PINX:TEWI Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 2012
 
o TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________ to ________
 
Commission File No. 000-26139
 
Titan Energy Worldwide, Inc.
 
Nevada
26-0063012
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
6130 Blue Circle Drive, Minnetonka, MN 55343
(Address of principal executive offices) (Zip Code)
Company’s telephone number, including area code: (952)-960-2371
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o   No x
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes o   No x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b of the Exchange Act.
 
Large accelerated filer o
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 August 10, 2012 the issuer had 44,087,189 shares of its common stock issued and outstanding.
 
 
 

 
 
TABLE OF CONTENTS
 
PART I
   
3
ITEM 1.
FINANCIAL STATEMENTS
 
3
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
29
ITEM 4.
CONTROLS AND PROCEDURES
 
40
PART II
   
40
ITEM 1.
LEGAL PROCEEDINGS
 
40
ITEM 1A
RISK FACTORS
 
41
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
41
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
 
41
ITEM 4.
MINE SAFETY DISCLOSURE
 
41
ITEM 5.
OTHER INFORMATION
 
41
ITEM 6.
EXHIBITS
 
41
SIGNATURES
   
42

 
 

 
 
ITEM 1.  Financial Statements
 
Not conforming to the Regulation S-X Rule 8-03 the Company’s Interim Financial Statements for the period ended June 30, 2012 (the “Financial Statements”) included in this Quarterly Report on the form of 10-Q (the “Form 10-Q”) have not been reviewed by an independent public accountant with professional standards for conducting such reviews, as established by generally accepted auditing standards, as may be modified or supplemented by the Securities and Exchange Commission ( the “Commission”).The review was not completed due to the cost and availability of cash required to pay past due fees owed to our independent accountant. The Company believes this is a temporary situation and will request the independent public accountants to complete the review when our liquidity position improves and we have completed a payment arrangement. Upon the completion of the review of the Company's Condensed Consolidated Financial Statements for the quarterly period ended June 30, 2012 by our independent public accountants we will amend Form 10-Q, the Financial Statements have been prepared in accordance with generally accepted accounting principles and applicable rules and regulation. In the opinion of Management, the information contained herein is accurate.
 
 
3

 
 
Titan Energy Worldwide, Inc.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 
ASSETS
 
June 30,
   
December 31,
 
Current assets
 
2012
   
2011
 
Cash and cash equivalents
  $ 134,296     $ 139,432  
Accounts receivable less allowance for doubtful accounts
    2,744,154       2,045,766  
Inventory, net
    699,447       619,518  
Other current assets
    95,071       52,996  
Total current assets
    3,672,968       2,857,712  
Property and equipment, net
    643,112       747,566  
Customer and distribution lists, net
    549,423       628,118  
Goodwill
    1,351,695       1,351,695  
Other assets
    31,092       31,092  
Total assets
  $ 6,248,290     $ 5,616,183  
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
               
Current liabilities
               
Accounts payable
  $ 2,073,159     $ 2,404,538  
Accrued liabilities
    2,126,162       1,807,422  
Customer deposits and deferred revenue
    188,145       234,339  
Factoring obligation
    1,707,542       959,868  
Notes payable - current portion
    100,000       210,370  
Current portion of convertible debt, net of discount
    2,838,203       2,551,216  
Total current liabilities
    9,033,211       8,167,753  
Notes payable, less current portion
    67,700       -  
Other long term liabilities
    188,589       122,248  
Total long-term liabilities
    256,289       122,248  
Total liabilities
    9,289,500       8,290,001  
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 44,087,189 and 31,472,127 shares, respectively
    4,409       3,147  
Treasury stock, at cost, held 1,550,000 and 1,550,000 shares, respectively
    (775,000 )     (775,000 )
Additional paid-in capital
    31,781,951       31,462,769  
Accumulated deficit
    (34,052,571 )     (33,364,735 )
Total stockholders’ equity (deficit)
    (3,041,210 )     (2,673,818 )
Total liabilities and stockholders’ equity (deficit)
  $ 6,248,290     $ 5,616,183  
 
See accompanying notes to unaudited condensed consolidated financial statements
 
 
4

 
 
Titan Energy Worldwide, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended June 30, 2012 and 2011
 
   
2012
   
2011
 
Sales of equipment
  $ 3,642,472     $ 2,346,045  
Sales of service and parts
    1,699,789       1,199,543  
        Total  sales
    5,342,261       3,545,588  
                 
Material cost and labor for equipment
    3,009,912       1,940,723  
Material cost and labor for service and parts
    840,374       684,478  
Total cost of  sales
    3,850,286       2,625,201  
Gross profit
    1,491,975       920,387  
Operating expenses:
               
Selling and service expenses
    691,387       594,702  
General and administrative expenses
    448,698       385,770  
Research and development
    -       68,651  
Corporate overhead
    153,026       310,470  
Depreciation and amortization
    86,535       90,019  
Loss on sale of fixed assets
    (5,731 )     -  
Total operating expenses
    1,373,915       1,449,612  
Operating income (loss)
    118,060       (529,225 )
Other expenses
               
Interest expense, net
    203,331       106,160  
Amortization of debt discount and financing costs
    33,989       351,501  
Change in fair value of embedded conversion feature
    (37,873 )        
Change in fair value of warrants
    (11,250 )     (86,010 )
Total Other Expense, net
    188,197       371,651  
Net income (loss)
  $ (70,137 )   $ (900,876 )
Weighted average number of shares outstanding
    40,323,957       29,301,563  
Basic and diluted (loss) per common share
  $ (0.00 )   $ (0.03 )
 
See accompanying notes to unaudited condensed consolidated financial statements 
 
 
5

 
 
Titan Energy Worldwide, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Months Ended June 30, 2012 and 2011
 
   
2012
   
2011
 
Sales of equipment
  $ 5,745,706     $ 4,723,758  
Sales of service and parts
    2,866,240       2,293,877  
        Total  sales
    8,611,946       7,017,635  
                 
Material cost and labor for equipment
    4,827,308       3,880,574  
Material cost and labor for service and parts
    1,363,959       1,239,831  
Total cost of  sales
    6,191,267       5,129,405  
Gross profit
    2,420,679       1,888,230  
Operating expenses:
               
Selling and service expenses
    1,335,786       1,247,185  
General and administrative expenses
    886,683       832,032  
Research and development
    -       194,238  
Corporate overhead
    312,936       724,792  
Depreciation and amortization
    175,471       171,301  
Gain (loss) on sale of fixed assets
    (949 )     -  
Total operating expenses
    2,709,927       3,169,548  
Operating income (loss)
    (289,248 )     (1,281,318 )
Other expenses
               
Interest expense, net
    361,835       200,710  
Amortization of debt discount and financing costs
    95,464       724,081  
Change in fair value of embedded conversion feature
    (49,769 )     -  
Change in fair value of warrants
    (8,942 )     (273,048 )
Total Other Expense, net
    398,588       651,743  
Net income (loss)
  $ (687,836 )   $ (1,933,061 )
Weighted average number of shares outstanding
    36,610,914       29,050,442  
Basic and diluted (loss) per common share
  $ (0.02 )   $ (0.07 )
                 
See accompanying notes to unaudited condensed consolidated financial statements
 
 
6

 
 
Titan Energy Worldwide, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2012 and 2011
 
Operating activities:
 
2012
   
2011
 
Net income (loss)
  $ (687,836 )   $ (1,933,061 )
Adjustments to reconcile net loss to net cash used in operating activities:
         
Compensation paid by issuance of stock and stock options
    123,103       139,084  
Depreciation and amortization
    175,471       171,301  
Amortization of debt discount and financing costs
    95,464       724,081  
Stock Issued for services
    24,941       -  
Change in fair value of lease obligation
    66,341       -  
Change in fair value of warrants
    (8,942 )     (273,048 )
Change in fair value of embedded conversion
    (49,769 )     -  
Gain on sales of fixed assets
    (949 )     -  
Changes in operating assets and liabilities:
               
Accounts receivables
    (698,388 )     250,630  
Inventory
    (79,929 )     49,615  
Other assets
    (18,947 )     86,392  
Accounts payable
    (292,622 )     (435,639 )
Accrued liabilities and customer deposits
    272,546       156,523  
Net cash used in operating activities
    (1,079,516 )     (1,064,122 )
Investing activities:
               
     Purchase of  fixed assets
    (31,246 )     (23,626 )
     Asset purchased in business acquisitions
    -       -  
     Proceeds from sales of fixed assets
    40,622       -  
Net cash (used) provided in investing activities
    9,376       (23,626 )
Financing activities:
               
Proceeds provided  by Convertible Debt
    360,000       300,000  
Payment of short-term credit line
    -       (992,558 )
Net borrowings from Factoring Obligation
    747,674       893,483  
Proceeds from stock warrant exercised
    -       2,250  
Proceed of promissory note
    67,700       100,000  
Payment of Notes Payable
    (110,370 )     (106,413 )
Net cash (used) provided by financing activities
    1,065,004       196,762  
Increase (decrease) in cash and cash equivalents
    (5,136 )     (890,986 )
Cash and cash equivalents, beginning of year
    139,432       968,416  
Cash and cash equivalents, end of period
  $ 134,296     $ 77,430  
 
See accompanying notes to unaudited condensed consolidated financial statements
 
 
7

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

NOTE 1 - BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Background
 
Titan Energy Worldwide, Inc. (the “Company”) was incorporated on December 28, 2006 in the state of Nevada. The Company’s stock is traded on the OTC under the symbol “TEWI”.
 
On December 28, 2006, the Company acquired Stellar Energy Services, Inc., a Minnesota corporation (“Stellar”), whereby Stellar exchanged all its common shares for 750,000 newly issued shares of the Company’s preferred stock, plus a Note payable to Stellar shareholders of $823,000. The Stellar shareholders also received 1,000,000 shares of Common Stock. Stellar is doing business as Titan Energy Systems, Inc (“TES”).
 
On June 11, 2009, the Company through its wholly owned subsidiary, Grover Power, Inc., a Florida corporation (“GPI”), acquired certain assets and assumed certain liabilities of R.B. Grove, Inc.’s Industrial and Service Divisions. The purchase was effective June 1, 2009. The purchase price consisted of a cash payment of $214,827 and an $86,612 secured promissory note at 8% interest rate due November 11, 2010. This Note obligation has been fully satisfied. The Seller also received five year warrants to purchase 200,000 shares of the Company common stock at a price of $0.01 per share. The Company determined the fair value of these warrants to be $32,000.
 
On November 1, 2009, the Company acquired certain assets and assumed certain liabilities for a sales office in New Jersey. This business had open orders at the date of acquisition of approximately $3,000,000. The Company agreed to pay the owner $150,000. This sales office has been consolidated with the TES operations.
 
On January 1, 2010, the Company acquired the stock of Sustainable Solutions, Inc. (“SSI”) a company that performs energy audits, consulting and management services. The purchase price for this business was a stock option to purchase 200,000 shares of the Company’s common stock at of $0.50 per share. We used the Black-Scholes method to value the stock option for this acquisition at $71,671. The asset of the business is a contract with a major utility company to perform energy assessments for the three year period from 2010 to 2012.
 
On November 1, 2010, the Company acquired certain assets and assumed certain liabilities of Stanza Systems, Inc., a software development company specializing in smart-grid applications. This company is doing business as Stanza Technologies (“Stanza”). The purchase price for this company consisted of $175,000 in cash and 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 June 30, 2012 and December 31, 2011, the Company has no Preferred Stock Series A, B and C outstanding. The description of these securities is as follows:
 
Preferred Stock, Series A, authorized 10,000,000, $.0001 par value
Preferred Stock, Series B, authorized 10,000,000, $.0001 par value
Preferred Stock, Series C, authorized 10,000,000, $.0001 par value
 
 
8

 
 
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
 
Following is a summary of the Company’s significant accounting policies.
 
Principles of Consolidation
 
The financial statements include the accounts of the Company and its 100% owned subsidiaries, TES, GPI, SSI and Stanza.
 
Basis of Presentation
 
The accompanying Consolidated Financial Statements (“Financial Statements”) have been prepared by management in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all the information and disclosures required by U.S. GAAP for complete consolidated financial statements. In the opinion of management, all adjustments, consisting principally of normal recurring adjustments, considered for fair presentation have been included. These Financial Statements should be read in conjunction with the Company’s unaudited consolidated financial statements and accompanying notes for the year ended December 31, 2011 on Form 10-K filed with SEC on April 27, 2012.
 
Going Concern
 
The accompanying Financial Statements have been prepared assuming the Company will continue as a going concern. The Company incurred a net loss for the six months ended June 30, 2012 of $687,836. At June 30, 2012, the Company had an accumulated deficit of $34,052,571. These conditions raise substantial doubt as to the Company’s ability to continue as a going concern.  These Financial Statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of recorded asset amounts, or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Management has taken the following steps that it believes will be sufficient to provide the Company with the ability to continue its operations:
 
Management has been able to raise funds to support its working capital needs.  The Company raised $200,000 in convertible debt and $67,700 in a two year promissory note during the first quarter.
 
Management has been successful in extending $1,890,000 of convertible notes that were in default. The new maturity date for these notes is April 1, 2013.
 
The Company has been able extend its factoring agreement for another year with significantly lower factoring rates thereby reducing the Company’s borrowing expenses.
 
The Company’s has achieved profitable months in April and May 2012 as service sales reached the highest monthly levels in the Company’s history.
   
The Company has terminated or suspended indefinitely certain unprofitable business divisions thereby improving the future overall cash position in the Company.
 
Strong growth in the Company’s service sales division improves the Company cash flow position through the cash generated by these high margins, recurring revenues. The Company has terminated or suspended indefinitely certain unprofitable business divisions thereby improving the future overall cash position in the Company.
   
The Company has accumulated a strong equipment backlog and believes that the Company will achieve a positive cash flow for the rest of the year.
 
 
9

 
 
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
 
Supplemental Cash Flow Information Regarding Non-Cash Transactions
 
During the three and six months ended June 30, 2012 and 2011, the Company has entered into several non-cash transactions in order to provide financing for the Company and to conserve cash. The table below shows the transactions that occurred during the period presented.
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30
   
June 30
 
   
2012
   
2011
   
2012
   
2011
 
Stock  issued for services
  $ 30,000       -     $ 44,500       -  
Common stock issued for conversion of Series D Preferred Stock
  $ 20,000       -     $ 30,000       -  
Stock issued for the conversion of convertible debt
  $ 14,321     $ 39,992     $ 64,071     $ 39,992  
Accounts Payable settled with stock
  $ 39,002       -     $ 39,002       -  
 
Interest paid for the three months ended June 30, 2012 and 2011 was $35,178 and $30,763, respectively. Interest payments for the six months ended June 30, 2012 and 2011 were $55,010 and $48,108, respectively.
 
Use of Estimates
 
The preparation of Financial Statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and assumptions at the date of the Financial Statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Revenue Recognition
 
The Company recognizes revenue when the significant risks and rewards of ownership have been transferred to the customer pursuant to applicable laws and regulations, including factors such as when there has been evidence of sales arrangement, delivery has occurred, or services have been rendered, the price to the buyer is fixed or determinable, and collectability is reasonably assured.
 
For equipment sales, the Company recognizes revenue when the equipment has been delivered to the customer and the customer has taken title and risk of the equipment. For service and parts sales, the Company recognizes revenue when the parts have been installed and over the period in which the services are performed. The Company in some circumstances will require customers to make a down payment that is included in customer deposits and the revenue is deferred until work has been completed. The Company also has long-term maintenance agreements that the customer may elect to pay in advance. The revenue recognition on these contracts is based on when the work is performed.
 
 
10

 
 
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
 
Cash Equivalents
 
For purposes of reporting cash flows, the Company considers all short-term investments with an original maturity of three months or less to be a cash equivalent.
 
Concentration of Credit Risk
 
Financial instruments which subject the Company to concentrations of credit risk include cash and cash equivalents. The Company maintains its cash in well-known banks selected based upon management’s assessment of the bank’s financial stability. Balances may periodically exceed the Federal Deposit Insurance Corporation limit which is currently $250,000.
 
Property and Equipment
 
Property and equipment are recorded at cost, net of accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, which range from three to seven years. Expenditures for major renewals and betterments that extend the original estimated economic useful lives of the applicable assets are capitalized. Expenditures for normal repairs and maintenance are charged to expense as incurred. The cost and related accumulated depreciation of assets sold or otherwise disposed of are removed from the accounts, and any gain or loss is included in operations.
 
Intangible Assets
 
The Company evaluates intangible assets and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable from its estimated future cash flows. Recoverability of intangible assets and other long-lived assets is measured by comparing their net book value to the related projected undiscounted cash flows from these assets, considering a number of factors including past operating results, budgets, economic projections, market trends and product development cycles that represent customer lists, distribution list and contracts. These intangibles have finite lives and therefore are required to be amortized to expense. The Company believes that the useful life of these intangibles ranges from 5-10 years.
 
Goodwill
 
In accordance with ASC 350, we test goodwill at the reporting unit level for impairment on an annual basis and between annual tests if events and circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying value. We have determined that the reporting unit level is the subsidiary level as discrete financial information is not available at a lower level and our chief operating decision maker, which is our chief executive officer and executive management team, collectively, make business decisions based on the evaluation of financial information at the entity level. Events that would indicate impairment and trigger an interim impairment assessment include, but are not limited to, current economic and market conditions, including a decline in market capitalization, a significant adverse change in legal factors, business climate or operational performance of the business, and an adverse action or assessment by a regulator. Our annual impairment test date is December 31.
 
In performing the test, we utilize the two-step approach prescribed under ASC 350. The first step requires a comparison of the carrying value of the reporting units, as defined, to the fair value of these units. We considered a number of factors to determine the fair value of a reporting unit. The valuation is based upon expected future discounted operating cash flows of the reporting unit. We base the discount rate used to arrive at a present value as the date of the impairment test on our weighted average cost of capital. If the carrying value of the reporting unit exceeds its fair value, we will perform the second step of the goodwill impairment test to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of a reporting unit’s goodwill to its carrying value.
 
 
11

 
 
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
 
We conducted our annual impairment test as of December 31, 2011. In order to complete the annual impairment test, we performed detailed analyses estimating the fair value of our reporting unit utilizing our forecast for the fiscal year ending December 31, 2012 with updated long-term growth assumptions. As a result of completing the first step, the fair value of the reporting units exceeded the carrying values, and as such the second step of the impairment test was not required.
 
Income Taxes
 
The Company accounts for income taxes whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Effective January 1, 2009 the Company adopted guidance regarding accounting for uncertainty in income taxes. This guidance clarifies the accounting for income taxes by prescribing the minimum recognition threshold an income tax position is required to meet before being recognized in the financial statements and applies to all federal or state income tax positions. Each income tax position is assessed using a two step process. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more likely than not criteria, the benefit recorded in the financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement. As of June 30, 2012 and December 31, 2011 there were no amounts that had been accrued in respect to uncertain tax positions.
 
None of the Company’s federal or state income tax returns is currently under examination by the Internal Revenue Service (“IRS”) or state authorities. However, fiscal years 2007 and later remain subject to examination by the IRS and respective states.
 
Loss per Share
 
The basic income (loss) per common share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding. Diluted income per common share is computed similar to basic income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The loss for common shareholders is increased for any preferred dividends. As of June 30, 2012 and 2011, the Company had potentially dilutive shares of 131,200,375 and 23,584,067 related to outstanding stock options, warrants and convertible securities that were not included in the calculation of loss per share, because their effect would have been anti-dilutive.
 
 
12

 
 
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
 
Share-Based Compensation
 
The Company uses the fair value method of accounting for share-based payments. Accordingly, the Company recognizes the cost of employee services received in exchange for awards of equity instruments based on the grant date fair value of those rewards. Options or share awards issued to non-employees are valued using the fair value method and expensed over the period services are provided.
 
Segment Reporting
 
The Company operates in 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 2012, the FASB issued ASU 2012-02, “Intangible-Goodwill and Other (Topic 350) Testing Indefinite-Lived Intangibles Assets for Impairment” ASU 2012 -02 allows an entity to assessed qualitatively whether an indefinite-lived intangible assets is impaired prior to performing a qualitative analysis. This ASU 2012-02 is effective for fiscal year beginning after September 15, 2012. We expect that the adoption of ASU 2012-02 to have no material impact on our financial position and results of operations.
 
In September 2011, the FASB issued ASU 2011-08, “Intangibles – Goodwill and Other (Topic 350) Testing Goodwill for Impairment.” ASU 2011-08 allows an entity to assess qualitatively whether it is necessary to perform step one of the two-step annual goodwill impairment test. Step one would be required if it is more-likely-than-not that a reporting unit’s fair value is less than its carrying amount. This is different than previous guidance, which required entities to perform step one of the test, at least annually, by comparing the fair value of a reporting unit to its carrying amount. An entity may elect to bypass the qualitative assessment and proceed directly to step one, for any reporting unit, in any period. ASU 2011-08 does not change the guidance on when to test goodwill for impairment. The amendments in ASU 2011-08 are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We expect the adoption of ASU 2011-08 to have no material impact on our financial position and results of operations.
 
Other Accounting Standards Updates effective after June 30, 2012 are not expected to have a significant effect on the Company’s consolidated financial position or results of operations.
 
 
13

 
 
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed 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:
 
   
June 30,
   
December 31,
 
   
2012
   
2011
 
Parts
  $ 615,807     $ 464,225  
Work in process
    59,648       125,071  
Finished Goods
    127,189       133,397  
Obsolescence Reserve
    (103,197 )     (103,175 )
    $ 699,447     $ 619,518  

 
NOTE 3 - NOTES PAYABLE
 
Notes payable consists of the following at June 30, 2012 and December 31, 2011:
 
   
June 30,
   
December 31,
 
Short -Term Debt
 
2012
   
2011
 
Convertible Notes bearing interest at 12% due on demand
  $ 660,000     $ 350,000  
Convertible Note bearing interest at 12% due January 2012 to March 2012
    -       1,250,000  
Convertible Note bearing interest at 12% due April 2013
    1,890,000       -  
Convertible Note bearing interest at 8% due April 2013
    200,000       -  
Convertible Notes bearing interest at 11% due on demand
    30,000       30,000  
Convertible Note bearing interest at 10% due January 2012 to March 2012
    -       350,000  
Promissory note bearing interest at 12% due on demand
    100,000       100,000  
Convertible Note bearing interest at 12% due April 2012
    -       300,000  
Convertible Note bearing interest at 10% due April 2012
    -       300,000  
Other loans
    -       110,370  
Convertible Settlement agreement
    77,660       -  
Unamortized Discount
    (19,457 )     (28,784 )
    $ 2,938,203     $ 2,761,586  
Long-term
               
Promissory Note bearing interest at 8% due March 9, 2014
  $ 67,700          
 
 
14

 
 
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
 
At June 30, 2012 the Company was in default on $790,000 of convertible notes payable and is accruing interest at the default rate of 12%. The long term convertible notes of $1,890,000 have agreed to extend their notes to April 1, 2013 in return for receiving 2,143,425 additional five year warrants with an exercise price of $0.10 per share. The Company has determined using the Black-Scholes method the value of these warrants to be $32,442, which will be amortized over the extension period. The Company has also issued a convertible note for $200,000 due April 1, 2013 with a conversion feature that allowed the note holder to convert the note and the interest at $.03 per share. This note does not have any warrants and the conversion feature was issued at market price resulting in no beneficial conversion feature. The Company also issued a promissory note to an individual for $67,700 at 8% and maturity March 9, 2014. There are no conversion rights or warrants associated with this debt.
 
Certain outstanding notes related to the Stanza purchase have been sold to Southridge Partners II L.P. This Agreement requires the Company to treat these notes as debt that can be converted into common stock based on a discount of 40% of the average of the lowest two closing bid prices for the Company’s common stock during the five trading days immediately preceding a conversion date. Southridge Partners II L.P. will receive free trading stock. As of June 30, 2012 Southridge Partners II L.P has converted notes and accrued interest of $53,922 into 7,167,616 shares of common stock. The agreement has a limit of Southridge Partners II, L.P. to holding 9.99% of the Company’s shares outstanding. Southridge Partners II has $102,643 of principal and accrued interest under these agreements that have not been converted. The embedded conversion feature determined at issuance is treated as a discount which is amortized over the estimated life to income. In addition since the embedded conversions feature have down round protection at each accounting period we have revalued the embedded conversion feature and that change is reflected in our Statement of Operations.
 
During the year ended December 31, 2011, the Company issued $430,000 of debt. The Convertible Notes due April 2012 have a conversion feature that allows the Noteholder to convert its principal and unpaid interest at the lesser of $0.25 cents per share or a “Qualified Offering Price” defined as a transaction with gross proceeds of $2,000,000. On December 9, 2011 the company issued an 11% Convertible Note for $30,000. The conversion feature associated with this note can be exercised at the option of Noteholder and within 10 days after the maturity date can be converted into common stock by dividing the principal and accrued interest into an amount equal to fifty percent of the average of the lowest three bid prices for the Company common stock in the twenty days immediately preceding conversion date or by the price of $0.03 per share whichever is greater.
 
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 June 10, 2012 for six months
 
The amended Agreement allows the Company to sell, transfer and assign its receivables to Harborcove. In return Harborcove will loan the Company 90% of the face value of the receivable. The balance, less factoring fees and interest, are paid to the Company once the final payment is received. Harborcove has the right to reject any receivables that do not meet their credit requirement approvals. The Company pays a fee on each invoice purchased by Harborcove equal to 1.45% of the face value of the invoice, with a minimum fee of $5.00. The Company also pays interest on the amount advanced at prime plus 4.5%. If the receivable is not paid within 90 days of the invoice date or 45 days from due date, Harborcove can chargeback the receivable to the Company, unless the debtor was credit approved and the sole reason for not paying is financial difficulty.
 
 
15

 
 
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 amended Agreement has a term with a minimum contract factoring fee and interest of $30,000 for the TES line and $20,000 on the GPI line. Early termination is allowed with a minimum penalty of two times the minimum contract fee and interest.
 
The amounts outstanding at June 30, 2012 and December 31, 2011 were $1,707,542 and $959,868, respectively. The factoring fees for the six months ended June 30, 2012 and the year ended December 31, 2011 was $168,643 and $119,083, respectively. The interest expenses on this amended Agreement for the six months ended June 30, 2012 and the year ended December 31, 2011were $52,657 and $34,915, respectively.
 
NOTE 5 – ACCRUED LIABILITIES
 
Accrued liabilities consist of the following:
 
   
June 30,
   
December 31,
 
   
2012
   
2011
 
Accrued Compensation
  $ 559,055     $ 533,717  
Accrued Interest
    583,664       439,383  
Embedded conversion feature at fair value
    27,720       648  
Common stock warrants, at fair value
    3,709       12,651  
Purchase obligation on stock option, at fair value
    250,000       250,000  
Stanza payroll taxes including interest and penalties
    290,112       304,773  
Accrued costs on completed jobs
    201,900       154,585  
Accrued sales tax
    192,755       95,288  
Accrued other
    17,247       16,377  
    $ 2,126,162     $ 1,807,422  
 
The amount listed as Purchase obligation on stock option is a stock option that permits the holder to demand payment in lieu of exercising the option. The amount for Stanza payroll taxes was assumed in the purchase of this company. The payroll taxes are from June 2009 through September 2010. We have reached an agreement with the Internal Revenue Service to pay $4,011 per month beginning in May 2011 until paid in full.  The Company has reached agreements with various states to pay past due sales tax amounts on installment plans.
 
 
16

 
 
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed 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 three and six months ended June 30:
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Income taxes at the statutory rate
  $ (23,847 )   $ (306,298 )   $ (233,864 )   $ (651,142 )
Valuation Allowance
    10,874       295,241       196,671       630,917  
Permanent differences and other
    12,973       11,057       37,193       20,225  
Total income tax
  $ -     $ -     $ -     $ -  
 
The following presents the components of the Company’s total income tax provision for the three and six months ended June 30:
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30
   
June 30
 
   
2012
   
2011
   
2012
   
2011
 
Current expense
  $ -     $ -     $ -     $ -  
Deferred benefit
    (10,874 )     (295,241 )     (196,671 )     (630,917 )
Change in valuation
    10,874       295,241       196,671       630,917  
Total
  $ -     $ -     $ -     $ -  
 
Deferred tax assets and liabilities reflect the net effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. The tax effects of primary temporary differences giving rise to deferred tax assets and liabilities for the three and six months ended June 30 are as follows:
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30
   
June 30
 
   
2012
   
2011
   
2012
   
2011
 
Deferred tax assets
                       
Amortization
    1,861       557       3,809       2,008  
Non qualify stock option expense
    20,956       23,244       41,855       47,288  
Operating losses carry forward
    6,413,796       5,122,279       6,599,593       5,474,139  
Deferred Tax Liabilities
                               
Fair value income
    (16,702 )     (29,230 )     (19,962 )     (92,836 )
Depreciation
    (5,588 )     (1,420 )     (8,423 )     (4,943 )
Net deferred assets
    6,414,323       5,115,430       6,616,872       5,425,656  
Valuation Allowance
    (6,414,323 )     (5,115,430 )     (6,616,872 )     (5,425,656 )
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.
 
 
17

 
 
 Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
 
At June 30, 2012 the Company had consolidated federal net operating losses of $18,832,125. 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
    1,855,639  
2032
    2,746,742  
    $ 18,832,125  
 
NOTE 7 - SERIES D CONVERTIBLE PREFERRED STOCK
 
On October 3, 2007, the Company issued a private placement memorandum to sell up to $10,000,000 of Units consisting of one share of Series D Convertible Preferred Stock, one Class A Warrant and one Class B Warrant. Each Unit was offered at $10,000. The holder of the Convertible Preferred Stock may convert at any time and is required to convert their Preferred Stock 24 months after issuance, in whole or in part, into shares of the Company Common Stock. Assuming an initial conversion price of $1.00, each share of Preferred Stock is convertible into 10,000 shares of the Company Common Stock. Each Class A Warrant and Class B Warrant entitles the holder to purchase 3,333 shares of Common Stock with exercise prices of $1.20 and $1.40, respectively.
 
For the six months ended June 30, 2012, investors holding Series D Preferred Stock elected to convert their holdings into the Company Common Stock using the Volume Weighted Average Price “VWAP” formula as provided for in the offering documents. A total of three shares of Series D Preferred Stock elected to convert into Common Stock receiving an aggregate of 793.648 shares of the Company common stock. The weighted average conversion price per share was $0.038. In addition, the Class A and Class B Warrants were repriced based the on conversion price multiplied by 120% and 140%, respectively.
 
In an Event of Liquidation (as defined below) of the Company, holders of any then-unconverted shares of Preferred Stock will be entitled to immediately receive accelerated redemption rights in the form of a Liquidation Preference Amount. The Liquidation Preference Amount shall be equal to 125% of the sum of: (i) the Stated Value ($10,000) of any then-unconverted shares of Preferred Stock and (ii) any accrued and unpaid dividends thereon. An “Event of Liquidation” shall mean any liquidation, dissolution, or winding up of the Company, whether voluntary or involuntary, as well as any change of control of the Company which shall include, for the purposes hereof, sale by the Company of either (x) substantially all of its assets or (y) that portion of its assets which comprises its core business technology, products or services.
 
 
18

 
 
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
 
NOTE 8 – TREASURY SHARES
 
On June 30, 2009, the Company offered to the common shareholders that were converted in the Series D Convertible Preferred stock offering the opportunity to exchange the Company Common Stock received into units of Series D Preferred Stock. A total of 2,740,000 shares of the Company Common Stock were repurchased for 137 Units of Series D Preferred Stock and 456,621 of detachable Class A Warrants and 456,621 of detachable Class B Warrants. This transaction has been accounted for using the Black–Scholes method to determine the value of the detachable Warrants. This method resulted in a cost of the treasury shares of $1,370,000, which is the sum of the value of the Series D Preferred Stock of $1,285,553, and the fair value of the Warrants of $84,467.
 
During the six months ended June 30, 2012, no treasury shares were converted into Common Stock.
 
NOTE 9 – STOCK OPTIONS
 
The Company issued nonqualified stock options to employees on January 16, 2012. These options were not issued under any plan that required stockholder approval. The Company believes that such stock options align the interest of its employees with the shareholders. Stock option awards are granted with an exercise price equal to the market price of the Company common stock at the date of grant. The options granted to employees have a term of 10 years with a vesting commencing on January 16, 2013 over the four year period. The Company used the Black-Scholes method to evaluate the value of the options. The option granted on March 27, 2012 was to a member of our advisory board. The option is for 5 years and vesting immediately. We determined that the value of the option was $11,405 and will be charged to income over the one-year term to serve as an advisory board member. The expected volatility is computed based on a twelve month standard deviation of our month ended closing price. The risk free rate for periods within the contractual life of the option is based on the U.S. treasury yield curve in effect at time of grant. Below are the parameters in determining the fair value of these options.
 
   
2012
 
Excepted volatility
    96 %
Vesting period
    5  
Expected term
    7  
Expected dividends
    0 %
Risk free rate
    1 %
 
 
19

 
 
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
 
The following is a table that shows a summary of activity for the six months ended June 30, 2012 and the year ended December 31, 2011:
 
Outstanding December 31, 2010
    8,245,000     $ 0.31  
Granted
               
Exercised
    -          
Forfeited
    (510,000 )   $ 0.33  
Outstanding December 31, 2011
    7,735,000     $ 0.31  
Granted January 16, 2012
    4,025,000     $ 0.07  
Granted March 27, 2012
    500,000     $ 0.02  
Exercised
               
Forfeited
    (842,500 )   $ 0.26  
Outstanding June 30, 2012
    11,417,500     $ 0.23  
Exercisable as of June 30, 2012
    5,620,095     $ 0.26  
 
As of June 30, 2012, the nonvested options totaled 5,797,403 shares. There is approximately $440,000 of unrecognized compensation and share-based expense arrangements that have been granted. These costs will be recognized over a weighted average period of 2.25 years. At June 30, 2012, the aggregate intrinsic value of exercisable stock options was $56,200.
 
NOTE 10 – COMMON STOCK TRANSACTIONS
 
 During the six months ended June 30, 2012 the Company issued the following shares of common stock:
 
The company issued 793,648 shares of common stock for the conversion for the Series D Preferred Stock.
The company issued 100,000 shares to a consultant for services performed with a value of $2,500.
The company issued 7,167,616 shares of common stock for the conversion in accordance with Security Transfer Agreements in exchange for the retirement of $53,922 of convertible notes and accrued interest.
The company issued 303,797 shares for investor relations services value at $12,000.
The company issued 750,000 shares to the Company’s Advisory Board for services value at $30,000.
The company issued 3,500,000 shares to settle accounts payable totaling $39,162.
 
During the year ended December 31, 2011, the Company issued 810,569 shares of common stock for the conversion of the Series D Preferred Stock. The Company also issued 239,956 shares for the conversion of Convertible Notes and accrued interest of $39,992.
 
 
20

 
 
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 11 - COMMON STOCK WARRANTS
 
There were 2,143,425 warrants issued for the extension of $1,890,000 of convertible notes during the six months ended June 30, 2012. There were no warrants exercised during the six months ended June 30, 2012. However 1,568,827 of warrants have expired without being exercised. The following table shows the warrants outstanding at June 30, 2012:
 
Number of
     
Exercise
 
Expiration
Warrants
 
Purpose
 
Price range
 
Date
200,000
 
Acquisition of Grove Power, Inc.
 
$0.01
 
14-Jun
2,143,425
 
Extension of Convertible Notes
 
$0.10
 
17-Apr
7,851
 
Broker warrants on debt Offerings
 
$0.10-$0.625
 
Dec-12-Jan-13
920,000
 
 Convertible Debt Offering 2009/2010
 
$0.25
 
Dec-14 - Mar-15
75,000
 
Debt offering  2007
 
$0.50
 
July-12
1,650,000
 
Convertible Debt Offering 2010
 
$0.60
 
May - Nov -15
158,000
 
Debt Offering 2007
 
$0.75
 
12-Dec
1,476,522
 
Converted Preferred D Class A
 
$0.03 -$0.89
 
13-Jun
1,476,522
 
 Converted Preferred D Class B
 
$0.04-$0.63
 
13-Jan
1,136,559
 
Unconverted Preferred D Class A 
 
$1.20
 
13-Jan
1,136,559
 
Unconverted Preferred D Class B
 
$1.40
 
13-Jan
777,135
 
Broker warrants on Preferred D
 
$1.25
 
13-Jan
 
NOTE 12 – FAIR VALUE
 
GAAP provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. GAAP also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets. The fair value measurements are disclosed by level within that hierarchy. Hierarchical levels are directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:
 
Level 1 — Inputs were unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
 
Level 2 — Inputs (other than quoted prices included in Level 1) were either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
 
Level 3 — Inputs reflected management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration was given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
 
 
21

 
 
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
 
Determining which hierarchical level an asset or liability falls within requires significant judgment. The Company will evaluate its hierarchy disclosures each quarter. The Company’s fair value measurements for level three inputs were based on the following methods:
 
 
1.
Common Stock Warrants are valued using the Black-Scholes model updated for current stock price, volatility, interest rate and remaining term. The following were the assumptions used to compute the fair value:
 
   
June 30,
   
December 31,
 
   
2012
   
2011
 
Common stock price
 
$June0.01
    $ 0.03  
Exercise price
  $ 0.15     $ 0.15  
Volatility
    107.0 %     82.7 %
Interest rate
    0.19 %     0.12 %
Remaining Terms
 
3.5 yrs
   
4 yrs
 
 
 
2. 
Embedded beneficial conversion options were determined by using the Black –Scholes methods with the following table for June 30, 2012 and December 31, 2011
 
   
June 30,
   
December 31,
 
   
2012
   
2011
 
Common stock price
  $ 0.01     $ 0.03  
Exercise price
  $ 0.005     $ 0.12  
Volatility
    107.0 %     82.7 %
Interest rate
    0.18 %     0.05 %
Remaining Terms
 
0.2yrs
   
0.3 yrs
 
 
 
3.
Purchase obligation of a stock option represents the value of the purchase obligation to buy back these options at any time during the next year. The agreement is for 1,000,000 options with a guarantee buy back provision at $0.25, which is also the exercise price.

 
22

 
 
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 June 30, 2012.
 
   
Fair Value Measurements
 
Assets
 
Level 1
   
Level 2
   
Level 3
   
Total
 
                         
Liabilities
                       
Common stock warrants
              $ 3,709     $ 3,709  
Purchase obligations for stock option
              $ 250,000     $ 250,000  
Embedded beneficial conversion options
              $ 27,720     $ 27,720  
Total
              $ 281,429     $ 281,429  
 
The following table summarizes the financial instruments measured at fair value in the Consolidated Balance Sheet as of December 31, 2011:
 
   
Fair Value Measurements
 
Assets
 
Level 1
   
Level 2
   
Level 3
   
Total
 
                         
Liabilities
                       
Common stock warrants
              $ 12,651     $ 12,651  
Purchase obligations for stock option
              $ 250,000     $ 250,000  
Embedded beneficial conversion options
              $ 648     $ 648  
Total
              $ 263,299     $ 263,299  
 
The table below includes a roll forward of the fair value of financial instruments that are classified as within Level 3 of the valuation hierarchy.
 
   
Level 3
 
   
Liabilities
 
Balance at December 31, 2011
  $ 263,299  
Embedded Conversion Option
    76,841  
Change in fair value common warrants stock recorded in other expense
    (8,942 )
Change in fair value of embedded conversion option
    (49,769 )
Balance at June 30, 2012
  $ 281,429  
 
 
23

 
 
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
 
Note 13 –Segment Data
 
Our operating segments represent components of our business for which discrete financial information is available and is reviewed regularly by the chief operating decision-maker, or decision-making group, to evaluate performance and make operating decisions. We conduct our operations through two operating segments: Power Distribution and Energy Service. Our reportable segments are strategic business units that offer different products and services and serve different customers. Power Distribution consists of the sale of emergency and standby power equipment and renewable energy solutions. Energy Services consist of the sale of maintenance and service programs, interruptible rate services, monitoring and energy audits.
 
Summarized financial information concerning our reportable segments is shown in the following tables. Unallocated costs include corporate overhead, research and development. Other expense for purposes of evaluating the operations of our segments is not allocated to our segment activities. Total asset amounts exclude intercompany receivable balances eliminated in consolidation.  The Unallocated Costs for assets includes cash, goodwill and in-process research and development. Customer lists and other intangibles are allocated to their segments.
 
For the Three Months Ended June 30, 2012
 
   
Power
   
Energy
   
Unallocated
       
   
Distribution
   
Services
   
Costs
   
Total
 
Sales
    3,642,472     $ 1,699,78           $ 5,342,261  
Cost of sales
    3,009,912       840,374             3,850,286  
Gross profit
    632,560       859,415             1,491,975  
Operating Expenses:
                             
 Selling and service expenses
    373,788       317,599             691,387  
 General and administrative expenses
    225,132       223,566             448,698  
 Depreciation & amortization
    20,299       65,580       656       86,535  
 Gain on sale of fixed assets
            (5,731 )     -       (5,731 )
 Corporate overhead
    -       -       153,026       153,026  
Operating Expense
    619,219       601,014       153,682       1,373,915  
Operating Income (Loss)
    13,341       258,401       (153,682 )     118,060  
Other Expenses
                               
 Interest expense, net
    -       -       203,331       203,331  
   Amortization of debt discount and financing costs
                    33,989       33,989  
   Fair value of warrants
                    (11,250 )     (11,250 )
   Fair value of embedded conversion feature
                    (37,873 )     (37,873 )
         Total Other Expense, net
    -       -       188,197       188,197  
Net Income (Loss)
  $ 13,341       258,401     $ (341,879 )   $ (70,137 )
Total assets
  $ 2,623,782     $ 2,081,953     $ 1,542,555     $ 6,248,290  

 
24

 
 
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
For the Three Months Ended June 30, 2011
 
   
Power
   
Energy
   
Unallocated
       
   
Distribution
   
Services
   
Costs
   
Total
 
Sales
  $ 2,346,045     $ 1,199,543           $ 3,545,588  
Cost of sales
    1,940,723       684,478             2,625,201  
Gross profit
    405,322       515,065             920,387  
Operating Expenses:
                             
 Selling and service expenses
    304,660       290,042             594,702  
 General and administrative expenses
    130,200       255,570             385,770  
 Depreciation & amortization
    29,213       59,842       964       90,019  
 Research and development
    -       -       68,651       68,651  
 Corporate overhead
    -       -       310,470       310,470  
Operating Expense
    464,073       605,454       380,085       1,449,612  
Operating Loss
    (58,751 )     (90,389 )     (380,085 )     (529,225 )
Other Expenses
                               
Interest expense, net
    -       -       106,160       106,160  
Amortization of debt discount and financing costs
                    351,501       351,501  
Fair value of warrants
                    (86,010 )     (86,010 )
         Total Other Expense, net
    -       -       371,651       371,651  
Net Loss
  $ (58,751 )   $ (90,389 )   $ (751,736 )   $ (900,876 )
Total assets
  $ 1,962,256     $ 2,366,558     $ 1,503,223     $ 5,832,037  
 
 
25

 
 
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
For the Six Months Ended June 30, 2012
 
   
Power
   
Energy
   
Unallocated
       
   
Distribution
   
Services
   
Costs
   
Total
 
Sales
  $ 5,745,706     $ 2,866,240           $ 8,611,946  
Cost of sales
    4,827,308       1,363,959             6,191,267  
Gross profit
    918,398       1,502,281             2,420,679  
                               
Operating Expenses:
                             
 Selling and service expenses
    701,066       634,720             1,335,786  
 General and administrative expenses
    424,623       462,060             886,683  
 Depreciation & amortization
    43,357       130,718       1,396       175,471  
Loss (gain) on sale of fixed assets
    -       (1,904 )     955       (949 )
 Corporate overhead
    -       -       312,936       312,936  
Operating Expense
    1,169,046       1,225,594       315,287       2,709,927  
Operating Income (Loss)
    (250,648 )     276,687       (315,287 )     (289,248 )
                                 
Other Expenses
                               
   Interest expense, net
    -       -       361,835       361,835  
   Amortization of debt discount and financing costs
                    95,464       95,464  
   Fair value of warrants
                    (8,942 )     (8,942 )
   Fair value of embedded conversion feature
                    (49,769 )     (49,769 )
         Total Other Expense, net
    -       -       398,588       398,588  
Net Income (Loss)
  $ (250,648 )   $ 276,687     $ (713,875 )   $ (687,836 )
Total assets
  $ 2,623,782     $ 2,081,953     $ 1,542,555     $ 6,248,290  

 
26

 
 
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
For the Six Months Ended June 30, 2011
 
   
Power
   
Energy
   
Unallocated
       
   
Distribution
   
Services
   
Costs
   
Total
 
Sales
  $ 4,723,758     $ 2,293,877           $ 7,017,635  
Cost of sales
    3,889,574       1,239,831             5,129,405  
Gross profit
    834,184       1,054,046             1,888,230  
                               
Operating Expenses:
                             
 Selling and service expenses
    625,832       621,353             1,247,185  
 General and administrative expenses
    280,118       551,914             832,032  
 Depreciation & amortization
    58,341       111,033       1,927       171,301  
 Research and development
    -       -       194,238       194,238  
 Corporate overhead
    -       -       724,792       724,792  
Operating Expense
    964,291       1,284,300       920,957       3,169,548  
                                 
Operating Income (Loss)
    (130,107 )     (230,254 )     (920,957 )     (1,281,318 )
                                 
Other Expenses
                               
   Interest expense, net
    -       -       200,710       200,710  
   Amortization of debt discount and financing costs
                    724,081       724,081  
   Fair value of warrants
                    (273,048 )     (273,048 )
         Total Other Expense, net
    -     -       651,743       651,743  
                                 
Net Loss
  $ (130,107 )   $ (230,254 )   $ (1,572,700 )   $ (1,933,061 )
Total assets
  $ 1,962,255     $ 2,366,558     $ 1,503,224     $ 5,832,037  

 
27

 
 
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
 
NOTE 13– SUBSEQUENT EVENT
 
The Company has performed a review of events subsequent to the balance sheet date and no other matters require disclosure.
 
 
28

 
 
ITEM 2. Management’s Discussion and Analysis or Plan of Operation.
 
Statements included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in future filings by us with the Securities and Exchange Commission (the “SEC”), in our press releases and in oral statements made with the approval of an authorized executive officer which are not historical or current facts are “forward-looking statements” and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The following important factors, among others, in some cases have affected and in the future could affect our actual results and could cause our actual financial performance to differ materially from that expressed in any forward-looking statement: (i) the extremely competitive conditions that currently exist in the market for companies similar to us, and (ii) the lack of resources to maintain our good standing status and requisite filings with the SEC. The foregoing list should not be construed as exhaustive and we disclaim any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
 
OUR BUSINESS
 
We specialize in the sales and management of onsite power generation for industrial and commercial customers. By utilizing advanced communication technologies, automated data collection, reporting systems and remote monitoring capabilities, we believe we are creating a new standard for power asset management and are leading the way for critical energy programs such as demand response and distributed generation. In fact, we believe we are one of the first companies to combine expertise in power generation asset management with real time information processing to create a more reliable and effective Smart Grid approach to onsite power management.
 
In 2006, we acquired Stellar Energy, a Minneapolis-based provider of power generation equipment and service. Stellar Energy is now called Titan Energy Systems (‘TES”) and has expanded its number of sales and service offices to include Nebraska, Iowa, North and South Dakota, New York, New Jersey and Connecticut. TES provides our company and its satellite offices with accounting and administrative support.
 
In 2009, we acquired the Industrial and Service Division of RB Grove, a 52-year old power generation provider located in Miami, Florida. This company is now called Grove Power Inc. (“GPI”) and it is responsible for our long term goal to expansion throughout the Southeastern United States.
 
In 2009, we acquired a power generation business in New Jersey that provide us with purchase orders, backlog and extensive customer and marketing relationships in New York, Connecticut and New Jersey. This business has been merged into TES.
 
In 2010, we acquired Sustainable Solutions, Inc. (“SSI”), which is engaged in providing energy audits, energy consulting and energy management services in the Midwest region.
 
In 2010, Titan Energy Development, Inc. (“TEDI”) purchased certain assets and assumed certain liabilities of Stanza Systems, which provide us with a software development company experienced in smart grid and utility operations. The company operates this business as Stanza Technologies (“Stanza”)’ Stanza has developed network communications software that we plan to utilize in our generator service business.
 
 
29

 
 
RESULTS OF OPERATIONS
 
Three Months Ended June 30, 2012 Compared to the Three Months Ended June 30 2011
 
Sales
 
Sales for the three months ended June 30, 2012 were $5,342,261 compared to $3,545,588 for the three months ended June 30, 2011. The following table summarizes sales by their business segment:
 
   
Power
   
Energy
 
   
Distribution
   
Services
 
2012
  $ 3,642,472     $ 1,699,789  
2011
    2,346,045       1,199,543  
Increase
  $ 1,296,427     $ 500,246  
Percent Increase
    55 %     42 %
 
The increased sales in the Power Distribution segment is primarily attributable to higher sales in the Midwest region of approximately $2.9 million compared to $1.4 million for the three months ended June 30, 2011. This increase was attributable to the completion of jobs from the relatively higher backlog we had at the end of 2011 and improvement in the economy in this region. Both Florida and New York are small offices with limited sales staff and can experience large fluctuations in sales from quarter to quarter. Due to a large sale which boosted its sales last year, the Florida office showed a $200,000 decrease in revenues this year. The New York office was approximately even with its sales results in the second quarter of 2011. Overall, our backlog for Power Distribution at July 31, 2012 was $7.3 million compared to $4.7 million at the same period as last year.
 
The increase in our Energy Services segment sales is attributable to increased sales in our national account program which was $637,000 higher than the second quarter of 2011. In the quarter ended June 30, 2012 the Company launched its asset management program and completed the audit of the power assets at approximately 1800 stores for a major national retailer This was partially offset by a decrease in contract programming of $28,000 and lower service sales at GPI of $95,000 compared to the same quarter in 2011.
 
Cost of Sales
 
Cost of sales was $3,850,286 for the three months ended June 30, 2012 compared to $2,625,201 for the three months ended June 30, 2011:
 
   
Power
   
Energy
 
   
Distribution
   
Services
 
2012
  $ 3,009,912     $ 840,374  
2011
    1,940,723       684,478  
Increase
  $ 1,069,189     $ 155,896  
Percent Cost of Sales
               
2012
    82.6 %     49.4 %
2011
    82.7 %     57.1 %
 
The increase in cost of sales in the Power Distribution segment is attributable to the higher sales volume. The Midwest region percentage cost of sales has historically been in the range of 81 to 85 percent and since all the growth in equipment sales was in the Midwest region the Company’s overall sales margins did not benefit from the lower costs of sales typically achieved in the New York and Florida markets.
 
 
30

 
 
The lower percent cost of sales in the Energy Services segment is attributable to an improvement in our margins in national accounts. We believe the technologies that we deploy to carry out much of the National Account business, including online instructions and wireless consolidation and reporting, is more efficient compared to traditional methods resulting in lower costs and thereby improving overall sales margins.
 
Selling and Service Expenses
 
Sales and services expenses include all sales and service personnel, benefits related to these personnel and other costs in support of these functions. The Selling and Service expenses were $691,387 for the three months ended June 30, 2012, compared to $594,702 for the three months ended June 30, 2011. The following table summarizes the area of costs in this category:
 
     
Power
   
Energy
 
2012    
Distribution
   
Services
 
Payroll related costs
    $ 339,415     $ 262,705  
Shared based compensation
      9,421       12,376  
Other
      24,952       42,518  
Total
    $ 373,788     $ 317,599  
2011
                 
Payroll related cost
    $ 274,373     $ 223,217  
Shared based compensation
      10,098       13,845  
Other
      20,189       52.980  
Total
      304,660     $ 290,042  
                   
Increase
    $ 69,128       27,557  
Percent of Sales
                 
2012
      10 %     19 %
2011
      13 %     28 %
 
The higher costs in Power Distribution payroll related costs are attributable to higher sales commissions resulting from higher sales volume. The higher costs in the Energy Service payroll related costs category are primarily due the addition of support personnel to handle the rapid growth in sales and higher commission due to the higher sales volume.
 
General and Administrative Expenses
 
The general and administrative expense category reflects the cost of each subsidiary’s management, accounting, facilities and office functions which we allocate to our segments. General and administrative expenses were $448,689 for the three months ended June 30, 2012, compared to $365,770 for the three months ended June 30, 2011. The following table summarizes the areas of costs in this category:
 
 
31

 
 
     
Power
   
Energy
 
2012
   
Distribution
   
Services
 
Payroll related costs
    $ 24,050     $ 77,963  
Shared based compensation
      9,026       9,026  
Facilities
      50,633       52,300  
Factoring fees
      94,067       19,788  
Other
      47,356       64,489  
Total
    $ 225,132     $ 223,566  
2011
                 
Payroll related cost
    $ 17,440       105,101  
Shared based compensation
      2,805       2,805  
Facilities
      56,862       80,981  
Factoring fees
      5,159       -  
 Other
      47,934       66,683  
Total
    $ 130,200     $ 255,570  
                   
Increase (Decrease)
    $ 94,932     $ (32,004 )
 
The major cause for the increase in the Power Distribution Segment Costs is attributable to the factoring fees that we incur when we finance our accounts receivables. The lower cost in Energy Service segment is attributable to reduction in administration costs for Stanza of approximately $41,000 for the three months ended June 30, 2012 compared to $122,000 for the period ended June 30, 2011. This reduction was partially offset by factoring fees of $19,000, higher share-based compensation of $7,500 and the addition of administration personnel to support the growth in national accounts.
 
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 Company has completed this software package and has begun to market it to customers. Therefore, there are no Research and Development costs recorded in the second quarter of 2012.
 
Corporate Overhead
 
Included in corporate overhead expenses are the salaries and travel expenses of our officers, legal fees, audit fees, investor relations and other costs associated with being a SEC registrant. Corporate overhead for the three months ended June 30, 2012 was $153,026 as compared to $310,476 for the three months ended June 30, 2011. The following table shows the costs related to corporate activities:
 
   
2012
   
2011
 
Payroll related activates
  $ 83,098     $ 144,444  
Stock Compensation
    21,786       24,682  
Professional Fees
    10,500       88,064  
Shared based payments for professional services
    10,441       -  
Travel
    15,163       27,225  
Other
    12,038       26,055  
Total
  $ 153,026     $ 310,470  
 
 
32

 
 
Our payroll is lower due to right sizing the number of the executive officers. Currently there are two executive officers, the CEO and the CFO. In 2011 we had two additional executive officers, a President and Vice President of Business Development. These latter positions have been eliminated. The Company’s CEO and CFO took significant pay cuts in April of 2011 which reduced the payroll amount by $17,000 for the second quarter of 2012. The lower professional fees in the three months ended June 30, 2012 was due to our decision not to have audited financial statements for the year ended December 31, 2011.  The decrease in business travel in the three months ended June, 2012 is associated with the elimination of our fund raising activities and reducing executive travel by moving our corporate office to Minnesota in 2012.  In 2012, the Company issued stock to members of our Advisory Board, which will be recognized over their term of service.  This cost is non-cash charge and is based on the actual stock price at the time of payment.
 
Depreciation and Amortization
 
The amounts in this category include depreciation on our fixed assets and amortization of our intangibles, represented by our customer lists. The expense for the three months ended June 30, 2012 was $86,534 compared to $90,019 in the three months ended June 30, 2011. We have limited our capital expenditures and sold certain fixed assets resulting in a small decrease in depreciation expense.
 
Other Expenses
 
The following table below summarizes the items in this category for the three months ended June 30:
 
   
2012
   
2011
 
Interest expense, net
  $ 203,331     $ 106,160  
Amortization of debt discount
    25,884       309,600  
Amortization of deferred financing costs
    8,105       41,901  
Fair value of embedded conversion feature
    (37,873 )     -  
Fair value of warrants
    (11,250 )     (86,010 )
Total
  $ 188,197     $ 371,651  
 
The Company’s outstanding debt as of June 30, 2012 before applying any debt discount is $3,025,360 compared to $2,789,716 at June 30, 2011, a net increase of $235,644. In addition, essentially most of our debt is at 12% compared to 10% in the second quarter of 2011. As a result we incurred an increase of approximately $21,000 in additional interest expense in 2012. We also had to replace our bank credit line with a factoring arrangement that has added an additional $6,000 of interest expense. The company also accrued approximately $51,000 in finance charges mainly related to our sales tax liabilities.
 
The present value of the lease obligation is a calculation used to determine the fair value of a lease that the Company has defaulted on due to its inability to pay. The unexpired lease term is 31 months and the value of this lease obligation will continue to accrue unless there is settlement between the Landlord and the Company. The Landlord has filed a lawsuit against the Company to collect unpaid and future lease payments and seeking a judgment in the amount of $289,206. The Company as accrued the present value of the lease $188,589 at June 30, 2012. The increase in the present value is treated as additional interest expense totaling $24,000 in the second quarter of 2012
 
Our convertible debt has warrants and beneficial conversion features which are accounted for in accordance with ASC 470, whereas we must determine the fair value of the warrants and the beneficial conversion feature and treat that amount as a debt discount to be amortized over the life of the debt. At June 30, 2012 there are unamortized discounts totaling approximately $20,000 on our balance sheet that will be expensed in 2012. The embedded conversion feature and the warrants are treated as a liability and are re-measured with each reporting period. The gain in the change of fair value of the warrants was the result of a higher volatility rate and a slightly higher interest rate. The gain in the embedded conversion feature reflect a stock price at June 30.2012 of $0.01 compared to a price of $0.03 at March 31 2012.
 
 
33

 
 
RESULTS OF OPERATIONS
 
Six Months Ended June 30, 2012 Compared to the Six Months Ended June 30 2011
 
Sales
 
Sales for the six months ended June 30, 2012 were $8,611,946 compared to $7,017,635 for the six months ended June 30, 2011. The following table summarizes our sales by their segments:
 
       
Power
   
Energy
 
       
Distribution
   
Services
 
2012
      $ 5,745,706     $ 2,866,240  
2011
          4,723,758       2,293,877  
Increase
        $ 1,021,948     $ 572,363  
Percent Increase
          22 %     25 %
 
The increased sales in the Power Distribution and the Energy Services segments is primarily attributable to higher sales in the second quarter as explained above. This increase in sales is attributable to the higher backlog of jobs at end of 2011 and an improvement in economy in this region. Overall, our backlog for Power Distribution at July 31, 2012 was $7.3 million compared to $4.7 million at the same period as last year. The increase in our Energy Services segment sales is attributable to increased sales in our national account program which was $569,000 higher than the six months ended June 31, 2011.
 
Cost of Sales
 
Cost of sales was $6,191,267 for the six months ended June 30, 2012 compared to $5,129,405 for the six months ended June 30, 2011:
 
     
Power
   
Energy
 
     
Distribution
   
Services
 
2012
    $ 4,827,308     $ 1,363,959  
2011
      3,889,574       1,239,831  
Increase
    $ 937,734     $ 124,128  
Percent of Sales
                 
2012
      84.0 %     47.6 %
2011
      82.3 %     54.0 %
 
The increase in cost of sales in the Power Distribution and the Energy Services segments is attributable to the higher sales volume. The Midwest region percentage of sales has historically been in the range of 81 to 85 percent of sales and since all the growth in equipment sales was in the Midwest region the Company’s overall margins did not benefit from the lower cost of sales typically achieved in the New York and Florida markets.
 
The Energy Service segment in the percent of sales is attributable to the improvement in our margins for national accounts due to our use of more cost effective audit and reporting systems.
 
 
34

 
 
Selling and Service Expenses
 
Sales and services expenses include all sales and service personnel, benefits related to these personnel and other costs in support of these functions. Selling and Service expenses were $1,335,786 for the six months ended June 30, 2012, compared to $1,247,185 for the six months ended June 30, 2011. The following table summarizes the area of costs in this category:
 
         
Power
   
Energy
 
2012