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EX-31.1 - CERTIFICATION - Titan Energy Worldwide, Inc.f10q0314ex31i_titanenergy.htm
EX-32.1 - CERTIFICATION - Titan Energy Worldwide, Inc.f10q0314ex32i_titanenergy.htm
EX-32.2 - CERTIFICATION - Titan Energy Worldwide, Inc.f10q0314ex32ii_titanenergy.htm
EX-31.2 - CERTIFICATION - Titan Energy Worldwide, Inc.f10q0314ex31ii_titanenergy.htm


U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(Mark One)
 
x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014
 
o  TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________ to ________
 
Commission File No. 000-26139
 
Titan Energy Worldwide, Inc.
 
Nevada
 
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
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes   o  No   o
 
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   o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.    See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b of the Exchange Act.
 
 
Large accelerated filer
o
Accelerated filer
o
 
 
 
 
 
 
Non-accelerated filer
o
Smaller reporting company
x
 
 
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   o  No   x
 
Indicate the number of shares outstanding of each of the issuer’s class of common stock, as of the latest practicable date:
 
As of June 18, 2014, the issuer had 71,308,641 shares of its common stock issued and outstanding.
 


 
 

 
 
TABLE OF CONTENTS
 
 
 
2

 
 
 
Not conforming to the Regulation S-X Rule 8-03 the Company’s Interim Financial Statements for the period ended March 31, 2014 (the “Financial Statements”) included in this Quarterly Report on the form of 10-Q (the “Form 10-Q”) have not been reviewed by an independent public accountant with professional standards for conducting such reviews, as established by generally accepted auditing standards, as may be modified or supplemented by the Securities and Exchange Commission ( the “Commission”).The review was not completed due to the cost and availability of cash required to pay past due fees owed to our independent accountant. The Company believes this is a temporary situation and will request the independent public accountants to complete the review when our liquidity position improves. Upon the completion of the review of the Company's Condensed Consolidated Financial Statements for the quarterly period ended March 31, 2014 by our independent public accountants we will amend Form 10-Q, the Financial Statements have been prepared in accordance with generally accepted accounting principles and applicable rules and regulation. In the opinion of Management, the information contained herein is accurate.
 
 
3

 
 
Titan Energy Worldwide, Inc.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

   
March 31
   
December 31,
 
   
2014
   
2013
 
ASSETS
 
 
   
 
 
Current assets
           
Cash and cash equivalents
  $ 378,130     $ 215,795  
Accounts receivable less allowance for doubtful accounts
    2,555,668       2,552,453  
Inventory, net
    817,404       938,612  
Other current assets
    217,299       237,844  
Total current assets
    3,968,501       3,944,704  
Property and equipment, net
    508,703       544,905  
Customer and distribution lists, net
    299,890       334,109  
Goodwill
    1,351,695       1,351,695  
Other assets
    26,735       26,455  
Total assets
  $ 6,155,524     $ 6,201,868  
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
               
Current liabilities
               
Accounts Payable
  $ 3,031,994     $ 2,829,470  
Accrued liabilities
    2,527,937       2,372,862  
Customer deposits and deferred revenue
    476,574       610,564  
Factoring obligation
    1,361,511       1,024,781  
Notes payable - current portion
    167,700       167,700  
Current portion of convertible debt, net of discount
    2,740,000       2,740,000  
           Total current liabilities
    10,305,716       9,745,377  
Total liabilities
    10,305,716       9,745,377  
Commitments and Contingencies
               
Stockholders’ equity (deficit)
               
Preferred Stock Series D, 10,000,000 authorized, $.0001 par value, issued and outstanding 341 both periods
    1       1  
Common stock 1,800,000,000 shares authorized, $.0001 par value, issued 71,308,641 both periods
    7,131       7,131  
Treasury stock, at cost, held 1,550,000 shares both periods
    (775,000 )     (775,000 )
Additional paid-in capital
    32,150,362       32,132,933  
Accumulated deficit
    (35,532,687 )     (34,908,576 )
Total stockholders’ equity (deficit)
    (4,150,193 )     (3,543,511 )
Total liabilities and stockholders’ equity (deficit)
  $ 6,155,523     $ 6,201,866  

See accompanying notes to unaudited condensed consolidated financial statements.

 
4

 
 
Titan Energy Worldwide, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2014 and 2013
 
   
March 31,
   
March 31,
 
   
2014
   
2013
 
Sales of equipment
  $ 2,972,514     $ 2,811,296  
Sales of service and parts
    1,776,875       1,842,786  
        Net sales
    4,749,389       4,654,082  
                 
Material cost and labor for equipment
    2,601,255       2,321,403  
Material cost and labor for service and parts
    1,086,063       996,551  
Total cost of sales
    3,687,318       3,317,954  
Gross profit
    1,062,071       1,336,128  
Operating expenses:
               
Selling and service expenses
    806,411       719,138  
General and administrative expenses
    509,322       479,850  
Research and development
    -       6,651  
Corporate overhead
    77,269       109,536  
Depreciation and amortization
    86,694       82,282  
Loss on sale of fixed assets
    -       -  
           Total operating expenses
    1,479,696       1,397,457  
Operating Loss
    (417,625 )     (61,329 )
Other Expenses
               
Interest expense, net
    189,892       174,017  
Amortization of debt discount and financing costs
    -       8,106  
Change in fair value of embedded conversion feature
    -       11,129  
Change in fair value of warrants
    16,594       24,978  
Total Other Expense, net
    206,486       218,230  
Net loss
    (624,111 )   $ (279,559 )
Weighted average number of shares outstanding
    71,308,641       70,853,522  
Basic and diluted (loss) per common share
  $ (0.01 )   $ -  
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
 
5

 
 
Titan Energy Worldwide, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2014 and 2013
 
   
2014
   
2013
 
Operating activities:                
Net Income (Loss)
  $ (624,111 )   $ (279,559 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Compensation paid by issuance of stock and stock options
    19,853       41,252  
Depreciation and amortization
    86,694       82,282  
Amortization of debt discount and financing costs
    -       8,106  
Stock issued for services
    -       9,000  
Change in fair value of warrants
    16,594       24,978  
Change in fair value of embedded conversion
    -       11,129  
Changes in operating assets and liabilities:
               
Accounts receivables
    (3,215 )     (815,688 )
Inventory
    119,208       (91,561 )
Other assets
    20,545       16,717  
Accounts payable
    185,226       193,313  
Accrued liabilities and customer deposits
    21,085       227,524  
Net cash used in operating activities
    (158,121 )     (572,507 )
Investing activities:
               
          Purchase of fixed assets
    (16,273 )     (18,084 )
Net cash (used) provided in investing activities
    (16,273 )     (18,084 )
Financing activities:
               
Net borrowings from Factoring Obligation
    336,729       507,856  
Payment of notes payable
    -       (6,000 )
Cost associated with stock issuances
    -       (60 )
Net cash (used) provided by financing activities
    336,729       501,796  
Increase (decrease) in cash and cash equivalents
    162,335       (88,795 )
Cash and cash equivalents, beginning of year
    215,795       304,374  
Cash and cash equivalents, end of period
  $ 378,130     $ 215,579  

See accompanying notes to unaudited condensed consolidated financial statements.
 
 
6

 
 
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
 
NOTE 1 - BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Background
 
Titan Energy Worldwide, Inc. (the “Company”) was incorporated on December 28, 2006 in the state of Nevada. The Company’s stock is traded on the OTC under the symbol “TEWI”.

On December 28, 2006, the Company acquired Stellar Energy Services, Inc., a Minnesota corporation (“Stellar”), whereby Stellar exchanged all its common shares for 750,000 newly issued shares of the Company’s preferred stock, plus a Note payable to Stellar shareholders of $823,000. This Note obligation has been fully satisfied. The Stellar shareholders also received 1,000,000 shares of Common Stock.    Stellar is doing business as Titan Energy Systems, Inc (“TES”).
 
On June 11, 2009, the Company through its wholly owned subsidiary,  Grove Power, Inc., a Florida corporation (“GPI”), acquired certain assets and assumed liabilities of R.B. Grove, Inc. Industrial and Service Divisions. The purchase was effective June 1, 2009. The purchase price consisted of a cash payment of $214,827 and an $86,612 secured promissory note at 8% interest rate due November 11, 2010. This Note obligation has been fully satisfied. The seller also received five year warrants to purchase 200,000 shares of the Company common stock at a price of $0.01 per share. The Company determined the fair value of these warrants to be $32,000.
 
On November 1, 2009, the Company acquired certain assets and assumed liabilities for a sales office in New Jersey. This business had open orders at date of acquisition of approximately $3,000,000. The Company agreed to pay the owner $150,000. This sales office has been consolidated with the TES operations.

On January 1, 2010, the Company acquired the stock of Sustainable Solutions, Inc., (“SSI”) a company that performs energy audits, consulting and management services. The purchase price for this business was a stock option to purchase 200,000 shares of the Company’s common stock at of $0.50 per share. We used the Black-Scholes method to value the stock option for this acquisition at $71,671. The primary asset of the business was a contract with a major utility company to perform energy assessments for the six year period from 2010 to 2012.
 
On November 1, 2010, the Company acquired the assets of Stanza Systems, Inc., a software development company specializing in smart-grid applications. This company is doing business as Stanza Technologies (“Stanza”). The purchase price for this company consisted of $175,000 cash and assumed liabilities of  $481,190. In addition, to complete this acquisition the Company had to satisfy the senior debt holders by offering common shares of the Company. The Company offered these debt holders 413,333 shares of common stock which was valued at the closing price of our stock as of November 1, 2010 resulting in a value of $186,000.
 
At March 31, 2014 and December 31, 2013, 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

 
7

 
 
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

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

Principles of Consolidation
 
The financial statements include the accounts of the Company and its 100% owned subsidiaries, TES, GPI, SSI and Stanza.
 
Basis of Presentation
 
The accompanying Consolidated Financial Statements (“Financial Statements”) have been prepared by management in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all the information and disclosures required by U.S. GAAP for complete consolidated financial statements. In the opinion of management, all adjustments, consisting principally of normal recurring adjustments, considered for fair presentation have been included. These Financial Statements should be read in conjunction with the Company’s unaudited consolidated financial statements and accompanying notes for the year ended December 31, 2013 on Form 10-K filed with SEC on March 20, 2014.
 
Going Concern
 
The accompanying Financial Statements have been prepared assuming the Company will continue as a going concern. The Company’s  net loss for the three months ended March 31, 2014 was $624,111.  The Company believes it can be profitable for the year 2014 as some of the factors that created the loss were due to extreme weather conditions and Management believes it has put into place new processes and procedures that should mitigate the impact of these types of conditions in the future. In addition, the Company is in the process of restructuring its balance sheet.  If successful, this should allow the Company to gain access to capital at a reduced rate.    However, the accumulated deficit and the notes that are in default raise substantial doubt as to the Company’s ability to continue as a going concern.    These Financial Statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of recorded asset amounts, or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Management has taken the following steps that it believes will be sufficient to provide the Company with the ability to continue its operations:

The Company has continued to lower costs in Corporate Overhead by reducing and limiting legal and travel expense.
   
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.
   
Management will seek to either restructure or replace its existing factoring agreement with either an asset based or bank line of credit before the end of the year 2014.  Management believes the company is eligible for a lower cost lending facility and that this could save the Company up to $300,000 a year in interest and fees.
 
 
8

 
 
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
 
Supplemental Cash Flow Information Regarding Non-Cash Transactions
 
During the three months ended March 31, 2014 and 2013, the Company has entered into several non-cash transactions in order to provide financing for the Company and to conserve cash. The table below shows the transactions that occurred during the periods presented.

   
Three Months
Ended
March 31,
2014
   
Three Months
Ended
March 31,
2013
 
Common stock issued for conversion of Series D Preferred Stock
  $ -    
 
 
Common stock issued for debt conversions
  $ -    
 
 
Stock and stock options issued for services
  $ -     $ 8,000  
 
Interest paid for the three months ended March 31, 2014 and 2013 were $57,791 and $24,296, respectively. The factoring fees paid for the three months ended March 31, 2014 and 2013 were $46,272 and $54,157, respectively.
 
Use of Estimates
 
The preparation of Financial Statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and assumptions at the date of the Financial Statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Revenue Recognition
 
The Company recognizes revenue when the significant risks and rewards of ownership have been transferred to the customer pursuant to applicable laws and regulations, including factors such as when there has been evidence of sales arrangement, delivery has occurred, or services have been rendered, the price to the buyer is fixed or determinable, and collectability is reasonably assured.
 
For equipment sales, the Company recognizes revenue when the equipment has been delivered to the customer and the customer has taken title and risk of the equipment. For service and parts sales, the Company recognizes revenue when the parts have been installed and over the period in which the services are performed. The Company in some circumstances will require customers to make a down payment that is included in customer deposits and the revenue is deferred until work has been completed. The Company also has long-term maintenance agreements that the customer may elect to pay in advance. The revenue recognition on these contracts is based on when the work is performed.

 
9

 
 
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
 
Cash Equivalents
 
For purposes of reporting cash flows, the Company considers all short-term investments with an original maturity of six months or less to be a cash equivalent.
 
Concentration of Credit Risk
 
Financial instruments which subject the Company to concentrations of credit risk include cash and cash equivalents. The Company maintains its cash in well-known banks selected based upon management’s assessment of the bank’s financial stability. Balances may periodically exceed the Federal Deposit Insurance Corporation limit which is currently $250,000.

Property and Equipment
 
Property and equipment are recorded at cost, net of accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, which range from six to seven years. Expenditures for major renewals and betterments that extend the original estimated economic useful lives of the applicable assets are capitalized. Expenditures for normal repairs and maintenance are charged to expense as incurred. The cost and related accumulated depreciation of assets sold or otherwise disposed of are removed from the accounts, and any gain or loss is included in operations.
 
Intangible Assets
 
The Company evaluates intangible assets and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable from its estimated future cash flows.

Recoverability of intangible assets and other long-lived assets is measured by comparing their net book value to the related projected undiscounted cash flows from these assets, considering a number of factors including past operating results, budgets, economic projections, market trends and product development cycles that represent customer lists, distribution list and contracts. These intangibles, except in process research and development (see note 2), have finite lives and therefore are required to be amortized to expense. The Company believes that the useful life of these intangibles ranges from 5-10 years.
 
Goodwill
 
In accordance with ASC  350, we test goodwill at the reporting unit level for impairment on an annual basis and between annual tests if events and circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying value. We have determined that the reporting unit level is the subsidiary level as discrete financial information is not available at a lower level and our chief operating decision maker, which is our chief executive officer and executive management team, collectively, make business decisions based on the evaluation of financial information at the entity level. Events that would indicate impairment and trigger an interim impairment assessment include, but are not limited to, current economic and market conditions, including a decline in market capitalization, a significant adverse change in legal factors, business climate or operational performance of the business, and an adverse action or assessment by a regulator. Our annual impairment test date is December 31.
 
 
10

 
 
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
 
The Company has examined the qualitative factors related the goodwill recorded as on our books. These factors includes the improving operations in each business unit, the improving economic business climate and the interest in the energy related investors, Therefore, we have not performed a detail evaluation of goodwill last year
 
Income Taxes
 
The Company accounts for income taxes whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.    Effective January 1, 2009 the Company adopted guidance regarding accounting for uncertainty in income taxes. This guidance clarifies the accounting for income taxes by prescribing the minimum recognition threshold an income tax position is required to meet before being recognized in the financial statements and applies to all federal or state income tax positions. Each income tax position is assessed using a two-step process. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more likely than not criteria, the benefit recorded in the financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement.  As of March 31, 2014 and December 31, 2013 there were no amounts that had been accrued in respect to uncertain tax positions. None of the Company’s federal or state income tax returns is currently under examination by the Internal Revenue Service (“IRS”) or state authorities.    However, fiscal years 2009 and later remain subject to examination by the IRS and respective states

The Company has not recorded any taxes payable for the three ended March 31, 2014, as it has net operating losses that will offset any tax liabilities.
 
Earnings or Loss per Share
 
The basic income (loss) per common share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding. Diluted income per common share is computed similar to basic income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The loss or earnings for common shareholders is increased for any preferred dividends. As of March 31, 2014 and March 31, 2013, the Company had potentially dilutive shares of 106,138,406  and 258,190,584 related to outstanding stock options, warrants and convertible securities that were not included in the calculation of loss per share, because their effect would have been anti-dilutive.
 
Share-Based Compensation
 
The Company uses the fair value method of accounting for share-based payments. Accordingly, the Company recognizes the cost of employee services received in exchange for awards of equity instruments based on the grant date fair value of those rewards.    Options or share awards issued to non-employees are valued using the fair value method and expensed over the period services are provided.

 
11

 
 
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

Segment Reporting
 
The Company operates in a two business segments, Power Distribution and Energy Services. Power Distribution consists of the sale of emergency, standby power equipment and renewable energy solutions. Energy Services consist of the sale of maintenance and service programs, interruptible rate demand response programs, monitoring program and energy audits.
 
New Accounting Standards and Updates Not Yet Effective
 
The following are new accounting standards and interpretations that may be applicable in the future to the Company:
 
In July, 2013 the FASB issued an Accounting Standards Update 2013-11, “Income Taxes (Topic 740) Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss or a Tax Credit Carryforward Exists.” This update will be effective for fiscal years and interim periods within those years beginning after December 15, 2013, The Company will evaluate its provision to determine its impact on our Consolidated Financial Statements, Other Accounting Standards Updates not effective until after September 30, 2013 are not expected to have a significant effect on the Company’s consolidated financial position or results of operations.
 
NOTE 2 – INVENTORY, NET
 
Inventory is stated at the lower of cost, determined by a first in, first out method, or market. Inventory is adjusted for estimated obsolescence and written down to net realizable value based upon estimates of future demand, technology developments and market conditions. Inventories are comprised of the following:
 
   
March 31,
   
December 31,
 
   
2014
   
2013
 
Parts
  $ 552,439     $ 606,764  
Work in process
    323,082       61,669  
Finished Goods
    62,636       388,932  
Obsolescence Reserve
    (120,753 )     (118,753 )
Total
  $ 817,404     $ 1,056,099  
 
 
12

 
 
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statement

NOTE 3 - NOTES PAYABLE
 
Notes payable consists of the following at March 31, 2014 and December 31, 2013:
 
   
March 31
   
December 31,
 
Short -Term Debt
 
2014
   
2013
 
Convertible Notes bearing interest at 12% due on demand
  $ 250,000     $ 440,000  
Convertible Note bearing interest at 12% due July 2014
    2,490,000       2,300,000  
Convertible Note bearing interest at 8% due July 2014
    100,000       100,000  
Promissory Note bearing interest at 8% due on demand
    67,700       67,700  
Other Loans in Default
            18,000  
 
  $ 2,907,700     $ 2,925,700  
 
As of March 31, 2014, certain note holders totaling a principal balance of $2,490,000 agreed to extend their notes to July 1, 2014 in return for reducing their conversion price from $0.12 to $0.05. Since the new conversion price is higher than the current stock price there is no beneficial conversion feature to be recognized. In addition, a promissory note for $100,000 has also been extended to July 1, 2014. If the Company is successful in restructuring its Balance Sheet these notes and their accrued interest will either be paid or converted into equity securities.
 
At March 31, 2014 the Company was in default on $250,000 of convertible notes payable. These notes are accruing interest at the annual default rate of 12%. These note holders will be given the option to convert into an equity security; however they have not extended their notes.
 
NOTE 4- FACTORING AGREEMENT
 
On June 15, 2011, the Company replaced its bank line of credit with a Factoring and Security Agreement (“Agreement”) with Harborcove Fund I, LP. (“Harborcove”). There are two agreements that provide financing separately to TES and GPI with identical terms. This agreement was extended and amended on December 10, 2012 for twelve months with cancellation after 60 days’ notice and a right of first refusal to match the term of a competing offer. The separate agreement with GPI was not extended.
 
The amended Agreement allows the Company to sell, transfer and assign its receivables to Harborcove. In return Harborcove will loan the Company 90% of the face value of the receivable. The balance, less factoring fees and interest, are paid to the Company once the final payment is received. Harborcove has the right to reject any receivables that do not meet their credit requirement approvals. The Company pays a fee on each invoice purchased by Harborcove equal to 1.00% (as amended) of the face value of the invoice, with a minimum fee of $5.00. The Company also pays interest on the amount advanced at prime plus 4.5%. If a receivable is not paid within 90 days of the invoice date or 45 days from due date, Harborcove can chargeback the receivable to the Company, unless the debtor was credit approved and the sole reason for not paying is financial difficulty.

 
13

 
 
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
 
The security for this amended Agreement includes all the assets of the Company including the assets of TEWI, Stanza and SSI.

The amounts outstanding at March 31, 2014 and December 31, 2013 were $865,854 and $1,024,761, respectively. The factoring fees for the three months ended March 31, 2014 and March 31, 2013 were $46,272 and $54,157 respectively. The interest expenses on this amended Agreement for the three months ended March 31, 2014 and 2013 were $57,791 and $24,296 respectively.
 
NOTE 5 – ACCRUED LIABILITIES
 
Accrued liabilities consist of the following:
 
   
March 31,
   
December 31,
 
   
2014
   
2013
 
Accrued Compensation
  $ 425,933     $ 372,379  
Accrued Interest
    1,165,636       1,082,221  
Embedded conversion feature at fair value
    -       -  
Common stock warrants, at fair value
    30,937       14,343  
Purchase obligation on stock option, at fair value
    250,000       250,000  
Stanza payroll taxes including interest and penalties
    301,893       272,692  
Accrued costs on completed jobs
    205,579       226,311  
Accrued sales tax
    122,755       110,116  
Accrued other
    25,204       44,800  
    $ 2,527,937     $ 2,372,862  

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.
 
NOTE 6 - INCOME TAXES
 
The Company’s effective income tax rate of 0.0% differs from the federal statutory rate of 35% for the reason set forth below for the three months ended March 31:

 
 
2014
   
2013
 
Income taxes at the statutory rate
  $ (218,439 )   $ (89,085 )
Utilization of NOL
    -          
Valuation Allowance
    195,654       79,277  
Permanent differences and other
    22,785       9,808  
Total income taxes of continuing operations
  $ -     $ -  

 
14

 
 
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

The following presents the components of the Company’s total income tax provision:

   
2014
   
2013
 
Current expense
  $ -     $ -  
Deferred benefit
    195,654       79,277  
Change in valuation
    (195,654 )     (79,277 )
Total
  $ -     $ -  
 
Deferred tax assets and liabilities reflect the net effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. The tax effects of primary temporary differences giving rise to deferred tax assets and liabilities for the three months ended March 31 are as follows:

 
 
2014
   
2013
 
Deferred tax assets
 
 
       
Amortization
  $ 7,045     $ 6,844  
Non-qualified stock option expense
    6,948       13,687  
Embedded conversion option
    -       3,784  
Warrants fair value income
    5,808       8,493  
Operating losses carry forward
    7,342,075       6,481,977  
Deferred tax liabilities
               
Embedded conversion option
               
Warrants fair value income
               
Depreciation
    (2,954 )     (3,400 )
Net deferred assets
    7,358,922       6,511,385  
Valuation allowance
    (7,358,922 )     (6,511,385 )
Total net deferred tax asset liability
  $ -     $ -  
 
The Company has recorded a valuation allowance to fully offset the net deferred assets based on the fact that the Company has not recognized any taxable income since its inception.
 
 
15

 
 
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

At March 31, 2014 the Company had consolidated federal net operating losses of $20,977,358. The expiration dates of these net operating losses are as follows:

2019
  $ 104,604  
2020
    654,454  
2021
    1,700,703  
2022
    72,209  
2023
    451,382  
2024
    262,795  
2025
    385,410  
2026
    911,684  
2027
    2,540,363  
2028
    1,543,573  
2029
    2,807,561  
2030
    2,795,006  
2031
    2,088,153  
2032
    2,746,742  
2033
    1,311,393  
2034
    601,326  
 
  $ 20,977,358  
 
NOTE 7 - SERIES D CONVERTIBLE PREFERRED STOCK
 
On October 3, 2007, the Company issued a private placement memorandum to sell up to $10,000,000 of Units consisting of one share of Series D Convertible Preferred Stock, one Class A Warrant and one Class B Warrant. Each Unit was offered at $10,000. The holder of the Convertible Preferred Stock may convert at any time and is required to convert their Preferred Stock 24 months after issuance, in whole or in part, into shares of the Company Common Stock. Assuming an initial conversion price of $1.00, each  share of Preferred Stock is convertible into 10,000 shares of the Company Common Stock. The Class A Warrant and Class B Warrant expired on January 31, 2013 and none were exercised.
 
For the three months ended March, 31, 2014, no shares were converted

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

NOTE 8 – LEASE OBLIGATION SETTLEMENT

On September 19, 2013, The Company and Paragon Operating Associates, L.P. reached a settlement agreement to resolve the judgment of $302,227.15 for unpaid rent by Stanza. The settlement agreement is for the Company to pay $30,000 in 10 equal installments of $3,000 each. The Company had previously recognized the judgment in other expense during years 2011 and 2012. The company has recognized the reversal of 272,227.15 as other income in the third quarter 2013. Under the agreement if Stanza’s customer extends its contract additional payments of $3000 per month will be due to the end of the extension period. The Company does not believe this contract will be extended past its expiration on December 31, 2013.
 
 
16

 
 
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 9– TREASURY SHARES
 
On June 30, 2009, the Company offered to the common shareholders that were converted in the Series D Convertible Preferred stock offering the opportunity to exchange the Company Common Stock received into units of Series D Preferred Stock. A total of 2,740,000 shares of the Company Common Stock were repurchased for 137 Units of Series D Preferred Stock and 456,621 of detachable Class A Warrants and 456,621 of detachable Class B Warrants. These warrants have expired. During the three months ended March 31, 2014 no treasury shares were converted into Common Stock.

NOTE 10 – STOCK OPTIONS
 
The Company did not issue any stock options in the three months ended March 31, 2014. The Company issued stock options to employees and an advisory board member in 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 expected volatility is computed based on a twelve month standard deviation of our month ended closing price. The risk free rate for periods within the contractual life of the option is based on the U.S. treasury yield curve in effect at time of grant. Below are the parameters in determining the fair value of these options.
 
 
 
2012
 
Expected volatility
 
 
96
%
Vesting period
 
 
5
 
Expected term
 
 
7
 
Expected dividends
 
 
0
%
Risk free rate
 
 
1
%

The following is a table shows a summary of activity for the three months ended March 31, 2014:

Outstanding December 31, 2012
    10,230,000        
Granted
    -        
Exercised
    -        
Forfeited
    (132,500 )      
Outstanding December 31, 2013
    10,097,500     $ 0.23  
Granted
    -          
Exercised
    -          
Forfeited
    (2,175,000 )   $ 0.18  
Outstanding March 31, 2014
    7,922,500     $ 0.25  
Exercisable as of March 31, 2014
    6,193,750     $ 0.23  
Nonvested options
    1,728,750          
 
As of March 31, 2014, the nonvested options totaled 1,728,750 shares. There is approximately $230,000 of unrecognized compensation and share-based expense arrangements that have been granted. These costs will be recognized over a weighted average period of 2.5 years.   At March 31, 2014, the aggregated intrinsic value of the stock options exercisable was $475,350.
 
 
17

 
 
NOTE 11 – COMMON STOCK TRANSACTIONS
 
During the three months ended March 31, 2014 the Company issued no shares of common stock.

During the year ended December 31, 2013 the Company issued the following shares of common stock:
 
The company issued 150,000 shares to a consultant for services performed with a value of $3,000.
   
The company issued 250,000 shares for an investor advisor for a value at $5,000.
   
On April 2, 2013, Southridge Partners converted the balance of accrued interest of $2,903 that was outstanding into 208,549 the Company’s common stock.
 
NOTE 12 - COMMON STOCK WARRANTS
 
There were no warrants issued during the three months ended March 31, 2014; however 200,000 warrants expired without being exercised. The following table shows the warrants outstanding at March 31, 2014:
 
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
 
 
18

 
 
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
 
NOTE 13 – FAIR VALUE
 
GAAP provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. GAAP also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets. The fair value measurements are disclosed by level within that hierarchy.      The Company adopted the provisions of fair value measurements as of January 1, 2009. Hierarchical levels are directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:

Level 1 — Inputs were unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2 — Inputs (other than quoted prices included in Level 1) were either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
Level 3 — Inputs reflected management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration was given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

Determining which hierarchical level an asset or liability falls within requires significant judgment.    The Company will evaluate its hierarchy disclosures each quarter.  The Company’s fair value measurements for level six inputs were based on the following methods:
 
 
1.
Common Stock Warrants are valued using the Black-Scholes model updated for current stock price, volatility, interest rate and remaining term. The following were the assumptions used to compute the fair value:
 
   
March 31,
   
December 31,
 
   
2014
   
2013
 
Common stock price
  $ 0.06     $ 0.03  
Exercise price
  $ 0.15     $ 0.15  
Volatility
    103.3 %     131.5 %
Interest rate
    0.13 %     0.13 %
Remaining Terms
 
1.75 yrs.
   
2 yrs.
 
 
 
3.
Purchase obligation of a stock option represents the value of the purchase obligation to buyback these options at any time during the next two years. The agreement is for 1,000,000 options with a guarantee buy back provision at $0.25, which is also the exercise price.
 
 
19

 
 
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
 
The following table summarizes the financial instruments measured at fair value in the Consolidated Balance Sheet as of March 31, 2014.
 
 
 
Fair Value Measurements
 
Assets
 
Level 1
   
Level 2
   
Level 3
   
Total
 
 
 
 
   
 
   
 
   
 
 
Liabilities
                 
 
   
 
 
Common stock warrants
                  $ 30,937     $ 30,937  
Purchase obligations for stock option
                  $ 250,000     $ 250,000  
Total
                  $ 280,937     $ 280,937  

The following table summarizes the financial instruments measured at fair value in the Consolidated Balance Sheet as of December 31, 2013:

 
 
Fair Value Measurements
 
Assets
 
Level 1
   
Level 2
   
Level 3
   
Total
 
 
 
 
   
 
   
 
   
 
 
Liabilities
 
 
   
 
   
 
   
 
 
Common stock warrants
                  $ 14,343     $ 14,343  
Purchase obligations for stock option
                  $ 250,000     $ 250,000  
Total
                  $ 264,343     $ 264,343  
 
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.
 
Balance at December 31, 2013
  $ 264,343  
Change in fair value of stock options
  $ 16,594  
Balance at March 31, 2014
  $ 280,937  
 
 
20

 
 
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
 
Note 14 –Segment Data
 
Our operating segments represent components of our business for which discrete financial information is available and is reviewed regularly by the chief operating decision-maker, or decision-making group, to evaluate performance and make operating decisions. We conduct our operations through two operating segments: Power Distribution and Energy Service. Our reportable segments are strategic business units that offer different products and services and serve different customers. Power Distribution consists of the sale of emergency and standby power equipment and renewable energy solutions. Energy Services consist of the sale of maintenance and service programs, interruptible rate services, monitoring  and energy audits.
 
Summarized financial information concerning our reportable segments is shown in the following table. Unallocated costs include corporate overhead, research and development. Other expense  for purposes of evaluating the operations of our segments is not allocated to our segment activities. Total asset amounts exclude intercompany receivable balances eliminated in consolidation.  The Unallocated Costs for assets includes cash, goodwill and in-process research and development. Customer lists and other intangibles are allocated to their segments.

For the Three Months ended March 31, 2014
 
   
Power
   
Energy
   
Unallocated
Corporate
       
   
Distribution
   
Services
   
Costs
   
Total
 
Sales
  $ 2,972,514     $ 1,776,875    
 
    $ 4,749,389  
Cost of Sales
    2,601,256       1,086,063    
 
      3,687,319  
Gross profit
    371,258       690,812    
 
      1,062,070  
                               
Operating Expenses:
                 
 
         
Selling and service expenses
    261,628       544,783             806,411  
General and administrative expenses
    173,745       335,577    
 
      509,322  
Depreciation & Amortization
    32,458       54,126       110       86,694  
Research and development
                    -       -  
Corporate overhead
    -       -       77,269       77,269  
Operating Expense
    467,831       934,486       77,379       1,479,696  
Operating Income (Loss)
  $ (96,573 )   $ (243,674 )   $ (77,379 )   $ (417,626 )
 
                               
Total assets
  $ 2,320,282     $ 2,061,094     $ 1,774,147     $ 6,155,523  
 
For the Three Months Ended March 31, 2013
 
   
Power
   
Energy
   
Unallocated
Corporate
       
   
Distribution
   
Services
   
Costs
   
Total
 
Sales
    2,811,296       1,842,786    
 
    $ 4,654,082  
Cost of Sales
    2,321,403       996,551    
 
      3,317,954  
Gross profit
    489,893       846,235    
 
      1,336,128  
                               
Operating Expenses:
                 
 
         
Selling and service expenses
    232,549       486,589             719,138  
General and administrative expenses
    146,088       333,702    
 
      479,850  
Depreciation & Amortization
    28,045       53,822       415       82,282  
Research and development
                    6,651       6,651  
Corporate overhead
    -       -       109,536       109,536  
Operating Expense
    406,682       874,113       116,602       1,397,457  
Operating Income (Loss)
  $ 83,211     $ (27,878 )   $ (116,602 )   $ (61,329 )
 
                               
Total assets
  $ 2,567,829     $ 2,672,398     $ 1,569,503     $ 6,809,730  

 
21

 
 
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
 
NOTE 15 – SUBSEQUENT EVENT
 
The Company has performed a review of events subsequent to the balance sheet date and, except for the matters described above in this note, no other matters require disclosure.
 
 
22

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

We specialize in the sales and management of onsite power generation for industrial and commercial customers. By utilizing advanced communication technologies, automated data collection, reporting systems and remote monitoring capabilities, we believe we are creating a new standard for power asset management and are leading the way for critical energy programs such as demand response and distributed generation.
 
In 2006, we acquired Stellar Energy, a Minneapolis-based provider of power generation equipment and service. Stellar Energy is now called Titan Energy Systems (‘TES”) and has expanded its number of sales and service offices to include Nebraska, Iowa, North and South Dakota, New York, New Jersey and Connecticut. TES provides our company and its satellite offices with accounting and administrative support.

In 2009, we acquired the Industrial and Service Division of RB Grove, a 52-year old power generation provider located in Miami, Florida. This company is now called Grove Power Inc. (“GPI”) and it is responsible for our long term goal to expansion throughout the Southeastern United States.

In 2009, we acquired a power generation business in New Jersey that provide us with purchase orders, backlog and extensive customer and marketing relationships in New York, Connecticut and New Jersey. This business has been merged into TES.
 
In 2010, we acquired Sustainable Solutions, Inc. (“SSI”), which is engaged in providing energy audits, energy consulting and energy management services in the Midwest region. This company is inactive as we completed the six year contract related to this business.
 
In 2010, Titan Energy Development, Inc. (“TEDI”) purchased certain assets and assumed certain liabilities of Stanza Systems, which provide us with a software development company experienced in smart grid and utility operations. The company operates this business as Stanza Technologies (“Stanza”)’ Stanza has developed network communications software that we plan to utilize in our generator service business.
 
 
23

 
 
RESULTS OF OPERATIONS
 
Three Months Ended March 31, 2014 Compared to the Three Months Ended March 31, 2013
 
Sales
 
Sales for the three months ended March 31, 2014 were $4,749,389 compared to $4,654,082 for the three months ended March 31, 2013. The following table summarizes our sale by their segments:

   
Power
   
Energy
 
   
Distribution
   
Services
 
2014
  $ 2,972,514     $ 1,776,875  
2013
    2,811,296       1,842,786  
Increase (Decrease)
  $ 161,218     $ (65,911 )
Percent Increase
    6 %     -4 %
 
The increase in sales in Power Distribution segment was attributable to the Company's decision to increased sales from our New Jersey/New York division.
 
The slight decrease in sales in the Energy Services segment is mainly attributable to the decreased service activity during the period of severe cold weather in the Midwest in January and February 2014 and to decreased activities in our national accounts division due to Target, our major national account customer, asking for new bids on this contract. Titan’s contract with Target ended March 31, 2014 and we were required to bid out these services in a competitive manner.  Titan won the bid for 1500 of the approximately 1800 stores but new work was not allocated during this bidding period, resulting in lower than expected service revenues.  The new contract for Target includes nearly $800,000 in preventive maintenance work that we did not have last year, and so we expect this new component to make up for the territories that were lost to other bidders.

Cost of Sales
 
Cost of sales was $3,687,319 for the three months ended March 31, 2014 compared to $3,317,954 for the three months ended March 31, 2013.

   
Power
   
Energy
 
   
Distribution
   
Services
 
2014
  $ 2,601,256     $ 1,086,063  
2013
  $ 2,321,403     $ 996,551  
Increase
  $ 279,853       89,512  
Percent of Sales
               
2014
    88 %     61 %
2013
    83 %     54 %
 
The increase in the cost of sales in the Power Distribution lower sales volume was due to increased competitive pricing in our market territories that required us to bid at lower margins than usual.   The percentage of cost of sales for 2014 is higher than the accepted range of 82 to 86 percent of sales.
 
 
24

 
 
The higher costs for our Energy Services Segment were attributable to the impact of the severe weather in the Midwest. During the periods of extreme cold, when temperatures were regularly below zero and sometimes -20 degrees F or even colder with wind chill, we cannot allow technicians to travel or work alone as they usually do for safety reasons.  Therefore on many days, we utilized two technicians instead of one on each job, thereby increasing the cost of labor.  During these very cold temperatures, we also required the technicians to work for limited periods of times in the cold for safety reasons.  This increases the number of hours to complete a job and thereby increases our cost of sales.  The weather experienced during the quarter ending March 31, 2104 was for the most part unprecedented; however, the Company has undertaken new policies, procedures and scheduling methods in order to minimize the impact of future weather on revenues and margins.
 
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 $806,411 for the three months ended March 31, 2014, compared to $719,138 for the three months ended March 31, 2013. The following table summarizes the areas of costs in this category:

   
Power
   
Energy
 
2014
 
Distribution
   
Services
 
Payroll related costs
  $ 239,331     $ 417,638  
Shared based compensation
    1,842       16,774  
Other
    20,455       110,371  
Total
  $ 261,628     $ 544,783  
2013
               
Payroll related cost
  $ 213,745     $ 365,566  
Shared based compensation
    6,128       31,516  
Other
    12,676       89,507  
Total
    232,549     $ 315,439  
                 
Increase
  $ 29,079       229,344  
Percent of Sales
               
2014
    9 %     31 %
2013
    8 %     17 %
 
The slight increase in the Power Distribution costs is attributable to an increase in sales from 2013 to 2104.
 
The increase in costs in the Energy Service segment is primarily attributable to the impact of the extreme cold and winter weather we experienced in the Midwest as discussed above.
 
 
25

 
 
General and Administrative Expenses
 
The general and administrative expense category reflects the cost of each subsidiary’s management, accounting, facility and office functions which we can allocate to our segments. General and administrative expenses were $430,493 for the three months ended March 31, 2014, compared to $384,519 for the three months ended March 31, 2013. The following table breaks out general and administrative expenses by segment for the three months ended March 31, 2014 and 2013:

   
Power
   
Energy
 
2014
 
Distribution
   
Services
 
Payroll related costs
  $ 48,936     $ 94,566  
Shared based compensation
    303       303  
Facilities
    44,295       78,839  
Travel
    15,039       28,298  
Other
    65,172       133,572  
Total
  $ 173,745     $ 335,577  
2013
               
Payroll related cost
  $ 32,510     $ 84,914  
Shared based compensation
    1,915       1,915  
Facilities
    29,727       109,141  
Travel
    21,112       44,587  
Other
    60,824       93,205  
Total
  $ 146,088     $ 333,762  
                 
Increase
  $ 27,657     $ 1,815  

The increase in payroll related costs in the Power Distribution and the Energy Service is attributable to additional administrative staff hired for service and national accounts.  The increase in the Power Distribution and Energy Service facilities costs is attributable to new office spaces in Minneapolis, MN and in Des Moines, IA which were obtained due to the need for more space. These increases were partially offset by decreases in travel and Other costs.
 
Research and Development
 
We entered into a contract in September 2010 with a third party to design and develop a remote monitoring system dedicated to onsite power generation equipment.  We believe that there are few alternatives available in the market place that support the management of onsite power generators in the manner that is required by peak shaving, demand response and energy efficiency programs, and so to better serve these marketplaces, Titan needed to develop its own monitoring program. The Company has completed this software package and has begun to market it to customers. In the three months ended March 31, 2014, we did not incur any expenses related to research and development.
 
 
26

 
 
Corporate Overhead
 
Included in corporate overhead expenses are the salaries and travel expenses of our officers, legal fees, audit fees, investor relations and other costs associated with being a SEC registrant. Corporate overhead for the three months ended March 31, 2104 was $89,879 as compared to $117,799 for the three months ended March 31, 2014.  The following table show expenses related to corporate activities:

   
2014
   
2013
 
Payroll related activates
  $ 56,232     $ 82,553  
Shared based compensation
    632       632  
Professional fees
    9,264       12,094  
Travel
    7,285       1,803  
Other
    3,856       12,455  
Total
  $ 77,269     $ 109,536  
 
The reduction in payroll is primarily attributable to the retirement of our CFO, who is now working part time as a consultant for the Company. The reduction in professional fees is due to a decrease in legal-related activity. The increase in travel was due to the Company working with firms to raise additional capital.
 
Depreciation and Amortization
 
The amounts in this category include depreciation on our fixed assets and amortization of our intangibles, represented by our customer lists. The expense for the three months ended March 31, 2104 was $83,879 compared to $86,660 in the three months ended March 31, 2013. The reduction of expense is attributable to the full amortization of our customer list and certain fixed assets which have been fully depreciated.

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

   
2013
   
2013
 
Interest expense, net
  $ 189,892     $ 174,017  
Amortization of deferred financing costs
    -       8,106  
Change in fair value of embedded conversion feature
    -       11,129  
Change in fair value of warrants
    16,594       24,978  
Total
  $ 206,486     $ 218,230  

 
27

 
 
Liquidity and Capital Resources
 
The Company recorded a net loss for the three months ended March 31, 2014 of $624,111. As of March 31, 2014 we have an accumulated deficit $35,532,687.  On March 31, 2014 we were in default on approximately $250,000 of convertible notes.  At June 30, 2013, certain note holders elected to extend their convertible notes until July 1, 2014 in order to help the Company restructure their balance sheet and raise additional capital. The total notes extended were $2,490,000. Under the extension the note holders received a reduced conversion price from $0.12 to $0.05.  With the improving financial results and settling some lawsuits, the Company believes it will be able to raise additional capital.   While there is no guarantee that these efforts will result in any new capital for the Company, these potential funds would have a significant impact on the Company’s financial position and its cash flow.
 
The Company has had periodic difficulties keeping current with various suppliers during the past few years. Most of our major vendors require us to pay in 30 days, however collection of payment from our customers takes an average of 60 days and therefore we have used our factoring obligation to pay our suppliers in a timely manner. The cost of the factoring fees and interest paid to factor our receivable for the three months ended March 31, 2104 was $104,063. These extra costs have had an adverse impact on our liquidity position. .
 
The Company bottom line was severely impacted by factors directly related to the severe weather the Midwest and other parts of the United States experienced in the quarter ending March 31, 2014.  While overall revenues increased slightly over the same quarter in 2013, the Company was forced by the weather to resort to staffing and labor procedures that adversely impacted the sales margins.  Also, the Company’s largest national account customer, Target Corporation, required Titan to enter into a competitive bidding process for the next two years.  While Titan won 80% of the new bid, the lack of new service sales during the three month bidding process in the quarter ending March 31, 2014 adversely impacted the Company’s margins and bottom line.   Management believes that these adverse factors are now behind the Company and expects to see revenues and margins return to normal over the next two quarters.
 
 
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Additional Information
 
Non-GAAP Financial Measures
 
To supplement our consolidated financial statements presented on a GAAP basis, we believe disclosing certain non-GAAP measures are useful information to our investors. These non-GAAP measures are not in accordance with, or alternative for, generally accepted accounting principles in the United States. For example, Management uses adjusted EBITDA as measure of operating performance and for internal planning and forecasting. Management believes that such measures help to indicate underlying trends in our business, are important in comparing our current results with prior period results and our useful to investors and financial analysts in assessing our operating performance.
 
The GAAP measure most comparable to adjusted EBITDA is GAAP net income (loss): reconciliation for adjusted EBITDA to GAAP net income (loss). The following is an explanation of non-GAAP, adjusted EBITDA that we utilize, including the adjustments that management excludes as part of the adjusted EBITDA measures for the three and nine months ended March 31, 2014 and 2013, 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.
 
 
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The reconciliation of adjusted EBITDA to net loss is set forth below:
 
   
Three Months Ended
March 31,
 
   
2014
   
2013
 
Net loss
  $ (624,111 )   $ (279,559 )
Add back:
               
Depreciation and amortization
    86,694       82,282  
Stock based compensation
    19,853       40,253  
Stock payment for services
    -       18,441  
Interest and factoring fees
    189,892       174,017  
Amortization of debt discount
    -       8,106  
Fair value adjustment of conversion feature
    -       11,129  
Fair value adjustment on warrants
    16,594       24,978  
Adjusted EBITDA
  $ (311,078 )   $ 79,647  
 
Off-Balance Sheet Arrangements
 
None.
 
 
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Evaluation of Disclosure Controls and Procedures

Our principal executive officer and  principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of March 31, 2014 covered by this Quarterly Report on Form 10-Q have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported as specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Notwithstanding the foregoing, there can be no assurance that the Company’s disclosure controls and procedures will detect or uncover all failures of persons within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable, not absolute, assurance of achieving their control objectives.

Changes in Internal Control over Financial Reporting

As of January 1, 2014, our CFO retired, leaving our CEO to take over all CFO related duties.  The individual who was previously the CFO continues to consult for the Company on a part-time basis, but does not provide the level of oversight of a qualified financial officer.  No other changes in the Company’s internal control over financial reporting have occurred during the quarter ended  March 31, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
 
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The Company subsidiary Titan Energy Development, Inc. (“TEDI”) was sued by TEDI’s landlord (the “Plaintiff”) for non-payment of the office lease in the name of Stanza Systems, Inc. in Houston, TX. The Plaintiff has received a judgment in the amount of $302,227 on September 24, 2012.  On September 19, 2013, The Company and Paragon Operating Associates, L.P. reached a settlement agreement to resolve the judgment  The settlement agreement is for the Company to pay $30,000 in 10 equal installments. Under the agreement if Stanza extends its contract beyond December 2013, additional payments of $3000 per month will be due until the end of the extension period. The Company does not believe this contract will be extended past it expiration.


Not applicable.

 
None.
 
 
During the quarter ended March 31, 2014 the following securities were in default:

Convertible notes payable, bearing interest at 12%, due on demand
 
$
250,000
 
 
 
Not applicable.

ITEM 5.     Other Information

None.
 
ITEM 6.     Exhibits

Exhibit
No.
 
Description
31.1
 
Certification of  Jeffrey W. Flannery, Chief Executive Officer of the Company, pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2
 
Certification of Jeffrey W. Flannery, Chief Financial Officer of the Company, pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1
 
Certification of Jeffrey W. Flannery, Chief Executive Officer of the Company, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2
 
Certification of Jeffrey W. Flannery, Chief Financial Officer of the Company, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
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SIGNATURES
 
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
TITAN ENERGY WORLDWIDE, INC.
     
Dated: June 20, 2014
By:
/s/ Jeffrey W. Flannery
   
Jeffrey W. Flannery
   
Chief Executive Officer
     
Dated: June 20, 2014
By:
/s/ Jeffrey W. Flannery
   
Jeffrey W. Flannery
Chief Financial Officer
 
 
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EXHIBIT INDEX
 
Exhibit
No.
 
Identification of Exhibit
31.1
 
Certification of Jeffrey W. Flannery, Chief Executive Officer of the Company, pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2
 
Certification of Jeffrey W. Flannery, Chief Financial Officer of the Company, pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1
 
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2
 
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
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