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[May 21, 2013]
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. 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.
21 -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Three Months Ended March 31, 2013 Compared to the Three Months Ended March 31, 2012 Sales Sales for the three months ended March 31, 2013 were $4,654,982 compared to $3,269,686 for the three months ended March 31, 2012. The following table summarizes our sale by their segments: Power Energy Distribution Services 2013 $ 2,811,296 $ 1,842,786 2012 2,129,237 1,140,449 Increase $ 682,059 $ 702,337 Percent Increase 32 % 62 % The higher sales in Power Distribution were attributable to increased New York sales by 85% compared to sales in 2012. In addition, the increased sales in the Midwest were 40% over 2012. The company made the decision to close the Power Distribution of our Florida office effective August 1, 2012 as it was not profitable. The sales for the Florida office in first quarter of 2012 were $226,203 which negatively impacts the percentage of growth.
The increased sales in the Energy Services segment are attributable to the improvements in our national accounts program. Sales to national accounts for the three months ended March 31, 2013 totaled $625,000 compared to $161,600 in the three months ended March 31, 2012. Our traditional service programs, UPS and part sales were increased approximately 24% over the three months ended March 31, 2012.
Cost of Sales Cost of sales was $3,317,954 for the three months ended March 31, 2013 compared to $2,340,982 for the three months ended March 31, 2012.
Power Energy Distribution Services 2013 $ 2,321,403 $ 996,551 2012 $ 1,816,461 $ 524,521 Increase $ 504,942 472,030 Percent of Sales 2013 83 % 54 % 2012 85 % 46 % The increase in cost of sales in the Power Distribution and the Energy Services segments is attributable to higher sales volume. The percentage of cost to sales being lower than 2012 resulted in higher margin for our Power Distribution segment. This improvement is due to the higher margin achieved in the New York market. . 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 three months ended March 31, 2013, sales to national accounts represented 34% of our total Energy Service sales compared to 14% for the three months ended March 31, 2012. The percentage cost of sales related to national account for the three months ended March 31, 2013 was 74%. The percentage cost of sales for our traditional service business for the three months ended 2013 was 44%.
22 -------------------------------------------------------------------------------- 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 $719,138 for the three months ended March 31, 2013, compared to $644,548 for the three months ended March 31, 2012. The following table summarizes the areas of costs in this category: Power Energy 2013 Distribution Services Payroll related costs $ 213,745 $ 365,566 Shared based compensation 6,128 31,516 Other 12,676 89,507 Total $ 232,549 $ 486,589 2012 Payroll related cost $ 308,735 $ 254,524 Shared based compensation 9,205 11,993 Other 11,169 48,921 Total 329,109 $ 315,439 Increase $ (96,560 ) 171,150 Percent of Sales 2013 8 % 26 % 2012 15 % 28 % The decrease in the Power Distribution costs is attributable to the Company decision to discontinue the sales operations in our Florida office as it was not a profitable operation.
The increase in costs in the Energy Service segment is primarily attributable to the increasing volume of business being driven by our national account program. The increase in the Energy Service Other category was primarily attributable to higher vehicle costs, recruiting technicians and greater use of consumables and small tools.
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 $479,850 for the three months ended March 31, 2013, compared to $377.120 for the three months ended March 31, 2012.
23 -------------------------------------------------------------------------------- The following table included in expenses included\in general and administrative for the three months ended March 31, 2013 and 2012: Power Energy 2013 Distribution Services Payroll related costs $ 32,510 $ 84,914 Shared based compensation 1,915 1,915 Facilities 29,727 109,141 Travel 21,112 44,587 Other 60,824 93,205 Total $ 146,088 $ 333,762 2012Payroll related cost $ 54,645 $ 79,889 Shared based compensation 9,107 9,107 Facilities 55,723 61,314 Travel 31,181 4,874 Other 2,295 68,986 Total $ 152,950 $ 224,170 Increase $ (6,862 ) $ 109,592 The increase in other costs in the Power Distribution and the Energy Service is attributable to higher consulting fees, settlement of a lawsuit and some temporary help personnel in our Minnesota accounting department. The decrease in the Power Distribution and the Energy Service payroll related costs is attributable to moving Grove's administrative functions to TES lm Minnesota. The increase in the Energy Service travel cost is attributable to the additional travel by our Service Manager to consolidating this operation under management in Minnesota..
Research and Development We entered into a contract in June 2010 with a third party to design and develop a remote monitoring system dedicated to onsite power generation equipment. We believe that there are few alternatives available in the market place that support the management of onsite power generators in the manner that is required by peak shaving, demand response and energy efficiency programs, and so to better serve these marketplaces, Titan needed to develop its own monitoring program. . The Company has completed this software package and has begun to market it to customers. In the three months ended March 31, 2013, we incurred $6,651 of additional costs to enhance the program to monitor RICE NESHAP data.
24 -------------------------------------------------------------------------------- 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 March 31, 2013 was $109,537 as compared to $157,857 for the three months ended March 31, 2012. The following table show expenses related to corporate activities: 2013 2012 Payroll related activates $ 82,553 $ 79,317 Shared based compensation 632 22,058 Professional fees 12,094 22,500 Travel 1,803 8,310 Other 12,455 25,672 Total $ 109,537 $ 157,857 The reduction in share based compensation is attributable to the fact that previous stock option have fully vested and expensed in prior years. This represents a 300,000 share stock option with an exercise price of $0.07 for the CFO vesting over four years. The reduction in professional fee is attributable to not using an investor relation firm this year. The reduction in other expense is attributable to a judgment in the first quarter of 2012 on a lawsuit. 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 three months ended March 31, 2013 was $82,282 compared to $89,436 in the three months ended March 31, 2012.The reduction of expense is attributable to a fully amortized customer list as of the end of 2012 and some fixed assets that have been fully depreciated.
Other Expenses The following table below is summarizing the items in this category: 2013 2012 Interest expense, net $ 174,017 $ 194,831 Present value of lease obligation - 24,426 Amortization of debt discount - 50,870 Amortization of deferred financing costs 8,106 1,190 Change in fair value of embedded conversion feature 11,129 7,559 Change in fair value of warrants 24,978 (7,732 ) Total $ 218,230 $ 271,144 25-------------------------------------------------------------------------------- The decrease in interest expense is attributable lower finance charges and an extension fee paid in first quarter of 2012. The lease obligation was fully accrued in 2012 and the Company is in process of reaching settlement on this judgment. The debt discount related to the convertible debt was fully amortized in 2012. The amount amortized as deferred financing cost is related to the extension on certain convertible notes given on April 1, 2012. At March 31, 2013 the amount of the extension has been amortized against income.
The embedded conversion feature and the warrants are treated as a liability and are re-measured with each reporting period. The loss in the embedded conversion feature and warrants reflects a stock price at March 31, 2013 of $0.03 compared to a price of $0.01 at d\December 31, 2012. As the stock price increased the value of these items which resulted in a loss to the financial statement. The embedded conversion feature was fully converted so the amount of in the second quarter $11,129 will be recognized as income Liquidity and Capital Resources The Company incurred a net loss for the three months ended March 31, 2013 of $279,559. As of March 31, 2013 we have an accumulated deficit $35,297,414. On April 1, 2013, we are in default on $2,740,000 of convertible notes plus accrued interest of approximately $813,000. These conditions raise substantial doubt as to the ability to continue as a going concern. Management has entered into an agreement with Forefront Capital to raise up to $5 million of new capital of on a best efforts basis. In addition, the Company will request the debt holders to convert their convertible notes and accrued interest. 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 has had periodic difficulties keeping current with various suppliers during the past few years. Most of our major vendors require us to pay in 30 days, however collection of payment from our customers takes an average of 60 days and therefore we have used our factoring obligation to pay our suppliers ina timely manner. The cost of the factoring fees and interest paid to factor our receivable for the three months ended March 31, 2013was $78,452. These extra costs have had an adverse impact on our liquidity position.
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 sufficient cash flow to operate the business and replace our factoring line with a more affordable credit facility which would improve our cash flow by about $250,000 per year.
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.
26 -------------------------------------------------------------------------------- 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 three months ended March 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.
The reconciliation of adjusted EBITDA to net loss is set forth below: Three Months Ended March 31, 2013 2012 Net loss $ (279,559 ) $ (616,185 ) Add back: Depreciation and amortization 82,282 89,436 Stock based compensation 40,253 61,469 Stock payment for services 18,441 14,500 Interest and factoring fees 174,017 194,831 Present value of lease obligation - 24,426 Amortization of debt discount 8,106 52,060 Fair value adjustment of conversion feature 11,129 (7,732 ) Fair value adjustment on warrants 24,978 7,559 Adjusted EBITDA $ 79,647 $ (179,636 ) Off-Balance Sheet Arrangements None.
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