10-Q 1 f10q0613_titanenergy.htm QUARTERLY REPORT f10q0613_titanenergy.htm


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

FORM 10-Q
(Mark One)
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2013
 
o TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________ to ________
 
Commission File No. 000-26139
 
Titan Energy Worldwide, Inc.
 
Nevada
 
26-0063012
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
6321 Bury Drive, Suite 8, Eden Prairie, MN 55346
 
(Address of principal executive offices) (Zip Code)
 
Company’s telephone number, including area code: (952)-960-2371
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o    No 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 July 24, 2013, the issuer had 71,309,324 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
24
ITEM 4.
CONTROLS AND PROCEDURES
36
PART II
 
37
ITEM 1.
LEGAL PROCEEDINGS
37
ITEM 1A
RISK FACTORS
37
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
37
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
37
ITEM 4.
MINE SAFETY DISCLOSURE
37
ITEM 5.
OTHER INFORMATION
37
ITEM 6.
EXHIBITS
37
SIGNATURES
38
 
 
2

 
 
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, 2013  (the “Financial Statements”) included in this Quarterly Report on the form of 10-Q (the “Form 10-Q”) have not been reviewed by an independent public accountant with professional standards for conducting such reviews, as established by generally accepted auditing standards, as may be modified or supplemented by the Securities and Exchange Commission ( the “Commission”).The review was not completed due to the cost and availability of cash required to pay past due fees owed to our independent accountant. The Company believes this is a temporary situation and will request the independent public accountants to complete the review when our liquidity position improves 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, 2013 by our independent public accountants we will amend Form 10-Q, the Financial Statements have been prepared in accordance with generally accepted accounting principles and applicable rules and regulation. In the opinion of Management, the information contained herein is accurate.
 
 
3

 
 
Titan Energy Worldwide, Inc.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 
   
June 30,
   
December 31,
 
   
2013
   
2012
 
ASSETS
           
Current assets
           
Cash and cash equivalents
  $ 142,690     $ 304,374  
Accounts receivable less allowance for doubtful accounts
    2,362,162       2,196,907  
Inventory, net
    793,546       1,056,099  
Other current assets
    151,841       99,709  
Total current assets
    3,450,239       3,879,249  
Property and equipment, net
    526,271       592,995  
Customer and distribution lists, net
    402,547       470,985  
Goodwill
    1,351,695       1,351,695  
Other assets
    35,071       37,194  
Total assets
  $ 5,765,823     $ 6,332,118  
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
               
Current liabilities
               
Accounts Payable
  $ 2,177,509     $ 2,637,951  
Accrued liabilities
    2,453,192       2,352,653  
Customer deposits and deferred revenue
    503,026       774,518  
Factoring obligation
    1,126,569       934,930  
Notes payable - current portion
    79,700       118,000  
Current portion of convertible debt, net of discount
   
440,010
      2,740,000  
Total current liabilities
   
6,779,996
      9,558,052  
Convertible debt and notes payable
   
2,400,000
      67,700  
Other long term liabilities
    302,227       302,227  
Total long –term liabilities
   
2,702,227
      369,927  
Total liabilities
    9,482,223       9,927,979  
Commitments and Contingencies
               
Stockholders’ equity (deficit)
               
Preferred Stock Series D, 10,000,000 authorized, $,0001 par value, issued and outstanding 341 and 344, shares, respectively
    1       1  
Common stock 1,800,000,000 shares authorized, $.0001 par value, issued  71,309,324\ and 70,800,775 shares, respectively
    7,131       7,080  
Treasury stock, at cost, held 1,550,000 and 1,550,000shares, respectively
    (775,000 )     (775,000 )
Additional paid-in capital
    32,067,615       31,967,753  
Accumulated deficit
    (35,016,147 )     (35,017,855 )
Total stockholders’ equity (deficit)
    (3,716,400 )     (3,595,861 )
Total liabilities and stockholders’ equity (deficit)
  $ 5,765,823     $ 6,332,118  

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, 2013 and 2012
 
   
2013
   
2012
 
Sales of equipment
  $ 3,192,272     $ 3,642,472  
Sales of service and parts
    3,242,011       1,699,789  
Net  sales
    6,434,283       5,342,261  
                 
Material cost and labor for equipment
    2,731,990       3,009,912  
Material cost and labor for service and parts
    1,919,611       840,374  
        Total cost of  sales
    4,651,601       3,850,286  
Gross profit
    1,782,682       1,491,975  
Operating expenses:
               
 Selling and service expenses
    810,132       691,387  
 General and administrative expenses
    321,760       334,843  
 Research and development
    3,848       -  
 Corporate overhead
    114,892       153,026  
 Depreciation and amortization
    83,845       86,535  
Gain on sale of fixed assets
    (5,705 )     (5,731 )
Total operating expenses
    1,328,772       1,260,060  
Operating income
    453,910       231,915  
Other Expenses
               
Interest expense, net
    191,436       317,186  
Amortization of debt discount and financing costs
    -       33,989  
Change in fair value of embedded conversion feature
    (14,072 )     (37,873 )
Change in fair value of warrants
    (4,721 )     (11,250 )
Total Other Expense, net
    172,643       302,052  
Net Income (loss)
    281,267     $ (70,137 )
Weighted average number of shares outstanding
    71,306,349       32,897,871  
Basic and diluted (loss) per common share
  $ 0.00     $ 0.00  

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, 2013 and 2012

   
2013
   
2012
 
Sales of equipment
  $ 6,003,568     $ 5,745,706  
Sales of service and parts
    5,084,796       2,866,240  
Net  sales
    11,088,364       8,611,946  
                 
Material cost and labor for equipment
    5,053,393       4,827,308  
Material cost and labor for service and parts
    2,916,162       1,363,959  
Total cost of  sales
    7,969,555       6,191,267  
Gross profit
    3,118,809       2,420,679  
Operating expenses:
               
 Selling and service expenses
    1,529,270       1,335,786  
 General and administrative expenses
    801,611       718,000  
 Research and development
    10,499       -  
 Corporate overhead
    224,428       312,936  
 Depreciation and amortization
    166,127       175,471  
Gain on sale of fixed assets
    (5,705 )     (949 )
Total operating expenses
    2,726,230       2,541,244  
Operating income (loss)
    392,579       (120,565 )
Other Expenses
               
Interest expense, net
    365,452       530,518  
Amortization of debt discount and financing costs
    8,106       95,464  
Change in fair value of embedded conversion feature
    (2,943 )     (49,769 )
Change in fair value of warrants
    20,257       (8,942 )
Total Other Expense, net
    390,872       567,271  
Net Income (loss)
    1,707     $ (687,836 )
Weighted average number of shares outstanding
    71,306,349       36,610,914  
Basic and diluted (loss) per common share
  $ 0.00     $ -0.02  

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, 2013 and 2012
 
Operating activities:
 
2013
   
2012
 
Net loss
  $ 1,707     $ (616,185 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Compensation paid by issuance of stock and stock options
    80,210       123,103  
Depreciation and amortization
    166,127       175,471  
Amortization of debt discount and financing costs
    8,106       95,464  
Stock issued for services
    9,000       24,941  
Change in fair value of lease obligation
    -       66,341  
Change in fair value of warrants
    20,257       (8,942 )
Change in fair value of embedded conversion
    (2,943 )     (49,769 )
Gain on sales of fixed assets
    (5,705 )     (949 )
Changes in operating assets and liabilities:
               
Accounts receivables
    (165,254 )     (698,388 )
Inventory
    262,553       (79,929 )
Other assets
    (50,011 )     (18,947 )
Accounts payable
    (460,456 )     (292,622 )
Accrued liabilities and customer deposits
   
(188,594
)     272,546  
Net cash used in operating activities
   
(324,988
)     (1,079,516 )
Investing activities:
               
     Purchase of  fixed assets
    (27,965 )     (31,246 )
     Proceeds from sales of fixed assets
    5,705       40,622  
Net cash (used) provided in investing activities
    (22,260 )     9,376  
Financing activities:
               
Proceeds provided  by Convertible Debt
    -       360,000  
Net borrowings from Factoring Obligation
    191,639       747,674  
Proceed of promissory note
    -       67,700  
Payment of notes payable
    (6,000 )     (110,370 )
Cost associated with stock issuances
    (75 )        
Net cash (used) provided by financing activities
    185,564       1,065,004  
Increase (decrease) in cash and cash equivalents
   
(161,684
)     (5,136 )
Cash and cash equivalents, beginning of year
    304,374       139,432  
Cash and cash equivalents, end of period
  $
142,690
    $ 134,296  

See accompanying notes to unaudited condensed consolidated financial statements.
 
 
7

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

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

On January 1, 2010, the Company acquired the stock of Sustainable Solutions, Inc., (“SSI”) a company that performs energy audits, consulting and management services. The purchase price for this business was a stock option to purchase 200,000 shares of the Company’s common stock at of $0.50 per share. We used the Black-Scholes method to value the stock option for this acquisition at $71,671. The primary asset of the business was a contract with a major utility company to perform energy assessments for the six year period from 2010 to 2012.
 
On November 1, 2010, the Company acquired the assets of Stanza Systems, Inc., a software development company specializing in smart-grid applications. This company is doing business as Stanza Technologies (“Stanza”). The purchase price for this company consisted of $175,000 cash and assumed liabilities of   $481,190. In addition, to complete this acquisition the Company had to satisfy the senior debt holders by offering common shares of the Company. The Company’s offered these debt holders 413,333 shares of common stock which was valued at the closing price of our stock as of November 1, 2010 resulting in a value of $186,000.
 
At June 30, 2013 and December 31, 2012, the Company has no Preferred Stock Series A, B and C outstanding. The description of these securities is as follows:
 
Preferred Stock, Series A, authorized 10,000,000, $.0001 par value
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, 2012 on Form 10-K filed with SEC on April 4, 2013.
 
Going Concern
 
The accompanying Financial Statements have been prepared assuming the Company will continue as a going concern. The Company incurred a net income for the three months ended June 30, 2013 of 281,267, its first profitable quarter in the Company history. The net income for the six months ended June 30, 2013 was $1,707. At June 30, 2013, the Company had an accumulated deficit of $35,016,147. The Company believes it will be profitable for the year 2013 and is in the process of restructuring its balance sheet.  However until we are successful in completing these items, the accumulated deficit and the notes that are in default raise substantial doubt as to the Company’s ability to continue as a going concern.  These Financial Statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of recorded asset amounts, or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Management has taken the following steps that it believes will be sufficient to provide the Company with the ability to continue its operations:
  
The Company has achieved positive EBITDA for several past quarters and has a positive Net Income for the 2nd quarter of 2013 and the entire first 6 months of 2013.  The Company expects to continue to operate in both a positive EBITDA and Net Income manner for the foreseeable future and this should have a beneficial impact on the Company’s ability to continue its operations.
  • Management has entered into an agreement with Forefront Capital to raise up to $5 million on a best efforts basis.  While there is no guarantee that these efforts will result in any new capital for the Company, these potential funds would have a significant impact on the Company’s ability to restructure its debt and improve its cash flow.
  • Management has been successful in having the majority of the Convertible Notes extend their due date to July 1, 2014. These extensions were achieved to allow the Company the time to complete its restructuring of the balance sheets. These note holders will convert their notes and accrued interest into equity if the item above is successful.
  • Management will continue to take steps to expand and increase its service sales and work order flow.  Service sales account for the highest margins of any business segment and the quickest turnaround in terms of customer payments.
 
9

 
 
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
  • Management will seek to either restructure or replace its existing factoring agreement with either an asset based or bank line of credit before the end of the year 2013.  Management believes the company is eligible for a lower cost lending facility and that this could save the Company up to $300,000 a year in interest and fees.
Supplemental Cash Flow Information Regarding Non-Cash Transactions
 
During the three and six months ended June 30, 2013 and 2012, the Company has entered into several non-cash transactions in order to provide financing for the Company and to conserve cash. The table below shows the transactions that occurred during the periods presented.
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2013
   
2012
   
2013
   
2012
 
Stock  issued for services
    -     $ 30,000     $ 8,000     $ 44,500  
Common stock issued for conversion of Series D Preferred Stock
    -     $ 20,000       -     $ 30,000  
Stock issued for the conversion of convertible debt
  $ 2,903     $ 14321     $ 2,903     $ 64,071  
Accounts Payable settled with stock
    -     $ 39,002       -     $ 39,002  
 
Interest paid for the three months ended June 30, 2013 and 2012 were $26,863 and $45,178, respectively. The interest paid for the six months ended June 30, 2013 and 2012 were $48,150 and $55,010. The factoring fees paid for the three months ended June 30, 2013 and 2012 were $68,069 and $113,855, respectively. The factoring fees for the six months ended June 30, 2013 and 2012 were $122,225 and $168,683.
 
Use of Estimates
 
The preparation of Financial Statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and assumptions at the date of the Financial Statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Revenue Recognition
 
The Company recognizes revenue when the significant risks and rewards of ownership have been transferred to the customer pursuant to applicable laws and regulations, including factors such as when there has been evidence of sales arrangement, delivery has occurred, or services have been rendered, the price to the buyer is fixed or determinable, and collectability is reasonably assured.
 
For equipment sales, the Company recognizes revenue when the equipment has been delivered to the customer and the customer has taken title and risk of the equipment. For service and parts sales, the Company recognizes revenue when the parts have been installed and over the period in which the services are performed. The Company in some circumstances will require customers to make a down payment that is included in customer deposits and the revenue is deferred until work has been completed. The Company also has long-term maintenance agreements that the customer may elect to pay in advance. The revenue recognition on these contracts is based on when the work is performed.
 
 
10

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

Cash Equivalents
 
For purposes of reporting cash flows, the Company considers all short-term investments with an original maturity of six months or less to be a cash equivalent.
 
Concentration of Credit Risk
 
Financial instruments which subject the Company to concentrations of credit risk include cash and cash equivalents. The Company maintains its cash in well-known banks selected based upon management’s assessment of the bank’s financial stability. Balances may periodically exceed the Federal Deposit Insurance Corporation limit which is currently $250,000.
 
Property and equipment are recorded at cost, net of accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, which range from six to seven years. Expenditures for major renewals and betterments that extend the original estimated economic useful lives of the applicable assets are capitalized. Expenditures for normal repairs and maintenance are charged to expense as incurred. The cost and related accumulated depreciation of assets sold or otherwise disposed of are removed from the accounts, and any gain or loss is included in operations.
 
Intangible Assets
 
The Company evaluates intangible assets and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable from its estimated future cash flows.

Recoverability of intangible assets and other long-lived assets is measured by comparing their net book value to the related projected undiscounted cash flows from these assets, considering a number of factors including past operating results, budgets, economic projections, market trends and product development cycles that represent customer lists, distribution list and contracts. These intangibles, except in process research and development (see note 2), have finite lives and therefore are required to be amortized to expense. The Company believes that the useful life of these intangibles ranges from 5-10 years.
 
Goodwill
 
In accordance with ASC 350, we test goodwill at the reporting unit level for impairment on an annual basis and between annual tests if events and circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying value. We have determined that the reporting unit level is the subsidiary level as discrete financial information is not available at a lower level and our chief operating decision maker, which is our chief executive officer and executive management team, collectively, make business decisions based on the evaluation of financial information at the entity level. Events that would indicate impairment and trigger an interim impairment assessment include, but are not limited to, current economic and market conditions, including a decline in market capitalization, a significant adverse change in legal factors, business climate or operational performance of the business, and an adverse action or assessment by a regulator. Our annual impairment test date is December 31.
 
 
11

 
 
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
 
The Company has examined the qualitative factors related the goodwill recorded as on our books. These factors includes the improving operations in each business unit, the improving economic business climate and the interest in the energy related investors, Therefore, we have not performed a detail evaluation of goodwill last year
 
Income Taxes
 
The Company accounts for income taxes whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  Effective January 1, 2009 the Company adopted guidance regarding accounting for uncertainty in income taxes. This guidance clarifies the accounting for income taxes by prescribing the minimum recognition threshold an income tax position is required to meet before being recognized in the financial statements and applies to all federal or state income tax positions. Each income tax position is assessed using a two step process. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more likely than not criteria, the benefit recorded in the financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement. As of June 30, 2013 and December 31, 2012 there were no amounts that had been accrued in respect to uncertain tax positions. None of the Company’s federal or state income tax returns is currently under examination by the Internal Revenue Service (“IRS”) or state authorities.  However, fiscal years 2009 and later remain subject to examination by the IRS and respective states

The Company has not recorded any taxes payable for the three and six months ended June 30, 2013, as it has net operating losses that will offset any tax liabilities.
 
Earnings or Loss per Share
 
The basic income (loss) per common share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding. Diluted income per common share is computed similar to basic income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The loss or earnings for common shareholders is increased for any preferred dividends. As of June 30, 2013 and 2012, the Company had potentially dilutive shares of 211,395,746 and 126,634,631 related to outstanding stock options, warrants and convertible securities that were not included in the calculation of loss per share, because their effect would have been anti-dilutive.
 
Share-Based Compensation
 
The Company uses the fair value method of accounting for share-based payments. Accordingly, the Company recognizes the cost of employee services received in exchange for awards of equity instruments based on the grant date fair value of those rewards.  Options or share awards issued to non-employees are valued using the fair value method and expensed over the period services are provided.
 
 
12

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

Segment Reporting
 
The Company operates in a two business segments, Power Distribution and Energy Services. Power Distribution consists of the sale of emergency, standby power equipment and renewable energy solutions. Energy Services consist of the sale of maintenance and service programs, interruptible rate demand response programs, monitoring program and energy audits.
 
New Accounting Standards and Updates Not Yet Effective
 
The following are new accounting standards and interpretations that may be applicable in the future to the Company:
 
In July, 2013 the FASB issued an Accounting Standards Update 2013-11, “Income Taxes (Topic 740) Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss or a Tax Credit Carryforward Exists.” This update will be effective for fiscal years and interim periods within those years beginning after December 15, 2013, The Company will evaluate its provision to determine its impact on our Consolidated Financial Statements, Other Accounting Standards Updates not effective until after June 30, 2013 are not expected to have a significant effect on the Company’s consolidated financial position or results of operations.
 
NOTE 2 – INVENTORY, NET
 
Inventory is stated at the lower of cost, determined by a first in, first out method, or market. Inventory is adjusted for estimated obsolescence and written down to net realizable value based upon estimates of future demand, technology developments and market conditions. Inventories are comprised of the following:
 
   
June 30,
   
December 31,
 
   
2013
   
2012
 
Parts
  $ 613,673     $ 543,551  
Work in process
    262,702       577,297  
Finished Goods
    67,171       85,251  
Obsolescence Reserve
    (150,000 )     (150,000 )
Total
  $ 793,546     $ 1,056,099  
  
 
13

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

NOTE 3 - NOTES PAYABLE
 
Notes payable consists of the following at June 30, 2013 and December 31, 2012:
 
   
June 30
   
December 31
 
Short -Term Debt
 
2013
   
2012
 
Convertible Notes bearing interest at 12% due on demand
  $
440,000
    $ 650,000  
Convertible Note bearing interest at 12% due April 2013
    -       1,890,000  
Convertible Note bearing interest at 8% due April 2013
            200,000  
Promissory Note bearing interest at 8% due March 9, 2014
    67,700          
Other loans in default
    12,000       118,000  
    $
519,700
      2,858,000  
Long-term
               
Promissory Note bearing interest at 8% due March  9, 2014
  $ -     $ 67,700  
Convertible Note bearing interest at 12% due July 1, 2014
   
2,300,000
      -  
Promissory Note bearing interest ar 12% due July 1, 2014
   
100,000
      -  
    $
2,400,000
    $ 67,700  
 
On June 30, 2012, certain note holders totaling a principal balance of $2,300,000 agreed to extend their note to July 1, 2014.in return for reducing their conversion price from $0.12 to $0.05. Since the new conversion price is higher than the current stock price there in no beneficial conversion feature to be recognized. In addition, a promissory note for $100,000 has also been extended to July 1, 2013 If the Company is successful in restructuring its Balance Sheet these notes and their accrued interest will convert into equity securities.
 
At June 30, 2013 the Company was in default on $440,000 of convertible notes payable. These notes are accruing interest at the default rate of 12%. These note holders will be given the option to convert into an equity security; however they have not extended their notes. The other loans consist of a note for $12,000. The Company plans to pay off the $12,000 before the end of the year,
 
NOTE 4- FACTORING AGREEMENT
 
On June 15, 2011, the Company replaced its bank line of credit with a Factoring and Security Agreement (“Agreement”) with Harborcove Fund I, LP. (“Harborcove”). There are two agreements that provide financing separately to TES and GPI with identical terms. This agreement was extended and amended on December 10, 2012 for twelve months with cancellation after 60 days’ notice and a right of first refusal to match the term of a competing offer. The separate agreement with GPI was not extended.
 
The amended Agreement allows the Company to sell, transfer and assign its receivables to Harborcove. In return Harborcove will loan the Company 90% of the face value of the receivable. The balance, less factoring fees and interest, are paid to the Company once the final payment is received. Harborcove has the right to reject any receivables that do not meet their credit requirement approvals. The Company pays a fee on each invoice purchased by Harborcove equal to 1.00% (as amended) of the face value of the invoice, with a minimum fee of $5.00. The Company also pays interest on the amount advanced at prime plus 4.5%. If 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.
 
 
14

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

The amounts outstanding at June 30, 2013 and December 31, 2012 were $1,126,569 and $934,930, respectively. The factoring fees for the six months ended June 30, 2013 and 2012 were $122,225 and $168,680 respectively. The interest expenses on this amended Agreement for the six months ended June 30, 2013 and 2012 were $48,140 and $52,627 respectively. The factoring fees have been reclassified as additional interest expense.

NOTE 5 – ACCRUED LIABILITIES
 
Accrued liabilities consist of the following:
 
   
June 30
   
December 31,
 
   
2013
   
2012
 
Accrued Compensation
  $ 498,147     $ 604,785  
Accrued Interest
    903,724       732,291  
Embedded conversion feature at fair value
    -       2,942  
Common stock warrants, at fair value
    21,019       763  
Purchase obligation on stock option, at fair value
    250,000       250,000  
Stanza payroll taxes including interest and penalties
    258,511       278,137  
Accrued costs on completed jobs
    296,094       232,695  
Accrued sales tax
    183,953       246,355  
Accrued other
    41,744       4,685  
    $ 2,453,192     $ 2,352,653  

The amount listed as purchase obligation on stock option is a stock option that permits the holder to demand payment in lieu of exercising the option. The Company has payment plans to paid past due sales taxes with various state agencies.
 
NOTE 6 - INCOME TAXES
 
The Company’s effective income tax rate of 0.0% differs from the federal statutory rate of 35% for the reason set forth below for the periods below:
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2013
   
2012
   
2013
   
2012
 
Income taxes at the statutory rate
  $ 98,443     $ (23,847 )   $ 597     $ (233,864 )
Utilization of NOL
    (100,872 )     -       (9,185 )     -  
Valuation Allowance
            10,874               196,671  
Permanent differences and other
    2,429       12,973       8,588       37,193  
Total income tax
  $ -     $ -     $ -     $ -  
 
 
15

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

The following presents the components of the Company’s total income tax provision:
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30
   
June 30
 
   
2013
   
2012
   
2013
   
2012
 
Current expense
  $ 100,872     $ -     $ 9,185     $ -  
Deferred benefit
    (100,872 )     (10,874 )     (9,185 )     (196,671 )
Change in valuation
    -       10,874       -       196,671  
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 six months ended March 31 are as follows:
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30
   
June 30
 
   
2013
   
2012
   
2013
   
2012
 
Deferred tax assets
                       
Amortization
    6,884       1,861       13,768       3,809  
Non qualify stock option expense
    13,985       20,956       28,074       41,855  
Fair value loss
    -               7,090          
Operating losses carry forward
    7,104,973       6,413,796       7,137,064       6,599,593  
Deferred Tax Liabilities
                               
Fair value income
    (6,578 )     (16,792 )     (1,030 )     (19,962 )
Depreciation
    (3,400 )     (5,588 )     (6,800 )     (8,423 )
Net deferred assets
    7,115,864       6,414,233       7,178,166       6,616,872  
Valuation Allowance
    (7,115,862 )     (6,414,233 )     (7,168,163 )     (6,616,872 )
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.
 
 
16

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

At June 30, 2013 the Company had consolidated federal net operating losses of $20,400,795 The expiration date of these net operating losses is as follows:
 
 
 2019
  $ 104,604  
 
2020
    654,454  
 
2021
    1,700,703  
 
2022
    72,209  
 
2023
    451,382  
 
2024
    262,795  
 
2025
    385,410  
 
2026
    911,684  
 
2027
    2,540,363  
 
2028
    1,543,573  
 
2029
    2,807,561  
 
2030
    2,795,006  
 
2031
    2,088,153  
 
2032
    2,746,742  
 
2033
    1,336,156  
      $ 20,400,795  
 
NOTE 7 - SERIES D CONVERTIBLE PREFERRED STOCK
 
On October 3, 2007, the Company issued a private placement memorandum to sell up to $10,000,000 of Units consisting of one share of Series D Convertible Preferred Stock, one Class A Warrant and one Class B Warrant. Each Unit was offered at $10,000. The holder of the Convertible Preferred Stock may convert at any time and is required to convert their Preferred Stock 24 months after issuance, in whole or in part, into shares of the Company Common Stock. Assuming an initial conversion price of $1.00, each share of Preferred Stock is convertible into 10,000 shares of the Company Common Stock. The Class A Warrant and Class B Warrant expired on January 31, 2013 and none were exercised.
 
For the six months ended June 30, 2013, no shares were converted

In an Event of Liquidation (as defined below) of the Company, holders of any then-unconverted shares of Preferred Stock will be entitled to immediately receive accelerated redemption rights in the form of a Liquidation Preference Amount. The Liquidation Preference Amount shall be equal to 125% of the sum of: (i) the Stated Value ($10,000) of any then-unconverted shares of Preferred Stock and (ii) any accrued and unpaid dividends thereon. An “Event of Liquidation” shall mean any liquidation, dissolution, or winding up of the Company, whether voluntary or involuntary, as well as any change of control of the Company which shall include, for the purposes hereof, sale by the Company of either (x) substantially all of its assets or (y) that portion of its assets which comprises its core business technology, products or services.
 
 
17

 
 
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. These warrants have expired. During the six months ended June 30, 2013, no treasury shares were converted into Common Stock.

9 – STOCK OPTIONS
 
The Company did not issue any stock options in the six months ended June 30, 2013.The Company issued January 16, 2012. These options were not issued under any plan that required stockholder approval. The Company believes that such stock options align the interest of its employees with the shareholders. Stock option awards are granted with an exercise price equal to the market price of the Company common stock at the date of grant. The options granted to employees have a term of 10 years with a vesting commencing on January 16, 2013 over the four year period.   The Company used the Black-Scholes method to evaluate the value of the options. The option granted on March 27, 2012 was to a member of our advisory board. The option is for 5 years and vesting immediately. We determined that the value of the option was $11,405 and will be charged to income over the one-year term to serve as an advisory board member. The expected volatility is computed based on a twelve month standard deviation of our month ended closing price. The risk free rate for periods within the contractual life of the option is based on the U.S. treasury yield curve in effect at time of grant. Below are the parameters in determining the fair value of these options.
 
   
2012
 
Expected volatility
   
96
%
Vesting period
   
5
 
Expected term
   
7
 
Expected dividends
   
0
%
Risk free rate
   
1
%

The following is a table shows a summary of activity for the six months ended June 30, 2013 and the year ended December 31, 2012:
 
Outstanding December 31, 2011
    7,735,000     $ 0.31  
Granted January 16.2012
    4,025,000     $ 0.07  
Granted March 27 2012
    500,000     $ 0.02  
Exercised
               
Forfeited
    (2,030,000 )   $ 0.26  
Outstanding December 31, 2012
    10,230,000     $ 0.31  
Granted
    -          
Exercised
    -          
Forfeited
    (82,500 )   $ 0.19  
Outstanding June 30, 2013
    10,147,500     $ 0.23  
Exercisable June 30, 2013
    6,900,125     $ 0.24  
 
 
18

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

As of June 30, 2013, the nonvested options totaled 3,247,375 shares. There is approximately $225,000 of unrecognized compensation and share-based expense arrangements that have been granted. These costs will be recognized over a weighted average period of 2.5 years. At June 30, 2013, the aggregate intrinsic value of exercisable stock options was $192,000.
 
NOTE 9 – COMMON STOCK TRANSACTIONS
 
During the six months ended June 30, 2013 the Company issued the following shares of common stock:

The company issued 150,000 shares to a consultant for services performed with a value of $3,000.
 
The company issued 250,000 shares for an investor advisor for a value at $5,000.
 
On April 2, 2013, Southridge Partners converted the balance of accrued interest of $2,903 that was outstanding into 208,549 the Company’s common stock.
 
During the year ended December 31, 2012 the Company issued the following shares of common stock:
 
The company issued 793,648 shares of common stock for the conversion for the Series D Preferred Stock.
   
The company issued 100,000 shares to a consultant for services performed with a value of $2,500.
   
The company issued 33,881,203 shares of common stock for the conversion in accordance with Security Transfer Agreements in exchange for the retirement of $153,602 of convertible notes and accrued interest.
   
The company issued 303,797 shares for investor relations services value at $12,000.
   
The company issued 750,000 shares to the Company’s Advisory Board for services value at $30,000.
   
The company issued 3,500,000 shares to settle an accounts payable totaling $39,162.
 
NOTE 10 - COMMON STOCK WARRANTS
 
There were no warrants issued during the six months ended June 30, 2013. There were no warrants exercised during the six months ended June, 2013, however 6,011,250 of warrants expired without being exercised. The following table shows the warrants outstanding at June 30, 2013:
 
Number of
     
Exercise
 
Expiration
Warrants
 
Purpose
 
Price range
 
Date
200,000
 
Acquisition of Grove Power, Inc.
  $ 0.01  
Jan-2014
2,143,425
 
Extension of Convertible Notes
  $ 0.10  
Apr-2017
830,000
 
 Convertible Debt Offering 2009/2010
  $ 0.25  
Dec-2014 – Mar2015
1,650,000
 
Convertible Debt Offering 2010
  $ 0.60  
May 2015 - Nov -2015
 
 
19

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

NOTE 11 – FAIR VALUE
 
GAAP provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. GAAP also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets. The fair value measurements are disclosed by level within that hierarchy.   The Company adopted the provisions of fair value measurements as of January 1, 2009. Hierarchical levels are directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:

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

Determining which hierarchical level an asset or liability falls within requires significant judgment.  The Company will evaluate its hierarchy disclosures each quarter. The Company’s fair value measurements for level six inputs were based on the following methods:
 
 
1.
Common Stock Warrants are valued using the Black-Scholes model updated for current stock price, volatility, interest rate and remaining term. The following were the assumptions used to compute the fair value:
 
   
June 30,
   
December 31,
 
   
2013
   
2012
 
Common stock price
  $ 0.03     $ 0.01  
Exercise price
  $ 0.15     $ 0.15  
Volatility
    131.8 %     89.8 %
Interest rate
    0.14 %     0.15 %
Remaining Terms
 
2.5 yrs
   
3 yrs
 
 
 
2.
Embedded beneficial conversion options were determined by using the Black –Scholes methods with the following input variables at December 31, 2012. This conversion feature was fully exercise during the quarter ended June 30, 2013
 
   
December 31,
 
   
2012
 
Common stock price
  $ 0.01  
Conversion price
  $ 0.005  
Terms in years
    0.3  
Volatility
    89.80 %
Interest rate
    0.15 %
 
 
20

 
 
 Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
3.
Purchase obligation of a stock option represents the value of the purchase obligation to buyback these options at any time during the next two years. The agreement is for 1,000,000 options with a guarantee buy back provision at $0.25, which is also the exercise pe.
 
The following table summarizes the financial instruments measured at fair value in the Consolidated Balance Sheet as of June 30 2013.
 
   
Fair Value Measurements
 
Assets
 
Level 1
   
Level 2
   
Level 3
   
Total
 
                         
Liabilities
                         
Common stock warrants
                  $ 21,019     $ 21,029  
Purchase obligations for stock option
                  $ 250,000     $ 250,000  
                                 
Total
                  $ 271,019     $ 271.019  
 
The following table summarizes the financial instruments measured at fair value in the Consolidated Balance Sheet as of December 31, 2012:
 
   
Fair Value Measurements
 
Assets
 
Level 1
   
Level 2
   
Level 3
   
Total
 
                         
Liabilities
                           
Common stock warrants
                  $ 763     $ 763  
Purchase obligations for stock option
                  $ 250,000     $ 250,000  
Embedded beneficial conversion option
                  $ 2,942     $ 2,942  
Total
                  $ 253,705     $ 253,705  
 
The table below includes a roll forward of the fair value of financial instruments that are classified as within Level 3 of the valuation hierarchy.
 
   
Level 3
 
   
Liabilities
 
Balance at December 31, 2012
  $ 253,705  
Change in fair value of embedded conversion
    (2,942 )
Change in fair value of stock options
    20/256  
Balance at June 30, 2013
  $ 271,019  
  
Note 12 –Segment Data
 
Our operating segments represent components of our business for which discrete financial information is available and is reviewed regularly by the chief operating decision-maker, or decision-making group, to evaluate performance and make operating decisions. We conduct our operations through two operating segments: Power Distribution and Energy Service. Our reportable segments are strategic business units that offer different products and services and serve different customers. Power Distribution consists of the sale of emergency and standby power equipment and renewable energy solutions. Energy Services consist of the sale of maintenance and service programs, interruptible rate services, monitoring and energy audits.

 
21

 
 
Titan Energy Worldwide, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
 
Summarized financial information concerning our reportable segments is shown in the following table. Unallocated costs include corporate overhead, research and development. Other expense for purposes of evaluating the operations of our segments is not allocated to our segment activities. Total asset amounts exclude intercompany receivable balances eliminated in consolidation.  The Unallocated Costs for assets includes cash, goodwill and in-process research and development. Customer lists and other intangibles are allocated to their segments.
 
For the Three Months Ended June 30, 2013
 
   
Power
   
Energy
   
Unallocated
       
   
Distribution
   
Services
   
Costs
   
Total
 
Sales
  $ 3,192,272     $ 3,242,011           $ 6,434,283  
Cost of sales
    2,731,990       1,919,611             4,651,601  
Gross profit
    460,282       1,322,400             1,782,682  
Operating Expenses:
                             
 Selling and service expenses
    248,928       561,204             810,132  
 General and administrative expenses
    43,301       278,460             321,760  
  Research and Development
                    3,848       3,848  
 Depreciation & amortization
    23,847       59,747       251       83,845  
 Gain on sale of fixed assets
    -       (5,705 )     -       (5,705 )
 Corporate overhead
    -       -       114,892       114,892  
Operating Expense
    316,176       893,706       118,991       1,328,772  
Operating Income (Loss)
    144,206       428,684       (118,991 )     453,910  
Total assets
  $ 1,378,084     $ 2,848,177     $ 1,539,562     $ 5,765,823  
 
For the Three Months Ended June 30, 2012
 
   
Power
   
Energy
   
Unallocated
         
   
Distribution
   
Services
   
Costs
   
Total
 
Sales
  $ 3,642,472     $ 1,699,789             $ 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
    131,065       203,778               334,843  
 Depreciation & Amortization
    20,299       65,580       656       86,535  
 Corporate overhead
    -               153,026       153,026  
 Gain  on sale of fixed assets
    -       (5,731 )     -       (5,731 )
Operating Expense
    525,152       581,226       153,682       1,260,060  
Operating Income (Loss)
    107,408       278,189       (153,682 )     231,915  
Total Assets
  $ 2,623,782     $ 2,165,781     $ 1,542,555     $ 6,332,118  
 
 
22

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

For the Six Months Ended June 30, 2013
 
   
Power
   
Energy
   
Unallocated
       
   
Distribution
   
Services
   
Costs
   
Total
 
Sales
  $ 6,003,568     $ 5,084,796           $ 11,088,364  
Cost of sales
    5,053,393       2,916,162             7,969,555  
Gross profit
    950,175       2,168,634             3,118,809  
                               
Operating Expenses:
                             
 Selling and service expenses
    481,477       1,047,793             1,529,270  
 General and administrative expenses
    181,311       620,300             801,611  
 Research and Development
    -       -       10,499       10,499  
 Depreciation & amortization
    48,042       117,419       666       166,127  
Loss (gain) on sale of fixed assets
    -       (5,705 )             (5,705 )
 Corporate overhead
    -       -       224,428       224,428  
Operating Expense
    710,830       1,779,807       235,593       2,726,230  
Operating Income (Loss)
    239,345       388,827       (235,593 )     392,579  
Total assets
  $ 1,378,084     $ 2,848,177     $ 1,539,562     $ 5,765,823  
 
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
    4,827,508       1,363,959               6,191,467  
Gross profit
    918,198       1,502,281               2,420,479  
                                 
Operating Expenses:
                               
 Selling and service expenses
    701,066       634,720               1,335,786  
 General and administrative expenses
    278,577       439,423               718,000  
 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
    1,023,000       1,202,957       315,287       2,541,244  
Operating Income (Loss)
    (104,802 )     299,324       (315,287 )     (120,765 )
Total Assets
  $ 2,623,782     $ 2,165,781     $ 1,542,555     $ 6,332,118  
 
NOTE 13– SUBSEQUENT EVENT
 
The Company has performed a review of events subsequent to the balance sheet date and, except for the matters described above in this note, no other matters require disclosure.
 
 
23

 
 
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. This company is inactive as we completed the six year contract related to this business.
 
In 2010, Titan Energy Development, Inc. (“TEDI”) purchased certain assets and assumed certain liabilities of Stanza Systems, which provide us with a software development company experienced in smart grid and utility operations. The company operates this business as Stanza Technologies (“Stanza”)’ Stanza has developed network communications software that we plan to utilize in our generator service business.
 
 
24

 
 
RESULTS OF OPERATIONS
 
Three Months Ended June 30, 2013 Compared to the Three Months Ended June 30, 2012
 
Sales
 
Sales for the three months ended June 30, 2013 were $6,654,283 compared to $5,342.261 for the three months ended June 30, 2012. The following table summarizes our sale by their segments:
 
     
Power
   
Energy
 
     
Distribution
   
Services
 
2013
    $ 3,192,272     $ 3,242,011  
2012
      3,642,472       1,699,789  
Increase (decrease)
    $ (450,200 )   $ 1,542,222  
Percent Increase
      -12 %     91 %
 
The lower sales in Power Distribution segment was attributable to the company made the decision to close the Power Distribution of our Florida office effective August 1, 2012 as it was not profitable. The sales for the Florida office in second quarter of 2012 were $431.637 which negatively impacts the percentage of growth percentage
 
The increased sales in the Energy Services segment is primarily attributable to  the retrofitting  of pollution control equipment as required by the EPA on older generators that are Non-emergency standby units, prime power applications load management/peak shaving and rental units. In the three months ended June 30, 2013, sales for the retrofitting were $867,000. Sales to national accounts for the three months ended June 30, 2013 totaled $911,000 compared to $635,000 in the three months ended June 30, 2012. Our traditional service programs, UPS and part sales were increased approximately 33% over the three months ended June 30, 2012.
Cost of Sales
 
Cost of sales was $4,651,601 for the three months ended June 30, 2013 compared to $3,850,286 for the three months ended June 30, 2012.
 
     
Power
   
Energy
 
     
Distribution
   
Services
 
2013
    $ 2,731,990     $ 1,919,611  
2012
      3,009,912       840,374  
Increase (Decrease)
    $ (277,922 )   $ 1,079,237  
Percent of Sales
                 
2013
      85.6 %     59.2 %
2012
      82.6 %     49.4 %
 
The decrease in cost of sales in the Power Distribution lower sales volume as noted above,  The percentage of cost to sales being higher than 2012 resulted  in lower margin for our Power Distribution segment. The Midwest region percentage of sales has historically been in the range of 82 to 86 percent of sales.
 
 
25

 
 
The higher costs for our Energy Services Segment are attributable to the higher sales volume. The increase of cost as a percentage of sales is attributable to a change in the mix of products. The national account program and the retrofitting of pollution control equipment have higher costs because we use subcontractors for national account program and incur expensive material costs for the pollution equipment, with an average cost as a percentage of sales was approximately 70%. These two products accounted for 55% of our Energy Service sales for the three months ended June 30, 2013 compared to 37% for the three months ended June 30, 2012. The percentage cost of sales for our traditional service business for the six months ended June 30, 2013 was 45%, consistent with prior periods.
 
Sales and Service Expenses
 
Sales and services expenses include all of sales and service personnel, benefits related to these personnel and other costs in support of these functions. The Sales and Service expenses were $810,132 for the three months ended June 30, 2013, compared to $691,387 for the three months ended June 30, 2012. The following table summarizes the areas of costs in this category:
 
     
Power
   
Energy
 
2013
   
Distribution
   
Services
 
Payroll related costs
      220,330     $ 430,034  
Shared based compensation
      7,187       28,337  
Other
      21,411       102,833  
Total
    $ 248,928     $ 561,204  
2012
                 
Payroll related cost
      339,415       262,705  
Shared based compensation
      9,421       12,376  
Other
      24,952       42,518  
Total
    $ 373,788     $ 317,599  
                   
Increase
    $ (124,860 )   $ 243,605  
Percent of Sales
                 
2013
      8 %     17 %
2012
      10 %     19 %
 
The decrease in the Power Distribution costs is attributable to the Company decision to discontinue the sales operations in our Florida office as it was not a profitable operation.
 
The increase in costs in the Energy Service segment is primarily attributable to the increasing volume of business being driven by our national account program.  The increase in the Energy Service Other category was primarily attributable to higher vehicle maintenance costs and greater use of consumables and small tools.
 
 
26

 
 
General and Administrative Expenses
 
The general and administrative expense category reflects the cost of each subsidiary’s management, accounting, facility and office functions which we can allocate to our segments. General and administrative expenses were $321,760 for the three months ended June 30, 2013, compared to $334,843 for the three months ended June 30, 2012.The following table included in expenses included\in general and administrative for the six months ended June 30, 2013 and 2012:
 
     
Power
   
Energy
 
2013
   
Distribution
   
Services
 
Payroll related costs
    $ 43,733     $ 117,946  
Shared based compensation
      1,900       1,900  
Facilities
      29,985       71,464  
Travel
      14,386       30,187  
Other
      (46,703 )     56,963  
Total
    $ 43,301     $ 278,460  
2012
                 
Payroll related cost
    $ 24,050       77,963  
Shared based compensation
      9,026       9,026  
Facilities
      50,633       52,300  
Travel
      19,875       10,780  
Other
      27,481       53,709  
Total
    $ 131,065     $ 203,778  
Increase (Decrease)
    $ (75,286 )   $ 62,203  
 
The increase in payroll related costs in the Power Distribution and the Energy Service is attributable to an increase in the number of support staff in our Minnesota office, as this office performs all accounting functions for all operating division. In addition, the Energy Services segment includes the costs  related to the Chief Technical Officer whose primary function is to assure our monitoring system is operating properly.  The negative amount in Power Distribution “Other cost” is attributable to a large bad debt recovery totaling $69,300.  The increase in the Energy Service “Travel cost” is attributable to the additional travel by our Service Manager to consolidating Florida and New York service operation under management in Minnesota.
 
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. In the three months ended June 30, 2013, we incurred $3,848 of additional costs to enhance the program to monitor RICE NESHAP data.
 
 
27

 
 
Corporate Overhead
 
Included in corporate overhead expenses are the salaries and travel expenses of our officers, legal fees, audit fees, investor relations and other costs associated with being a SEC registrant. Corporate overhead for the three months ended June 30, 2013 was $114,892 as compared to $153,026 for the three months ended June 30, 2012. The following table show expenses related to corporate activities:
 
   
2013
   
2012
 
 Payroll related activates
  $ 89,477     $ 83,098  
 Stock Compensation
    632       21,786  
 Professional Fees
    361       20,941  
 Travel
    11,226       15,163  
 Other
    13,196       12,038  
 Total
  $ 114,892     $ 153,026  
 
The reduction in share based compensation is attributable to the fact that previous stock options have fully vested and expensed in prior years. This represents a 300,000 share stock option with an exercise price of $0.07 for the CFO vesting over four years. The reduction in professional fee is attributable to not using an investor relation firm this year. The reduction in travel was due to moving the corporate office to Minnesota reducing the amount of travel in previous years.
 
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, 2013 was $83,845 compared to $86,535 in the three months ended June 30, 2012.The reduction of expense is attributable to a fully amortized customer list as of the end of 2012 and some fixed assets that have been fully depreciated.
Other Expenses
 
The following table below is summarizing the items in this category:
 
   
2013
   
2012
 
Interest expense, net
  $ 191,436     $ 203,331  
Amortization of debt discount
    -       25,884  
Amortization of deferred financing costs
    -       8,105  
Fair value of embedded conversion feature
    (14,072 )     (37,873 )
Fair value of warrants
    (4,721 )     (11,250 )
Total
  $ 172,643     $ 188,197  
 
The decrease in interest expense is attributable to lower factoring fees. The debt discount related to the convertible debt was fully amortized in 2012. The amount amortized as deferred financing cost was fully amortized at the end of the first quarter 2013.
 
The embedded conversion feature and the warrants are treated as a liability and are re-measured with each reporting period. The gain in the embedded conversion feature reflects the write-off of the outstanding balance when the embedded conversion feature was exercised,  The warrants reflects a stock price at June 30, 2013 of $0.03 compared to a price of $0.01 at December 31, 2012. As the stock price increased the value of these items resulted in a gain on the financial statement.
 
 
28

 
 
RESULTS OF OPERATIONS
 
Six Months Ended June 30, 2013 Compared to the Six Months Ended June 30, 2012
 
Sales
 
Sales for the six months ended June 30, 2013 were $11,088,364 compared to $8,611,946 for the six months ended June 30, 2012. The following table summarizes our sale by their segments:
 
   
Power
   
Energy
 
   
Distribution
   
Services
 
2013
  $ 6,003,568     $ 5,084,796  
2012
    5,745,706       2,866,240  
Increase
  $ 257,862     $ 2,218,556  
Percent Increase
    4 %     77 %
 
The higher sales in Power Distribution segment was attributable to increased sales through our New York office which offset the Company decision to close the Power Distribution of our Florida office effective August 1, 2012 as it was not profitable. Sales for the Florida office in the first half of 2012 were $625,255. The actual sales growth without the Florida sales for 2012 would be 17% for the first half of 2013.
 
The increased sales in the Energy Services segment is primarily attributable to  the retrofitting  of pollution control equipment as required by the EPA on older generators that are non-emergency standby units, prime power applications, load management/peak shaving and rental units. In the six months ended June 30, 2013, sales for the retrofitting were $1,206,000. Sales to national accounts for the six months ended June 30, 2013 totaled $1,536,000 compared to $797,000 in the six months ended June 30, 2012. Sales for our traditional service programs, UPS and part sales increased approximately 13% over the six months ended June 30, 2012.
 
Cost of Sales
 
Cost of sales was $7,969,555 for the six months ended June 30, 2013 compared to $6,191,267 for the six months ended June 30, 2012.
 
   
Power
   
Energy
 
   
Distribution
   
Services
 
2013
  $ 5,053,393     $ 2,916,162  
2012
    4,827,508       1,363,959  
Increase
  $ 225,885     $ 1,552,203  
Percent of Sales
               
2013
    84.2 %     57.4 %
2012
    84.0 %     47.6 %
 
The increase in cost of sales in the Power Distribution slightly higher sales volume as noted above. The Midwest region percentage of sales has historically been in the range of 82 to 86 percent of sales.
 
 
29

 
 
The higher costs for our Energy Services Segment are attributable to the higher sales volume. The increase of cost as a percentage of sales is attributable to a change in the mix of products. The national account program and the retrofitting of pollution control equipment have higher costs because we use subcontractors for the national account program and incur expensive material costs for the pollution equipment, with an average cost as a percentage of sales of approximately 69%. These two products comprised 54% of our Energy Service sales for the six months ended June 30, 2013 compared to 28% for the six months ended June 30, 2012. The percentage cost of sales for our traditional service business for the six months ended June 30, 2013 was 44%.
 
Sales and Service Expenses
 
Sales and services expenses include all of sales and service personnel, benefits related to these personnel and other costs in support of these functions. The Sales and Service expenses were $1,529,270 for the six months ended June 30, 2013, compared to $1,335,768 for the six months ended June 30, 2012. The following table summarizes the areas of costs in this category:
 
   
Power
   
Energy
 
2013
 
Distribution
   
Services
 
Payroll related costs
  $ 434,076     $ 813,189  
Shared based compensation
    13,315       56,853  
Other
    34,086       177,751  
Total
  $ 481,477     $ 1,047,793  
2012
               
Payroll related cost
  $ 637,464     $ 517,139  
Shared based compensation
    18,566       24,383  
 Other
    45,036       98,198  
Total
  $ 701,066     $ 639,720  
                 
Increase (Decrease)
  $ (219,589 )   $ 408,073  
Percent of Sales
               
2013
    8 %     21 %
2012
    12 %     22 %
 
The decrease in the Power Distribution costs is attributable to the Company decision to discontinue the sales operations in our Florida office as it was not a profitable operation.
 
The increase in costs in the Energy Service segment is primarily attributable to the increasing volume of business being driven by our national account program.  The increase in the Energy Service “Other” category was primarily attributable to higher vehicle maintenance costs, recruiting fees and greater use of consumables and small tools.
 
 
30

 
 
General and Administrative Expenses
 
The general and administrative expense category reflects the cost of each subsidiary’s management, accounting, facility and office functions which we can allocate to our segments. General and administrative expenses were $801,611 for the six months ended June 30, 2013, compared to $718,000 for the six months ended June 30, 2012.  The following table itemizes general and administrative expenses for the six months ended June 30, 2013 and 2012:
 
   
Power
   
Energy
 
2013
 
Distribution
   
Services
 
Payroll related costs
  $ 72,231     $ 184,168  
Shared based compensation
    632       632  
Facilities
    56,142       150,827  
Travel
    34,781       77,884  
Other
    17,525       206,789  
Total
  $ 181,311     $ 620,300  
2012
               
Payroll related cost
  $ 51,983       167,277  
Shared based compensation
    18,143       18,143  
Facilities
    106,356       113,614  
Travel
    41,252       29,617  
 Other
    60,843       110,772  
Total
  $ 278,577     $ 439,423  
                 
Increase (Decrease)
  $ (97,266 )   $ 180,877  
 
The increase in payroll related costs in the Power Distribution and the Energy Service is attributable to an increased number of support staff in our Minnesota office, as this office performs all accounting functions for all operating divisions. In addition, the Energy Services segment includes the cost related to the Chief Technical Officer whose primary function is to assure our monitoring system is operating properly.  The low “Other cost” amount in Power Distribution is attributable to a large bad debt recovery totaling $69,300.  The increase in the Energy Service “Travel Cost” is attributable to the additional travel by our CEO, CTO, Accounting Manager, President and Service Manager to have operational meetings with onsite personnel.
 
Research and Development
 
We entered into a contract in 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. In the six months ended June 30, 2013, we incurred $10,499 of additional costs to enhance the program to monitor RICE NESHAP data.
 
 
31

 
 
Corporate Overhead
 
Included in corporate overhead expenses are the salaries and travel expenses of our officers, legal fees, audit fees, investor relations and other costs associated with being a SEC registrant. Corporate overhead for the six months ended June 30, 2013 was $234,428 as compared to $312,936 for the six months ended June 30, 2012. The following table show expenses related to corporate activities:
 
   
2013
   
2012
 
Payroll related activates
  $ 172,030     $ 162,731  
Stock Compensation
    1,263       43,869  
Professional Fees
    12,456       43,441  
Travel
    13,029       16,873  
Other
    25,650       46,022  
Total
  $ 224,428     $ 312,936  
 
The reduction in share based compensation is attributable to the fact that previous stock options have fully vested and expensed in prior years. This represents a 300,000 share stock option with an exercise price of $0.07 for the CFO vesting over four years. The reduction in professional fees is attributable to not using an investor relation firm this year. The increase in payroll related activities is due to returning the CEO salary to the level before pay cuts, partially offset by the CFO reducing his time to three days a week.
 
Depreciation and Amortization
 
The amounts in this category include depreciation on our fixed assets and amortization of our intangibles, represented by our customer lists. The expense for the six months ended June 30, 2013 was $166,127 compared to $175,471 in the six months ended June 30, 2012.  The reduction of expense is attributable to a fully amortized customer list as of the end of 2012 and some fixed assets that have been fully depreciated.
 
Other Expenses
 
The following table below is summarizing the items in this category:
 
   
2013
   
2012
 
Interest expense, net
  $ 365,452     $ 530,518  
Amortization of debt discount
    8,106       95,464  
Fair value of embedded conversion feature
    (2,943 )     (49,769 )
Fair value of warrants
    20,257       (8,942 )
Total
  $ 390,872     $ 567,271  
 
The decrease in interest expense is attributable to lower factoring fees and reduced finance charges from vendors and governmental agencies. The debt discount related to the convertible debt was fully amortized in 2012 and the amount amortized in 2013 relates to deferred financing costs that was fully amortized in the first quarter.
 
 
32

 
 
The embedded conversion feature and the warrants are treated as a liability and are re-measured with each reporting period. The gain in the embedded conversion feature reflect the write-off of the outstanding balance when the embedded conversion feature was exercised,  The warrants reflects a stock price at June 30, 2013 of $0.03 compared to a price of $0.01 at December 31, 2012. As the stock price increased the value of these items which resulted in a loss in the financial statement
 
Liquidity and Capital Resources
 
The Company incurred a net income for the six months ended June 30, 2013 of $1,707. As of June 30, 2013 we have an accumulated deficit $35,016,147.  On June 30, 2013 we were in default on $440,000 of convertible notes.  At June 30, 2013, certain note holders elected to extend their convertible notes until July 1, 2014 in order to help the Company restructure their balance sheet and raise some additional capital. The total notes extended were $2,275,000. Under the extension the note holders received a reduce conversion price from $0.12 to $0.05.  Management has entered into an agreement with Forefront Capital to raise up to $5 million of new capital on a best efforts basis. In addition, the Company will request the debt holders to convert their convertible notes and accrued interest.  While there is no guarantee that these efforts will result in any new capital for the Company, these potential funds would have a significant impact on the Company’s ability to restructure its debt and improve its cash flow. However, there is no guarantee that this plan will be successful. If our plan is not successful our financial conditions would raise substantial doubt as to the ability to continue as a going concern.
 
The Company has had periodic difficulties keeping current with various suppliers during the past few years. Most of our major vendors require us to pay in 30 days, however collection of payment from our customers takes an average of 60 days and therefore we have used our factoring obligation to pay our suppliers in a timely manner. The cost of the factoring fees and interest paid to factor our receivable for the six months ended June 30, 2013 was $170,365. These extra costs have had an adverse impact on our liquidity position.
 
The Company had its first profitable quarter for the three month ended June 30, 2013. This profitability will allow us to generate sufficient cash flow to operate the business and replace our factoring line with a more affordable credit facility which would improve our cash flow by about $250,000 per year.
 
 
33

 
 
Additional Information
 
Non-GAAP Financial Measures
 
To supplement our consolidated financial statements presented on a GAAP basis, we believe disclosing certain non-GAAP measures are useful information to our investors. These non-GAAP measures are not in accordance with, or alternative for, generally accepted accounting principles in the United States. For example, Management uses adjusted EBITDA as measure of operating performance and for internal planning and forecasting. Management believes that such measures help to indicate underlying trends in our business, are important in comparing our current results with prior period results and our useful to investors and financial analysts in assessing our operating performance.
 
The GAAP measure most comparable to adjusted EBITDA is GAAP net income (loss): reconciliation for adjusted EBITDA to GAAP net income (loss). The following is an explanation of non-GAAP, adjusted EBITDA that we utilize, including the adjustments that management exclude as part of the adjusted EBITDA measures for the six months ended June 30, 2013  and 2012, respectively, as well as reasons for excluding individual items.
 
●       
Management defines adjusted EBITDA as net income (loss), excluding depreciation, amortization, stock based compensation, interest, factoring fees, income taxes (benefit) and other income and expenses. Adjusted EBITDA also eliminates items that do not require cash outlays, such as warrants and beneficial conversion features from issuing convertible securities which are treated as debt discounts and amortized to expenses; fair value adjustment for warrants and embedded conversion features, which is dependent on current stock price, volatility, term and interest rate which are factors that are not easily controlled; and amortization expense related to acquisition-related assets, which us based on our estimate of the useful life of tangible and intangible assets.  These estimates could vary from the actual performance of the asset, are based on the value determined on acquisition date and may not be indicative of current or future capital expenditures. Management has also eliminated the effect of contingent consideration that was established in the purchase of Stanza which based on current assumptions this liability will not be realized. We also will eliminate from our net loss the present value of the lease obligation as this is not part of our continuing operations.
   
●       
Adjusted EBITDA may have limitations as an analytical tool. The adjusted EBITDA financial information presented here should be considered in conjunction with, and not as a substitute for or superior to, financial information presented in accordance with GAAP and should not be considered as a measure of our liquidity. Further, adjusted EBITDA as a measure may differ from other companies and therefore should not be used to compare our performance to that of other companies.
 
The reconciliation of adjusted EBITDA to net loss is set forth on the next page:
 
 
34

 
 
Reconciliation of adjusted EBITDA to GAAP Net Income (Loss)
 
For the three and six months ended June 30 2013 and 2012
 
   
Three Months Ended June 30,
 
   
2013
   
2012
 
Net (Income) loss
  $ 281,267     $ (70,137 )
Add back:
               
 Depreciation and amortization
    83,845       86,535  
Stock based compensation
    39,956       61,634  
Stock payment for services
            10,441  
 Interest expense and factoring fees
    191,434       317,186  
 Present value of lease obligation
    -       24,213  
Amortization of debt discount
            33,989  
Fair value adjustment of conversion feature
    (14,072 )     (37,873 )
Fair value adjustment on warrants
    (4,721 )     (11,259 )
Adjusted EBITDA
  $ 577,709     $ 414,729  
                 
   
Six Months Ended June 30,
 
      2013       2012  
Net (Income) loss
  $ 1,707     $ (687,836 )
Add back:
               
 Depreciation and amortization