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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 fact, we believe we are one of the first companies to combine expertise in power generation asset management with real time information processing to create a more reliable and effective Smart Grid approach to onsite power management. In 2006, we acquired Stellar Energy, a Minneapolis-based provider of power generation equipment and service. Stellar Energy is now called Titan Energy Systems ('TES") and has expanded its number of sales and service offices to include Nebraska, Iowa, North and South Dakota, New York, New Jersey and Connecticut. TES provides our company and its satellite offices with accounting and administrative support. In 2009, we acquired the Industrial and Service Division of RB Grove, a 52-year old power generation provider located in Miami, Florida. This company is now called Grove Power Inc. ("GPI") and it is responsible for our long term goal to expansion throughout the Southeastern United States. In 2009, we acquired a power generation business in New Jersey that provide us with purchase orders, backlog and extensive customer and marketing relationships in New York, Connecticut and New Jersey. This business has been merged into TES. In 2010, we acquired Sustainable Solutions, Inc. ("SSI"), which is engaged in providing energy audits, energy consulting and energy management services in the Midwest region. In 2010, Titan Energy Development, Inc. ("TEDI") purchased certain assets and assumed certain liabilities of Stanza Systems, which provide us with a software development company experienced in smart grid and utility operations. The company operates this business as Stanza Technologies ("Stanza")' Stanza has developed network communications software that we plan to utilize in our generator service business. 27 -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Three Months Ended September 30, 2012 Compared to the Three Months Ended September 30 2011 Sales Sales for the three months ended September 30, 2012 were $5,850,960 compared to $3,659,862 for the three months ended September 30, 2011. The following table summarizes sales by business segment: Power Energy Distribution Services 2012 $ 4,004,960 $ 1,845,952 2011 2,344,206 1,315,656 Increase $ 1,660,754 $ 530,296 Percent Increase 71 % 40 % The increased sales in the Power Distribution segment is primarily attributable to a $1.2 million project for a national energy company. Without this sale, the Power Distribution sales would have increased by approximately $450,000 over the sales for the three months ended September30, 2011. This increase was attributable to the completion of jobs from the relatively higher backlog in our New York office. Overall our backlog for Power Distribution at October 31, 2012 was $6.1 million compared to $4.7 million at the same period as last year. In the third quarter we discontinued Grove's Power Distribution department as this was not a profitable portion of our business. The backlog in 2011 included $1.0 million of Grove equipment orders. The increase in our Energy Services segment sales is attributable to increased sales in our national account program which was $450,000 higher than the third quarter of 2011. In addition, service sales in New York were at their highest quarterly level. These sales were offset due to lower service sales in the Florida operations. Cost of Sales Cost of sales was $4,626,963 for the three months ended September 30, 2012 compared to $2,573,872 for the three months ended September 30, 2011: Power Energy Distribution Services 2012 $ 3,584,272 $ 1,042,691 2011 $ 1,934,771 $ 639,101 Increase $ 1,649,501 $ 403,590 Percent of Sales 972012 89.5 % 56.5 % 2011 82.5 % 48.6 % The increase in cost of sales in the Power Distribution segment is attributable to the higher sales volume. The reason for the increase in the percent of sales is attributable to a large low margin project for New York office. The cost of sales for this job was 96%. The reason we took this low margin job was that we hope this job would allow us to sell additional equipment at higher margins and also give us the opportunity to provide monitoring and service contracts with a prominent national energy company that has more than 200 locations. Without this sale the Power Distribution percent of sales would have been 86.4%. The Midwest region percentage cost of sales has historically been in the range of 82 to 86 percent. 28 -------------------------------------------------------------------------------- The higher percent cost of sales in the Energy Services segment is attributable to the increases sales to national accounts, which has lower margin than our traditional service business. In the third quarter of 2012 sales to national accounts represented 34% of our total sales compared to 15% in the third quarter of 2011. The cost of sales related to national account for the three months ended September 30, 2012 was 68.9%. Selling and Service Expenses Sales and services expenses include all sales and service personnel, benefits related to these personnel and other costs in support of these functions. The Selling and Service expenses were $772,066 for the three months ended September 30, 2012, compared to $639,051 for the three months ended September 30, 2011. The following table summarizes the area of costs in this category: Power Energy 2012 Distribution Services Payroll related costs $ 304,076 $ 327,909 Shared based compensation 6,252 12,896 Other 49,888 71,045 Total $ 360,216 $ 411,850 2011 Payroll related cost $ 253,448 $ 276,607 Shared based compensation 10,098 13,845 Other 18,042 67,011 Total 588 $ 357,463 Increase $ 78,628 $ 54,387 Percent of Sales 2012 9 % 22 % 2011 12 % 27 % The higher costs in Power Distribution payroll related costs are attributable to the accrual of severance pay for terminated employees at Grove and New York offices. The higher costs in the Product Distribution Other category is partially attributable to an increase in our inventory reserve for equipment that might not be salable as result of our decision to discontinue equipment sales in Florida. The higher costs in the Energy Service payroll related costs category are primarily due to the addition of support personnel to handle the rapid growth in sales and higher commission due to the higher sales volume. 29 -------------------------------------------------------------------------------- General and Administrative Expenses The general and administrative expense category reflects the cost of each subsidiary's management, accounting, facilities and office functions which we allocate to our segments. General and administrative expenses were $384,519 for the three months ended September 30, 2012, compared to $430,747 for the three months ended September 30, 2011. The following table summarizes the areas of costs in this category: Power Energy 2012 Distribution Services Payroll related costs $ 30,326 $ 62,150 Shared based compensation 5,753 11,681 Facilities 62,245 70,637 Other 59,613 82,114 Total $ 157,937 $ 226,582 2011 Payroll related cost $ 19,543 $ 110,205 Shared based compensation 2,806 16,934 Facilities 61,393 83,653 Other 57,351 78,862 Total $ 141,093 $ 289,654 Increase (Decrease) $ 16,844 $ (63,072 ) The major cause for the increase in the Power Distribution Segment Costs is the addition of accounting personnel. The lower cost in the Energy Service segment is attributable to reduction in administration costs for Stanza/ Stanza administration costs of approximately $44,000 for the three months ended September 30, 2012 compared to $151,000 for the period ended September 30, 2011. This reduction was partially offset by higher travel and the addition of administration personnel to support the growth in national accounts. 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, 2012 was $117,799 as compared to $302,248 for the three months ended September 30, 2011. The following table shows the costs related to corporate activities: 2012 2011 Payroll related activates $ 71,082 $ 181,362 Stock Compensation 22,319 24,636 Professional Fees 500 63,299 Shared based payments for professional services 10,441 - Travel 570 12,521 Other 12,887 20,430 Total $ 117,799 $ 302,248 30-------------------------------------------------------------------------------- Our payroll is lower due to right sizing the number of executive officers. Currently there are two executive officers, the CEO and the CFO. In 2011 we had two additional executive officers, a President and Vice President of Business Development. These latter positions have been eliminated. The payroll and related activates in 2011 include the severance pay accrual for the former Chief Operating Officer of $42,000.The lower professional fees in the three months ended September 30, 2012 was due to our decision not to have audited financial statements for the year ended December 31, 2011 and not performing an audited review on the quarterly reports in 2012. The decrease in business travel in the three months ended September 30, 2012 is attributable to reducing executive travel by moving our corporate office to Minnesota in 2012. In 2012, the Company issued stock to members of our Advisory Board, which will be recognized over their term of service. This cost is non-cash charge and is based on the actual stock price at the time of payment. Depreciation and Amortization The amounts in this category include depreciation on our fixed assets and amortization of our intangibles, represented by our customer lists. The expense for the three months ended September 30, 2012 was $86,660compared to $89,256 in the three months ended September 30, 2011. We have limited our capital expenditures and sold certain fixed assets resulting in a small decrease in depreciation expense. Other Expenses The following table below summarizes the items in this category for the three months ended September 30: 2012 2011 Interest expense, net $ 119,909 $ 111,393 Factoring Fees 91,773 70,943 Loss on modification of debt - 253,181 Loss related to lease obligation 110,639 - Amortization of debt discount 19,457 195,118 Amortization of deferred financing costs 8,105 29,637 Change in fair value of embedded conversion feature (19,623 ) - Fair value of warrants (111 ) (21,557 ) Total $ 330,149 $ 638,715 The higher interest expense is attributable to debt issued in 2012 and higher average balance on the Company's factoring obligation. The company has reclassified the factoring fees from general and administrative to other expense, as we believe that the factor fee is similar to interest expense. The factoring fees are higher in the third quarter of 2012 because we had greater collections than in the third quarter of 2011. We pay our factoring fees upon collection of the receivable. The average balance of the factoring obligation was approximately $1,350,000. Combining the interest expense and the factoring fees for the quarter, the effective interest rate is 35%. The loss related to lease obligation is the amount we accrued for the full balance of the judgment received by the Landlord's lawsuit against the Company to collect unpaid and future lease payments. The total lease obligation of $302,277 has been accrued as a long -term obligation. The Company will seek a long range payment plan for this obligation. Our convertible debt has warrants and beneficial conversion features which are accounted for in accordance with ASC 470, whereas we must determine the fair value of the warrants and the beneficial conversion feature and treat that amount as a debt discount to be amortized over the life of the debt. At September 30, 2012, the full amount of debt discounts has been expensed in 2012. The embedded conversion feature and the warrants are treated as a liability and are re-measured with each reporting period. The gain in the embedded conversion feature reflects a stock price at September 30, 2012 of $0.005 compared to a price of $0.03 at March 31, 2012. In 2011, we recorded a loss on the modification of convertible debt. The transaction extended the maturity, reduced the warrant exercise price and the beneficial conversion options. In accordance with ASC 815 carry value of the debt must be consistent with the risk. When the amounts were determined the additional interest rate of the carry value of the debt was 59%. We believe that the debt rate should be 20% resulting in a loss of $253,181. 31 -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Nine Months Ended September 30, 2012 Compared to the Nine Months Ended September 30 2011 Sales Sales for the nine months ended September 30, 2012 were $14,463,725 compared to $10,677,497 for the nine months ended September 30, 2011. The following table summarizes our sales by their segments: Power Energy Distribution Services 2012 $ 9,782,061 $ 4,681,664 2011 7,076,401 3,601,096 Increase $ 2,705,660 $ 1,080,568 Percent Increase 38 % 30 % The increased sales in the Power Distribution and the Energy Services segments is primarily attributable to the large project as explained above under the three months ended September. We also had an increase of 53% in Power Distribution sales in the second quarter attributable to record shipments out of our Midwest operations. The increased sales in the Energy Service segment are attributable to the improvements in our national account program. Sales to national accounts for the nine months ended September 30, 2012 totaled 1.4 million compared to 304,000 in the nine months ended September 30, 2011. Cost of Sales Cost of sales was $10,818,394 for the nine months ended September 30, 2012 compared to $7,703,277 for the nine months ended September 30, 2011: Power Energy Distribution Services 2012 $ 8,432,784 $ 2,385,610 2011 5,824,345 1,878,932 Increase $ 2,608,439 $ 506,678 Percent of Sales 2012 86.2 % 51.0 % 2011 82.3 % 52.2 % The increase in cost of sales in the Power Distribution and the Energy Services segments is attributable to higher sales volume. The high cost of sales for the $1.2 million project from the New York project increased the Power distribution cost of sales percentage by 1.5% The Midwest region percentage of sales has historically been in the range of 82 to 86 percent of sales. The Energy Service segment improvement in the percentage of sales is attributable to lower costs due to right sizing the operations at Groves and Stanza. Also, the traditional service program in the Midwest has improved slightly to offset the lower margins in the national account program. 32 -------------------------------------------------------------------------------- Selling and Service Expenses Sales and Services expenses include all sales and service personnel, benefits related to these personnel and other costs in support of these functions. Selling and Service expenses were $2,103,108 for the nine months ended September 30, 2012, compared to $1,886,236 for the nine months ended September 30, 2011. The following table summarizes the area of costs in this category: Power Energy 2012 Distribution Services Payroll related costs $ 896,378 $ 894,734 Shared based compensation 18,893 38,315 Other 61,892 192,896 Total $ 977,163 $ 1,125,945 2011 Payroll related cost $ 813,073 $ 752,305 Shared based compensation 31,048 42,536 Other 65,102 181,571 Total 909,223 $ 976,412 Increase $ 67,940 149,533 Percent of Sales 2012 10 % 24 % 2011 13 % 27 % The higher costs in Power Distribution payroll related costs are attributable to higher sales commission and the accrual of severance pay for terminated employees. The higher costs in the Energy Services payroll related costs was primarily due the addition of support personnel to handle the rapid growth in sales and higher commissions due to the higher sales volume. General and Administrative Expenses The general and administrative expense category reflects the cost of each subsidiary's management, accounting, facilities and office functions which we can allocate to our segments. General and administrative expenses were $1,099,696 for the nine months ended September 30, 2012, compared to $1,257,619 for the nine months ended September 30, 2011. The following table summarizes the areas of costs in this category: Power Energy 2012 Distribution Services Payroll related costs $ 82,299 $ 209,973 Shared based compensation 19,373 35,978 Facilities 169,301 184,809 Other 180,036 217,927 Total $ 451,009 $ 648,687 2011 Payroll related cost $ 66,010 356,657 Shared based compensation 8,405 22,003 Facilities 176,238 239,219 Other 162,507 226,581 Total $ 413,160 $ 844,460 Increase (Decrease) $ 37,849 $ (195,773 ) 33-------------------------------------------------------------------------------- The major cause for the increase in the Power Distribution Segment Costs is attributable to additional personnel in Midwest and New York offices. The lower costs in Energy Service segment are attributable to reduction in administration costs for Stanza of approximately $136,314 for the nine months ended September 30, 2012 compared to $412,188 for the nine months ended September 30, 2011. This reduction was partially offset by the addition of administration personnel to support the growth in national accounts and legal and consulting services for the Midwest operations. 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. Therefore, there are no Research and Development costs recorded in the nine months ended September 30, 2012 Corporate Overhead Included in corporate overhead expenses are the salaries and travel expenses of our officers, legal fees, audit fees, investor relations and other costs associated with being a SEC registrant. Corporate overhead for the nine months ended September 30, 2012 was $433,993 as compared to $1,027,651 for the nine months ended September 30, 2011. The following table shows the costs related to corporate activities: 2012 2011 Payroll related activates $ 240,412 $ 521,441 Stock Compensation 69,446 73,955 Professional Fees 21,500 237,962 Shared based payments for professional services 32,882 - Travel 17,443 126,865 Other 52,309 67,418 Total $ 433,993 $ 1,027,641 Our payroll is lower due to right sizing the number of the executive officers. Currently there are two executive officers, the CEO and the CFO. In 2011 we had in addition to the current executive officers, a President and Vice President of Business Development. These latter positions have been eliminated. The payroll and related activates in 2011 include the severance pay accrual for the former Chief Operating Officer of $42,000.The lower professional fees in the nine months ended September 30, 2012 was due to our decision not to have audited financial statements for the year ended December 31, 2011 and no independent review of our quarterly financial statements in 2012. The decrease in business travel in the nine months ended September 30, 2012 is associated with our limited fund raising activities and moving our corporate office to Minnesota in 2012. In 2012, the Company issued stock to members of our Advisory Board, which will be recognized over their service term. We also issued stock to our investor relation professional to improve communications with shareholders and investors. These stock payments are non-cash charge and are based on actual stock price at the time of payment. Depreciation and Amortization The amounts in this category include depreciation on our fixed assets and amortization of our intangibles, represented by our customer lists. The expense for the nine months ended September 30, 2012 was $262,530 compared to $260,557 in the nine months ended September 30, 2011. We have limited our capital expenditures and sold certain fixed assets therefore incurred only a small increase in depreciation expense. 34 -------------------------------------------------------------------------------- Other Expenses The following table below summarizes the items in this category for the nine months ended September 30: 2012 2011 Interest expense, net $ 433,104 $ 310,744 Factoring fees 260,456 77,462 Loss related to lease obligation 162,278 - Loss on modification of debt - 253,181 Amortization of debt discount 105,625 834,565 Amortization of deferred financing costs 17,401 114,271 Fair value of embedded conversion feature (69,392 ) - Fair value of warrants (9,054 ) (294,605 ) Total $ 900,418 $ 1,295,618 The higher interest expense is attributable to a higher interest rate, as most of our loans were in default, raising the interest rate from 10% to 12% resulting in $53,000 of additional interest expense. The Company issued $267,700 in new loans at 8% in the first quarter of 2012. The interest expense from our factoring obligation for the nine months ended September 30, 2012 was $80,600. In 2011 our financing consisted of bank credit line for the first five months of the year and was replaced by the factoring obligation for the four months remaining in the nine months ended September 30, 2011. The interest expense for the nine months ended September 30, 2011 was $58,600. The higher factoring fees for the nine months ended September 2011 is because the factoring obligation was outstanding for full period. In the nine months ended 2011 the factor fee was only outstanding from June17, 2011 to September 30, 2011. The loss lease obligation is the accrued amount for the full balance of the judgment received by the Landlord's lawsuit against the Company to collect unpaid and future lease payments. The total lease obligation of $302,277 has been accrued as a long -term obligation. The Company will seek a long range payment plan for this obligation. Our convertible debt has warrants and beneficial conversion features which are accounted for in accordance with ASC 470, whereas we must determine the fair value of the warrants and the beneficial conversion feature and treat that amount as a debt discount to be amortized over the life of the debt. At September 30, 2012, the full amount of debt discounts has been expensed in 2012.The embedded conversion feature and the warrants are treated as a liability and are re-measured with each reporting period. . The gain in the embedded conversion feature reflect a stock price at September 30.2012 of $0.005 compared to a price of $0.03 at March 31 2012. In 2011, we recorded a loss on the modification of convertible debt. The transaction extended the maturity date and reduced the warrant exercise price and the beneficial conversion options. In accordance with ASC 815 the carry value of the debt must be consistent with the risk. When the amounts were determined the additional interest rate of the carry value of the debt was 59%. We believe that the debt rate should be 20% resulting in a loss of $253,181. 35 -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES The Company incurred a net loss for the nine months ended September 30, 2012 of $1,156,970. At September 30, 2012 we had an accumulated deficit of $34,521,705. In addition, we are currently in default on notes payable of $703,333 of principal. These conditions raise substantial doubt as to the Company's ability to continue as a going concern. The Company's ability to maintain its operations is supported by a number of activities. The Company has raised $200,000 in convertible debt and $67,700 in a promissory note the first quarter of 2012. We were able to retire $110,000 of Stanza related debt through a Security Transfer Settlement Agreement. The Company's improvement in cash flow is allowing us stay current with our critical vendors. The debt holders that are in default have not indicated that they plan any adverse action against the Company. In fact several of these debt holders have verbally indicated they plan to extend their notes. For the nine months ended September 30, 2012, the company reported the lowest net loss since 2006 in the first year of the Company's history. The Adjusted EBITDA for the nine months ended September 30, 2012 was a positive $223,464 and for the three months ended September 30, 2012 we have a positive Adjusted EBITDA of $15,502. This is the second consecutive quarter that we had positive Adjusted EBITDA. Adjusted EBITDA is a non- GAAP Financial Measure defined in detail under the Additional Information section below. In the second quarter of 2012, we were successful in amending our factoring agreement by reducing the factoring fee from 1.7% to 1.45%. We have estimated that this will result in approximately $50,000 of annual savings over the next year. We are currently seeking a lower priced financing instrument with other providers which would further reduce our interest and related expenses. We have also reached agreement with various state agencies to pay our past due sales tax on an installment basis. We have an installment plan for the payment of the Control Crew lawsuit, which we have paid $37,000 as November 2, 2012 and are paying down the balance in $4,000 monthly payments. We received a judgment from a lawsuit for nonpayment of lease obligation ion the total of $302,277 which has been accrued on balance sheet as a long -term liability. Titan Energy Development, Inc. (Stanza) has been subpoenaed to provide certain financial information. The company believes that an installment plan can be reached to pay this obligation. Our continue improvement in operating the business and the opportunities that have been generated through our Energy Service segment will provide the cash needed to fund current operations. At September30, 2012, we had $610,168 in cash and short-term investments. 36 -------------------------------------------------------------------------------- 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, we use an Adjusted EBTDA to provide this additional information. These non-GAAP measures are not in accordance with, or alternative for, generally accepted accounting principles in the United States. The GAAP measure most comparable to Adjusted EBITDA is GAAP net income (loss): reconciliation for Adjusted EBITDA to GAAP net income (loss) is provided below. Management uses this 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. Management considers Adjusted EBITDA to be an important indicator of our operational strength and performance of our business and good measure of our historical operating trend. 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 2012 and 2011, respectively, as well as reasons for excluding individual items. Management defines Adjusted EBITDA as net income (loss), excluding depreciation, amortization, stock based compensation and payments, interest (including 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 is 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. We also will eliminate from our net loss from the lease obligation as this is a settlement of a lawsuit which is not consider 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. 37-------------------------------------------------------------------------------- Adjusted EBITDA was positive $15,502 and negative $213,561 for the three months ended September30, 2012 and 2011, respectively. The reconciliation of adjusted EBITDA to net loss is set forth below: Three Months Ended September 30, 2012 2010 Net loss $ (470,649 ) $ (1,009,851 ) Add back: Depreciation and amortization 86,660 89,256 Stock based compensation and payments 69,342 68,319 Interest and factoring fees 211,682 182,336 Amortization of debt discount 27,562 224,755 Loss on modification of convertible debt - 253,181 Loss related to lease obligation 110,639 - Fair value adjustments (19,734 ) (21,557 ) Adjusted EBITDA $ 15,502 $ (213,561 ) Adjusted EBITDA was positive $223,464 and negative $1,079,335 for the nine months ended September 30, 2012 and 2011, respectively. The reconciliation of adjusted EBITDA to net loss is set forth below: Nine Months Ended September 30, 2011 2011 Net loss $ (1,156,970 ) $ (2,942,913 ) Add back: Depreciation and amortization 262,630 260,557 Stock based compensation and payments 217,386 207,403 Interest and factoring fees 693,560 388,206 Amortization of debt discount 123,026 948,836 Loss on modification of convertible debt - 253,181 Loss related to lease obligation 162,278 - Fair value adjustments (78,446 ) (294,605 ) Adjusted EBITDA $ 223,464 $ (1,179,335 ) OFF-BALANCE SHEET ARRANGEMENTS None. 38 -------------------------------------------------------------------------------- |