| • QUARTERLY REPORT • 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 • CERTIFICATION OF JAMES J. FAHRNER, CHIEF FINANCIAL OFFICER OF THE COMPANY, PURSUANT TO RULES 13A-14(A) AND 15D-14(A) OF THE EXCHANGE ACT, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 • 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 • 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 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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.
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.
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
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.
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Titan Energy Worldwide, Inc.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
See accompanying notes to unaudited condensed consolidated financial statements
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Titan Energy Worldwide, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended June 30, 2012 and 2011
See accompanying notes to unaudited condensed consolidated financial statements
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Titan Energy Worldwide, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Months Ended June 30, 2012 and 2011
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Titan Energy Worldwide, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2012 and 2011
See accompanying notes to unaudited condensed consolidated financial statements
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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:
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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:
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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.
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.
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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.
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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.
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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.
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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:
NOTE 3 - NOTES PAYABLE
Notes payable consists of the following at June 30, 2012 and December 31, 2011:
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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.
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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:
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.
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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:
The following presents the components of the Company’s total income tax provision for the three and six months ended June 30:
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:
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.
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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:
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.
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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.
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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:
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:
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.
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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:
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.
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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:
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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.
The following table summarizes the financial instruments measured at fair value in the Consolidated Balance Sheet as of December 31, 2011:
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.
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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.
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Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
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Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
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Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
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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.
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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.
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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:
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:
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.
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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:
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:
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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:
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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:
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.
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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:
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:
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.
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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:
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