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TITAN ENERGY WORLDWIDE, INC. - 10-Q/A - Management's Discussion and Analysis or Plan of Operation.
[August 07, 2013]

TITAN ENERGY WORLDWIDE, INC. - 10-Q/A - Management's Discussion and Analysis or Plan of Operation.

(Edgar Glimpses Via Acquire Media NewsEdge) 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.

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 166,127 530,518 Stock based compensation 80,210 123,103 Stock payment for services 15,441 22,441 Interest expense and factoring fees 365,452 315,196 Present value of lease obligation - 48,639 Amortization of debt discount 8,106 95,464 Fair value adjustment of conversion feature (2,942 ) (49,769 ) Fair value adjustment on warrants 20,256 (8,942 ) Adjusted EBITDA $ 654,357 $ 388,814 Off-Balance Sheet Arrangements None.

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