS OF OPERATIONS
 
Year Ended December 31, 2013 Compared to the Year Ended December 31, 2012

Sales
 
Sales for the year ended December 31, 2013 were $21,898,288 compared to $19,151,874 for the year ended December 31, 2012. The following table summarizes our sale by their segments:

   
Power
   
Energy
 
   
Distribution
   
Services
 
2013
  $ 10,822,283     $ 11,076,005  
2012
    11,598,000       7,553,874  
(Decrease) Increase
  $ (775,717 )   $ 3,522,131  
Percent (Decrease) Increase
    -7 %     47 %
 
 
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The decrease in sales in the Power Distribution segment is the result of our failure to close some of the larger projects that usually contribute to our overall performance and harsh winter weather in late 2013 which delayed shipments into 2014.

The increased sales in the Energy Service segment are attributable to improvements in our national accounts program, RICE NESHAP and UPS programs. Sales to national accounts for the year ended December 31, 2013 totaled $3,764,592 compared to $2,396,715 in the year ended December 31, 2012. RICE NESHAP revenues were $2,249,794 in 2013 compared to $0 in 2012.  Sales of UPS equipment and services were $405,522 in 2013 compared to $92,366 in 2012.

Cost of Sales

Cost of sales was $15,615,470 for the year ended December 31, 2013 compared to $13,920,571 for the year ended December 31, 2012.
 
   
Power
   
Energy
 
   
Distribution
   
Services
 
2013
  $ 9,122,873     $ 6,492,597  
2012
    9,781,864       4,138,707  
(Decrease) Increase
  $ (658,991 )   $ 2,353,890  
Percent of Sales
               
2013
    84 %     59 %
2012
    84 %     55 %

The decreased cost of sales in the Power Distribution segment is due to lower sales.  The higher costs of sales in the Energy Services segment are attributable to higher sales volume.

The higher percent cost of sales in the Energy Services segment is attributable to the increased sales in the national accounts and RICE NESHAP programs, which have lower margins than our traditional service business. For the year ended December 31, 2013, sales to national accounts represented 17% of our total sales compared to 16% for the year ended December 31, 2012, while RICE NESHAP, which had no revenues in 2012,  accounted for 10% of the Company’s overall sales in 2013. The percentage cost of sales related to national accounts for the year ended December 31, 2013 was 75%.  The percentage cost of sales related to RICE NESHAP for the year ended December 31, 2013 was 67%. The percentage cost of sales for our traditional service business for the year ended 2013 was 30%.

  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 $3,323,827 for the year ended December 31, 2013, compared to $3,039,816 for the year ended December 31, 2012. The following table summarizes the areas of costs in this category:
 
   
Power
   
Energy
 
2013
 
Distribution
   
Services
 
Payroll related costs
  $ 810,854     $ 1,840,681  
Shared based compensation
    25,215       105,638  
Other
    90,138       451,301  
Total
  $ 926,207     $ 2,397,620  
2012
               
Payroll related cost
  $ 1,209,579     $ 1,273,007  
Shared based compensation
    25,040       51,209  
Other
    84,761       390,968  
Total
    1,324,631     $ 1,715,184  
                 
(Decrease) Increase
  $ (398,424 )     682,436  
Percent of Sales
               
2013
    9 %     22 %
2012
    11 %     23 %
 
 
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The increase in costs is primarily attributable to an increase in service admin personnel and the inclusion of our Chief Technology Officer whose salary was previously reported under a different division of the Company.
 
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 $1,663,153 for the year ended December 31, 2013, compared to $1,577,669 for the year ended December 31, 2012.
 
   
Power
   
Energy
 
2013
 
Distribution
   
Services
 
Payroll related costs
  $ 185,208     $ 305,237  
Shared based compensation
    6,540       6,540  
Facilities
    116,918       312,278  
Travel and Meals
    73,821       155,804  
Bad debts
    (69,300 )     11,759  
Other
    241,899       316,448  
Total
  $ 555,086     $ 1,108,067  
2012
               
Payroll related cost
  $ 106,647       280,699  
Shared based compensation
    25,225       48,847  
Facilities
    213,150       253,409  
Travel and Meals
    79,929       39,235  
Bad debts
    221,165       71,851  
 Other
    230,599       228,088  
Total
  $ 876,715     $ 922,129  
                 
(Decrease) Increase
  $ (321,629 )   $ 185,938  
 
The lower costs in the Power Distribution segment are attributable to bad debt recovery which improved in 2013. The increase in Energy Service payroll related costs was due to additional personnel hired to manage the RICE NESHAP and national accounts.  Increase in travel expenses was due to travel of Minneapolis based personnel to the Miami and New Jersey offices in order to support the operations in those territories.

Research and Development

We entered into a contract in June 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 2013 expense for this research and development for this project was $17,902 for a total cost of $564,173 incurred since 2010.  The Company has completed this software platform and has begun to market it to customers. Future research and development expenses are anticipated in order to maintain and make improvements in the software platform.
 
 
19

 
 
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 year ended December 31, 2013 was $409,893 as compared to $517,865 for the year ended December 31, 2012. The following table show the costs related to corporate activities:

   
2013
   
2012
 
Payroll related activates
  $ 329,410     $ 286,604  
Stock Compensation
    2,526       72,289  
Professional Fees
    (16,708 )     24,101  
Shared based payments for professional services
    15,441       43,324  
Travel
    48,399       20,393  
Other
    30,825       71,194  
Total
  $ 409,893     $ 517,905  
 
We reduced our corporate overhead significantly in 2013 as we further reduced costs related to our audits and quarterly filings. The increase in payroll was due to an increase in salary for the CEO who received $192,500 in 2013 compared to $130,000 in 2012.  Our CFO decreased his time and his annual salary decreased from $105,000 to $81,000.  Lower costs in stock compensation are due to the CEO not receiving any stock options in 2013.  The negative professional fees were due to a reduction in legal and investor relations stock based compensation for the period.

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 year ended December 31, 2013 was $339,090 compared to $352,399 in the year ended December 31, 2012.The Company did not have significant purchases of new fixed assets as we were operating to conserve cash.

Other Expenses
 
The following table below is summarizing the items in this category:

   
2013
   
2012
 
Interest expense, net
  $ 484,520     $ 630,094  
Factoring fees
    196,523       326,203  
(Settlement) Loss related to lease obligation
    (272,227 )     162,278  
Amortization of debt discount
    -       105,625  
Amortization of deferred financing costs
    8,106       25,506  
Change in the fair value of embedded conversion feature
    (2,943 )     (74,447 )
Change in the fair value of warrants
    13,579       (11,988 )
Total
  $ 427,558     $ 1,163,271  

The decrease in interest expense is attributable to having paid off our sales tax obligations which were accruing significant interest. Factoring fees decreased because we made less use of our factoring arrangements as we were able to manage more of our receivables through our internal cash flow.
 
The gain in the lease obligation was the adjustment of the amount owed the creditor through our settlement agreement. We reached a settlement for approximately 10 cents on the dollar and are committed to making 10 monthly payments of $3,000.  In 2013 we made $9,000 in payments.
 
The deferred financing costs are related to the extension and issuance of additional warrants to note holders in return for extending their debt to July 1, 2014.

Our convertible debt has warrants and beneficial conversion features which are accounted for in accordance with ASC 470. We are required to determine the fair value of the warrants and the beneficial conversion feature and treat that amount as a debt discount to be amortized over the life of the debt. At December 31, 2013, the full amount of debt discounts has been expensed in 2013.The embedded conversion feature and the warrants are treated as a liability and are re-measured with each reporting period.
 
 
20

 

Liquidity and Capital Resources
 
The Company incurred a net profit for the year ended December 31, 2013 of $108,215. As of December 31, 2013 we have an accumulated deficit $34,908,576.  In addition, we were in default as of December 31, 2013 on notes payable of $250,000 plus interest. On July 1, 2014 a total of $1,875,000 of convertible notes will be in default unless new agreements are reached with these noteholders.   We have been able to use our factoring lines to provide additional cash flow to pay vendors and employees. These conditions raise substantial doubt as to the Company’s ability to continue as a going concern.

During the year ended December 31, 2013, cash used by operations was $19,876. Cash provided by financing activities was $71,776.

The Company has had periodic difficulties keeping current with various suppliers during 2013. 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 advance us cash in order to pay our suppliers. During 2013, we incurred vendor and taxing authorities financing charges of $13,521.   The cost of the factoring fees and interest paid to factor our receivable totaled $196,523.  These extra costs have had an adverse impact on our liquidity position.
 
To help address its cash flow issues, the Company has instituted a policy that each operating subsidiary covers its cash requirement.  This has resulted in certain operations accruing payroll and deferring payments on non-critical expenses. The service operations are slightly positive but we believe that it can support the cash flow needed to run the business.
 
The Company was profitable in 2013 and we believe that it will achieve greater profitability in 2014. This profitability will allow us to generate cash flow to operate the business and replace our factoring line with a more affordable credit facility which would improve our cash flow.
 
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 exclude as part of the adjusted EBITDA measures for the year ended December 31, 2013  and 2012, respectively, as well as reasons for excluding individual items.

·
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.
 
·
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.
 
 
21

 

The reconciliation of adjusted EBITDA to net loss is set forth below:
 
     
 
Years Ended December 31,
 
   
2013
   
2012
 
Net profit (loss)
  $ 108,215     $ (1,652,057 )
Add back:
               
Depreciation and amortization
    339,090       352,399  
Stock based compensation and payments
    164,901       263,933  
Interest and factoring fees
    680,524       956,297  
Amortization of debt discount
    8,106       131,131  
Loss related to lease obligation
    (272,227 )     162,278  
Fair value adjustments
    10,636       (86,435 )
Adjusted EBITDA
  $ 1,039,245     $ 127,546  
 
Off-Balance Sheet Arrangements
 
None.
 
Critical accounting policies and use of estimates
 
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts,, inventory obsolesces,  purchase price allocations related to business combinations, expected future cash flows including growth rates, discount rates, terminal values and other assumptions and estimates used to evaluate the recoverability of long-lived assets and goodwill, estimated fair values of intangible assets and goodwill, amortization methods and periods, certain accrued expenses and other related charges, stock-based compensation, contingent liabilities, tax reserves and recoverability of our net deferred tax assets and related valuation allowance. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates if past experience or other assumptions do not turn out to be substantially accurate. Any differences may have a material impact on our financial condition and results of operations.

We believe that of our significant accounting policies, which are described in Note 1 to our consolidated financial statements contained in  this Annual Report on Form 10-K, The following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.

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.
 
 
22

 
 
Intangible Assets

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

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 entity 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.
 
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 nor performed a detail evaluation of goodwill this year. There has been no adjustment to our goodwill for years ended December 31, 2013 and 2012. The carrying value of goodwill is summarized in the financial statement Note 1.

Income Taxes

The Company accounts for income taxes under the asset and liability whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. As of December 31, 2013 and December 31, 2012 the Company had no unrecognized tax benefits due to uncertain tax positions.
 
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 December 31, 2013 there were no amounts that had been accrued in respect to uncertain tax positions.

The Company’s federal tax reporting is not currently under examination by the Internal Revenue Service (“IRS”); and the Company’s state income or franchise tax is not currently under examination by the state authorities.  However fiscal years 2010 and later remain subject to examination by the IRS and respective states.
 
Loss per Share

The basic income (loss) per common share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding. Diluted income per common share is computed similar to basic income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The loss for common shareholders is increased for any preferred dividends. As of December 31, 2013, the Company had potentially dilutive shares 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. See Note 1for the details of impact of potentially dilutive securities.
 
 
23

 
 
Share-Based Compensation

The company uses the fair value method of accounting for share-based payments. Accordingly, the Company’s recognize the cost of employee services received in exchange for awards of equity instruments based on the grant date fair value of those rewards.  Options or share awards issued to non-employees are valued using the fair value method and expensed over the period services are provided.
 
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 ASU 2013-11 “Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss or a Tax Credit Carryforward Exits,” This amendment is effective for fiscal years beginning after December 15, 2013. The Company is evaluating the effects of this update, however it does not believe it will have a material impact on our financial position or results of operations.
 
            In July 2012, the FASB issued ASU 2012-02, “Intangible-Goodwill and Other (Topic 350) Testing Indefinite-Lived Intangibles Assets for Impairment” ASU 2012 -02 allows an entity to assessed qualitatively whether an indefinite-lived intangible assets is impaired prior to performing a qualitative analysis. This ASU 2012-02 is effective for fiscal year beginning after September 15, 2012. We have adopted of ASU 2012-02 it had no material impact on our financial position and results of operations.

There are several other new accounting pronouncements issued by the FASB. Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe any of these accounting pronouncements has had or will have a material impact on the Company’s consolidated financial statements.
 
 
24

 
 
 
TITAN ENERGY WORLDWIDE, INC.
Unaudited Consolidated Financial Statements
December 31, 2013 and 2012
 
Table of Contents
 
 
 
25

 
 
 
The Company’s Consolidated Financial Statements have not been audited as of December 31, 2013 or for the years ended December 31, 2013 and 2012.  The audit has not been performed due to the cost and availability of cash required to pay past due fees owed to our independent accountant firm.  These Consolidated Financial Statements have been prepared by Management in accordance with generally accepted accounting principles and applicable rules and regulation of the Securities and Exchange Commission.
 
 
F-1

 
 
UNAUDITED CONSOLIDATED BALANCE SHEETS
December 31, 2013 and 2012
 
   
2013
   
2012
 
ASSETS
           
Current assets
           
Cash and cash equivalents
  $ 215,795     $ 304,374  
Accounts receivable less allowance for doubtful accounts
    2,552,453       2,196,907  
Inventory, net
    938,612       1,056,099  
Other current assets
    237,844       99,709  
Total current assets
    3,944,704       3,657,089  
Property and equipment, net
    544,905       592,995  
Customer and distribution lists, net
    334,109       470,985  
Goodwill
    1,351,695       1,351,695  
Other assets
    26,455       37,194  
Total assets
  $ 6,201,868     $ 6,109,958  
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
               
Current liabilities
               
Accounts Payable
  $ 2,829,470     $ 2,636,888  
Accrued liabilities
    2,372,862       2,352,653  
Customer deposits and deferred revenue
    610,564       774,518  
Factoring obligation
    1,024,781       934,930  
Notes payable - current portion
    167,700       118,000  
Current portion of convertible debt, net of discount
    2,740,000       2,740,000  
           Total current liabilities
    9,745,377       9,556,989  
Notes payable, less current portion
    -       67,700  
Other long term liabilities
    -       302,227  
               Total long –term liabilities
    -       369,927  
Total liabilities
    9,745,377       9,926,916  
Commitments and Contingencies
               
Stockholders’ equity (deficit)
               
Preferred Stock Series D, 10,000,000 authorized, $,0001 par value, issued and outstanding 341 and 344, shares, respectively
    1       1  
Common stock 1,800,000,000 shares authorized, $.0001 par value, issued  71,308,641 and 70,800,775 shares, respectively
    7,131       7,080  
Treasury stock, at cost, held 1,550,000 and 1,550,000 shares, respectively
    (775,000 )     (775,000 )
Additional paid-in capital
    32,132,933       31,967,753  
Accumulated deficit
    (34,908,576 )     (35,016,791 )
Total stockholders’ equity (deficit)
    (3,543,511 )     (3,816,957 )
Total liabilities and stockholders’ equity (deficit)
  $ 6,201,866     $ 6,109,959  
 
See accompanying notes to the unaudited consolidated financial statements.
 
 
F-2

 
 
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2013 and 2012

   
2013
   
2012
 
Sales of equipment
  $ 10,822,283     $ 11,598,000  
Sales of service and parts
    11,076,005       7,553,874  
        Net  sales
    21,898,288       19,151,874  
                 
Material cost and labor for equipment
    9,122,873       9,781,864  
Material cost and labor for service and parts
    6,492,597       4,138,707  
        Total cost of  sales
    15,615,470       13,920,571  
Gross profit
    6,282,818       5,231,303  
Operating expenses:
               
Selling and service expenses
    3,323,827       3,039,816  
General and administrative expenses
    1,663,153       1,798,844  
Research and development
    17,902       8,669  
Corporate overhead
    409,893       517,905  
Depreciation and amortization
    339,090       352,399  
(Gain) or Loss on sale of fixed assets
    (6,301 )     2,456  
           Total operating expenses
    5,747,564       5,720,089  
Operating Loss
    535,254       (488,786 )
Other Expenses
               
Interest expense, net
    680,524       956,297  
Amortization of debt discount and financing costs
    8,106       131,131  
Present value of lease obligation
    (272,227 )     162,278  
Change in fair value of embedded conversion feature
    (2,943 )     (74,447 )
Change in fair value of warrants
    13,579       (11,988 )
Total Other Expense, net
    427,039       1,163,271  
Net loss
    108,215       (1,652,057 )
Weighted average number of shares outstanding
    71,194,743       48,714,441  
Basic and diluted (loss) per common share
  $ -     $ (0.03 )
 
See accompanying notes to consolidated financial statements.
 
 
F-3

 
 
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2013 and 2012

   
Common Stock
   
Preferred Stock
   
Treasury shares
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
 
Balance December 31 ,2011
    31,472,127     $ 3,147       344     $ 1       1,550,000     $ (775,000 )
Stock issued for the conversion of Preferred D
    793,648       79       (3 )                        
Stock issued for conversion of convertible  notes
    33,881,203       3,388                                  
Stock issued for services
    4,653,797       466                                  
Stock options issued for compensation
                                               
Beneficial conversion feature on convertible debt
                                               
Cost of issuing stock certificates
                                               
Net loss for the year
                                               
Balance December 31, 2012
    70,800,775       7,080       341     $ 1       1,550,000     $ (775,000 )
Stock issued for conversion of convertible  notes
    207,866       21                                  
Stock issued for services
    300,000       30                                  
Stock options issued for compensation
                                               
Cost of issuing stock certificates
                                               
Net loss for the year
                                               
Balance December 31 , 2013
    71,308,641     $ 7,131       341     $ 1       1,550,000     $ (775,000 )
 
See accompanying notes to consolidated financial statements.
 
 
F-4

 
 
Titan Energy Worldwide, Inc.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2013 and 2012 (Continued)
 
   
Additional Paid
in Capital
   
Accumulated
Deficit
   
Total
 
Balance December 31 ,2011
  $ 31,462,767     $ (33,364,734 )   $ (2,673,819 )
Stock issued for the conversion of Preferred D
    (79 )             -  
Stock issued for conversion of convertible  notes
    160,863               164,251  
Stock issued for services
    82,596               83,062  
Stock options issued for compensation
    229,433               229,433  
Beneficial conversion feature on convertible debt
    32,422               32,422  
Cost of issuing stock certificates
    (249 )             (249 )
Net loss for the year
            (1,652,057 )     (1,652,057 )
Balance December 31, 2012
  $ 31,967,753     $ (35,016,791 )   $ (3,816,957 )
Stock issued for conversion of convertible  notes
    2,882               2,903  
Stock issued for services
    7,970               8,000  
Stock options issued for compensation
    154,403               154,403  
Cost of issuing stock certificates
    (75 )             (75 )
Net Income for the year
            108,215       108,215  
Balance December 31, 2013
  $ 32,132,933     $ (34,908,576 )   $ (3,543,511 )
 
See accompanying notes to consolidated financial statements.
 
 
F-5

 
 
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2013 and 2012

Operating activities:
 
2013
   
2012
 
Net Income (Loss)
  $ 108,215     $ (1,652,057 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Compensation paid by issuance of stock and stock options
    146,460       220,610  
Depreciation and amortization
    339,090       352,399  
Amortization of debt discount and financing costs
    8,106       131,131  
Stock issued for services
    8,000       43,324  
Change in fair value of lease obligation
    (302,227 )     162,278  
Change in fair value of warrants
    13,579       (11,988 )
Change in fair value of embedded conversion
    (2,943 )     (74,447 )
Gain on sales of fixed assets
    (6,301 )     2,456  
Changes in operating assets and liabilities:
               
Accounts receivables
    (355,545 )     (152,206 )
Inventory
    117,487       (530,231 )
Other assets
    (127,397 )     (44,707 )
Accounts payable
    192,582       329,117  
Accrued liabilities and customer deposits
    (158,983 )     1,152,606  
Net cash used in operating activities
    (19,876 )     (71,715 )
Investing activities:
               
     Purchase of  fixed assets
    (146,780 )     (24,297 )
     Proceeds from sales of fixed assets
    6,301       40,569  
Net cash (used) provided in investing activities
    (140,479 )     16,272  
Financing activities:
               
Proceeds provided  by Convertible Debt
    -       310,000  
Net borrowings from Factoring Obligation
    89,851       (24,938 )
Proceed of promissory note
    -       67,700  
Payment of notes payable
    (18,000 )     (132,037 )
Cost associated with stock issuances
    (75 )     (340 )
Net cash (used) provided by financing activities
    71,776       220,385  
Increase (decrease) in cash and cash equivalents
    (88,579 )     164,942  
Cash and cash equivalents, beginning of year
    304,374       139,432  
Cash and cash equivalents, end of period
  $ 215,795     $ 304,374  
 
See accompanying notes to consolidated financial statements.
 
 
F-6

 
 
UNAUDITED NOTES TO 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 of 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. These warrants have now expired.
 
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 three year period from 2010 to 2012. This company is inactive as we completed the three year contract related to this business.
 
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’s 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. The company is now inactive as it has completed any contracts it had with customers.
 
 
At December 31, 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
Preferred Stock, Series B, authorized 10,000,000, $.0001 par value
Preferred Stock, Series C, authorized 10,000,000, $.0001 par value

 
F-7

 
 
TITAN ENERGY WORLDWIDE, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO 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 U.S. generally accepted accounting principles (“GAAP”) for financial information and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”).
 
Going Concern
 
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company incurred a net profit for the year ended December 31, 2013 of $108,315. At December 31, 2012, the Company had an accumulated deficit of $34,908,756. Although the Company made its first profit in its history, there is still some risk as to continuing as a going concern.  These consolidated 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 profitability in 2013 as the growth in our service sales has improved the overall margins
     
 
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.
     
 
The Company has achieved a lower cost in Corporate Overhead by limiting by reducing the number of executives and limiting legal and travel expense. Corporate Overhead has declined by $758,000 since 2011.
 
Supplemental Cash Flow Information Regarding Non-Cash Transactions
 
During the years ended December 31, 2013 and 2012, the Company has entered into several non-cash transactions in order to provide financing for the Company and conserve cash. The table below shows the transactions that occurred during the past two years.
 
   
2013
   
2012
 
Stock  issued for services
  $ 8,000     $ 44,500  
Common stock issued for conversion of Series D Preferred Stock
  $ -     $ 30,000  
Stock issued for the conversion of convertible debt
  $ 2,913     $ 164,251  
Accounts Payable settled with stock
  $ -     $ 39,002  
 
Interest paid for the years ended December 31, 2013 and 2012 were $99,659 and $105,238 respectively. The factoring fees paid for the years ended December 31, 2013 and 2012 were $196,523 and $326,203, respectively.
 
 
F-8

 
 
TITAN ENERGY WORLDWIDE, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
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 assumption earn- out 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.
 
Cash Equivalents
 
For purposes of reporting cash flows, the Company considers all short-term investments with an original maturity of three months or less to be a cash equivalent.
 
Concentration of Credit Risk
 
Financial instruments that 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. The Company has utilizes banks that have Federal Deposit Insurance Corporation protection.
 
 
F-9

 
 
TITAN ENERGY WORLDWIDE, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Property and Equipment
 
Property and equipment are recorded at cost, net of accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, which range from three to seven years. Expenditures for major renewals and betterments that extend the original estimated economic useful lives of the applicable assets are capitalized. Expenditures for normal repairs and maintenance are charged to expense as incurred. The cost and related accumulated depreciation of assets sold or otherwise disposed of are removed from the accounts, and any gain or loss is included in operations.
 
   
December 31
   
December 31
 
   
2013
   
2012
 
Furniture and office equipment
  $ 273,305     $ 230,171  
Software
    682,320       649,171  
Vehicles
    41,929       59,733  
Tools and shop equipment
    202,468       181,529  
Leasehold improvements
    36,296       23,855  
Rental equipment
    40,759       40,759  
Accumulated depreciation
    (732,172 )     (592,223 )
Net property and equipment
  $ 544,905     $ 592,995  
Depreciation expense
  $ 202,214     $ 195,266  
 
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 intangible have finite lives and therefore are required to be amortized to expense. The Company believes that the useful life of these intangibles range from 5-10 years. The accumulated amortization at December 31, 2013 and December 31, 2012 was $854,651 and $717,775, respectively. The Company expects amortization expense for the next five years as follows: 2014-$121,376: 2015-$88,876: 2016-$88,876: 2017-$10,257: 2018-$10,257.
 
 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 entity 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.
 
 
F-10

 
 
TITAN ENERGY WORLDWIDE, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO 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 this year. There has been no adjustment to our goodwill for years ended December 31, 2013 and 2012. The carrying value of goodwill is summarized in the table below:
 
Goodwill Carrying Value:
     
Gross
  $ 2,042,024  
Accumulated impairment
    (690,329 )
Net  Goodwill
  $ 1,351,695  
 
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 December 31, 2013 and 2012 there were no amounts that had been accrued in respect to uncertain tax positions.
 
The Company’s federal state income tax is not currently under examination by the Internal Revenue Service (“IRS”) or by state authorities.  However, fiscal years 2010 and later remain subject to examination by the IRS and respective states.
 
Loss per Share
 
The basic income (loss) per common share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding. Diluted income per common share is computed similar to basic income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The loss for common shareholders is increased for any preferred dividends. As of December 31, 2013 and 2012, the Company had potentially dilutive shares related to outstanding stock options, warrants and convertible securities that were not included in the calculation of loss or earnings per share, because their effect would have been anti-dilutive. At December 31, 2013 and 2012, the following table sets forth potentially dilutive shares:
 
 
F-11

 
 
TITAN ENERGY WORLDWIDE, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
   
2013
   
2012
 
Conversion of Series D Preferred stock
    137,500,000       162,149,533  
Conversion of 8% convertible notes and warrants
    7,056,452       8,327,570  
Conversion of 10% convertible notes and warrants
    1,700,000       1,840,000  
Stock warrants
    119,355       106,542  
Vested stock options
    403,226       467,290  
Conversion of the 11% notes
    -       845,070  
Conversion of 10% convertible notes and warrants
    21,250,000       21,250,000  
Conversion  of 8% convertible notes
    1,200,000       1,200,000  
Total
    169,229,033       194,986,005  
 
The above table uses the December 31, 2013 and 2012 used the average closing stock price to determine securities that may be dilutive. The average stock prices for the years ended December 31, 2013 and 2012 were $0.0248 and $0.0214, respectively. The Series D Preferred Stock can be converted by dividing the amount invested by the 20 days VWAP price. The 8% convertible notes can be converted by taking the principal and accrued interest and dividing by the average closing bid price for five days before closing. In addition, upon conversion the note holder receives ten stock warrants for every $1000 of principal with an exercise price of $0.01. The 10% convertible notes may be converted by multiplying the  principal and accrued interest by four, in addition these notes have warrants equal to 2 stock warrants for every $1,000 of principal with an exercise price of $0.25. The conversion of the 11% notes may be converted by dividing the principal and accrued interest by amount equal to 50% discount of the last three closing prices, with a floor of $0.03 per share. The 10% convertible notes issued in 2010 and amended at September 30, 2011 may be convert principal and accrued interest at $0.12 per share.  The 8% promissory note issued in 2012 is convertible into common stock by dividing the principal and accrue interest by the conversion price of $0.03 per share .In addition these convertible notes were issued with detachable warrants equal to 1 warrant per principal invested. These warrants are exercisable at $0.15 per share. The 8% promissory note has the right to convert principal and accrued interest by dividing by $0.03 per share. The stock warrants and vested stock options are those securities that are in-the-money at December 31. We use the treasury method to compute the shares that would be issued.
 
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.
 
Supplier Concentration
 
The Company has an exclusive distribution agreement with one supplier that comprised 51% and 54% of its total purchase for the years ended December 31, 2013 and 2012, respectively. The loss of this exclusive distribution agreement could cause a delay or loss of sales which would affect the operating results adversely. Although there are other vendors from which the Company could make these purchases, management believes that they may not be on the same terms and conditions as our current supplier
 
 
F-12

 

ITAN ENERGY WORLDWIDE, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO 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 ASU 2013-11 “Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss or a Tax Credit Carryforward Exits,” This amendment is effective for fiscal years beginning after December 15, 2013. The Company is evaluating the effects of this update, however it does not believe it will have a material impact on our financial position or results of operations.
 
In July 2012, the FASB issued ASU 2012-02, “Intangible-Goodwill and Other (Topic 350) Testing Indefinite-Lived Intangibles Assets for Impairment” ASU 2012 -02 allows an entity to assessed qualitatively whether an indefinite-lived intangible assets is impaired prior to performing a qualitative analysis. This ASU 2012-02 is effective for fiscal year beginning after September 15, 2012. We have adopted of ASU 2012-02 it had no material impact on our financial position and results of operations.
 
There are several other new accounting pronouncements issued by the FASB. Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe any of these accounting pronouncements has had or will have a material impact on the Company’s consolidated financial statements.
 
 
F-13

 
 
TITAN ENERGY WORLDWIDE, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
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:
 
   
December 31,
   
December 31,
 
   
2013
   
2012
 
Parts
  $ 606,764     $ 543,551  
Work in process
    388,932       577,297  
Finished Goods
    61,669       85,251  
Obsolescence Reserve
    (118,753 )     (150,000 )
Total
  $ 938,612     $ 1,056,099  
 
NOTE 3 - NOTES PAYABLE
 
Notes payable consists of the following at December 31, 2013 and 2012:
 
   
December 31,
   
December 31,
 
Short -Term Debt
 
2013
   
2012
 
Convertible Notes bearing interest at 12% due on demand
  $
250,000
    $ 650,000  
Convertible Note bearing interest at 12% due July 2014
   
2,490,000
      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
    -       18,000  
    $ 2,907,700       2,858,000  
Long-term
               
Promissory Note bearing interest at 8% due March 9, 2014
  $ -     $ 67,700  
Total Debt
  $ 2,907,700     $ 2,925,700  
 
At December 31, 2013 the Company was in default on $2,505,000 of convertible notes payable which are accruing interest at the default rate of 12%. The convertible notes of $1,890,000 have agreed to extend their notes to July, 1, 2014. The Company has also issued a convertible note for $200,000 due April 1, 2013 which has been extended to July 1, 2014, with a conversion feature that allowed the note holder to convert the note and the interest at $.03 per share. The Company also issued a promissory note to an individual for $67,700 at 8% interest and a maturity date of March 9, 2014. There are no conversion rights or warrants associated with this debt.
 
Certain outstanding notes related to the Stanza purchase have been sold to Southridge Partners II L.P. As of April 2, 2013 Southridge Partners II L.P has converted all notes and accrued interest of $156,505 into 34,089,752 shares of common stock.
 
 
F-14

 

TITAN ENERGY WORLDWIDE, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
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. The TES 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. On December 10, 2013, the factoring agreement was extended with the same terms except no term and with cancellation after 60 days’ notice.
 
 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 the receivable is not paid within 90 days of the invoice date or 45 days from due date, Harborcove can chargeback the receivable to the Company, unless the debtor was credit approved and the sole reason for not paying is financial difficulty.
 
The security for this amended Agreement includes all the assets of the Company including the assets of TEWI, Grove, Stanza and SSI.
 
The amounts outstanding at December 31, 2013 and December 31, 2012 were $1,024,761 and $934,930, respectively. The factoring fees for the years ended December 31, 2013 and 2012 were $199,523 and $326,203 respectively. The interest expenses on this amended Agreement for the years ended December 31, 2013 and 2012were $99,659 and $102,630 respectively.
 
NOTE 5 – ACCRUED LIABILITIES
 
Accrued liabilities consist of the following at December 31, 2013 and 2012:
 
   
December
   
December
 
Accrued Liabilities
 
2013
   
2012
 
Accrued Compensation
  $ 372,379     $ 508,000  
Accrued Interest
    1,082,221       732,391  
Embedded conversion feature fair value
    -       2,942  
Common stock warrants fair value
    14,343       763  
Purchase obligation on stock option
    250,000       250,000  
Stanza Systems payroll tax including penalty and interest
    195,007       278,137  
Stanza System 401k obligation
    77,685       86,685  
Accrued cost on completed jobs
    226,311       232,695  
Accrued sales tax
    110,116       246,355  
Accrued other
    44,800       14,685  
Total Accrued Liabilities
  $ 2,372,862     $ 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
 
 
F-15

 
 
TITAN ENERGY WORLDWIDE, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 6 - INCOME TAXES
 
The Company’s effective income tax rate of 0.0% differs from the federal statutory rate of 34% for the reason set forth below for the years ended December 31:
 
   
2013
   
2012
 
Income taxes at the statutory rate
  $ 36,793     $ (561,699 )
Utilization of NOL
    (49,576 )     -  
Valuation Allowance
            540,719  
Permanent differences and other
    12,783       20,980  
Total income tax
  $ -     $ -  
 
The following presents the components of the Company total income tax provision:
 
   
2013
   
2012
 
Current expense
  $ 49,576     $ -  
Deferred benefit
    (49,576 )     (540,719 )
Change in valuation
            540,719  
Total
  $ -     $ -  
 
Deferred tax assets and liabilities reflect the net effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. The tax effect of primary temporary differences giving rise to the Company deferred tax assets and liabilities for the years ended December 31, 2013 and 2012 are as follows:
 
   
2013
   
2012
 
Deferred tax assets
           
Amortization
  $ 27,374     $ 29,387  
Non qualify stock option expense
    49,796       75,007  
Fair value loss
    3,616       -  
Operating losses carry forward
    6,779,605       6,927,851  
Depreciation
    5,100       -  
Deferred Tax Liabilities
               
Fair value income
    -       (29,388 )
Depreciation
    -       (20,828 )
Net deferred assets
    6,865,491       6,982,029  
Valuation Allowance
    (6,865,491 )     (6,982,029 )
Total net deferred tax asset liability
  $ -     $ -  
 
The Company will have taxable income for 2013 that will be offset against our NOL carry forward resulting in zero taxes.  The Company has recorded a valuation allowance to fully offset the net deferred assets based on the fact that the Company has only this year has taxable income and has not recognized taxable income in any other year.
 
 
F-16

 
 
TITAN ENERGY WORLDWIDE, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
At December 31, 2013, the Company had consolidated federal net operating losses of $19,940,015. The expiration date of these net operating losses are as follows:
 
2019
  $ 104,604  
2020
    654,454  
2021
    1,700,703  
2022
    72,209  
2023
    451,382  
2024
    262,795  
2025
    385,410  
2026
    911,684  
2027
    2,540,363  
2028
    1,543,573  
2029
    2,807,561  
2030
    2,795,006  
2031
    2,088,153  
2032
    2,746,742  
2033
    875,376  
    $ 19,940,015  
 
NOTE 7 – RETIREMENT PLAN
 
            All eligible employees are covered under the Company 401(k) pension and profit sharing plan. The Company did not make any contribution to the plan for the years ended December 31, 2013 and 2012.
 
NOTE 8 - 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 Common Stock. Assuming an initial conversion price of $1.00, each one (1) share of Preferred Stock is convertible into 10,000 shares of Common Stock. The warrants on this offering all expired on January 31, 2013.There were no conversion for the year ended December 31, 2013
 
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.
 
 
F-17

 
 
TITAN ENERGY WORLDWIDE, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO 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 common shares received into units of Series D Preferred Stock. A total of 2,740,000 shares of common stock were repurchased for 137 Units of Series D Preferred Stock and 456,621 of detachable Class Warrants and 456,621 of detachable Class B Warrants. This transaction has been accounted for using the Black–Scholes method to determine the value of the detachable warrants. This method resulted in a cost of the treasury shares of $1,370,000, which is the sum of the value of the Series D Preferred Stock of $1,285,553, and the fair value of the warrants of $84,467.
 
During the year ended December 31, 2013, no treasury shares were converted into Common Stock.
 
 NOTE 10 – STOCK OPTIONS
 
The Company issued nonqualified stock options to employees on January 16, 2012. These options were not issued under any plan that required stockholder approval. The Company believes that such stock options align the interest of its employees with the shareholders. Stock option awards are granted with an exercise price equal to the market price of the Company common stock at the date of grant. The options granted to employees have a term of 10 years with a vesting commencing on January 16, 2013 over the four year period. The Company used the Black-Scholes method to evaluate the value of the options. The option granted on March 27, 2012 was to a member of our advisory board. The option is for 5 years and vesting immediately. We determined that the value of the option was $11,405 and will be charged to income over the one-year term to serve as an advisory board member. The expected volatility is computed based on a twelve month standard deviation of our month ended closing price. The risk free rate for periods within the contractual life of the option is based on the U.S. treasury yield curve in effect at time of grant. Below are the parameters in determining the fair value of these options.
 
   
2012
 
Excepted volatility
    96 %
Vesting period (years)
    5  
Expected term (years)
    7  
Expected dividends
    0 %
Risk free rate
    1 %

 
F-18

 
 
TITAN ENERGY WORLDWIDE, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A summary of stock options activity for the years ended December 31, 2013 and 2012:
 
   
Shares
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual
Terms
 
Grant Date
Fair Value
 
Outstanding December 31, 2011
   
7,735,000
   
$
0.31
     
8
     
Granted January 16.2012
   
4,025,000
   
$
0.07
     
3.25
 
127,111
 
Granted March 27 2012
   
500,000
   
$
0.02
     
3.5
 
11,405
 
Exercised
                           
Forfeited
   
(2,030,000
 
$
0.26
             
Outstanding December 31, 2012
   
10,230,000
   
$
0.23
             
Granted
                           
Exercised
                           
Forfeited
   
(132,500
 
$
0.19
             
Outstanding December 31, 2013
   
10,097,500
   
$
0.22
     
3.5
     
Exercisable as of December 31, 2013
   
7,300,625
   
$
0.27
             
 
As of December 31, 2013, the non-vested options total 2,786,875 shares. There is approximately $133,000 of unrecognized compensation and share based expense arrangements have been granted. These costs will be recognized over the weighted average period of 3 years. At December 31, 2013 the aggregate intrinsic value of the stock options not exercisable was $76,000.
 
 NOTE 11 – 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 Stanza not paying rent. The settlement agreement is for the Company to pay $30,000 in 10 equal installments. 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 major customer extends its contract, additional payments of $3,000 per month will be due and added to the end of the extension period. The company has paid $9,000 of its obligation as of December 31, 2013.  The agreement with the major customer has been terminated as of January 31, 2014.
 
 
F-19

 
 
TITAN ENERGY WORLDWIDE, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 12- COMMON STOCK TRANSACTIONS
 
During the year ended December 31, 2013 the Company issued the following shares of common stock:
 
150,000 shares to a consultant for services performed with a value of $3,000.The Company also 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:
 
793,648 shares of common stock for the conversion for the Series D Preferred Stock The Company also issued 100,000 shares to a consultant for services performed with a value of $2,500. 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. 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.
 
NOTE 13 - COMMON STOCK WARRANTS
 
There were no warrants issued during the year ended December 31, 2013. There were no warrants exercised during the year ended December 31, 2013, however 6,011,250 of warrants expired without being exercised. The following table shows the warrants outstanding at December 31, 2013:
 
Number of
     
Exercise
 
Expiration
Warrants
 
Purpose
 
Price range
 
Date
  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
 
NOTE 14 – OPERATING LEASES
 
The Company leases office space, vehicles, equipment and warehouses. Rent expense for the years ended December 31, 2013 and 2012 was $508,230 and $408,393.  Future minimum rental payments required under the non-cancelable operating leases are as follows: 2014 - $344,684; 2015 - $270,920; 2016-$47,157; 2017 -$11,340.
 
 
F-20

 
 
TITAN ENERGY WORLDWIDE, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15 – 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.
 
 
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:
 
   
December 31,
   
December 31,
 
   
2013
   
2012
 
Common stock price
  $ 0.027     $ 0.01  
Exercise price
  $ 0.15     $ 0.15  
Volatility
    131.50 %     89.80 %
Interest rate
    0.13 %     0.15 %
Remaining Terms
 
2 yrs
   
3 yrs
 
 
 
2.
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.
 
 
3.
Embedded beneficial conversion option was determined by using the Black –Scholes methods for year ended December 31, 2012. The debt with the embedded beneficial conversion option was converted in 2013 resulting in eliminating any fair value for this item.
 
 
F-21

 
 
TITAN ENERGY WORLDWIDE, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
The following table summarizes the financial instruments measured at fair value in the Unaudited Consolidated Balance Sheet as of December 31, 2013:
 
 
Fair Value Measurements
 
 
Level 1
 
Level 2
 
Level 3
   
Total
 
Assets
                 
Liabilities
                 
Common stock warrants
        $ 14,343     $ 14,343  
Purchase obligations for stock option
          250,000       250,000  
                       
Total
        $ 264,343     $ 264,343  
 
The following table summarizes the financial instruments measured at fair value in the Unaudited Consolidated Balance Sheet as of December 31, 2012:
 
 
Fair Value Measurements
 
 
Level 1
 
Level 2
 
Level 3
   
Total
 
Assets
                 
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
    13,580  
Balance December 31, 2013
  $ 264,343  
 
 
F-22

 
 
TITAN ENERGY WORLDWIDE, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 16 –Segment Data
 
Our operating segments represent components of our business for which discrete financial information is available and is reviewed regularly by the chief operating decision-maker, or decision-making group, to evaluate performance and make operating decisions. We conduct our operations through two operating segments: Power Distribution and Energy Service. Our reportable segments are strategic business units that offer different products and services and serve different customers. Power Distribution consists of the sale of equipment Emergency, Standby Power and Renewal Energy solutions. Energy Services consist of the sale of maintenance and service programs, interruptible rate program, monitoring program and energy audits.
 
Summarized financial information concerning our reportable segments is shown in the following table. Unallocated costs amounts include corporate overhead, research and development. Other expense which, for purposes of evaluating the operations of our segments, is not allocated to our segment activities. Total asset amounts exclude intercompany receivable balances eliminated in consolidation.  The Unallocated costs assets include cash and goodwill. Customer list and other intangible are allocated to their segments.
 
For the Year Ended December 31. 2013
 
   
Power
   
Energy