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TITAN ENERGY WORLDWIDE, INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations.(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. 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, and New Jersey. 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 expand into 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 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 three year contract related to this business. In 2010, Titan Energy Development, Inc. ("TEDI"), a wholly owned subsidiary of Titan Energy Worldwide ("TEWI") 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 is now inactive as it has completed any contracts it had with customers. RESULTS OF OPERATIONS Year Ended December 31, 2013 Compared to the Year Ended December 31, 2012 Sales Sales for the year ended December 31, 2013 were $21,898,288 compared to $19,151,874 for the year ended December 31, 2012. The following table summarizes our sale by their segments: Power Energy Distribution Services 2013 $ 10,822,283 $ 11,076,005 2012 11,598,000 7,553,874 (Decrease) Increase $ (775,717 ) $ 3,522,131 Percent (Decrease) Increase -7 % 47 % 17-------------------------------------------------------------------------------- The decrease in sales in the Power Distribution segment is the result of our failure to close some of the larger projects that usually contribute to our overall performance and harsh winter weather in late 2013 which delayed shipments into 2014. The increased sales in the Energy Service segment are attributable to improvements in our national accounts program, RICE NESHAP and UPS programs. Sales to national accounts for the year ended December 31, 2013 totaled $3,764,592 compared to $2,396,715 in the year ended December 31, 2012. RICE NESHAP revenues were $2,249,794 in 2013 compared to $0 in 2012. Sales of UPS equipment and services were $405,522 in 2013 compared to $92,366 in 2012. Cost of Sales Cost of sales was $15,615,470 for the year ended December 31, 2013 compared to $13,920,571 for the year ended December 31, 2012. Power Energy Distribution Services 2013 $ 9,122,873 $ 6,492,597 2012 9,781,864 4,138,707 (Decrease) Increase $ (658,991 ) $ 2,353,890 Percent of Sales 2013 84 % 59 % 2012 84 % 55 % The decreased cost of sales in the Power Distribution segment is due to lower sales. The higher costs of sales in the Energy Services segment are attributable to higher sales volume. The higher percent cost of sales in the Energy Services segment is attributable to the increased sales in the national accounts and RICE NESHAP programs, which have lower margins than our traditional service business. For the year ended December 31, 2013, sales to national accounts represented 17% of our total sales compared to 16% for the year ended December 31, 2012, while RICE NESHAP, which had no revenues in 2012, accounted for 10% of the Company's overall sales in 2013. The percentage cost of sales related to national accounts for the year ended December 31, 2013 was 75%. The percentage cost of sales related to RICE NESHAP for the year ended December 31, 2013 was 67%. The percentage cost of sales for our traditional service business for the year ended 2013 was 30%. 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 $3,323,827 for the year ended December 31, 2013, compared to $3,039,816 for the year ended December 31, 2012. The following table summarizes the areas of costs in this category: Power Energy 2013 Distribution Services Payroll related costs $ 810,854 $ 1,840,681 Shared based compensation 25,215 105,638 Other 90,138 451,301 Total $ 926,207 $ 2,397,620 2012 Payroll related cost $ 1,209,579 $ 1,273,007 Shared based compensation 25,040 51,209 Other 84,761 390,968 Total 1,324,631 $ 1,715,184 (Decrease) Increase $ (398,424 ) 682,436 Percent of Sales 2013 9 % 22 % 2012 11 % 23 % 18-------------------------------------------------------------------------------- The increase in costs is primarily attributable to an increase in service admin personnel and the inclusion of our Chief Technology Officer whose salary was previously reported under a different division of the Company. 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 $1,663,153 for the year ended December 31, 2013, compared to $1,577,669 for the year ended December 31, 2012. Power Energy 2013 Distribution Services Payroll related costs $ 185,208 $ 305,237 Shared based compensation 6,540 6,540 Facilities 116,918 312,278 Travel and Meals 73,821 155,804 Bad debts (69,300 ) 11,759 Other 241,899 316,448 Total $ 555,086 $ 1,108,067 2012 Payroll related cost $ 106,647 280,699 Shared based compensation 25,225 48,847 Facilities 213,150 253,409 Travel and Meals 79,929 39,235 Bad debts 221,165 71,851 Other 230,599 228,088 Total $ 876,715 $ 922,129 (Decrease) Increase $ (321,629 ) $ 185,938 The lower costs in the Power Distribution segment are attributable to bad debt recovery which improved in 2013. The increase in Energy Service payroll related costs was due to additional personnel hired to manage the RICE NESHAP and national accounts. Increase in travel expenses was due to travel of Minneapolis based personnel to the Miami and New Jersey offices in order to support the operations in those territories. 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 2013 expense for this research and development for this project was $17,902 for a total cost of $564,173 incurred since 2010. The Company has completed this software platform and has begun to market it to customers. Future research and development expenses are anticipated in order to maintain and make improvements in the software platform. 19 -------------------------------------------------------------------------------- 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 year ended December 31, 2013 was $409,893 as compared to $517,865 for the year ended December 31, 2012. The following table show the costs related to corporate activities: 2013 2012 Payroll related activates $ 329,410 $ 286,604 Stock Compensation 2,526 72,289 Professional Fees (16,708 ) 24,101 Shared based payments for professional services 15,441 43,324 Travel 48,399 20,393 Other 30,825 71,194 Total $ 409,893 $ 517,905 We reduced our corporate overhead significantly in 2013 as we further reduced costs related to our audits and quarterly filings. The increase in payroll was due to an increase in salary for the CEO who received $192,500 in 2013 compared to $130,000 in 2012. Our CFO decreased his time and his annual salary decreased from $105,000 to $81,000. Lower costs in stock compensation are due to the CEO not receiving any stock options in 2013. The negative professional fees were due to a reduction in legal and investor relations stock based compensation for the period. 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 year ended December 31, 2013 was $339,090 compared to $352,399 in the year ended December 31, 2012.The Company did not have significant purchases of new fixed assets as we were operating to conserve cash. Other Expenses The following table below is summarizing the items in this category: 2013 2012 Interest expense, net $ 484,520 $ 630,094 Factoring fees 196,523 326,203 (Settlement) Loss related to lease obligation (272,227 ) 162,278 Amortization of debt discount - 105,625 Amortization of deferred financing costs 8,106 25,506 Change in the fair value of embedded conversion feature (2,943 ) (74,447 ) Change in the fair value of warrants 13,579 (11,988 ) Total $ 427,558 $ 1,163,271 The decrease in interest expense is attributable to having paid off our sales tax obligations which were accruing significant interest. Factoring fees decreased because we made less use of our factoring arrangements as we were able to manage more of our receivables through our internal cash flow. The gain in the lease obligation was the adjustment of the amount owed the creditor through our settlement agreement. We reached a settlement for approximately 10 cents on the dollar and are committed to making 10 monthly payments of $3,000. In 2013 we made $9,000 in payments. The deferred financing costs are related to the extension and issuance of additional warrants to note holders in return for extending their debt to July 1, 2014. Our convertible debt has warrants and beneficial conversion features which are accounted for in accordance with ASC 470. We are required to determine the fair value of the warrants and the beneficial conversion feature and treat that amount as a debt discount to be amortized over the life of the debt. At December 31, 2013, the full amount of debt discounts has been expensed in 2013.The embedded conversion feature and the warrants are treated as a liability and are re-measured with each reporting period. 20 -------------------------------------------------------------------------------- Liquidity and Capital Resources The Company incurred a net profit for the year ended December 31, 2013 of $108,215. As of December 31, 2013 we have an accumulated deficit $34,908,576. In addition, we were in default as of December 31, 2013 on notes payable of $250,000 plus interest. On July 1, 2014 a total of $1,875,000 of convertible notes will be in default unless new agreements are reached with these noteholders. We have been able to use our factoring lines to provide additional cash flow to pay vendors and employees. These conditions raise substantial doubt as to the Company's ability to continue as a going concern. During the year ended December 31, 2013, cash used by operations was $19,876. Cash provided by financing activities was $71,776. The Company has had periodic difficulties keeping current with various suppliers during 2013. 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 advance us cash in order to pay our suppliers. During 2013, we incurred vendor and taxing authorities financing charges of $13,521. The cost of the factoring fees and interest paid to factor our receivable totaled $196,523. These extra costs have had an adverse impact on our liquidity position. To help address its cash flow issues, the Company has instituted a policy that each operating subsidiary covers its cash requirement. This has resulted in certain operations accruing payroll and deferring payments on non-critical expenses. The service operations are slightly positive but we believe that it can support the cash flow needed to run the business. The Company was profitable in 2013 and we believe that it will achieve greater profitability in 2014. This profitability will allow us to generate cash flow to operate the business and replace our factoring line with a more affordable credit facility which would improve our cash flow. 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 year ended December 31, 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. 21-------------------------------------------------------------------------------- The reconciliation of adjusted EBITDA to net loss is set forth below: Years Ended December 31, 2013 2012 Net profit (loss) $ 108,215 $ (1,652,057 ) Add back: Depreciation and amortization 339,090 352,399 Stock based compensation and payments 164,901 263,933 Interest and factoring fees 680,524 956,297 Amortization of debt discount 8,106 131,131 Loss related to lease obligation (272,227 ) 162,278 Fair value adjustments 10,636 (86,435 ) Adjusted EBITDA $ 1,039,245 $ 127,546 Off-Balance Sheet Arrangements None. Critical accounting policies and use of estimates The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts,, inventory obsolesces, purchase price allocations related to business combinations, expected future cash flows including growth rates, discount rates, terminal values and other assumptions and estimates used to evaluate the recoverability of long-lived assets and goodwill, estimated fair values of intangible assets and goodwill, amortization methods and periods, certain accrued expenses and other related charges, stock-based compensation, contingent liabilities, tax reserves and recoverability of our net deferred tax assets and related valuation allowance. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates if past experience or other assumptions do not turn out to be substantially accurate. Any differences may have a material impact on our financial condition and results of operations. We believe that of our significant accounting policies, which are described in Note 1 to our consolidated financial statements contained in this Annual Report on Form 10-K, The following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations. 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. 22 -------------------------------------------------------------------------------- Intangible Assets The Company evaluates intangible assets and other long-lived assets for impairment at least on an annual basis and 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. If the net book value of the asset exceeds the related undiscounted cash flows, the asset is considered impaired, and a second test is performed to measure the amount of impairment loss. 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 entity 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. 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 nor performed a detail evaluation of goodwill this year. There has been no adjustment to our goodwill for years ended December 31, 2013 and 2012. The carrying value of goodwill is summarized in the financial statement Note 1. Income Taxes The Company accounts for income taxes under the asset and liability whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements 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. As of December 31, 2013 and December 31, 2012 the Company had no unrecognized tax benefits due to uncertain tax positions. 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 December 31, 2013 there were no amounts that had been accrued in respect to uncertain tax positions. The Company's federal tax reporting is not currently under examination by the Internal Revenue Service ("IRS"); and the Company's state income or franchise tax is not currently under examination by the state authorities. However fiscal years 2010 and later remain subject to examination by the IRS and respective states. Loss per Share The basic income (loss) per common share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding. Diluted income per common share is computed similar to basic income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The loss for common shareholders is increased for any preferred dividends. As of December 31, 2013, the Company had potentially dilutive shares 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. See Note 1for the details of impact of potentially dilutive securities. 23 -------------------------------------------------------------------------------- Share-Based Compensation The company uses the fair value method of accounting for share-based payments. Accordingly, the Company's recognize 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. 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 ASU 2013-11 "Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss or a Tax Credit Carryforward Exits," This amendment is effective for fiscal years beginning after December 15, 2013. The Company is evaluating the effects of this update, however it does not believe it will have a material impact on our financial position or results of operations. In July 2012, the FASB issued ASU 2012-02, "Intangible-Goodwill and Other (Topic 350) Testing Indefinite-Lived Intangibles Assets for Impairment" ASU 2012 -02 allows an entity to assessed qualitatively whether an indefinite-lived intangible assets is impaired prior to performing a qualitative analysis. This ASU 2012-02 is effective for fiscal year beginning after September 15, 2012. We have adopted of ASU 2012-02 it had no material impact on our financial position and results of operations. There are several other new accounting pronouncements issued by the FASB. Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe any of these accounting pronouncements has had or will have a material impact on the Company's consolidated financial statements. 24 -------------------------------------------------------------------------------- |