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[April 03, 2013]
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, 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 three 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.
25 -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Year Ended December 31, 2012 Compared to the Year Ended December 31, 2011 Sales Sales for the year ended December 31, 2012 were $19,151,874 compared to $14,065,980 for the year ended December 31, 2011. The following table summarizes our sale by their segments: Power Energy Distribution Services 2012 $ 11,598,000 $ 7,553,874 2011 9,056,035 5,009,945 Increase $ 2,541,965 $ 2,543,929 Percent Increase 28 % 51 % The increased sales in the Power Distribution segment is result of a stronger economic recovery in the Midwest with power distribution sales increasing by 26% over 2011. The New York sales increased by 44% compared to sales in 2011. This increase was primarily attributable to a $1.2 million project for a national energy company. 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 declined $775,000 compared to 2011.
The increased sales in the Energy Service segment are attributable to the improvements in our national accounts program. Sales to national accounts for the year ended December 31, 2012 totaled $3.0 million compared to $447,500 in the year ended December 31, 2011.
Cost of Sales Cost of sales was $13,920,574 for the year ended December 31, 2012 compared to $10,088,911 for the year ended December 31, 2011 Power Energy Distribution Services 2012 $ 9,781,864 $ 4,138,707 2011 7,586,719 2,502,192 Increase $ 2,195,145 $ 1,636,515 Percent of Sales 2012 84 % 55 % 2011 84 % 50 % The cost of sales in the Power Distribution and the Energy Services segments is attributable to higher sales volume. The percentage of cost to sales is equal to 2011. However, excluding a $1.2 million project from the New York which generated greater costs of sales than revenues, the overall cost of sales percentage would been 83% The Midwest region percentage of sales has historically been in the range of 82 to 86 percent of sales.
The higher percent cost of sales in the Energy Services segment is attributable to the increased sales to national accounts, which have lower margins than our traditional service business. For the year ended December 31, 2012, sales to national accounts represented 39% of our total sales compared to 9% for the year ended December 31, 2011. The percentage cost of sales related to national account for the year ended December 31, 2012 was 74%. The percentage cost of sales for our traditional service business for the year ended 2012 was 45%.
26 -------------------------------------------------------------------------------- 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 $3,939,316 for the year ended December 31, 2012, compared to $2,567,073 for the year ended December 31, 2011. The following table summarizes the areas of costs in this category: Power Energy 2012 Distribution Services Payroll related costs $ 1,209,579 $ 1,279,945 Shared based compensation 25,040 51,209 Other 90,012 384,030 Total $ 1,324,631 $ 1,715,184 2011 Payroll related cost $ 1,135,918 $ 1,026,965 Shared based compensation 40,565 54,483 Other 84,761 224,383 Total 1,261,244 $ 1,305,831 Increase $ 63,387 409,353 Percent of Sales 2012 11 % 23 % 2011 14 % 26 % The increase in costs is primarily attributable to the record sale volume that resulted in increasing the commission for employees in both the Power Distribution and the Energy Service. The increase in the Energy Service Other category was primarily attributable to inventory adjustments related to our service parts.
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. In 2012, we reclassify factoring fees to other expenses as we believe that fees are similar to interest expense than an operating expense. General and administrative expenses were $1,577,669 for the year ended December 31, 2012, compared to $1,668,848 for the year ended December 31, 2011.
Power Energy 2012 Distribution Services Payroll related costs $ 106,647 $ 280,699 Shared based compensation 25,225 46,847 Facilities 213,150 253,409 Travel and Meals 79,929 72,474 Other 230,599 268,690 Total $ 655,550 $ 922,119 2011 Payroll related cost $ 85,840 425,251 Shared based compensation 10,170 38,426 Facilities 221,064 284,193 Travel and Meals 59,793 39,235 Other 196,336 308,540 Total $ 573,203 $ 1,095,645 Increase (Decrease) $ 82,347 $ (173,526 ) 27-------------------------------------------------------------------------------- The increase in costs in the Power Distribution segment is attributable to higher consulting fees and additional personnel in our Minnesota accounting department. The decrease in the Energy Services payroll relate costs is attributable to lower personnel in the Stanza operation and the consolidation of Grove's administrative services with TES. The decrease in the Energy Service other cost is attributable to moving the Stanza office to a home office environment and lower legal and accounting costs.
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 2011 expense for this research and development for this project was $194,239 for a total cost of $547,801 incurred since 2010. The Company has completed this software package and has begun to market it to customers. In 2012, we incurred $8,669 of addition costs to utilize cloud computing for this program. [Do we need to add this Seems insignificant] 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, 2012 was $517,965, as compared to $1,276,056 for the year ended December 31, 2011. The following table show the costs related to corporate activities: 2012 2011 Payroll related activates $ 286,604 $ 645,188 Stock Compensation 72,289 103,011 Professional Fees 24,101 310,983 Shared based payments for professional services 43,324 - Travel 20,393 138,378 Other 71,194 78,496 Total $ 517,905 $ 1,276,056 The most significant impact to lower costs in 2012 was the reduction of executive officers from four employees to two employees. The other significant saving was in professional fees as we have not performed an audit since 2010 and we eliminated our legal counsel for SEC matters. The share based payment were for our Advisory Board and investor relations. The reduction in travel was due to moving the corporate office to Minnesota reducing the amount of travel in previous year.
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, 2012 was $352,399 compared to $352,233 in the year ended December 31, 2011.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: 2012 2011 Interest expense, net $ 630,173 $ 520,022 Factoring fees 326,203 119,083 Loss related to lease obligation 162,278 105,693 Loss on modification of debt - 253,181 Amortization of debt discount 105,625 916,379 Amortization of deferred financing costs 25,506 150,458 Change in fair value if contingent consideration (117,898 ) Change in the fair value of embedded conversion feature (74,447 ) (246,862 ) Change in the fair value of warrants (11,988 ) (350,240 ) Total $ 1,163,350 $ 1,349,816 28-------------------------------------------------------------------------------- The increase in interest expense is attributable to an increase of finance charges for past due sales taxes of $80,000 and the placement of two notes totaling $267,700 at an 8% interest rate for an additional $16,000 of interest expense. The increase in factoring fees is partially attributable to a full year of factoring invoices in 2012 compared to only six months in 2011. In addition, due to the higher sales we factor more invoices to keep our payments with our vendor as timely as possible.
The loss of the lease obligation was the amount of necessary to accrue the judgment that the landlord received by the court ruling. We have not paid any amount on this judgment and expect to reach a settlement.
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 December 31, 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 December 31, 2012 of $0.005 compared to a price of $0.03 at March 31 2012 when the embedded conversion feature was determined The deferred financing costs represent the costs related to the extension and issuance additional warrants to note holders in return for extending their debt to April 1, 2013. The costs are amortized over the life of the extension of debt.
Liquidity and Capital Resources The Company incurred a net loss for the year ended December 31, 2012 of $1,430,961. As of December 31, 2012 we have an accumulated deficit $34,795,695.
In addition, we were in default at December 31, 2012 on notes payable of $675,000 plus interest. On April 1, 2013 a total of $1,875,000 of convertible notes will be in default unless new agreements are reached with these noteholders. Although we will have $2,750,000 of notes that will be in default, we believe many of these debt holders will accept a new agreement on their debt or sign an extension. Company was successful in raising $267,700 of new debt in 2012. 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, 2012, cash used by operations was $71,715. We generated cash by selling some fixed assets in excess of purchase price by $16,262. Cash provided by financing activities was $220,585. The Company was able to raise approximately $367,700 of new debt and paid off $132,000 of old debt.
The Company has had periodic difficulties keeping current with various suppliers during 2012. 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. During 2012, we incurred vendor and taxing authorities financing charges of $144,000. The cost of the factoring fees and interest paid to factor our receivable totaled $426,832. These extra costs have had an adverse impact on our liquidity position.
To 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 Company made the decision to close the equipment sales operation of Groves in August this year as it could not generate positive cash flow. The service operations are slightly positive but we believe that it can support the cash flow need to run the business.
Management has entered into an agreement with Forefront Capital to raise up to $5 million on a best efforts basis. While there is no guarantee that these efforts will result in any new capital for the Company, these potential funds would have a significant impact on the Company's ability to restructure its debt and improve its cash flow.
The Company had several months of profitability during 2012 and we believe that it could achieve profitability in 2013. 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 by about $250,000 per year.
29 -------------------------------------------------------------------------------- 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, 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, 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 below: Years Ended December 31, 2012 2011 Net loss $ (1,430,961 ) $ (3,435,009 ) Add back: Depreciation and amortization 352,399 352,233 Stock based compensation and payments 263,933 274,912 Interest and factoring fees 956,376 639,105 Amortization of debt discount 131,131 1,066,837 Loss on modification of convertible debt - 253,181 Loss related to lease obligation 162,278 105,693 Fair value adjustments (86,435 ) (715,000 ) Adjusted EBITDA $ 348,720 $ (1,458,048 ) Off-Balance Sheet Arrangements None.
30 -------------------------------------------------------------------------------- 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.
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, 2012 and 2011. The carrying value of goodwill is summarized in the table below: 31 -------------------------------------------------------------------------------- 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, 2012 and December 31, 2011 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, 2012 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"); 0re Company's state income or franchise tax is not currently under examination by the state authorities. However fiscal years 20089 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, 2012, 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.
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 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.
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