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TITAN ENERGY WORLDWIDE, INC. - 10-Q - 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 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 September 30, 2013 Compared to the Three Months Ended September 30, 2012 Sales Sales for the three months ended September 30, 2013 were $5,304,078 compared to $5,850.912 for the three months ended September 30, 2012. The following table summarizes our sale by their segments: Power Energy Distribution Services 2013 $ 2,144,434 $ 3,159,644 2012 4,004,960 1,845,952 Increase (decrease) $ (1,860,526 ) $ 1,313,692 Percent Change -46 % 71 % The lower sales in Power Distribution segment were attributable to the Company's 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 third quarter of 2012 were $409,000. In addition, our New York office Power Distribution completed a $1.2 million project in the third quarter of 2012 for a national energy company which contributed significantly to the revenues for that quarter. The increased sales in the Energy Services segment are mainly attributable to the increased sales to national accounts. Sales to national accounts for the three months ended September 30, 2013 totaled $1,437,000 compared to $627,000 in the three months ended September 30, 2012 The sales increase in Energy Services is also partially 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 September 30, 2013, sales for the retrofitting were $371,000. Our traditional service programs, UPS and part sales were increased approximately 11% over the three months ended September 30, 2012. Cost of Sales Cost of sales was $3,649,675 for the three months ended September 30, 2013 compared to $4,626,963 for the three months ended September 30, 2012. Power Energy Distribution Services 2013 $ 1,759,599 $ 1,890,076 2012 3,584,272 1,042,691 Increase (decrease) $ (1,824,673 ) $ 847,385 Percent of Sales 2013 82.1 % 59.8 % 2012 89.5 % 56.5 % The decrease in cost of sales in the Power Distribution lower sales volume as noted above. The high percentage of cost of sales in 2012 was attributable to a large project for New York that had very low margins. The percentage of cost of sales for 2013 is in the accepted 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 and incur expensive material costs for the pollution equipment, with an average cost as a percentage of sales of approximately 70%. These two products accounted for 57% of our Energy Service sales for the three months ended September 30, 2013 compared to 34% for the three months ended September 30, 2012. The percentage cost of sales for our traditional service business for the three months ended September 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 $860,027 for the three months ended September 30, 2013, compared to $772,066 for the three months ended September 30, 2012. The following table summarizes the areas of costs in this category: Power Energy Distribution Services 2013 Payroll related costs $ 194,727 $ 476,015 Shared based compensation 7,142 28,247 Other 16,869 137,027 Total $ 218,738 $ 641,289 2012 Payroll related cost $ 304,076 $ 327,909 Shared based compensation 6,252 12,896 Other 49,888 71,045 Total $ 360,216 $ 411,850 Increase (decrease) $ (141,478 ) $ 229,439 Percent of Sales 2013 10.2 % 20.3 % 2012 9.0 % 22.3 % 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 an inventory write off of $46,000, higher vehicle maintenance costs and greater use of consumables and small tools due to higher number of jobs. 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 $430,493 for the three months ended September 30, 2013, compared to $384,519 for the three months ended September 30, 2012. The following table breaks out general and administrative expenses by segment for the three months ended September 30, 2013 and 2012: Power Energy Distribution Services 2013 Payroll related costs $ 30,649 $ 66,848 Shared based compensation 1,893 1,893 Facilities 29,373 90,786 Other 61,310 92,950 Total $ 123,225 $ 252,477 2012 Payroll related cost $ 31,326 $ 62,150 Shared based compensation 4,753 11,681 Facilities 62,245 70,637 Other 59,613 82,114 Total $ 157,937 $ 226,582 Increase $ (34,712 ) $ 25,895 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 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 increase in the Energy Service facilities costs is attributable to the Florida office rent which was allocated 50/50 between the two segments in 2012. However, this office is now service only all costs on allocated to the Energy Service segment. Research and Development We entered into a contract in September 2010 with a third party to design and develop a remote monitoring system dedicated to onsite power generation equipment. We believe that there are few alternatives available in the market place that support the management of onsite power generators in the manner that is required by peak shaving, demand response and energy efficiency programs, and so to better serve these marketplaces, Titan needed to develop its own monitoring program. The Company has completed this software package and has begun to market it to customers. In the three months ended September 30, 2013, we incurred $1,548 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 September 30, 2013 was $89,879 as compared to $117,799 for the three months ended September 30, 2012. The following table show expenses related to corporate activities: 2013 2012 Payroll related activates $ 73,103 $ 71,082 Stock Compensation 632 22,319 Professional Fees 225 10,941 Travel 7,024 570 Other 8,895 12,887 Total $ 89,879 $ 117,799 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 advisory board this year. The increase in travel was due to the Company working with firms to raise additional capital. Depreciation and Amortization The amounts in this category include depreciation on our fixed assets and amortization of our intangibles, represented by our customer lists. The expense for the three months ended September 30, 2013 was $83,879 compared to $86,660 in the three months ended September 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 $ 124,180 $ 119,909 Factoring Fees 34,579 91,772 (Gain) Loss related to lease obligation (272,227 ) 110,639 Amortization of debt discount - 19,457 Amortization of deferred financing costs - 8,106 Change in fair value of embedded conversion feature - (19,623 ) Fair value of warrants (584 ) (111 ) Total $ (114,052 ) $ 330,149 The decrease in factoring fees is attributable to lower receivables that were factored and a change in the factoring agreement. The debt discount and financing costs 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 gain related to the lease obligation is attributable of Settlement Agreement reached with Paragon Operating Associates, L.P. The company in previous years recoded the full judgment of $302,227.15. Under this agreement the Company will pay a sum of $30,000 in 10 equal monthly installments, Additional payments may be due if the Stanza contract with a customer is extended beyond its expiration date of 12/2013. The Company does not intend to extend the contract. 28 --------------------------------------------------------------------------------RESULTS OF OPERATIONS Nine Months Ended September 30, 2013 Compared to the Nine Months Ended September 30, 2012 Sales Sales for the nine months ended September 30, 2013 were $16,392,442 compared to $14,463,725 for the nine months ended September 30, 2012. The following table summarizes our sales by their segments: Power Energy Distribution Services 2013 $ 8,148,002 $ 8,244,440 2012 9,782,061 4,681,664 Increase (Decrease) $ (1,634,059 ) $ 3,562,776 Percent change -17 % 76 % The lower sales in the Power Distribution segment was attributable to a large project sold in 2012 through our New York office for $1.2 million, and the Company's 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 $1.1 million. The actual sales growth without the large project for New York and Florida Power Distribution sale would be 8.5% for the first nine months of 2013. The increased sales in the Energy Services segment are 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 nine months ended September 30, 2013, sales for the retrofitting were $1,578,000. Sales to national accounts for the nine months ended September 30, 2013 totaled $2,973,000 compared to $1,424,000 in the nine months ended September30, 2012. Sales for our traditional service programs, UPS and part sales increased approximately 13% over the nine months ended September30, 2012. Cost of Sales Cost of sales was $11,619,230 for the nine months ended September 30, 2013 compared to $11,818,394 for the nine months ended September 30, 2012. Power Energy Distribution Services 2013 $ 6,812,992 $ 4,806,238 2012 8,432,784 2,385,610 Increase (Decrease) $ (1,619,792 ) $ 2,420,628 Percent of Sales 2013 83.6 % 58.3 % 2012 86.2 % 51.0 % The decrease in cost of sales in the Power Distribution is due to lower volume as noted above and the high cost of sale in 2012 of the New York large project. The percentage of sales has historically been in the range of 82 to 85 percent of sales which is consistent with the 2013 percentage shown in the table above. 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 70%. These two products comprised 55% of our Energy Service sales for the nine months ended September 30, 2013 compared to 30% for the nine months ended September 30, 2012. The percentage cost of sales for our traditional service business for the nine months ended September 30, 2013 was 42%. 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 $2,500,445 for the nine months ended September 30, 2013 compared to $2,103,108 for the nine months ended September 30, 2012. The following table summarizes the areas of costs in this category: Power Energy Distribution Services 2013 Payroll related costs $ 628,802 $ 1,392,935 Shared based compensation 21,605 85,100 Other 50,957 321,046 Total $ 701,364 $ 1,799,081 2012 Payroll related cost $ 896,378 $ 894,734 Shared based compensation 18,893 38,315 Other 61,892 192,896 Total $ 977,163 $ 1,125,945 Increase (Decrease) $ (275,799 ) $ 673,136 Percent of Sales 2013 9 % 22 % 2012 10 % 24 % The decrease in the Power Distribution costs is attributable to the Company's decision to discontinue the equipment sales operations in our Florida office as it was not profitable. 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 and our work on RICE/NESHAP product. The increase in the Energy Service "Other" category was primarily attributable to higher vehicle maintenance costs, recruiting fees, greater use of consumables and small tools and inventory adjustments. 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 $1,122,094 for the nine months ended September 30, 2013, compared to $1,099,696 for the nine months ended September 30, 2012. The following table itemizes general and administrative expenses for the nine months ended September 30, 2013 and 2012: Power Energy Distribution Services 2013 Payroll related costs $ 102,880 $ 192,614 Shared based compensation 5,708 5,708 Facilities 85,515 241,613 Travel 46,170 81,504 Other 64,263 296,119 Total $ 304,536 $ 817,558 2012 Payroll related cost $ 82,299 $ 203,973 Shared based compensation 19,378 35,978 Facilities 169,311 184,809 Travel 49,729 46,707 Other 130,292 177,220 Total $ 451,009 $ 648,687 Increase (Decrease) $ (146,473 ) $ 168,871 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 accounting functions for all operating divisions. The decrease in "Other cost" amount in Power Distribution is attributable to a 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 September 2010 with a third party to design and develop a remote monitoring system dedicated to onsite power generation equipment. We believe that there are few alternatives available in the market place that support the management of onsite power generators in the manner that is required by peak shaving, demand response and energy efficiency programs, and so to better serve these marketplaces, Titan needed to develop its own monitoring program. The Company has completed this software package and has begun to market it to customers. In the nine months ended September 30, 2013, we incurred $12,047 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 nine months ended September 30, 2013 was $313,157 as compared to $433,993 for the nine months ended September 30, 2012. The following table shows expenses related to corporate activities: 2013 2012 Payroll related activates $ 245,764 $ 240,412 Stock Compensation 1,895 69,446 Professional Fees 11,532 54,382 Travel 12,028 17,443 Other 41,938 52,310 Total $ 313,157 $ 433,993 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 nine months ended September 30, 2013 was $250,006 compared to $262,630 in the nine months ended September 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 summarizes the items in these categories for the nine months ended September 30: 2013 2012 Interest expense, net $ 367,418 $ 433,104 Factoring Fees 156,804 260,456 (Gain) Loss related to lease obligation (272,227 ) 162,278 Amortization of debt discount - 105,625 Amortization of deferred financing costs 8,106 17,401 Change in fair value of embedded conversion feature (2,943 ) (69,392 ) Fair value of warrants 19,674 (9,054 ) Total $ 276,832 $ 900,418 The decrease in interest expense is attributable to reduced finance charges from vendors and governmental agencies. The lower factoring fees are attributable to the change in our factoring agreement and lower level of factoring receivables. 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 of 2013. The gain related to the lease obligation is attributable of Settlement Agreement reached with Paragon Operating Associates, L.P. The company in previous years recoded the full judgment of $302,227.15. Under this agreement the Company will pay a sum of $30,000 in 10 equal monthly installments, Additional payments may be due if the Stanza extends the current contract which is set to expire at the end of this year. The Company does not plan to extend the contract. 32 --------------------------------------------------------------------------------Liquidity and Capital Resources The Company recorded net income for the nine months ended September 30, 2013 of $305,159. As of September 30, 2013 we have an accumulated deficit $34,711,632. On September 30, 2013 we were in default on $240,000 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 $2,475,000. Under the extension the note holders received a reduce conversion price from $0.12 to $0.05. With the improving financial results and settling some lawsuits, the Company believes it will be able to raise additional capital. While there is no guarantee that these efforts will result in any new capital for the Company, these potential funds would have a significant impact on the Company financial position and its cash flow. The Company has had periodic difficulties keeping current with various suppliers during the past few years. Most of our major vendors require us to pay in 30 days, however collection of payment from our customers takes an average of 60 days and therefore we have used our factoring obligation to pay our suppliers in a timely manner. The cost of the factoring fees and interest paid to factor our receivable for the nine months ended September 30, 2013 was $228,156. These extra costs have had an adverse impact on our liquidity position. The Company has given notice to our factoring company that we plan to terminate this agreement and replace it with a lower cost credit agreement. The Company was profitable for the second and third quarter and for the nine months ended September 30, 2013. This profitability will allow us to generate sufficient cash flow to operate the business. The Company believes it will have its first profitable year in its history and will be able to utilize some of their tax loss carryforwards to minimize tax expenses. 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 excludes as part of the adjusted EBITDA measures for the three and nine months ended September 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 nine months ended September 30 2013 and 2012 Three Months Ended September 30, 2013 2012 Net (Income) loss $ 303,451 $ (470,649 ) Add back: Depreciation and amortization 83,879 86,660 Stock based compensation 39,806 69,342 Interest expense and factoring fees 158,759 211,682 (Gain) or loss on lease obligation (272,227 ) 110,639 Amortization of debt discount - 27,562 Fair value adjustment of conversion feature - (19,623 ) Fair value adjustment on warrants (584 ) (111 ) Adjusted EBITDA $ 313,085 $ 15,502 Nine Months Ended September 30, 2013 2012 Net (Income) loss $ 305,159 $ (1,156,970 ) Add back: Depreciation and amortization 250,006 262,630 Stock based compensation and payments 138,457 217,386 Interest expense and factoring fees 524,222 693,560 (Gain) or loss on lease obligation (272,227 ) 162,278 Amortization of debt discount 8,106 123,026 Fair value adjustment of conversion feature (2,943 ) (69,392 ) Fair value adjustment on warrants 19,674 (9,054 ) Adjusted EBITDA $ 970,454 $ 223,464 Off-Balance Sheet Arrangements None. 35-------------------------------------------------------------------------------- |